<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
___ SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
___ SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ___________
COMMISSION FILE NUMBER: 000-22061
INDUSTRIAL DATA SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0322261
- --------------------------------------- -----------------------------
(State or, other Jurisdiction of (I.R.S. Employer
corporation or organization) Identification Number)
600 CENTURY PLAZA DRIVE, BUILDING 140, HOUSTON, TEXAS 77073-6013
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 821-3200
Check whether the issuer (1) has filed all reports required to be filed
by Section 1.3 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 (2) has been subject to such filing
requirements for the past 90 days. YES X NO
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, $.001 Par Value 13,023,718
---------------------------------------------
(Shares outstanding as of September 30, 1998)
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QUARTERLY REPORT ON FORM 10-QSB
FOR THE PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
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<S> <C>
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at September 30, 1998
and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Income for the Three Months
ended September 30, 1998 and September 30, 1997 and the Nine
Months ended September 30, 1998 and September 30, 1997. . . . . . 2
Condensed Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 1998 and September 30, 1997 . . . . . . . . . 3
Notes to Condensed Consolidated Financial Statements. . . . . . . 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . .5
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 2. CHANGES IN SECURITIES. . . . . . . . . . . . . . . . . . . . . . 11
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . . . . . 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . 11
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . 12
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
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INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
FOR YEAR ENDED DECEMBER 31, 1997
AND FOR NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
September 30, 1998 Dec. 31, 1997
------------------ -------------
(audited)
<C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 795,451 $ 77,648
Mutual Funds 57,598 380,017
----------- -----------
$ 853,049 $ 457,665
Marketable securities:
Trading 645,632 375,045
Accounts receivable - trade, less allowance for doubtful account of
approximately $11,000 and $20,000 in 1997 and 1998, respectively 2,454,210 2,268,864
Inventory 1,265,534 884,342
Note receivable from stockholder 200,000 200,000
Advances to affiliate 0 5,546
Prepaid assets and deferred costs 336,086 66,152
----------- -----------
Total current assets $ 5,754,511 $ 4,257,650
----------- -----------
Property and Equipment, net 1,041,362 1,044,381
Other Assets 20,932 59,841
Goodwill 59,842 59,842
----------- -----------
Total assets $ 6,876,647 $ 5,368,100
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank $ 375,000 $ 425,000
Current portion - Note payable to bank, term 4,229 34,242
Note Payable - Insurance 62,737 0
Accounts payable 808,563 697,255
Income taxes payable 354,946 79,698
Accrued expenses and other current liabilities 288,754 230,896
----------- -----------
Total current liabilities $ 1,894,229 $ 1,467,091
----------- -----------
Note payable to bank, term $ 420,671 $ 420,671
DEFERRED INCOME TAX 34,010 41,334
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 75,000,000 shares authorized; 13,023,718 shares
issued in 1998, 12,723,718 shares issued in 1997 $ 13,024 $ 12,724
Additional paid-in capital 2,190,179 2,216,713
Retained earnings 2,339,857 1,224,890
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$ 4,543,060 $ 3,454,327
Treasury stock (15,323) (15,323)
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Total stockholders equity $ 4,527,737 $ 3,439,004
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Total liabilities and stockholders' equity $ 6,876,647 $ 5,368,100
----------- -----------
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</TABLE>
1
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INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ -----------------------------
Sept. 30, 1998 Sept. 30, 1997 Sept 30, 1998 Sept. 30, 1997
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Product sales $ 364,471 $ 515,095 $ 1,324,175 $ 825,344
Consulting sales 1,132,930 1,103,671 3,193,829 2,013,078
Thermal sales 697,288 1,226,659 2,752,726 1,469,444
Constant Power Sales 1,432,343 0 3,114,635 0
------------ ------------ ------------ ------------
$ 3,627,032 $ 2,845,425 $ 10,385,365 $ 4,307,866
COST OF REVENUES:
Product 377,545 389,750 1,123,016 623,606
Consulting 759,983 797,921 2,232,575 1,429,099
Thermal 598,973 932,635 2,086,360 1,095,325
Constant Power 919,377 0 1,957,814 0
