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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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-19580
INDUSTRIAL HOLDINGS, INC.
(exact name of registrant as specified in its charter)
TEXAS 76-0289495
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
7135 ARDMORE, HOUSTON, TEXAS 77054
(Address of principal executive offices, including zip code)
(713) 747-1025
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, $.01 PAR VALUE
CLASS B REDEEMABLE WARRANT
CLASS C REDEEMABLE WARRANT
CLASS D REDEEMABLE WARRANT
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
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. [X]
The aggregate market value of common stock held by non-affiliates of the
registrant was $16,224,926 at June 9, 2000. At that date, there were 15,111,097
shares of common stock outstanding.
TABLE OF CONTENTS
FORM 10-K
PART I
ITEM PAGE
1. Business.......................................................... 1
2. Properties........................................................ 12
3. Legal Proceedings................................................. 13
4. Submission of Matters to a Vote of Security Holders............... 13
PART II
5. Market for Registrant's Common Stock and Related Stockholder
Matters.......................................................... 14
6. Selected Financial Data .......................................... 15
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 16
7.A Quantitative and Qualitative Disclosures About Market Risk ....... 27
8. Financial Statements and Supplementary Data ...................... 27
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ......................................... 27
PART III
10. Directors and Executive Officers of the Registrant................ 27
11. Executive Compensation ........................................... 29
12. Security Ownership of Certain Beneficial Owners and Management.... 33
13. Certain Relationships and Related Transactions.................... 34
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .. 35
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UNLESS OTHERWISE INDICATED, ALL REFERENCES TO "WE," "US," "OUR," "OUR
COMPANY" OR "IHI" INCLUDE INDUSTRIAL HOLDINGS, INC. AND ALL OF ITS SUBSIDIARIES.
PART I
ITEM 1. BUSINESS
GENERAL
We own and operate a diversified group of middle-market industrial
manufacturing and distribution businesses. Our operations are organized into
four business segments: (i) fastener manufacturing and distribution; (ii) heavy
fabrication; (iii) valve manufacturing and repair (now known as "energy"); and
(iv) machine tool distribution. We believe our businesses are characterized by
strong market positions in niche markets, high value-added products and
services, an established and diversified customer base, experienced and
committed management, cost-efficient equipment and production facilities with a
low sensitivity to technological change. Our products and services are sold to a
broad customer base in the automotive, home furnishings, petrochemical, oil and
gas and various other industrial and consumer products industries. Most of our
products are manufactured to specific technical requirements and for specific
customer orders. We believe that the diversified nature of our products,
services and end-user markets reduces the effect of operating performance
fluctuations in any one of our core business segments and limits our overall
exposure to cyclical downturns within individual industry sectors.
Industrial Holdings, Inc. was incorporated in August 1989. Our principal
executive offices are located at 7135 Ardmore, Houston, Texas 77054, and our
telephone number is (713) 747-1025.
BUSINESS STRATEGY
In June 2000, we reached an agreement in principle with our senior lenders to
amend our revolving line of credit agreement, including covenants we believe we
will be able to comply with. We expect that the new maturity date will be
January 31, 2001. There can be no assurance that the agreement to amend our
revolving line of credit will be executed. Although this proposed agreement will
help to address our near-term liquidity issues, we still have substantial debt
obligations, including $87.3 million in notes payable and revolving credit debt,
which are currently in default. Therefore, we will continue to pursue various
financing alternatives to meet our future short-term liquidity needs. We
anticipate refinancing our debt facilities in 2000, although no assurances can
be given that we will be able to refinance our debt or that we will be able to
obtain terms that are as favorable as those that currently exist.
In addition to our current focus on refinancing our indebtedness, our
business strategy is to increase the sales, cash flow and profitability of each
business segment through a turnaround plan that was developed and implemented by
the Company to address the operational difficulties that occurred during 1999
and into 2000. This turnaround plan entails streamlining our operations and
refocusing on our core competencies in the following three areas:
ENHANCE REVENUE GROWTH. We believe that significant opportunities exist to
enhance revenue growth in our business segments. We plan to achieve this
growth by (i) promoting cross-selling opportunities across our customer base;
(ii) identifying new applications and new markets for our existing products,
production capabilities, and skill base; and (iii) acquiring companies that
are strategic fits within our business segments. To date in the fastener
segment, we have integrated the sales of certain product lines across each of
the related companies within this segment. In the energy segment, rather than
integrate the sales of our product lines across the companies within that
segment, we have begun to integrate our customer base through the joint
marketing of the individual companies' products and services to the entire
energy segment customer base. Over the next year, we will continue to expand
on these efforts. In the heavy fabrication segment, we have focused our
efforts on developing and expanding our power generation customers in order
to solidify our position in this burgeoning market. We believe that our
strong market positions within the niche markets we serve enhance our ability
to effectively implement this aspect of the turnaround plan. Although
historically much of our growth has been through acquisition, acquisitions
will not be an area of emphasis until our turnaround plan has been fully
executed and our financial performance has returned to historical levels.
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ELIMINATE WASTE. We believe that significant opportunities exist to reduce or
eliminate waste by: (i) reducing working capital levels company-wide through
increased inventory turns and accelerated collection of receivables; (ii)
selling non-strategic assets that are not part of our core competencies;
(iii) consolidating selected facilities; (iv) converting our present
manufacturing processes to "lean" or more efficient manufacturing techniques;
and (v) fully implementing our ERP systems, which will allow our managers to
obtain and use production information faster and more efficiently than
before.
During the past sixteen months, we have (i) consolidated three of our
facilities into other existing facilities, (ii) sold two non-core business
units, (iii) closed and liquidated four non-core and unprofitable business
units, (iv) completed the installation of two ERP systems, (v) converted one
plant from a traditional "batch and queue" operation to one that employs
one-piece flow or cellular production, and (vi) reduced inventory and
receivables. On a going-forward basis, we intend to (i) consolidate an
additional plant into an existing facility, (ii) sell three parcels of excess
real estate, (iii) convert the distribution operations of our fastener
segment to a common ERP system, and (iv) continue the implementation of
"lean" manufacturing techniques. We plan to pursue similar measures when it
is our best interest to do so.
DEVELOP EMPLOYEES. We believe that employee development is an integral part
of our turnaround plan. Across all of our businesses, our management, sales
and operations teams have participated in numerous training and development
programs that focus on management, sales, production, technical, safety and
quality issues. We believe that this training is a valuable tool in the
development and enhancement of our employees' skill sets and that we will
continue to be rewarded for these efforts by a better trained, more
knowledgeable and skilled workforce.
ACQUISITIONS
Since 1996, we have acquired 14 companies that either expanded or
complimented our then-existing product offerings. We continue to integrate these
acquired companies into our existing operations, which we believe will allow us
to achieve cost savings through the elimination of general and administrative
functions and to exploit cross-selling opportunities.
The following chart describes each of our acquisitions since January 1, 1996.
ACQUISITION DESCRIPTION OF ACCOUNTING
ACQUIRED COMPANY DATE SEGMENT CONSIDERATION TREATMENT
---------------- ------------- ----------------- --------------- ----------
American Rivet Company, Inc. ....... November 1996 Fastener Cash Purchase
LSS-Lone Star-Houston, Inc. ........ February 1997 Fastener Cash and Stock Purchase
Manifold Valve Services, Inc. ...... March 1997 Energy Stock Purchase
Rogers Equipment & Supply, Inc. (1) August 1997 Energy Cash Purchase
Walker Bolt Manufacturing Co. ...... November 1997 Fastener Cash Purchase
Philform, Inc. ..................... February 1998 Fastener Stock Purchase
Ameritech Fastener Manufacturing Co. March 1998 Fastener Stock Pooling
Moores Pump and Services, Inc. ..... April 1998 Energy Stock Pooling
GHX, Inc. .......................... April 1998 Fastener Stock Pooling
United Wellhead Services, Inc. ..... July 1998 Energy Stock Pooling
Beaird Industries, Inc. ............ July 1998 Heavy Fabrication Cash Purchase
Ideal Products Company ............. August 1998 Fastener Cash Purchase
A&B Bolt and Supply, Inc. .......... August 1998 Fastener Cash and Stock Purchase
Blastco Services Company ........... January 1999 Energy Stock Pooling
(1) Rogers was sold in October 1999.
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RECENT DEVELOPMENTS
PROPOSED AMENDMENT OF COMERICA AGREEMENT THROUGH JANUARY 31, 2001
In June 2000, we reached an agreement in principle to enter into an Amended
and Restated Credit Agreement (the "Revised Agreement") with Comerica
Bank-Texas, National Bank of Canada and Hibernia Bank (the "Senior Lenders") in
which they propose to amend our existing Credit Agreement. The proposed Revised
Agreement, which would mature January 31, 2001, would provide for a revolving
line of credit up to the lesser of a defined borrowing base or $50 million. The
proposed Revised Agreement would provide for interest at prime plus 3% payable
weekly. Additionally, the Senior Lenders would waive defaults of loan covenants
as of December 31, 1999 and March 31, 2000 and amend the loan covenants to
require maintenance of minimum consolidated tangible net
worth, and earnings before interest, taxes, depreciation and amortization
("EBITDA")-to-debt-service ratio as well as require limitations on capital
expenditures. Management believes that the Company would be able to comply with
these covenants. However, in the event that we would not be able to meet the
EBITDA-to-debt-service ratio test, the proposed agreement would provide that
this default may be cured by St. James advancing to us funds in adequate amounts
so as to bring this covenant into compliance.
In connection with the proposed Revised Agreement, St. James would be
required to provide a $2 million guaranty to the Senior Lenders in order to
secure any over-advances that may occur under the terms of the proposed Revised
Agreement. In exchange for providing this guaranty, we plan to (i) issue to St.
James warrants to acquire 400,000 shares of our common stock at $1.25 per share
(valued at $84,000), and (ii) forgive a $0.35 million note receivable from SJCP.
In addition, if the guaranty is funded, we plan to issue to St. James up to
500,000 warrants to acquire our common stock at $1.25 per share (valued at up to
$105,000), depending on the amount of the funding.
ENSERCO, L.L.C.
We have a $15 million note payable to EnSerCo, L.L.C. ("EnSerCo") that became
due on November 15, 1999. We were granted an extension of the due date through
January 31, 2000. On January 31, 2000, we were unable to repay the amounts
borrowed and defaulted on the note payable. EnSerCo has not called this note
due; however, it retains the right to do so. We have held preliminary
discussions with EnSerCo to modify the terms of the original note agreement,
which include extending the due date. Although we and EnSerCo have exchanged
non-binding term sheets that outline certain concepts that might be included in
an amendment to the credit agreement in the future, including (i) increasing the
principal amount to reflect unpaid accrued interest to date, (ii) extending the
maturity date to February 28, 2001, and (iii) increasing the interest rate to a
15% annual rate, payable at maturity; no agreement has been reached between us.
Furthermore, no assurances can be given that we will be able to successfully
conclude the arrangement being considered and we remain in default.
HELLER FINANCIAL, INC.
We have a $9.5 million term note with Heller Financial, Inc. ("Heller"),
which expires on September 30, 2004. We were not in compliance with certain
financial covenants at each of the required quarterly reporting dates during
1999. We requested and received waivers from Heller through the September 30,
1999 reporting period; however, we did not seek waivers for the reporting dates
of December 31, 1999 or March 31, 2000. We are in violation of the credit
agreement and although Heller has not expressed the intent to call this
obligation, it retains the right to do so. We have held preliminary discussions
with Heller to obtain waivers for the events of non-compliance; however, no
assurances can be given that we will be able to successfully obtain the required
consents.