------------ ------------ ------------ ------------
$ 2,655,878 $ 2,120,306 $ 7,399,765 $ 3,148,030
GROSS PROFIT 971,154 725,119 2,985,600 1,159,836
Selling, general and administrative 616,830 413,685 1,732,676 719,585
Depreciation 20,566 33,425 75,447 56,219
OTHER INCOME (EXPENSE)
Realized gains on marketable securities 120,986 20,539 164,136 76,036
Other income 547 19,137 6,170 34,597
Unrealized gain (loss) on marketable
securities (85,098) 17,730 (106,838) (33,647)
Interest income, net (17,311) (19,243) (57,864) (39,395)
Thermal expense 0 (25,307) 0 (48,030)
------------ ------------ ------------ ------------
INCOME BEFORE TAXES $ 352,882 $ 290,865 $ 1,183,081 $ 373,593
TAX PROVISION $ 144,467 $ 103,699 $ 453,646 $ 132,034
------------ ------------ ------------ ------------
NET INCOME $ 208,414 $ 187,166 $ 729,435 $ 241,559
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
BASIC EARNINGS PER COMMON SHARE $ 0.016 $ 0.015 $ 0.056 $ 0.019
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
DILUTED EARNINGS PER COMMON SHARE $ 0.016 $ 0.015 $ 0.056 $ 0.019
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
13,023,718 12,723,718 13,023,718 12,713,718
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
DILUTED WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 13,023,718 12,723,718 13,023,718 12,713,718
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
2
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INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 729,435 $ 241,559
Changes in working capital, net of Thermal and
Constant Power Manufacturing acquisition 118,138 (796,462)
----------- -----------
Net cash provided (used) by operating activities: $ 847,573 $ (554,903)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Thermal $ 0 $ (212,000)
Advances on note receivable from stockholder 0 (50,000)
Property and equipment acquired (72,703) (547,181)
Purchase of investments (270,587) (500,000)
Other assets acquired 0 (12,040)
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Net Cash used by investing activities $ (343,290) $(1,321,221)
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CASH FLOWS FROM FINANCING ACTIVITES:
Long term mortgage on land and buildings $ (30,013) $ 429,661
Repayment on notes payable, net (3,922) (300,000)
Proceeds from issuance of common stock, net 0 799,999
Sale of Treasury Stock 0 29,000
Borrowings from bank (75,000) 450,000
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Net cash provided by financing activities $ (108,935) $ 1,408,660
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 395,348 $ (467,464)
CASH AND CASH EQUIVALENTS,
at beginning of period $ 457,701 $ 975,100
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CASH AND CASH EQUIVALENTS,
at end of period $ 853,049 $ 507,636
----------- -----------
----------- -----------
* Non-cash Transactions:
Issuance of common stock for acquisitions $ 663,269 $ 387,000
</TABLE>
3
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INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The financial statements of Industrial Data Systems Corporation (the
"Company"), included herein, are unaudited for all periods ended September
30, 1998 and 1997. They reflect all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management, necessary
to fairly depict the results for the periods presented. Certain
information and note disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have
been condensed or omitted pursuant to rules and regulations of the
Securities and Exchange Commission. It is suggested these condensed
financial statements be read in conjunction with the Company's audited
financial statements for the years ended December 31, 1997 and 1996, which
are included in the Company's annual report on Form 10-KSB/A. The Company
believes that the disclosures made herein are adequate to make the
information presented not misleading.
2. NOTE RECEIVABLE FROM STOCKHOLDER:
At September 30, 1998, the Company had notes receivable due from a
stockholder in the amount of $200,000. The notes are unsecured, due on
demand and bear interest at a rate of 9% per annum. Interest on the note
is due annually.
3. STOCKHOLDERS' EQUITY:
There was no issuance or retirement of the Company's Common Stock during
the quarter ended September 30, 1998.
4. ACQUISITION:
In March 1998, the Company acquired Constant Power Manufacturing
Incorporated, (CPM) in a stock purchase. The Company issued 300,000 shares
of the Company's common stock, which may be put back to the Company for $1
per share at the option of the holder.
The following is the computation recorded in connection with the
acquisition of CPM:
<TABLE>
<S> <C>
Purchase price $ 663,269
Fair value of net assets of CPM acquired (663,269)
---------
$ -
</TABLE>
The accounts of CPM are reflected in the condensed consolidated balance
sheets as of September 30, 1998. The shares of common stock issued by the
Company have been reflected as issued and outstanding.
4
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The following table reflects pro forma information as if this transaction had
occurred at the beginning of each of the periods presented, (in 000's except
per share data):
<TABLE>
<CAPTION>
FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
Total Revenue $11,304 $6,699
Net Income 855 635
Income Per Share .06 .05
</TABLE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion is qualified in its entirety by, and should be
read in conjunction with, the Company's Consolidated Financial Statements
including the notes thereto, included elsewhere in the Company's Annual
Report on Form 10-KSB/A for the year ended December 31, 1997.
OVERVIEW
The Company has been in business since 1985 engaged in providing
engineering consulting services to the pipeline divisions of major integrated
oil and gas companies. For the period 1985 through 1989, most of its
revenues were derived from this segment. The Company introduced its computer
product segment in 1989 to provide industrial grade computers and industrial
applications for commercial use. This segment operated as a Texas
corporation under the name of Industrial Data Systems, Inc. (IPD). In October
1997, the engineering consulting segment, which had previously operated as
Industrial Data Systems, Inc. dba IDS Engineering, was incorporated as a
Texas corporation under the name of IDS Engineering, Inc. (IED). The IPD
segment has generated sales as a percent of total revenue of 12.8% and 19.2%,
for the nine months ended September 30, 1998 and 1997, respectively, while
the IED segment has generated sales as a percent of total revenue of 30.8%
and 46.7% for the same periods. In 1997, the Company acquired the Thermal
segment, which fabricates air handling equipment for commercial heating
ventilation and cooling systems. The Thermal segment has generated sales as
a percent of total revenue of 26.5% and 34.1% for the nine months ended
September 30, 1998 and for the seven months ended September 30, 1997,
respectively. In March 1998, the Company acquired the Constant Power
Manufacturing, Inc. (CPM) segment, which manufactures industrial grade
battery backup systems and battery chargers. The CPM segment has generated
sales as a percent of total revenue of 29.9% for the six months ended
September 30, 1998.
The gross margin varies between each of its operating segments. Computer
product sales have produced a gross margin ranging from 15.2% and 24.4% for
the nine months ended September 30, 1998 and 1997, respectively. This
decrease is attributable to the overall decline in IPD sales coupled with a
relative fixed production overhead. The gross margin for pipeline
engineering services, which reflects direct labor costs, has decreased
slightly to 30.1% in 1998 from 29.0% for the same period in 1997. Thermal's
gross margin was 24.2% and 25.5% for the nine months ended September 30, 1998
and 1997, respectively. This decrease was attributable to an increase in
material costs and slightly higher production overhead from 1997 to 1998.
Constant Power generated a gross margin of 37.1% for the six months ended
September 30, 1998. The overall gross margin for Industrial Data Systems
Corporation, which includes product sales, pipeline consulting services and
Thermal for the nine months ended September 30, 1998 and for Constant Power
for six months ended September 30, 1998 was 28.8%. The overall gross
5
<PAGE>
margin for the Company for the same period in 1997 was 26.9%. Gross margin
for 1997 does not include any contribution from Constant Power.
YEAR 2000 ISSUES AND CONSEQUENCES
The "Year 2000 Issue" has come about because many computer hardware and
software components use only the last two digits to refer to a year. If not
corrected, this situation could cause systems to fail or generate erroneous
data. The extent of the potential impact of the Year 2000 problem is not yet
identifiable or determinable.
In 1997 the Company began a program to address its Year 2000 issues.
Testing and upgrading of the Company's internal systems is underway and is
projected to be completed by the end of the second quarter of 1999. The
company's plan of testing compliance will continue throughout 1999. Costs to
address the Year 2000 problems are estimated to be approximately $250,000, of
which approximately $50,000 has been incurred. The cost is being funded from
internally-generated funds and expensed as incurred.
The Company's plan includes contacting outside vendors that are critical
to its ability to provide products and services, to determine the Year 2000
readiness of these suppliers.
The Company expects its program to identify Year 2000 issues to be
adequate, but intends to develop contingency plans in the first quarter of
1999. There can be no guarantee that the Company's current efforts or its
contingency plan will successfully address any contingencies that arise. In
the event the Company is unsuccessful in addressing its Year 2000 issues,
there could be a material adverse effect on the Company's financial
condition, results of operation and liquidity.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements, which are statements of
future expectation and not facts. Actual results or developments might
differ materially from those included in the forward-looking statements
because of factors such as competition and industry restructuring, changes in
economic conditions, changes in laws, regulations, regulatory policies or
public policies, technological developments, and other presently unknown or
unforeseen factors.