TRINITY INDUSTRIES, INC.
In July 1998, we acquired Beaird Industries, Inc. ("Beaird") from Trinity
Industries, Inc. (the "Seller") for $35.0 million in cash and receivables and a
$5.0 million note to the Seller. Under the purchase agreement, the Seller
assumed all liabilities and retained certain accounts receivable of Beaird. We
believe that we are entitled to receive $2.2 million of excess purchase price
paid to the Seller under the purchase agreement resulting from liabilities
incurred by us in connection with the acquisition, and $1.84 million in other
claims arising from breaches of representation and warranties. On July 15, 1999,
the first installment of $1.8 million was due on the Seller note. It is our
position that we have offset the amount owed under the purchase agreement
against this principal and interest payment. Although the Seller agrees that we
are owed an amount, in January 2000, the Seller filed suit against us in the
134th Judicial District in the District Court of Dallas County, Texas, in a suit
styled TRINITY INDUSTRIES, INC. V. INDUSTRIAL HOLDINGS, INC. In the lawsuit, the
Seller alleged that we defaulted on the $5 million note payment and asserted
that the amount it owes us is not sufficient to pay the first principal and
interest payment and additionally cannot be offset against the $5 million note
payment. In response, in February 2000, we filed a counterclaim alleging the
Seller's fraud in failing to disclose, and in misrepresenting, certain facts
about Beaird. We are currently in discussions to resolve this disagreement.
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OBLIGATIONS TO BELLELI ENERGY S.R.L. RELEASED
In July 1998, we entered into an option agreement that granted us the right
through 2003 to purchase approximately 95% of Belleli Energy S.r.L. ("Belleli").
Belleli is an Italian company that manufactures thick-walled pressure vessels
and heat exchangers, as well as designs, engineers, constructs and erects
components for desalination, electric power and petrochemical plants. Under the
terms of the option agreement, we were obligated to provide certain interim
funding to Belleli. Because of our financial condition in 1999, we could no
longer provide financial support to Belleli. In February 2000, SJMB, L.P.
("SJMB"), an affiliate of St. James Capital Partners, L.P. ("SJCP"), a large
shareholder of IHI (SJMB, SJCP and its affiliate, collectively "St. James"),
acquired a majority interest in Belleli from Belleli's shareholder, Impianti. As
a result of this transaction, all of our obligations with respect to Belleli
have been released and discharged. We retain a 3.5% minority interest in
Belleli.
As a part of the Belleli transaction, we will issue warrants to purchase
750,000 shares of our common stock to SJMB at an exercise price of $1.25 per
share (valued at $157,500). Additionally, we are obligated to reimburse SJMB for
satisfying our installment payment obligations under the option agreement of
approximately $280,000.
U.S. CRATING, INC. SOLD
In March 2000, we sold our U.S. Crating subsidiary to its general manager for
$400,000 at a gain of approximately $68,000. U.S. Crating provides crating,
inspection, preparation and partial documentation services for domestic and
international movement of goods.
MIDLAND RECYCLE, LLC LIQUIDATED
In January, 2000, Midland Recycle LLC ("Midland"), a company in which we held
a 30% interest through our subsidiary Blastco Services Company ("Blastco") and
for which we guaranteed $1.2 million in debt, was liquidated for less than its
net book value. As a result at December 31, 1999, we wrote-off a $343,000
intercompany note receivable from Midland as unrecoverable and recognized a
$280,000 loss on the investment. The outstanding debt of Midland was repaid as
part of the liquidation of the investment.
PROPOSED SALE OF BLASTCO SERVICES COMPANY
In 1999, the Board of Directors identified its refinery dismantling and gas
metering operations, Blastco, as outside of its core business and made the
decision to dispose of these operations. Blastco, which was acquired in January
1999, did not perform up to expectations. We reached an agreement in principle
to sell Blastco back to its former shareholders, including its current President
(see Item 3. Legal Proceedings). The sales price of Blastco is $2.0 million in
cash, $0.8 million in notes receivable and 1,586,265 shares of our common stock
that the former shareholders of Blastco received in our acquisition of Blastco
in a pooling-of-interests transaction. Also, we will retain inventory and
equipment with a net book value of $0.3 million. Blastco's 1999 sales were $12.1
million. Blastco will retain its minority ownership in AWR Acquisitions, L.C.
("AWR"). In 1999, Blastco recognized a loss from equity in earnings of
affiliates of $6.0 million related to its investment in these entities. While we
expect this transaction to be completed in the second quarter of 2000, there can
be no assurances that we will successfully complete this transaction on the
terms as described above.
RECENT NASDAQ HEARING AND POSSIBLE DELISTING OF OUR SECURITIES
On April 20, 2000, we received a notice of delisting of our Common Stock and
Class B, C, and D Warrants from the Nasdaq NMS because we had not timely filed
this 1999 Annual Report on Form 10-K. The delisting of our securities was stayed
pending our hearing before a Nasdaq Listing Qualifications Panel, on June 1,
2000. We responded by explaining that we had been unable to complete our 1999
audit because we had not received financial information from a company in which
we have a 33 1/3% interest. On May 18, 2000, we received a notice that our
failure to timely file our Form 10-Q for the quarter ended March 31, 2000 would
also be considered at our June 1st hearing. We attended the hearing before a
Nasdaq Listing Qualifications Panel on June 1, 2000 and indicated that we
planned to file our 1999 Annual Report on Form 10-K and the Form 10-Q for the
quarter ended March 31, 2000 shortly after June 10, 2000. We believe that we
were able, at the hearing, to demonstrate our ability to sustain long-term
compliance with all of the maintenance criteria for continued listing on the
Nasdaq NMS. While we expect to meet the filing requirements, we can't ensure
that Nasdaq will not delist our securities. If that happens, our securities
would be immediately eligible to trade on the over-the-counter market.
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PROPOSED ACQUISITION OF REMAINING 51% OF OF ACQUISITION, L.P. PARTNERSHIP
INTEREST FROM ST. JAMES
We have reached an agreement in principle with St. James, subject to
customary closing conditions and our shareholders' approval, to acquire from
SJMB the general partnership interest and the 51% of limited partnership
interests of OF Acquisition, L.P. ("Orbitform") that we do not already own (the
"St. James Transaction"). In the St. James Transaction, we would issue secured
subordinated debt that is convertible into a number of shares of our Common
Stock and warrants that are convertible into a number of shares of our Common
Stock that would exceed 20% of our currently issued and outstanding shares. For
that reason, and because we would be entering into a transaction with a
greater-than-5% shareholder, The Nasdaq Stock Market (the "Nasdaq NMS") requires
that we submit the St. James Transaction to our shareholders for their advance
approval.
OPERATIONS
PRODUCTS AND SERVICES
FASTENER MANUFACTURING AND DISTRIBUTION. Our fastener manufacturing and
distribution segment consists of the metal forming group (or "engineered
fasteners group") and the stud bolt and gasket group. Our engineered fasteners
group manufactures cold-formed fasteners and specialty metal components for sale
primarily to original equipment manufacturers in the home furnishings,
automotive, and electrical components industries. These fasteners are
manufactured in solid, semi-tubular, tubular or multi-dimensional form. We
specialize in the manufacture of special cold-formed fasteners that are
primarily targeted to more highly-engineered applications. These special
cold-formed fasteners can, in many cases, replace more expensive machined parts.
In addition to metal fasteners, we also manufacture electrical components
(including retention clips, fuse holders, contacts and switch components),
drapery hardware and wire drawn products such as common pins and safety pins, as
well as engineered fastener setting machines, which are sold to original
equipment manufacturers. The four facilities used for metal forming operations
are strategically located based on the industries they serve. We believe our
engineering and manufacturing capabilities, multiple manufacturing facilities
and broad equipment base make us one of the leading suppliers of cold-formed
fasteners in the U.S.
Our stud bolt and gasket group manufactures and distributes stud bolts, nuts,
gaskets, hoses, fittings and other products from 13 locations in Texas and
Louisiana primarily to the petrochemical, chemical and oil and gas industries
located in the Gulf Coast region of the U.S. We manufacture ASTM Grade stud
bolts and threaded fasteners, specializing in value added services such as
electroplating, coating and special machining and traceability. We also produce
specialty industrial fasteners including bolts, screws, studs, nuts and washers,
all of which are made to order using forging, heat-treating, machining, grinding
and threading processes. In addition to our manufactured products, we distribute
a full line of industrial fasteners and other related products, including
valves, pipe, gaskets, pipe hangers, steel, strainers, swages, tools, tubing and
mill supplies. Our gaskets are fabricated from metal sheet or cut in standard or
custom shapes out of various soft gasket materials. We believe that we are one
of the leading manufacturers and distributors of stud bolts and gaskets in the
Gulf Coast market, which is one of the largest oil and gas exploration,
production and refining regions in North America. Our distribution facilities
for stud bolt and gasket operations carry a broad product line, while our
manufacturing facilities focus on specialty orders
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that generally require a rapid turnaround.
HEAVY FABRICATION SEGMENT. Through our heavy fabrication segment, we
manufacture and distribute medium and thick-walled pressure vessels, gas turbine
casings, heat exchangers, wind towers, heat panels and other large machined
weldments. Our products are sold to customers in the electric power, marine,
petrochemical, petroleum refining and medical equipment industries and to major
capital equipment suppliers. These products range in size from 500,000 to
2,000,000 pounds and are produced from sophisticated materials that are subject
to quality requirements including fit, shape, size and metallurgy. We believe we
are one of only four manufacturers in the U.S. with the capabilities and
equipment required to produce these large machined weldments, which generally
are critical components for their respective end use applications. We offer
complete fabrication, material and welding laboratories, machining and finishing
capabilities that are certified to conform to the International Quality System
Standard 9001. Our facility in Shreveport, Louisiana is strategically located
with access to commercial waterways, which is critical for the transportation of
our large pressure vessels and other heavy weldments.
ENERGY SEGMENT. Through our energy segment, we manufacture, remanufacture,
distribute, install and provide maintenance and repair services for
high-pressure valves, blow out preventers, pumps and other related products for
companies in the exploration, production and pipeline transportation of oil and
gas and in the petrochemical, chemical and petroleum refining industries located
primarily in the Gulf Coast region. Through the acquisition of Blastco in
January 1999, we also provided refinery and tank farm dismantling services. The
cost to provide these products and services has a high variable component that
consists primarily of labor and raw materials costs. Accordingly, the cost
structure of this segment can be quickly adjusted in response to market
conditions. We consider ourselves to be one of the leading remanufacturers and
distributors of valves and pumps in the Gulf Coast and a leading provider of
refinery dismantling services.
MACHINE TOOL DISTRIBUTION SEGMENT. We distribute new machine tools in South
Texas and Louisiana for certain manufacturers including Okuma Machinery, Inc. on
an exclusive basis, and other manufacturers on a non-exclusive basis. We also
sell used machine tools primarily to larger corporations and machine shops in
the Gulf Cost 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. We also performed export crating
services through this segment. Our export crating operations were sold in 2000.