6
<PAGE>
RESULTS OF OPERATIONS
The following table sets for the for the periods indicated, certain
financial data derived from the Company's consolidated statements of
operations and indicates percentage of total revenue for each tem.
<TABLE>
<CAPTION>
Quarter Ended September 30, Nine Months Ended September 30
1998 1997 1998 1997
Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Computer Products $ 364,471 10.05 $ 515,095 18.10 $ 1,324,175 12.75 $ 825,344 19.16
Consulting Services 1,132,930 31.24 1,103,671 38.79 3,193,829 30.75 2,013,078 46.73
Thermal 697,288 19.22 1,226,659 43.11 2,752,726 26.51 1,469,444 34.11
Constant Power 1,432,343 39.49 0 0.00 3,114,635 29.99 0 0.00
----------- ------ ----------- ------ ----------- ------ ----------- ------
TOTAL REVENUE $ 3,627,032 100.00 $ 2,845,425 100.00 $10,385,365 100.00 $ 4,307,866 100.00
GROSS PROFIT:
Computer Products $ (13,074) (0.36) $ 125,345 4.41 $ 201,159 1.94 $ 201,738 4.68
Consulting Services 372,947 10.28 305,750 10.75 961,254 9.26 583,979 13.56
Thermal 98,315 2.71 294,024 10.33 666,366 6.42 374,119 8.68
Constant Power 512,966 14.14 0 0.00 1,156,821 11.14 0 0.00
----------- ------ ----------- ------ ----------- ------ ----------- ------
TOTAL GROSS PROFIT $ 971,154 26.78 $ 725,119 25.48 $ 2,985,600 28.75 $ 1,159,836 26.92
----------- ------ ----------- ------ ----------- ------ ----------- ------
----------- ------ ----------- ------ ----------- ------ ----------- ------
Selling, General and
Administrative Expense $ 616,830 17.01 413,685 14.54 1,732,676 16.68 719,585 16.70
Depreciation 20,566 0.57 33,425 1.17 75,447 0.73 56,219 1.31
OPERATING INCOME $ 333,758 9.20 $ 278,009 9.77 $ 1,177,477 11.34 $ 384,032 8.91
----------- ------ ----------- ------ ----------- ------ ----------- ------
----------- ------ ----------- ------ ----------- ------ ----------- ------
Other Income
(Expense) 19,124 0.53 12,856 0.45 5,604 0.05 (10,439) (0.24)
INCOME BEFORE
PROVISION FOR
INCOME TAXES $ 352,882 9.73 290,865 10.22 $ 1,183,081 11.39 $ 373,593 8.67
Provision for
Income Tax 144,467 3.98 103,699 3.64 453,646 4.37 132,034 3.06
NET INCOME
AFTER INCOME $ 208,414 5.75 $ 187,166 6.58 $ 729,435 7.02 $ 241,559 5.61
----------- ------ ----------- ------ ----------- ------ ----------- ------
----------- ------ ----------- ------ ----------- ------ ----------- ------
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
TOTAL REVENUE. Total revenue increased by $781,607 or 27.5% from
$2,845,425 for the three months ended September 30, 1997, compared to
$3,627,032 in 1998. Revenue from the IPD, which comprised 10.1% of total
revenue for the three months ended September 30, 1998, decreased by $150,624
or 29.2%. The decrease in IPD revenue was attributable to a drop in sales
orders in the 1998 period. Revenue from the IED, which comprised 31.2% of
total revenue for the three months ended September 30, 1998, increased by
$29,259 or 2.7%. Revenue from Thermal, which comprised 19.2% of total
revenue for the three months ended September 30, 1998, decreased by $529,371
or 43.2%. Thermal's third quarter 1997 revenue included some sizeable jobs
that were larger than the normal scope, creating an inordinate high level of
revenue for that period, this is attributable for the decrease between the
1997 and the 1998 period.
7
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Revenue from CPM which accounted for 39.5% of total revenue for the three
months ended September 30, 1998, was $1,432,343.
GROSS PROFIT. Gross profit increased by $246,035 or 33.9% from $725,119
for the three months ended September 30, 1997 to $971,154 for the same period
in 1998. The gross margin as a percentage of total revenues increased from
25.5% for the period ended September 30, 1997 to 26.8% for the same period in
1998. The increase was attributable to an increase in gross margin for the
IED and Thermal segments and the addition of CPM during the three months
ended September 30, 1998. The gross margin for the IPD decreased from 24.3%
for the period ended September 30, 1997 to (3.6%) for the same period in
1998. This decrease was attributable to a reduction in sales revenue coupled
with relative fixed production costs and adjustments for obsolete inventory.
The gross margin for the IED increased from 27.7% for the period ended
September 30, 1997 to 32.9% for the same period in 1998. This increase was
due to securing jobs that generate higher billing rates and performing
"lump-sum" jobs at reduced labor hours. The gross margin for Thermal
decreased from 24.0% for the period ended September 30, 1997, to 14.1% for
the same period in 1998. This decrease was attributable to an increase in
material and labor cost during the 1998 period. CPM generated a gross margin
of 35.8% for the period ended September 1998. There was no gross margin
contribution from CPM for the 1997 period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $203,145 or 49.1% from $413,685 for the
three months ended September 30, 1997, compared to $616,830 for the same
period in 1998. As a percentage of total revenue, selling, general and
administrative expenses increased from 14.5% for the three months ended
September 30, 1997, to 17.0% for the same period in 1998. The increase was
primarily attributable to the acquisition of Constant Power and additional
costs related to personnel, office administration and commissions.
OPERATING INCOME. Operating income increased by $55,749 or 20.1% from
$278,009 for the three months ended September 30, 1997, compared to $333,758
for the same period in 1998. Operating income decreased as a percentage of
total revenue from 9.8% for the three months ended September 30, 1997, to
9.2% for the same period in 1998. The decrease in operating income was a
result of an increase in the selling, general and administrative expenses.
OTHER INCOME (EXPENSE). Other income increased by $6,268 or 48.8% from
$12,856 for the three months ended September 39, 1997 to $19,124 for the same
period in 1998. This increase was due to gains from marketable securities.
NET INCOME. Net income after taxes increased by $21,248 or 11.4% from
$187,166 for the three months ended September 30, 1997 to $208,414 for the
same period in 1998. Net income after taxes decreased as a percentage of
total revenue from 6.6% for the three months ended September 30, 1997, to
5.8% for the same period in 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998
FINANCIAL DATA REFLECTED FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
INCLUDES ONLY THE SEVEN MONTHS (MARCH - SEPTEMBER) FOR THERMAL'S OPERATIONS
SINCE THE ACQUISITION IN LATE FEBRUARY, 1997 AND DOES NOT REFLECT ANY
CONTRIBUTION FROM CONSTANT POWER FOR THE SAME PERIOD. FINANCIAL DATA
REFLECTED FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 INCLUDES ONLY SIX
MONTHS (APRIL - SEPTEMBER) FOR CONSTANT POWER'S OPERATIONS.
8
<PAGE>
TOTAL REVENUE. Total revenue increased by $6,077,499 or 141.1% from
$4,307,866 for the nine months ended September 30, 1997, compared to
$10,385,365 in 1998. Revenue from the IPD, which comprised 19.2% of total
revenue for the nine months ended September 30, 1997, increased by $498,831
or 60.4%. The attributable is due to an unusually low sales volume in the
1997 period.
Revenue from the IED which comprised 46.7% of total revenue for the nine
months ended September 30, 1997 increased by $1,180,751 or 58.7% from
$2,013,078 in 1997 to $3,193,829 for the same period in 1998. The increase in
IED revenue was due to an expansion in the scope of work performed for
established clients and additional new business.
Revenue from Thermal was $1,469,444 or 34.1 % of total revenue for the seven
months (March-September), following the acquisition in 1997. Revenue from
Thermal was $2,752,726 or 26.5% of total revenue for the nine months ended
September 30, 1998. This decrease is due to the decline in the third quarter
1998 sales volume and to the addition of revenue of CPM to total revenue.
Revenue from CPM was $3,114,635 or 29.9% of total revenue for the six month
period (April-September), following the acquisition in March 1998. There
was no contribution to revenue by CPM for the nine months ended September 30,
1997.
GROSS PROFIT. Gross profit increased by $1,825,764 or 157.4% from
$1,159,837 for the nine months ended September 30, 1997 to $2,985,601 for the
same period in 1998. The gross margin for the IPD decreased from 24.4% in
the nine months ended September 30, 1997 to 15.2% for the same period in
1998. This decrease in IPD gross margins was primarily due to higher material
and labor costs coupled with lower sales volume. The gross margin for the
IED increased from 29.0% for the period ended September 30, 1997 to 30.1% for
the same period in 1998. Thermal's gross margin was 25.5% for the seven
months (March-September) 1997 to 24.2% for the nine months ended September
30, 1998. CPM generated a gross margin for the six months (April -
September) 1998 of 37.1%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1,013,091 or 140.8% from $719,585 for
the nine months ended September 30, 1997 compared to $1,732,676 for the same
period in 1998. As a percentage of total revenue, selling, general and
administrative expenses did not change from 16.7% for the nine months ended
September 30, 1997 to 16.7% for the same period in 1998.