CUSTOMERS AND MARKETS
Within the fastener manufacturing and distribution segment, the customers for
our cold-formed fasteners are primarily original equipment manufacturers in the
home furnishings and automotive industries. Our electrical components are sold
to manufacturers of electrical products, while our drapery hardware and our wire
drawn products are primarily sold to apparel manufacturers, drycleaners and
distributors of drapery hardware. Our stud bolts, specialty fasteners and
gaskets are sold primarily to customers in the petrochemical, chemical and oil
and gas industries on the Gulf Coast through our network of distribution
facilities. Our manufacturing and distribution facilities within this segment
are strategically located based on the customers that they serve. A significant
portion of the products produced by our fastener manufacturing and distribution
segment are manufactured to specific customer order. No single customer within
this segment accounted for over 10% of our total sales within the segment.
The major markets served by our heavy fabrication segment include electric
power, marine, petrochemical, petroleum refining and medical equipment
industries. Our customer base for this segment consists primarily of large
multinational corporations and engineering and construction companies. Most of
the large fabricated and machined weldments are manufactured pursuant to
long-term contracts and almost all of our products within this segment are
manufactured to specific customer orders. We utilize both an inside and outside
sales staff in marketing our products in this segment. While we usually sell our
pressure vessels directly to engineering and construction firms, we market
directly to the end-users as well. One customer, Vestas-American Wind
Technology, Inc., accounted for over 10% of total sales within this segment.
Sales to this customer represented 13% of total sales within this segment. The
contract with this customer was completed in June 1999.
Our energy segment sells its products primarily to customers in the oil and
gas exploration and production, pipeline transportation, refining and product
storage industries. Per-job orders account for substantially all of our
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remanufacturing and repair work performed and pipeline valves sold. We also sell
new, used and remanufactured pipeline valves from existing inventory according
to customer special orders. We conduct our sales efforts through our inside
sales staff and through sales representatives. No single customer within this
segment accounted for over 10% of our total sales within the segment.
SUPPLIERS AND RAW MATERIALS
The principal raw material that we use in our fastener manufacturing and
distribution and heavy fabrication segments is steel wire and steel. To date, we
have encountered no difficulty in meeting supply requirements of any raw
materials in these segments. We generally maintain an inventory level of raw
materials necessary for approximately 30 days of operations in our fastener
manufacturing and distribution segment. We generally do not maintain a
substantial raw material inventory in our heavy fabrication segment. The steel
industry is cyclical, and steel prices can be volatile due to a number of
factors beyond our control. This volatility can significantly affect our raw
material costs. Competitive conditions determine whether steel price increases
can be passed on to our customers. Our inability to pass some or all future
steel price increases to our customers could have an adverse effect on our
business, financial condition, results of operations and cash flows.
In our energy segment, we acquire new and used valves and related equipment
from suppliers, including individual brokers, other remanufacturing companies or
original equipment manufacturers. We currently have a significant inventory of
valves.
We do not maintain firm contractual agreements with any of our suppliers.
Instead, we purchase our raw materials on a continuing basis from suppliers on
the most favorable terms that we can negotiate. Since product purchases are
negotiated on a continuing basis, our ability to obtain raw materials may not be
as secure as if they were subject to a long-term contract. Our inability to
obtain sufficient raw materials from our suppliers would have a material adverse
effect on our business, financial condition, results of operations and cash
flows.
COMPETITION
Our cold-formed fastener products are subject to competition from a number of
small companies as well as four larger manufacturers. In the special cold-formed
fastener market that is concentrated primarily in the automotive and electronic
markets, we also face competition from larger public companies and foreign
manufacturers. We also compete with nine stud bolt manufacturers on a national
basis as well as other manufacturers on a regional basis. We have many
competitors in the markets for our gaskets, hose and related products that
compete in particular product categories. Our competitors within our heavy
fabrication segment vary based on the products manufactured. As the size and
complexity of the products increase, competition is generally less. The market
for each product is very competitive and we face competition from a number of
different manufacturers in each of our product areas. In our energy segment, we
believe that we are subject to competition from less than ten similarly-sized
remanufacturing businesses. We believe that our broad inventory of valves and
valve parts, machining capabilities and our high level of service are our
primary competitive advantages. Factors that affect competition within all of
our segments include price, quality and customer service. Some of our
competitors within each of our segments have greater financial and other
resources than we have.
BACKLOG
A significant amount of the sales of our heavy fabrication segment relate to
products that require several months to manufacture. As of December 31, 1999,
the backlog for the heavy fabrication segment was $13,093,000 compared to
$58,620,000 at December 31, 1998. As of March 31, 2000, the backlog for the
heavy fabrication segment was $21,528,000.
As of December 31, 1999, the backlog for the fastener manufacturing and
distribution and energy segments was $7,766,000 and $454,000, respectively,
compared to $7,932,000 and $1,956,000 for the fastener manufacturing and
distribution segment and energy segments, respectively, at December 31, 1998. As
of March 31, 2000, the backlog for the fastener manufacturing and distribution
and energy segments was $10,600,000 and $3,347,000, respectively.
7
REGULATION
ENVIRONMENTAL REGULATION
We are subject to extensive and changing federal, state and local
environmental laws including laws and regulations that relate to air and water
quality, impose limitations on the discharge of pollutants into the environment
and establish standards for the treatment, storage and disposal of toxic and
hazardous wastes. Stringent fines and penalties may be imposed for
non-compliance with these environmental laws. In addition, environmental laws
could impose liability for costs associated with investigating and remediating
contamination at our facilities or at third-party facilities at which we have
arranged for the disposal or treatment of hazardous materials.
Although no assurances can be given, we believe that we are in compliance in
all material respects with all environmental laws and we are not aware of any
non-compliance or obligation to investigate or remediate contamination that
could reasonably be expected to result in material liability. However, it is
possible that unanticipated factual developments could cause us to make
environmental expenditures that are significantly different from those we
currently expect. In addition, environmental laws continue to be amended and
revised to impose stricter obligations. We cannot predict the effect such future
requirements, if enacted, would have on us, although we believe that such
regulations would be enacted over time and would affect the industry as a whole.
HEALTH AND SAFETY MATTERS
Our facilities and operations are governed by laws and regulations, including
the federal Occupational Safety and Health Act, relating to worker health and
workplace safety. We believe that appropriate precautions are taken to protect
employees and others from workplace injuries and harmful exposure to materials
handled and managed at its facilities. While we do not anticipate that we will
be required in the near future to expend material amounts by reason of such
health and safety laws and regulations, we are unable to predict the ultimate
cost of compliance with these changing regulations.
EMPLOYEES
As of December 31, 1999, we employed approximately 1,782 persons. Of these
employees, approximately 254 are represented under one collective bargaining
agreement, which was recently renegotiated and which expires on November 20,
2002. We have not experienced a work stoppage at any of our facilities.
FORWARD-LOOKING INFORMATION AND RISK FACTORS
Certain information in this Annual Report, including the information we
incorporate by reference, includes forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. You can identify our forward-looking statements by the
words "expects," "projects," "estimates," "believes," "anticipates," "intends,"
"plans," "budgets," "predicts," "estimates" and similar expressions.
We have based the forward-looking statements relating to our operations on
our current expectations, and estimates and projections about us and about the
industries in which we operate in general. We caution you that these statements
are not guarantees of future performance and involve risks, uncertainties and
assumptions that we cannot predict. In addition, we have based many of these
forward-looking statements on assumptions about future events that may prove to
be inaccurate. Our actual outcomes and results may differ materially from what
we have expressed or forecast in the forward-looking statements.
WE ARE IN DEFAULT UNDER OUR CREDIT FACILITY AND TERM LOANS AND OUR LENDERS
HAVE THE RIGHT TO DECLARE ALL OUTSTANDING AMOUNTS IMMEDIATELY DUE AND PAYABLE.
We have a $15 million note payable to EnSerCo that was due on November 15,
1999 and extended to January 31, 2000. On January 31, 2000, we were unable to
repay the amounts borrowed and defaulted on the note. EnSerCo has not called
this note; however, they retain the right to do so. We have held preliminary
discussions with EnSerCo to modify the terms of the original note agreement,
which include extending the due date. Although we and
8
EnSerCo have exchanged non-binding term sheets that outline certain concepts
that might be included in an amendment to the credit agreement in the future,
including (i) increasing the principal amount to reflect unpaid accrued interest
to date, (ii) extending the maturity date to February 28, 2001, and (iii)
increasing the interest rate to a 15% annual rate, payable at maturity; no
agreement has been reached between us. Furthermore, no assurances can be given
that we will be able to successfully conclude the arrangement being considered
and we remain in default.
We have a $55 million revolving line of credit with Comerica Bank-Texas,
National Bank of Canada and Hibernia Bank (the "Senior Lenders"), which expires
in June 2001. We were not in compliance with certain financial covenants at each
of the required quarterly reporting dates during 1999. We requested and received
waivers from the Senior Lenders for the March 31, 1999 and June 30, 1999
reporting periods; however, we did not seek waivers for the reporting dates of
September 30, 1999, December 31, 1999 or March 31, 2000. We are in violation of
the credit agreement and although the Senior Lenders have not expressed the
intent to call this obligation, the Senior Lenders retain the right to do so. We
have held preliminary discussions with the Senior Lenders to modify the terms
and covenants of the credit agreement. We have reached an agreement in principle
with the Senior Lenders that would (i) accelerate maturity to January 31, 2001,
(ii) reduce the revolving credit line to the lesser of $50 million or the
defined borrowing base, (iii) increase the interest rate to prime plus 3%,
payable weekly and (iv) modify the financial covenants to require maintenance of
minimum consolidated tangible net worth, and earnings before interest, taxes,
depreciation and amortization ("EBITDA")-to-debt-service ratio as well as
require limitations on capital expenditures. In addition, the Senior Lenders
would waive all prior violations under the credit agreement. However, no
assurances can be given that we will be able to successfully conclude the
arrangement being considered.
In connection with the proposed amended agreement, St. James would be
required to provide a $2 million guaranty to the Senior Lenders in order to
secure any over-advances that may occur under the terms of the proposed amended
agreement. In exchange for providing this guaranty, we plan to (i) issue to St.
James warrants to acquire 400,000 shares of our common stock at $1.25 per share
(valued at $84,000), and (ii) forgive a $0.35 million note receivable from St.
James. In addition, if the guaranty is funded, we plan to issue to St. James up
to 500,000 warrants to acquire our common stock at $1.25 per share (valued at up
to $105,000), depending on the amount of the funding.
We have a $9.5 million term note with Heller Financial, Inc. ("Heller"),
which expires on September 30, 2004. We were not in compliance with certain
financial covenants at each of the required quarterly reporting dates during
1999. We requested and received waivers from Heller through the September 30,
1999 reporting period; however, we did not seek waivers for the reporting dates
of December 31, 1999 or March 31, 2000. We are in violation of the credit
agreement and although Heller has not expressed the intent to call this
obligation, it retains the right to do so. We have held preliminary discussions
with Heller to obtain waivers for the events of non-compliance; however, no
assurances can be given that we will be able to successfully obtain the required
consents.