OPERATING INCOME. Operating income increased by $793,445 or 206.6% from
$384,032 for the nine months ended September 30, 1997, compared to $1,177,477
for the same period in 1998. Operating income increased as a percentage of
total revenue from 8.9% for the nine months ended September 30, 1997 to 11.3%
for the same period in 1998. The increase in operating income was a result of
increased revenues, an overall increase in gross profit and reduced selling,
general and administrative expenses as a percent of total revenue.
OTHER INCOME (EXPENSE). Other income increased by $16,043 or 153.7%
from ($10,439) for the nine months ended September 30, 1997 to $5,604 for the
same period in 1998. This increase was due to the Company having realized
gains on its marketable securities in the 1998 period as compared to the 1997
period.
NET INCOME. Net income before taxes increased by $809,488 or 216.7%
from $373,594 for the nine months ended September 30, 1997 to $1,183,081 for
the same period in 1998. Net income after taxes increased by $487,876 or
202.0% from $241,560 for the nine months ended September 30, 1997 to $729,436
for the same period in 1998. Net income after taxes increased as a
percentage of total revenue from 5.6% for the nine months ended September 30,
1997 to 7.02% for the same period in 1998 due to higher margins and reduced
selling, general and administrative expenses as a percent of total revenue.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has satisfied its cash requirements
principally through borrowings under its line of credit and through
operations. As of September 30, 1998, the Company's cash position, including
marketable securities, was sufficient to meet its working capital
requirements. The Company had, as of September 30, 1998, $800,000 in
additional advances available under its line of credit with a bank. The
Company's line of credit which provides for maximum borrowings of $1,150,000,
which bears interest at prime plus 1%, is for a term of one year and matures
on June 30, 1999. The line of credit is secured by accounts receivable,
inventory and the personal guarantees of certain stockholders and officers of
the Company. The Company has consolidated its line of credit into one line
for all subsidiaries. This consolidation and renewal of its line of credit
was effective September 30, 1998.
The Company's working capital was $2,790,559 and $3,860,282 at December
31, 1997 and September 30, 1998, respectively.
CASH FLOW
Operating activities used net cash totaling $554,903 for the nine months
ended September 30, 1997 and generated $847,573 for the nine months ended
September 30, 1998. The Company did not generate significant cash flow from
operating activities for the nine months ended September 30, 1997, due to the
working capital requirements resulting from the rapid growth of the Company.
Trade accounts receivable increased $185,346 since December 31, 1997.
Inventory increased by $381,192 for the same period.
Investing activities used cash totaling, $1,321,221 for the nine months
ended September 30, 1997 and used cash totaling $343,290 for the same period
in 1998. The Company's investing activities that used cash during the period
ended September 30, 1997 was primarily related to the purchase of Thermal and
its facilities, in 1998 the investing activities were related to the purchase
of fixed assets and marketable securities.
As of September 30, 1998, the Company had a portfolio of marketable
securities which had a fair market value of $645,632 and consisted of common
stocks, bonds and mutual funds. The common stocks, and bonds that the
Company holds consists of securities which are traded on three national
exchanges - the New York Stock Exchange, the American Stock Exchange and the
NASDAQ National Market System. These securities are frequently traded by the
Company. The mutual funds that the Company has available for sale are
open-end stock funds which are managed by Smith Barney & Co. These mutual
fund investments are generally held for longer than a one-year period. These
securities are traded by the Company as part of its plan to provide
additional cash for working capital requirements.
The marketable securities to be held to maturity are stated at amortized
cost. Marketable securities classified as available-for-sale are stated at
market value, with unrealized gains and losses reported as a separate
component of stockholder's equity, net of deferred income taxes. If a
decline in market value is determined to be other than temporary, any such
loss is charged to earnings. Marketable securities accounted for as trading
securities are stated at market value, with unrealized gains and losses
charged to income. William A. Coskey, the Company's President and Chief
Executive Officer, is responsible for managing the Company's portfolio of
marketable securities. The funds used in this portfolio were from available
cash reserves.