In July 1998, we acquired Beaird Industries, Inc. ("Beaird") from Trinity
Industries, Inc. (the "Seller") for $35.0 million in cash and receivables and a
$5.0 million note to the Seller. Under the purchase agreement, the Seller
assumed all liabilities and retained certain accounts receivable of Beaird. We
believe that we are entitled to receive $2.2 million of excess purchase price
paid to the Seller under the purchase agreement resulting from liabilities
incurred by us in connection with the acquisition, and $1.84 million in other
claims arising from breaches of representation and warranties. On July 15, 1999,
the first installment of $1.8 million was due on the Seller note. It is our
position that we have offset the amount owed under the purchase agreement
against this principal and interest payment. Although the Seller agrees that we
are owed an amount, in January 2000, the Seller filed suit against us in the
134th Judicial District in the District Court of Dallas County, Texas, in a suit
styled TRINITY INDUSTRIES, INC. V. INDUSTRIAL HOLDINGS, INC. In the lawsuit, the
Seller alleged that we defaulted on the $5 million note payment and asserted
that the amount it owes us is not sufficient to pay the first principal and
interest payment and additionally cannot be offset against the $5 million note
payment. In response, in February 2000, we filed a counterclaim alleging the
Seller's fraud in failing to disclose, and in misrepresenting, certain facts
about Beaird. We are currently in discussions to resolve this disagreement.
OUR SECURITIES MAY BE DELISTED FROM THE NASDAQ NMS, POSSIBLY ADVERSELY IMPACTING
THEIR LIQUIDITY AND VALUE.
We attended our scheduled hearing before the Nasdaq Listing Qualifications
Panel on June 1, 2000. We indicated that we plan to file this 1999 Annual Report
on Form 10-K and the Form 10-Q for the quarter ended
9
March 31, 2000 shortly after June 10, 2000. Additionally, we believe that, at
the hearing, we were able to demonstrate our ability to sustain long-term
compliance with all of the maintenance criteria for continued listing on the
Nasdaq NMS. While we expect to have met those filing requirements, we can't
ensure that Nasdaq will not delist our securities. If that happens, our
securities would be immediately eligible to trade on the over-the-counter
market.
As a result of delisting from the Nasdaq NMS, current information regarding
bid and asked prices for our Common Stock may become less readily available to
brokers, dealers and/or their customers, which may reduce the liquidity of the
market for our Common Stock and which in turn may result in decreased demand, a
decrease in the stock price, and an increase in the spread between the bid and
asked prices for our Common Stock.
EVEN IF WE SUCCESSFULLY RESTRUCTURE OUR CREDIT FACILITY AND TERM LOANS, OUR
SUBSTANTIAL DEBT COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION,
RESULTS OF OPERATIONS OR PROSPECTS.
We have a significant amount of debt, which requires us to dedicate a
substantial portion of our cash flow from operations to payments on our debt,
thereby reducing the availability of our cash flow to fund current working
capital, capital expenditures and other general corporate needs. In addition, it
could:
- - increase our vulnerability to general adverse economic and industry
conditions;
- - limit our ability to fund future working capital, acquisitions, capital
expenditures and other general corporate requirements;
- - limit our flexibility in planning for, or reacting to, changes in our
business and our industry; and
- - place us at a competitive disadvantage compared to our competitors that have
less debt.
EVEN IF OUR LENDERS DO NOT DECLARE ALL AMOUNTS UNDER OUR CREDIT FACILITY AND
TERM LOANS IMMEDIATELY DUE AND PAYABLE, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF
CASH TO SERVICE OUR DEBT.
Our ability to service our debt and to fund capital expenditures will depend
on our ability to generate cash in the future. Our ability to generate
sufficient cash, to a large extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. We cannot assure you that we will generate sufficient cash flow or be
able to obtain sufficient funding to satisfy our debt service requirements.
We also cannot assure you that our business will generate sufficient cash
flow from operations or that future borrowings and financing alternatives will
be available to us under our credit facility or from alternative sources in an
amount sufficient to service our debts or to fund our other liquidity needs.
EVEN IF WE SUCCESSFULLY RESTRUCTURE OUR CREDIT FACILITY AND TERM LOANS, OUR DEBT
TERMS IMPOSE CONDITIONS AND RESTRICTIONS THAT COULD SIGNIFICANTLY ADVERSELY
IMPACT OUR ABILITY TO OPERATE OUR BUSINESSES.
Our proposed revised credit agreements contain restrictive covenants that,
among other things, impose certain limitations on us and require us to maintain
specified consolidated financial ratios and satisfy certain consolidated
financial tests. Our ability to meet those financial ratios and financial tests
may be affected by events beyond our control. If we fail to meet those tests or
breach any of the covenants in the future, the lenders may still declare all
amounts outstanding under the credit facility, together with accrued interest,
to be immediately due and payable. If we are unable to repay those amounts, the
lenders could proceed against the collateral granted to them. Our assets may not
be sufficient to repay in full that indebtedness or any other indebtedness.
EVEN IF WE ARE SUCCESSFUL IN ATTRACTING BUYERS FOR OUR NON-STRATEGIC ASSETS AND
INVESTMENTS, WE MAY NOT BE ABLE TO RECOVER THE CARRYING VALUE OF SUCH AMOUNTS.
We are in the process of selling a number of non-strategic assets and
investments as a part of our turnaround plan. Due to the current carrying values
of certain of our non-strategic assets and investments on our consolidated
balance sheet, we may not be able to dispose of certain of these non-strategic
assets and investments at a price that will allow us to recover the carrying
value of such non-strategic assets and investments.
10
THE MARKET VALUE OF OUR COMMON STOCK MAY DECLINE FURTHER IF WE CONTINUE TO INCUR
NET LOSSES.
For the 1999 fiscal year, we incurred a net after-tax loss of $19.0 million,
as more fully discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations." The price of our
common stock, which has declined significantly in the past year, depends on many
factors, most importantly our financial performance. If we continue to incur net
losses, our stock price could decline further.
SOME OF THE MARKETS FOR OUR PRODUCTS ARE CYCLICAL, WHICH MAY ADVERSELY IMPACT
SALES OF THOSE PRODUCTS DURING A DECLINE IN THOSE MARKETS.
Some of our products are sold in markets that are affected by the state of
both the U.S. and worldwide economies and by conditions within the industries
that purchase our products. Therefore, sales of these products may be reduced as
a result of conditions in the markets in which they are sold. Even though the
markets in which we sell our products are diversified, decreased sales in some
of these markets may not be offset by sales in our other markets, which may
result in a material adverse effect on our business, financial condition,
results of operations or prospectus. A significant percentage of our 1999 sales,
most of which are attributable to our energy segment and stud bolt and gasket
operations, are derived from the domestic oil and gas industry.
OUR ACQUISITION STRATEGY MAY NOT ACHIEVE OUR OBJECTIVES AS A RESULT OF A NUMBER
OF POTENTIAL FACTORS.
Our acquisition strategy has been a significant component of our business
plan, and we plan to resume our acquisition strategy after our turnaround plan
has been accomplished and our financial performance has returned to historical
levels. While we evaluate business opportunities on a regular basis, we may not
be successful in identifying any additional acquisitions or we may not have
sufficient financial resources to make additional acquisitions. In addition, as
we complete acquisitions and expand our operations, we will be subject to all of
the risks inherent in an expanding business, including integrating financial
reporting, establishing satisfactory budgetary and other financial controls,
funding increased capital needs and overhead expenses, obtaining management
personnel required for expanded operations, and funding cash flow shortages that
may occur if anticipated sales and revenues are not realized or are delayed,
whether by general economic or market conditions or unforeseen internal
difficulties. Our future performance will depend, in part, on our ability to
manage expanding operations and to adapt our operational systems for these
expansions. We may not succeed at effectively and profitably managing the
integration of our current or any future acquisitions.
We may fail or be unable to discover liabilities in the course of performing
due diligence investigations on each business that we have acquired or will
acquire in the future. Liabilities could include those arising from employee
benefits contribution obligations of a prior owner or noncompliance with
federal, state or local environmental requirements by prior owners for which we,
as a successor owner, may be responsible. We try to minimize these risks by
conducting due diligence as we deem appropriate under the circumstances.
However, we may not have identified, or in the case of future acquisitions,
identify, all existing or potential risks. We also generally require each seller
of acquired businesses or properties to indemnify us against undisclosed
liabilities. In some cases, this indemnification obligation may be supported by
deferring payment of a portion of the purchase price or other appropriate
security. However, we cannot assure you that the indemnification, even if
obtained, will be enforceable, collectible or sufficient in amount, scope or
duration to fully offset the possible liabilities associated with the business
or property acquired. Any of these liabilities, individually or in the
aggregate, could have a material adverse effect on our business, financial
condition, results of operations or prospects.
MANY OF THE INDUSTRIES IN WHICH WE PARTICIPATE ARE HIGHLY COMPETITIVE, WHICH MAY
RESULT IN A LOSS OF MARKET SHARE OR A DECREASE IN REVENUE OR PROFIT MARGINS.
Many of the industries in which we operate are highly competitive. Some of
our competitors within each of our segments have greater financial and other
resources than us. In our key fastener product areas of semi-tubular engineered
fasteners and cold-formed specialty fasteners, safety and straight pins and
threaded stud bolts, we face competition from very small manufacturers as well
as from the operations of companies much larger than ourselves. Our competitors
within our heavy fabrication segment vary based on the products fabricated. As
the size and complexity of the products increase, competition is generally less.
The market for each of our key heavy fabrication products is very competitive,
and we face competition from a number of different manufacturers in each of our
11
product areas. In our energy segment, we believe that we are subject to
competition from less than ten similarly-sized remanufacturing businesses.
Factors that affect competition within all of our segments include price,
quality and customer service. Strong competition may result in a loss of market
share in the segments in which we operate and a decrease in revenue and profit
margins.
THE LOSS OF KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OR
OPERATIONS.
Our success depends largely upon the abilities and experience of certain key
management personnel. If we lose the services of one or more of our key
personnel, it could have a material adverse effect on our business and results
of operations. We do not have non-compete agreements with all of our key
personnel. In addition, we generally do not maintain key-man life insurance
policies on our executives.
OUR INSURANCE COVERAGE MAY BE INADEQUATE TO COVER CERTAIN CONTINGENT
LIABILITIES.
Our business exposes us to possible claims for personal injury or death
resulting from the use of our products. We carry comprehensive insurance,
subject to deductibles, at levels we believe are sufficient to cover existing
and future claims. However, we could be subject to a claim or liability that
exceeds our insurance coverage. In addition, we may not be able to maintain
adequate insurance coverage at rates we believe are reasonable.
OUR OPERATIONS ARE SUBJECT TO REGULATION BY FEDERAL, STATE AND LOCAL
GOVERNMENTAL AUTHORITIES THAT MAY LIMIT OUR ABILITY TO OPERATE OUR BUSINESS.
Our business is affected by governmental regulations relating to our industry
segments in general, as well as environmental and safety regulations that have
specific application to our business. While we are not aware of any proposed or
pending legislation, future legislation may have an adverse effect on our
business, financial condition, results of operations or prospects.
We are subject to various federal, state and local environmental laws,
including those governing air emissions, water discharges and the storage,
handling, disposal and remediation of petroleum and hazardous substances. In
particular, our refinery demolition business involves the removal of asbestos
and other environmental contaminants for which we are responsible for handling
and disposal. We have in the past and will likely in the future incur
expenditures to ensure compliance with environmental laws. Due to the
possibility of unanticipated factual or regulatory developments, the amount and
timing of future environmental expenditures could vary substantially from those
currently anticipated. Moreover, certain of our facilities have been in
operation for many years and, over that time, we and other predecessor operators
have generated and disposed of wastes that are or may be considered hazardous.
Accordingly, although we have undertaken considerable efforts to comply with
applicable laws, it is possible that environmental requirements or facts not
currently known to us will require unanticipated efforts and expenditures that
cannot be currently quantified.
ITEM 2. PROPERTIES
We manufacture our products in the United States and distribute our products
and provide services throughout North America. We have 19
manufacturing/distribution facilities and 15 distribution facilities in seven
states. At December 31, 1999, these facilities contained an aggregate of
approximately 1.9 million square feet of which approximately 20% is owned and
the remainder leased.
We maintain our principal executive offices at 7135 Ardmore, Houston, Texas.
The office facility portion of this property consists of conventional office
space and is, in our opinion, adequate to meet our needs for the foreseeable
future. We believe that all existing office and warehouse facilities leased or
owned by our subsidiaries are adequate to meet our needs for the foreseeable
future and are suitable for the business conducted therein.
12
The following chart lists our material facilities by segment:
SEGMENT NUMBER OF FACILITIES SQUARE FOOTAGE
------- -------------------- --------------
Fastener Manufacturing and Distribution 17 760,000
Heavy Fabrication ...................... 1 691,000
Energy ................................. 13 260,000
Machine Tool Distribution .............. 3 193,000
ITEM 3. LEGAL PROCEEDINGS
In July 1998, we acquired Beaird Industries, Inc. ("Beaird") from Trinity
Industries, Inc. (the "Seller") for $35.0 million in cash and receivables and a
$5.0 million note to the Seller. Under the purchase agreement, the Seller
assumed all liabilities and retained certain accounts receivable of Beaird. We
believe that we are entitled to receive $2.2 million of excess purchase price
paid to the Seller under the purchase agreement resulting from liabilities
incurred by us in connection with the acquisition, and $1.84 million in other
claims arising from breaches of representation and warranties. On July 15, 1999,
the first installment of $1.8 million was due on the Seller note. It is our
position that we have offset the amount owed under the purchase agreement
against this principal and interest payment. Although the Seller agrees that we
are owed an amount, in January 2000, the Seller filed suit against us in the
134th Judicial District in the District Court of Dallas County, Texas, in a suit
styled TRINITY INDUSTRIES, INC. V. INDUSTRIAL HOLDINGS, INC. In the lawsuit, the
Seller alleged that we defaulted on the $5 million note payment and asserted
that the amount it owes us is not sufficient to pay the first principal and
interest payment and additionally cannot be offset against the $5 million note
payment. In response, in February 2000, we filed a counterclaim alleging the
Seller's fraud in failing to disclose, and in misrepresenting, certain facts
about Beaird. We are currently in discussions to resolve this disagreement. The
principal is classified as current portion of long-term debt at December 31,
1999.
In May 2000, we filed suit against some of the former Blastco shareholders in
Harris County District Court, in a suit styled INDUSTRIAL HOLDINGS, INC. AND
INDUSTRIAL HOLDINGS ACQUISITION FOUR, INC. V. GARY H. MARTIN, WORLD WIDE
LEASING, LUBRICATION SERVICES, INC. AND WILLIAM R. MASSEY. In the lawsuit, we
alleged Messrs. Massey and Martin's fraud in failing to disclose, and in
misrepresenting, certain facts about Blastco, as well as Mr. Martin's
mismanagement and self-dealing as President of Blastco. We have not yet served
the defendants.
In addition to the above, we are involved in various claims and litigation
arising in the ordinary course of business. While there are uncertainties
inherent in the ultimate outcome of such matters and it is impossible to
currently determine the ultimate costs that may be incurred, we believe the
resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on our consolidated financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders in the fourth
quarter of 1999.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the Nasdaq NMS under the symbol "IHII." The
following table sets forth the high and low closing sales prices of our common
stock, for the periods indicated below:
PRICE RANGE
-----------
HIGH LOW
------ -------
1999
First Quarter.................... $ 10.38 $ 7.38
Second Quarter................... $ 9.00 $ 6.75
Third Quarter.................... $ 7.94 $ 3.25
Fourth Quarter................... $ 4.19 $ 1.88
1998
First Quarter.................... $ 15.13 $ 11.63
Second Quarter................... $ 16.06 $ 12.50
Third Quarter.................... $ 15.38 $ 8.75
Fourth Quarter................... $ 11.13 $ 8.00
All of the foregoing prices reflect interdealer quotations, without retail
mark-up, mark-downs or commissions and may not necessarily represent actual
transactions in our common stock.
On April 20, 2000, we received a notice of delisting of our Common Stock and
Class B, C, and D Warrants from the Nasdaq NMS because we had not timely filed
this 1999 Annual Report on Form 10-K. The delisting of our securities was stayed
pending our hearing before a Nasdaq Listing Qualifications Panel, on June 1,
2000. We responded by explaining that we had been unable to complete our 1999
audit because we had not received financial information from a company in which
we have a 33 1/3% interest. On May 18, 2000, we received a notice that our
failure to timely file our Form 10-Q for the quarter ended March 31, 2000 would
also be considered at our June 1st hearing. We attended the hearing before a
Nasdaq Listing Qualifications Panel on June 1, 2000 and indicated that we
planned to file our 1999 Annual Report on Form 10-K and the Form 10-Q for the
quarter ended March 31, 2000 shortly after June 10, 2000. We believe that we
were able, at the hearing, to demonstrate our ability to sustain long-term
compliance with all of the maintenance criteria for continued listing on the
Nasdaq NMS. While we expect to meet the filing requirements, we can't ensure
that Nasdaq will not delist our securities. If that happens, our securities
would be immediately eligible to trade on the over-the-counter market.
On June 9, 2000, the last reported sales price of our common stock, as quoted
by the Nasdaq NMS, was $1.25 per share. On April 27, 2000, there were
approximately 303 record holders of our common stock.
We have never paid dividends on our common stock and do not anticipate paying
any cash dividends in the foreseeable future. We currently intend to retain
future earnings to support our operations and growth. Any payment of cash
dividends in the future will be dependent on the amount of funds legally
available therefor, our earnings, financial condition, capital requirements and
other factors that the Board of Directors may deem relevant. Additionally,
certain of our debt agreements restrict the payment of dividends.
14
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods included, selected
consolidated data of our company for the five years ended December 31, 1999,
derived from our consolidated financial statements. The following information
should be read in conjunction with our consolidated financial statements and the
related notes thereto and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
report.
YEARS ENDED DECEMBER 31,(1)
-----------------------------------------------------------------
1999(7) 1998(6) 1997(5) 1996(4) 1995(3)
--------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
OPERATING DATA:
Sales ............................... $ 242,170 $ 218,208 $ 151,228 $ 99,405 $ 75,186
Cost of sales ....................... 202,235 168,369 111,387 75,822 57,540
--------- --------- --------- --------- ---------
Gross profit ........................ 39,935 49,839 39,841 23,583 17,646
Selling, general & administrative ... 53,479 38,311 28,837 19,264 15,441
--------- --------- --------- --------- ---------
Operating income (loss) ............. (13,544) 11,528 11,004 4,319 2,205
Equity in earnings (losses) of
unconsolidated affiliates ........ (5,952) 2,144 (61) -- --
Other income (expense) .............. (6,813) (3,439) (2,263) (1,589) (1,466)
--------- --------- --------- --------- ---------
Income (loss) before income taxes ... (26,309) 10,233 8,680 2,730 739
Income tax provision (benefit) ...... (7,276) 4,099 3,477 1,025 74
--------- --------- --------- --------- ---------
Net income (loss) ................... (19,033) 6,134 5,203 1,705 665
Distributions to shareholders ....... -- 34 130 77 68
--------- --------- --------- --------- ---------
Net income (loss) available to common
shareholders ..................... $ (19,033) $ 6,100 $ 5,073 $ 1,628 $ 597
========= ========= ========= ========= =========
Basic earnings (loss) per share ..... $ (1.27) $ .44 $ .44 $ .18 $ .07
Diluted earnings (loss) per share ... $ (1.27) $ .42 $ .41 $ .17 $ .07
Weighted average common shares
outstanding -- basic ............ 14,956 14,000 11,489 9,060 8,412
Weighted average common shares
outstanding -- diluted .......... 14,956 14,726 12,403 9,710 8,510
DECEMBER 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital (deficit) ........... $ (36,079) $ 10,166 $ 7,768 $ 6,036 $ 4,676
Total assets ........................ 189,243 203,669 95,461 62,907 42,516
Long-term obligations (2) ........... 9,903 30,334 13,510 9,461 7,426
Total liabilities ................... 139,639 137,756 58,137 40,439 29,501
Shareholders' equity ................ 49,604 65,913 37,324 22,468 13,015
(1) The combinations of our company with GHX, Moores Pump, Ameritech and
United Wellhead in March through July 1998 and Blastco in 1999 and the
combination of Blastco and Valve Repair and Supply Company, Inc. in 1997
were accounted for as poolings-of-interest. The selected consolidated
financial data have been prepared as if these companies had been combined
for all periods presented.
(2) Excludes other long-term liabilities and deferred income taxes.
15
(3) We acquired Landreth Engineering's Connecticut manufacturing facility in
December 1995 and the results of its operations have been included from
the date of acquisition.
(4) We acquired American Rivet in November 1996 and the results of its
operations have been included from the date of acquisition.
(5) We acquired Lone Star in February 1997, Manifold Valve Services in March
1997, Rogers Equipment in August 1997 and Walker Bolt in November 1997.
The results of their operations have been included from the date of
acquisition.
(6) We acquired RJ Machine in January 1998, Philform in February 1998, Beaird
in July 1998, and Ideal Products and A&B Bolt in August 1998. The results
of their operations have been included from the date of acquisition.
(7) We sold Rogers Equipment in October 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
We own and operate a diversified group of middle-market industrial
manufacturing and distribution businesses whose products include metal
fasteners, large and heavy pressure vessels, high-pressure industrial valves and
related products and services. Operations are organized into four business
segments: (i) fastener manufacturing and distribution; (ii) heavy fabrication;
(iii) valve manufacturing and repair (now known as "energy"); and (iv) machine
tool distribution.
Our historical financial statements have been restated to include, for all
periods presented, the results of operations from each of the companies that
were acquired in acquisitions accounted for under the pooling-of-interests
method. The results of operations for companies acquired in acquisitions
accounted for under the purchase method are included in our historical financial
statements from the date of such acquisition. Since these "purchase"
acquisitions were consummated at various times, the financial information
contained herein with respect to each fiscal period does not fully reflect the
results of operations that would have been achieved had these acquisitions been
consummated at the beginning of the periods presented or which may be achieved
in the future. In connection with each "purchase" acquisition, we have recorded
goodwill to the extent the purchase price exceeded the fair market value of the
specific assets acquired.
In June 2000, we reached an agreement in principle with our senior lenders to
amend our revolving line of credit agreement, including covenants we believe we
will be able to comply with. We expect that the new maturity date will be
January 31, 2001. There can be no assurance that the agreement to amend our
revolving line of credit will be executed. Although this proposed agreement will
help to address our near-term liquidity issues, we still have substantial debt
obligations, including $87.3 million in notes payable and revolving credit debt,
which are currently in default. Therefore, we will continue to pursue various
financing alternatives to meet our future short-term liquidity needs. We
anticipate refinancing our debt facilities in 2000, although no assurances can
be given that we will be able to refinance our debt or that we will be able to
obtain terms that are as favorable as those that currently exist.