10
<PAGE>
The Company has implemented a policy that restricts it from purchasing
any securities on margin, and also limits the investment of any one security
or mutual fund to represent no more than 10% of the Company's investment
portfolio. The Company believes that the risks associated with its investment
portfolio are slightly higher than the risk of loss in a Standard & Poor's
500 Index Fund. This higher risk is due to the less diverse distribution of
the Company's portfolio as compared to the broadly based Standard & Poor's
500 Stock Index.
Financing activities used cash totaling $108,935 for the nine months
ended September 30, 1998, which was repayment of line of credit and repayment
on the term note for Thermal's facilities. The Company has additional
financing amounts of $800,000 available on its line of credit at September
30, 1998. The line of credit has been used principally to finance accounts
receivable and inventory purchases.
ASSET MANAGEMENT
The Company's cash flow from operations has been affected primarily by
the timing of its collection of trade accounts receivable. The Company
typically sells its products and services on short-term credit terms and
seeks to minimize its credit risk by performing credit checks and conducting
its own collection efforts. The Company had net trade accounts receivable of
$1,975,952 and $2,454,210 at September 30, 1997 and 1998, respectively. The
number of days' sales outstanding in trade accounts receivable was 51 days
and 80 days, respectively. Bad debt expenses have been insignificant for
each of these periods.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
On August 17, 1998 a Form 4 was filed with the Securities and
Exchange Commission reflecting the sale of 9,800 shares of Common Stock which
had been held in a custodial account for the benefit of minor children of
William A. Coskey, President and CEO of Industrial Data Systems Corporation.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
11
<PAGE>
ITEM 5. OTHER INFORMATION
On August 31, 1998, the Company accepted the resignation of its
director, Mr. Rex Zerger. Mr. Zerger had also served as Vice President of
Sales and Marketing. Mr. Ken Hedrick was immediately appointed by the Board
as an interim director to replace Mr. Zerger until the next annual meeting of
shareholders.
On September 9, 1998, the Company signed an agreement with Houston-based
Hunt Patton & Brazeal to serve as intermediaries and acquisition consultants
for the Company. Hunt Patton & Brazeal will work with the Company to
expedite its merger and acquisition goals as well as long term strategic
planning. The primary acquisition focus will be on organizations that are
complimentary to the Company's areas of strength and expertise; particularly,
the manufacturing, automation and computer systems integration sectors.
On October 9, 1998, the Company signed a Letter of Intent to acquire MLC
Enterprises, Inc. (MLC). MLC is a Houston-based company, which primarily
does business under its division name: Marine and Industrial Fire Safety
(MIFS). Stipulated in the letter of intent, IDS will exchange 50,000 shares
of the Company's common stock for 100% of MLC's shares. MLC had revenues of
approximately $2.2M in 1997 and expects 1998 revenues to be approximately
$5M. It is expected that this transaction will be accretive to the Company's
per share earnings and will close prior to November 15, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 27 Financial Data Schedule
b. Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INDUSTRIAL DATA SYSTEMS CORPORATION
Dated: November 16, 1998 By: /s/ Hulda L. Coskey
--------------------
Hulda L. Coskey, Chief Financial Officer,
Secretary and Treasurer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S QUARTERLY REPORT ON FORM 10-QSB FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 853,049
<SECURITIES> 645,632
<RECEIVABLES> 2,654,210
<ALLOWANCES> (20,000)
<INVENTORY> 1,265,534
<CURRENT-ASSETS> 5,754,511
<PP&E> 1,261,465
<DEPRECIATION> (220,103)
<TOTAL-ASSETS> 6,876,647
<CURRENT-LIABILITIES> 1,894,229
<BONDS> 420,671
0
0
<COMMON> 13,024
<OTHER-SE> 4,530,036
<TOTAL-LIABILITY-AND-EQUITY> 6,876,647
<SALES> 10,385,365
<TOTAL-REVENUES> 10,385,365
<CGS> 7,399,765
<TOTAL-COSTS> 1,808,123
<OTHER-EXPENSES> 63,468
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (57,864)
<INCOME-PRETAX> 1,183,081
<INCOME-TAX> 453,646
<INCOME-CONTINUING> 729,435
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 729,435
<EPS-PRIMARY> 0.056
<EPS-DILUTED> 0.056
</TABLE>