In addition to our current focus on refinancing our indebtedness, our
business strategy is to increase the sales, cash flow and profitability of each
business segment through a turnaround plan that was developed and implemented by
the Company to address the operational difficulties that occurred during 1999
and into 2000. This turnaround plan entails streamlining our operations and
refocusing on our core competencies in the following three areas:
ENHANCE REVENUE GROWTH. We believe that significant opportunities exist to
enhance revenue growth in our business segments. We plan to achieve this
growth by (i) promoting cross-selling opportunities across our customer base;
(ii) identifying new applications and new markets for our existing products,
production capabilities, and skill base; and (iii) acquiring companies that
are strategic fits within our business segments. To date in the fastener
segment, we have integrated the sales of certain product lines across each of
the related companies within this segment. In the energy segment, rather than
integrate the sales of our product lines
16
across the companies within that segment, we have begun to integrate our
customer base through the joint marketing of the individual companies'
products and services to the entire energy segment customer base. Over the
next year, we will continue to expand on these efforts. In the heavy
fabrication segment, we have focused our efforts on developing and expanding
our power generation customers in order to solidify our position in this
burgeoning market. We believe that our strong market positions within the
niche markets we serve enhance our ability to effectively implement this
aspect of the turnaround plan. Although historically much of our growth has
been through acquisition, acquisitions will not be an area of emphasis until
our turnaround plan has been fully executed and our financial performance has
returned to historical levels.
ELIMINATE WASTE. We believe that significant opportunities exist to reduce or
eliminate waste by: (i) reducing working capital levels company-wide through
increased inventory turns and accelerated collection of receivables; (ii)
selling non-strategic assets that are not part of our core competencies;
(iii) consolidating selected facilities, (iv) converting our present
manufacturing processes to "lean" or more efficient manufacturing techniques,
and (v) fully implementing our ERP systems, which will allow our managers to
obtain and use production information faster and more efficiently than
before.
During the past sixteen months, we have (i) consolidated three of our
facilities into other existing facilities, (ii) sold two non-core business
units, (iii) closed and liquidated four non-core and unprofitable business
units, (iv) completed the installation of two ERP systems, (v) converted one
plant from a traditional "batch and queue" operation to one that employs
one-piece flow or cellular production, and (vi) reduced inventory and
receivables. On a going-forward basis, we intend to (i) consolidate an
additional plant into an existing facility, (ii) sell three parcels of excess
real estate, (iii) convert the distribution operations of our fastener
segment to a common ERP system, and (iv) continue the implementation of
"lean" manufacturing techniques. We plan to pursue similar measures when it
is our best interest to do so.
DEVELOP EMPLOYEES. We believe that employee development is an integral part
of our turnaround plan. Across all of our businesses, our management, sales
and operations teams have participated in numerous training and development
programs that focus on management, sales, production, technical, safety and
quality issues. We believe that this training is a valuable tool in the
development and enhancement of our employees' skill sets and that we will
continue to be rewarded for these efforts by a better trained, more
knowledgeable and skilled workforce.
Our results of operations are affected by the level of economic activity in
the industries served by our customers, which in turn may be affected by other
factors, including the level of economic activity in the U.S. and foreign
markets they serve. The principal industries served by our clients are the
automotive, home furnishings, petrochemical and oil and gas industries. An
economic slowdown in these industries could result in a decrease in demand for
our products and services, which could adversely affect our operating results.
During 1998 and into 1999, oil and gas prices declined significantly, resulting
in a decrease in the demand for our products and services that are used in the
exploration and production of oil and gas. Exploration and production
expenditures generally lag improvements in oil and gas prices; therefore,
although oil and gas prices have improved during 1999 and into 2000, we did not
experience significant sales increases through the end of 1999. We have
experienced increased sales and backlog in the first quarter of 2000.
This section should be read in conjunction with our consolidated financial
statements included elsewhere.
17
RESULTS OF OPERATIONS
The following table sets forth certain operating statement data for each of
our segments for each of the periods presented.
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
------------- ------------- -------------
Sales:
Fastener Manufacturing and
Distribution ......... $ 122,422,980 $ 110,403,167 $ 79,472,953
Heavy Fabrication ........ 73,807,083 40,011,472
Energy ................... 40,463,067 53,487,881 56,130,384
Machine Tool Distribution 5,476,733 14,305,192 15,624,347
------------- ------------- -------------
242,169,863 218,207,712 151,227,684
------------- ------------- -------------
Cost of Sales:
Fastener Manufacturing and
Distribution ......... 98,127,852 83,189,597 59,166,263
Heavy Fabrication ........ 70,133,582 34,775,923
Energy ................... 29,126,250 38,531,540 38,762,176
Machine Tool Distribution 4,847,682 11,871,634 13,458,243
------------- ------------- -------------
202,235,366 168,368,694 111,386,682
------------- ------------- -------------
Selling, General and Administrative
Fastener Manufacturing and
Distribution ......... 26,078,184 20,319,963 14,762,350
Heavy Fabrication ........ 9,358,807 3,254,128
Energy ................... 10,393,494 10,639,143 10,767,049
Machine Tool Distribution 2,131,057 2,410,902 2,423,430
Corporate ................ 5,517,352 1,686,506 884,040
------------- ------------- -------------
53,478,894 38,310,642 28,836,869
------------- ------------- -------------
Operating Income (Loss) ............ $ (13,544,397) $ 11,528,376 $ 11,004,133
============= ============= =============
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
SALES. On a consolidated basis, sales increased $23,962,151, or 11%, in 1999
compared to 1998.
Sales for the fastener manufacturing and distribution segment increased
$12,019,813, or 11%, in 1999 compared to 1998. This increase was primarily
attributable to the acquisition of Ideal Products and A&B Bolt in the third
quarter of 1998, which together added $26.0 million in sales for 1999 compared
to 1998. The increase was partially offset by a $11.3 million aggregate sales
decrease in our stud bolt and gasket operations, excluding A&B Bolt. These
operations were adversely effected by depressed activity in the oil and gas
industries and a decline in spending in the refining and processing industries
related to reductions in our customers' profit margins that resulted from
increases in their feedstock prices. Additionally, sales at our engineered
fasteners operations, excluding Ideal Products, decreased by approximately $2.7
million due to several factors: (i) we lost two customers in 1999 that were
customers in 1998; one of these is again a customer in 2000 and the other, a
lower margin customer, is not expected to return, (ii) a third customer's
business was off significantly in 1999 compared with 1998 levels, though its
business has recovered in 2000 to date, (iii) one of our engineered fasteners
group companies serves the aircraft/defense industry, which was weak in 1999
compared with 1998, and (iv) the plant consolidations that took place in the
fourth quarter of 1999 were somewhat disruptive at the affected plants during
the actual transferring period.
18
Sales for the heavy fabrication segment increased by $33,795,611, or 84%, in
1999 compared to 1998. The heavy fabrication segment was formed July 1, 1998
with the acquisition of Beaird Industries. Under the purchase method of
accounting, no sales were recorded relating to this segment prior to the second
half of 1998. Sales for 1999 increased $2.2 million, or 3.1%, compared to 1998,
inclusive of Beaird's sales for the six-month period prior to our ownership.
This sales increase, which was greater during the first half of the year, was
based on a strategic decision to increase sales by expanding the range of
products manufactured, primarily to the production of wind turbine towers.
Beaird's primary contract for wind turbine towers required delivery of the
towers on or before June 30, 1999, the mid-point of our year. The man-hours
associated with the completed wind turbine tower contract were not replaced
during the remainder of 1999. Additionally, a substantial percentage of this
segment's revenues are derived from customers in the hydrocarbon processing
industry. Because of the volatile oil feedstock prices during 1999, the
customers of this segment experienced a reduction in their profit margins and
have materially reduced their capital spending. In addition, heavy competitive
pressure from overseas, particularly Korean competition, has substantially
reduced backlog. Due to the highly competitive market and the downturn in
spending in one of the primary industries that we serve, we experienced a
continued decline in revenues for this segment through the first quarter of
2000. However, at March 31, 2000, Beaird's backlog had increased 64% over
December 31, 1999.
Sales for the energy segment decreased $13,024,814, or 24%, in 1999 compared
to 1998. This sales decrease was primarily attributable to a decrease in sales
volume resulting from reductions in the worldwide rig count, continued caution
regarding the long-term hydrocarbon price environment, consolidation within the
oil and gas industry and ongoing cost reduction efforts by oil and gas
companies. Increasing worldwide demand for oil and gas coupled with declining
production in many areas should support a more stable and favorable level of oil
and gas prices in the future, resulting in increased exploration and production
spending in 2000 and an improved demand for oilfield services.
Sales for the machine tool distribution segment decreased $8,828,459, or 62%,
as demand for machine tools declined in the energy industry due to the factors
described in the energy segment disclosure above. However, as the level of oil
and gas prices has risen, sales of machine tools in this segment have increased
in the first quarter of 2000 in comparison to previous quarters in 1999. In
2000, we sold our export crating business, which had sales of $1,626,000 in
1999. We do not expect this transaction to have a material impact on the
operating results of this segment.
COST OF SALES. On a consolidated basis, cost of sales increased $33,866,672,
or 20%, in 1999 compared to 1998. Cost of sales as a percentage of sales was 84%
in 1999 compared to 77% in 1998. Cost of sales as a percentage of sales was
higher on a consolidated basis for a number of reasons. The addition, in July
1998, of the heavy fabrication segment, which typically has lower gross margins
on its large contract business in comparison to our other segments, negatively
impacted consolidated margins. The energy segment, which typically has the
highest margins of all of our segments, represented a smaller percentage of
total sales excluding the heavy fabrication segment (24% in 1999 compared to 30%
in 1998). Additionally, margins in the energy segment, fastener segment and
heavy fabrication segment decreased as competition for shrinking sales volumes
in the energy-related industries (as discussed above) placed downward pressure
on sales prices.
Cost of sales for the fastener manufacturing and distribution segment
increased $14,938,255, or 18%, in 1999 compared to 1998, primarily as a result
of the increased sales related to the addition of Ideal Products and A&B Bolt
acquired in 1998 as described above. Cost of sales as a percentage of sales was
80% for 1999 compared to 75% in 1998 as a result of management and production
changes, including planned reductions in inventory at two of our facilities.
Additionally, several large sales took place during 1999 that had lower than
average margins resulting from lower negotiated pricing, acceptable due to high
volume. In addition, cost of sales increased as a result the write-off of
inventory and tooling in the third and fourth quarters of 1999 of approximately
$3.3 million in the aggregate, primarily in association with the closing of our
Waterbury, CT and El Paso, TX manufacturing facilities and our Baytown, TX
distribution facility.
Cost of sales for the heavy fabrication segment increased $35,357,659, or
102%, in 1999 compared to 1998. Cost of sales as a percentage of sales was 95%
in 1999 compared to 87% for 1998. Gross margins were adversely affected by the
significant increase in sales during a period in which we were unable to hire or
retain adequate skilled workers due to the terms of our then existing union
contract that covered most of Beaird's workforce. The
19
union contract expired in November 1998 and the effectiveness of the workforce
was further reduced during the period of contract renegotiation. The backlog
created during the negotiating process was still being cleared in the first half
of 1999 and this, along with the increase in volume associated with the wind
turbine tower product addition, resulted in higher than usual overtime and
outsourcing costs. Margins also decreased as we were forced to lower our
contract values in response to the competitive pressures mentioned in relation
to the decline in sales. Cost of sales was also impacted by approximately $0.9
million in expenses, primarily relating to warranty reserves in connection with
the wind turbine tower contract and personnel severance and related charges.
Cost of sales for the energy segment decreased $9,405,290, or 24%, in 1999
compared to 1998, primarily as a result of the decrease in sales described
above. Cost of sales as a percentage of sales was 72% in 1999 and 1998. For the
first half of 1999, cost of sales as a percentage of sales decreased because as
sales decreased, our energy companies reduced their workforce and were able to
eliminate overtime and outsourcing of production. However, in the second half of
1999, margins decreased in our oilfield related businesses, especially in parts
and equipment sales, as competition in this market intensified due to the
reasons discussed in relation to sales decreases. In addition, we discontinued
certain product offerings and wrote-off related inventories at one of our
subsidiaries resulting in charges of approximately $0.2 million during the third
and fourth quarters of 1999.
Cost of sales for the machine tool distribution segment decreased $7,023,952,
or 59%, in 1999 compared to 1998 primarily as a result of the decrease in sales
described above. Cost of sales as a percentage of sales was 89% for 1999
compared to 83% for 1998. Sales related to export crating represented 30% of
total sales for 1999 compared to 23% for 1998. Gross margins have historically
been higher for crating compared to machine sales. The increase in margin due to
sales mix was partially offset due to the incurrence of $0.6 million in costs in
the third and fourth quarters of 1999 related to the liquidation of inventory
resulting from the closure of a used equipment sales subsidiary.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. On a consolidated basis,
selling, general and administrative expenses increased $15,168,252, or 40%, in
1999 compared to 1998. The increase is primarily the result of (i) an increase
of approximately $7.7 million reflecting the fact that 1999 included a full year
of expenses for Beaird, Ideal Products and A&B Bolt, which were acquired during
the third quarter of 1998, (ii) approximately $1.0 million in costs incurred due
to the closing of the Waterbury, CT, El Paso, TX and Baytown, TX facilities and
the consolidation of the distribution and production into other facilities,
along with severance costs associated with personnel reductions at various
facilities, (iii) an expense of $1.1 million for bad debt associated with the
settlement of a dispute with a major customer in the heavy fabrication segment,
(iv) professional fees related to productivity consultants in the amount of
approximately $1.1 million at our heavy fabrication segment, and (v) $1.7
million in expenses incurred in relation to the high yield bond offering that
was abandoned in the third quarter of 1999. In addition, we incurred fees
associated with our refinancing efforts and increased provisions for bad debt at
various subsidiaries due to the difficulties being experienced by our customers
in the upstream energy market. These increases were partially offset by cost
reduction measures implemented as a result of the decrease in sales.
Selling, general and administrative expenses for the fastener manufacturing
and distribution segment increased $5,758,221, or 28%, primarily as a result of
two acquisitions in the third quarter of 1998 as described above.
Selling, general and administrative expenses in the heavy fabrication segment
increased $6,104,679, or 188%, in 1999 compared to only six months ended
December 31, 1998 (Beaird was purchased effective July 1, 1998). As mentioned
above, the third and fourth quarters of 1999 included an aggregate of
approximately $1.1 million in expense for a provision for bad debt related to a
customer dispute and $1.1 million in professional fees associated with
productivity consultants. Selling, general and administrative expenses without
the provision and professional fees were comparable to the historical amounts
for the full year of 1998 (including expenses incurred by Beaird prior to its
acquisition by the Company).
Selling, general and administrative expenses for the energy segment decreased
$245,649, or 2%, in 1999 compared to 1998. This was primarily as the result of
the elimination of the salary and related expenses of the president of a company
who resigned in connection with our acquisition of the company, which was
accounted for under the pooling-of-interests method of accounting; other
personnel reductions; and reductions in other general and administrative
expenses in response to decreases in sales.
20
Selling, general and administrative expenses for the machine tool
distribution segment decreased $279,845, or 12%, in 1999 compared to 1998,
primarily as a result of cost reduction measures implemented due to the
decreases in sales described above.
Selling, general and administrative expenses at corporate increased
$3,830,846, or 227%, in 1999 compared to 1998. This increase was primarily
attributable to the $1.7 million in expenses incurred in relation to the high
yield bond offering that was abandoned in the third quarter of 1999, and
personnel additions and increases in professional fees associated with our
continued refinancing efforts.
EARNINGS (LOSSES) FROM EQUITY INVESTMENTS IN UNCONSOLIDATED AFFILIATES. On a
consolidated basis, earnings from equity investments decreased $8,095,734 in
1999 compared to 1998, primarily as a result of the Company's investment in one
affiliate, AWR, which is engaged in the demolition of refineries and site
remediation. Losses at this affiliate for 1999 include the recognition of
anticipated losses to complete its contracts. During 1999, AWR experienced a
tank failure in addition to other problems at a job site, significantly
increasing the cost of the site remediation. Additionally, we recognized a
$280,000 loss on the liquidation of an investment in an affiliate, Midland, that
had been engaged in the recycling business. Midland and AWR are equity
investments of Blastco.
INTEREST EXPENSE. On a consolidated basis, interest expense increased
$4,385,876, or 82%, in 1999 compared to 1998, primarily as a result of higher
debt levels and interest rates.
INTEREST INCOME. On a consolidated basis, interest income decreased $144,250,
or 28%, in 1999 compared to 1998, primarily as a result of lower cash balances
being held in interest bearing accounts.
OTHER INCOME, NET. On a consolidated basis, other income, net, was
approximately $2.5 million for 1999, primarily consisting of $1.0 million in
deferred gain recognition on the sale of a demolition contract, as well as
rental income and gains and losses on the disposal of assets.
INCOME TAXES. Income tax expense decreased $11,374,311 in 1999 compared to
1998. Our effective tax rate for 1999 was 28% compared to 40% for 1998. The
effective tax rate decreased as our federal income tax refunds received as a
result of net operating loss carrybacks were at an actual rate which was less
than 34%, the increase in the valuation allowance, and because, despite net
losses on a consolidated basis, we have tax expense at a state level.
NET INCOME (LOSS). On a consolidated basis, the Company incurred a net loss
of $19,033,290 in 1999 compared to net income of $6,134,229 in 1998 as a result
of the foregoing factors.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
SALES. On a consolidated basis sales increased $66,980,028, or 44%, in 1998
compared to 1997.
Sales for the fastener manufacturing and distribution segment increased
$30,930,214, or 39%, in 1998 compared to 1997. This increase was primarily as a
result of the acquisitions of two companies in 1998 and the inclusion of a full
year of operations of two companies in 1998 that were acquired in 1997.
The heavy fabrication segment was formed July 1, 1998 with the acquisition of
Beaird. Under the purchase method of accounting, no sales were recorded relating
to this segment prior to the second half of 1998. Sales for the six months ended
December 31, 1998 increased compared to the periods prior to the acquisition of
Beaird by approximately $13.1 million or 49% over the comparable 1997 period and
$8.6 million, or 27%, over the six months ended June 30, 1998. Sales increased
based on a strategic decision to increase sales by expanding the range of
products manufactured.
21
Sales for the energy segment decreased $2,642,503, or 5%, in 1998 compared to
1997. This decrease was primarily due to a $3,487,015 decrease in sales at
Blastco attributable to the assignment of demolition contracts to AWR, a company
in which we have a 33 1/3% interest. Our interest in the earnings from these
contracts is included in the earnings from equity investments in unconsolidated
affiliates. The decrease in sales at Blastco was partially offset by an $844,512
increase in sales resulting from the inclusion of a full year of operations of
two companies acquired during 1997.
Sales for the machine tool distribution segment decreased $1,319,155, or 8%,
as demand for machine tools declined in the Texas Gulf Coast region.
COST OF SALES. On a consolidated basis, cost of sales increased $56,982,012,
or 51%, in 1998 compared to 1997. Cost of sales as a percentage of sales was 77%
in 1998 compared to 74% in 1997. Cost of sales as a percentage of sales was
higher on a consolidated basis primarily as a result of the addition in 1998 of
the heavy fabrication segment, which typically has lower gross margins on its
large contract business in comparison to our other segments.
Cost of sales for the fastener manufacturing and distribution segment
increased $24,023,334, or 41%, in 1998 compared to 1997. Cost of sales as a
percentage of sales remained relatively unchanged from 75% in 1998 compared to
74% in 1997.
Cost of sales for the heavy fabrication segment as a percentage of sales was
87% for the six months ended December 31, 1998. Gross margins were adversely
affected by the significant increase in sales during a period in which we were
unable to hire or retain adequate skilled workers due to the terms of our then
existing union contract that covered most of Beaird's workforce. The union
contract expired in November 1998 and the effectiveness of the workforce was
further reduced during the period of contract renegotiation. A new collective
bargaining agreement was entered into in late November 1998. We believe that the
terms of this agreement provide us with adequate flexibility to hire employees
with the appropriate skills. With the settlement of the contract and additional
new hires, Beaird experienced improvements in labor efficiency beginning in
December 1998. However, due to the increase in backlog during the third and
fourth quarters, the effects on gross margins in the fourth quarter of 1998
continued through the first six months of 1999 as Beaird reduced its backlog.
Cost of sales for the energy segment decreased $230,636, or 0.6%, in 1998
compared to 1997. This decrease was primarily due to the decrease in sales at
Blastco described above, offset by the inclusion of a full year of operations of
two companies acquired during 1997. Cost of sales as a percentage of sales was
72% in 1998 compared to 69% in 1997.
Cost of sales for the machine tool distribution segment decreased $1,586,609,
or 12%, in 1998 compared to 1997 primarily as a result of the decrease in sales
described above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. On a consolidated basis,
selling, general and administrative expenses increased $9,473,773, or 33%, in
1998 compared to 1997.
Selling, general and administrative expenses for the fastener manufacturing
and distribution segment increased $5,557,613, or 38%, primarily as the result
of acquisitions in the third quarter of 1998 and the inclusion of a full year of
operations of two companies in 1998 that were acquired in late 1997.
Selling, general and administrative expenses in the heavy fabrication segment
for the six months ended December 31, 1998 relate to Beaird's operations during
the second half of 1998 and were comparable to the historical amounts prior to
the acquisition of Beaird.
Selling, general and administrative expenses for the energy segment decreased
$127,906, or 1%, in 1998 compared to 1997. This was primarily as the result of
the elimination of the salary and related expenses of the president of a company
who resigned in connection with our acquisition of the company.
Selling, general and administrative expenses for the machine tool
distribution segment for 1998 did not change significantly from 1997.
22
Selling, general and administrative expenses at corporate increased $802,466,
or 91%, in 1998 compared to 1997 primarily as a result of personnel increases
and increases in professional fees that have resulted from our growth.
EARNINGS FROM EQUITY INVESTMENTS IN UNCONSOLIDATED AFFILIATES. On a
consolidated basis, earnings from equity investments increased $2,204,651 in
1998 compared to 1997, primarily as a result of a full year of operations from
our investment in AWR, which had in process two contracts for demolition and
site abatement and from our investment in OF Acquisition, L.P. ("OF"), which was
entered into during 1998.
INTEREST EXPENSE. On a consolidated basis, interest expense increased
$2,587,616, or 94%, in 1998 compared to 1997, primarily as a result of $57.7
million in debt assumed or incurred in connection with acquisitions in 1998.
INTEREST INCOME. On a consolidated basis, interest income increased $361,541,
or 226%, in 1998 compared to 1997. Interest income was earned primarily on the
$10.9 million raised in January 1998 in connection with our offer to Class B
warrant holders, which was held in interest bearing accounts prior to being used
to repay debt and in acquisitions, as well as on notes receivable, which have
increased since 1997.
OTHER INCOME, NET. On a consolidated basis, other income, net, increased
$1,049,648, or 322%, in 1998 compared to 1997, primarily as a result of
recognition of income resulting from the sale of an interest in a demolition
contract to one of our equity investees.
INCOME TAXES. Income tax expense increased $621,530, or 18%, in 1998 compared
to 1997. The effective tax rate was 40% for 1998 and 1997.
NET INCOME. Net income was $6,134,229 in 1998 compared to $5,203,292 in 1997
as a result of the foregoing factors.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had a retained deficit of $3,868,157 and negative
working capital of $36,078,657 as a result of $88,959,491 in notes payable and
long-term obligations classified as current liabilities. At March 31, 2000, we
had a retained deficit of $9,149,903 and negative working capital of $41,902,642
as a result of $86,672,523 in notes payable and long-term obligations classified
as current liabilities.
At December 31, 1999, we had short-term debt of $46,192,562, current
maturities of long-term obligations of $42,766,929, long-term obligations of
$9,902,936 and shareholders' equity of $49,603,578. Historically, our principal
liquidity requirements and uses of cash have been for debt service, capital
expenditures, working capital and acquisition financing, and our principal
sources of liquidity and cash have been from cash flows from operations,
borrowings under long-term debt arrangements and issuances of equity securities.
We have financed acquisitions through bank borrowings, sales of equity and
internally generated funds.
PRINCIPAL DEBT INSTRUMENTS. As of December 31, 1999, we had an aggregate of
$98.9 million borrowed under our principal bank credit facility and debt
instruments entered into or assumed in connection with acquisitions as well as
other bank financings. In June 2000, we reached an agreement in principle to
amend our credit agreement with our Senior Lenders, which represents $57.9
million of debt, through January 2001.
We are currently exploring various financing alternatives to meet our future
liquidity needs. We anticipate refinancing certain of our debt facilities in
2000, although no assurances can be given that we will be able to refinance such
facilities or that we will be able to obtain terms that are as favorable as
those that currently exist.
We have a $55 million revolving line of credit with Comerica Bank-Texas,
National Bank of Canada and Hibernia Bank (the "Senior Lenders"), which expires
in June 2001. We were not in compliance with certain financial covenants at each
of the required quarterly reporting dates during 1999. We requested and received
waivers from the Senior Lenders for the March 31, 1999 and June 30, 1999
reporting periods; however, we did not
23
seek waivers for the reporting dates of September 30, 1999, December 31, 1999 or
March 31, 2000. We were in violation of the credit agreement and although the
Senior Lenders have not expressed the intent to call this obligation, the Senior
Lenders retain the right to do so. The principal amount of the credit facility
is the lesser of $55 million at December 31, 1999 or a defined borrowing base.
The credit facility bore interest at the prime rate of Comerica at December 31,
1999 (which was 8.5% at December 31, 1999), and allows the borrowing of funds
based on 80% of eligible accounts receivable and 50% of eligible inventory. At
December 31, 1999, the borrowing capacity under the credit facility was $46.8
million and availability was $0.6 million. At June 9, 2000, the borrowing
capacity was $44.7 million and availability was $0.4 million. We have held
preliminary discussions with the Senior Lenders to modify the terms and
covenants of the credit agreement. We have reached an agreement in principle
with the Senior Lenders that would (i) accelerate maturity to January 31, 2001,
(ii) reduce the revolving credit line to the lesser of $50 million or the
defined borrowing base, (iii) increase the interest rate to prime plus 3%,
payable weekly and (iv) modify the financial covenants to require maintenance of
minimum consolidated tangible net worth, and earnings before interest, taxes,
depreciation and amortization ("EBITDA")-to-debt-service ratio as well as
require limitations on capital expenditures. In addition, the Senior Lenders
would waive all prior violations under the credit agreement. However, no
assurances can be given that we will be able to successfully conclude the
arrangement being considered.
In connection with the proposed credit agreement amendment, St. James would
be required to provide a $2 million guaranty to the Senior Lenders in order to
secure any over-advances that may occur under the terms of the proposed credit
agreement amendment. In exchange for providing this guaranty, we plan to (i)
issue to St. James warrants to acquire 400,000 shares of our common stock at
$1.25 per share (valued at $84,000), and (ii) forgive a $0.35 million note
receivable from SJCP. In addition, if the guaranty is funded, we plan to issue
to St. James up to 500,000 warrants to acquire our common stock at $1.25 per
share (valued at up to $105,000), depending on the amount of the funding.
We have a $15 million note payable to EnSerCo, L.L.C. ("EnSerCo") that became
due on November 15, 1999. We were granted an extension of the due date through
January 31, 2000. On January 31, 2000, we were unable to repay the amounts
borrowed and defaulted on the note payable. EnSerCo has not called this note
due; however, it retains the right to do so. We have held preliminary
discussions with EnSerCo to modify the terms of the original note agreement,
which include extending the due date. Although we have exchanged non-binding
term sheets with EnSerCo that outline certain concepts that might be included in
an amendment to the credit agreement in the future, including (i) increasing the
principal amount to reflect unpaid accrued interest to date, (ii) extending the
maturity date to February 28, 2001, and (iii) increasing the interest rate to a
15% annual rate, payable at maturity; no agreement has been reached between the
parties. Furthermore, no assurances can be given that we will be able to
successfully conclude the arrangement being considered.
We have a $9.5 million term note with Heller Financial, Inc. ("Heller"),
which expires on September 30, 2004. We were not in compliance with certain
financial covenants at each of the required quarterly reporting dates during
1999. We requested and received waivers from Heller through the September 30,
1999 reporting period; however, we did not seek waivers for the reporting dates
of December 31, 1999 or March 31, 2000. We are in violation of the credit
agreement and although Heller has not expressed the intent to call this
obligation, it retains the right to do so. We have held preliminary discussions
with Heller to obtain waivers for the events of non-compliance; however, no
assurances can be given that we will be able to successfully obtain the required
consents.
We are in default of a $5 million note payable to Trinity Industries, Inc.
("Trinity"). We and Trinity have entered into litigation regarding the note
payable (see Item 3. Legal Proceedings).
Our liquidity has been constrained by our borrowing base limitations and by
our operating losses and, as a result, our financial position and cash flows
have been adversely effected. We have experienced an increase in the level of
our accounts payable at December 31, 1999 as compared to prior periods. We
continue to explore various alternative to improve our liquidity, including
refinancing our indebtedness with other lenders. In addition, we have identified
and are pursuing the sale of non-strategic assets as well as raising additional
debt and equity capital. There can be no assurance that we will successfully
refinance our indebtedness with other lenders, or successfully sell
non-strategic assets.
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During the third quarter of 1999, we developed and implemented a turnaround
plan to streamline our operations and refocus on our core competencies through
enhanced revenue growth, elimination of waste and development of employees. As a
part of this turnaround plan, we closed duplicate facilities, reduced personnel,
eliminated certain products, wrote-off the related inventory, and adopted
uniform information systems platforms in the fastener segment. On a
going-forward basis, we intend to (i) consolidate an additional plant into an
existing facility, (ii) sell three parcels of excess real estate, (iii) convert
the distribution operations of our fastener segment to a common ERP system, and
(iv) continue the implementation of "lean" manufacturing. We will continue to
pursue other similar measures when it is our best interest to do so.
The energy segment, excluding our refinery demolition operations, is closely
tied to the price of oil and gas. Sales and operating income within the energy
group have been adversely effected over the past twelve to fifteen months. This
reduction in sales volume and profitability has been primarily attributable to
reductions in the worldwide and gulf coast rig counts, continued caution
regarding the long-term hydrocarbon price environment, consolidation within the
oil and gas industry, and ongoing cost reduction efforts by oil and gas
companies. Within the energy segment, we believe that sales reached their lowest
levels during the second and third quarters of 1999. Increasing worldwide demand
for oil and gas coupled with declining production in many areas should support a
more stable and favorable level of oil and gas prices in the future, resulting
in increased exploration and production spending in 2000 and an improved demand
for oilfield services. We have experienced such a trend for the first quarter of
2000 in our energy group, with increasing backlog and sales in the first quarter
of 2000 over the fourth quarter of 1999.
Within the fastener segment, the stud bolt and gasket group serves both the
oil and gas exploration and production industry and the hydrocarbon processing
industry. The stud bolt and gasket operations have experienced results similar
to the energy segment operations. As a result in 1999, we closed an unprofitable
distribution location, eliminated the personnel at that location and wrote-off
inventory. Our expectation is that with increasing oil and gas prices, sales and
profitability within these operations will improve. We have experienced such a
trend for the first quarter of 2000 in our stud bolt and gasket operations, with
increasing backlog and sales in the first quarter of 2000 over the fourth
quarter of 1999.
Within the fastener segment, the engineered fasteners group's operating
profits have been adversely effected by over capacity and resulting inefficient
operations. As a result, we have closed two manufacturing facilities and have
consolidated their operations into the three remaining facilities. Personnel
reductions and inventory write-offs took place in connection with these facility
consolidations. We expect the full benefit of the various overhead and cost
reductions to occur in 2000.
The heavy fabrication segment's sales and profitability have decreased
significantly in the second half of 1999 compared to 1998. This segment's
customers have seen a reduction in their margins because of the volatility of
oil feedstock prices during 1999, and have significantly reduced their capital
spending. In addition, it has experienced significant competitive pressures from
overseas. Mainly because of these factors, revenues continued to decline in the
fourth quarter of 1999 and the first quarter of 2000. However, in response to
this revenue decline, we have continued to reduce overhead and make other
operational improvements to increase the efficiency of our operations as well as
seek new markets for our products. The composition of our backlog at the end of
the first quarter of 2000 reflects this approach since a significant portion
consists of products for the power generation industry as opposed to our
traditional products that serve the hydrocarbon processing industry.
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. For the year ended
December 31, 1999, net cash provided by operating activities was $5.2 million
compared to 1998, which used cash of $5.1 million and 1997, which provided cash
of $3.4 million. Cash was provided in 1999 primarily because although the sum of
the net loss added to depreciation and amortization was a negative number, it
was more than offset by the positive cash generated by the reduction of accounts
receivable and inventory levels during 1999 which decreased as sales decreased.
The cash used in 1998 was primarily as a result of the acquisition of Beaird and
the related net increases in receivables, inventory, other assets and accounts
payable over those acquired. Beaird's receivables and inventories increased as
sales increased for the six months ended December 31, 1998 compared to the six
month period ended June 30, 1998, which was prior to the Beaird acquisition.
Additionally, receivables and payables increased at Beaird as $7.0 million in
accounts receivable and all liabilities were distributed to the seller prior to
acquisition. Cash was provided in 1997 primarily because net income and
depreciation and amortization were greater than increases in current assets
25
resulting from increased sales.
NET CASH USED IN INVESTING ACTIVITIES. Principal uses of cash are for capital
expenditures and acquisitions. For 1999, 1998 and 1997, the Company made capital
expenditures of approximately $7.4 million, $6.2 million and $5.0 million,
respectively. In 1999, 1998 and 1997, the Company made investments in
unconsolidated affiliates of $3.4 million, $0.9 million and $1.7 million,
respectively. Other significant investing activities included acquisitions in
1998 and 1997. The aggregate cash purchase price for acquisitions was $58.7
million in 1998 and $18.9 million in 1997.
NET CASH PROVIDED BY FINANCING ACTIVITIES. Sources of cash from financing
activities include borrowings under our credit facilities and sales of equity
securities. Financing activities provided net cash