UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NO. 000-22061
INDUSTRIAL DATA SYSTEMS CORPORATION
(Name of Small Business Issuer in its Charter)
NEVADA 88-0322261
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
600 CENTURY PLAZA DRIVE, BUILDING 140
HOUSTON, TEXAS 77073-6013
(281) 821-3200
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Check whether the issuer 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, and (2) has been subject to such filing requirements for the past 90
days. Yes X NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. X .
The net sales for the Company for the fiscal year ended December 31, 1997 were
$10,523,977.
The aggregate market value of the voting stock held by non-affiliates of the
Company on December 31, 1997 was $18,536,378. The number of shares outstanding
of the Company's common stock on December 31, 1997 was 12,723,718.
DOCUMENTS INCORPORATED BY REFERENCE
Responses to Items 9, 10, 11 and 12 of Part III of this report are incorporated
herein by reference to certain information contained in the Company's definitive
proxy statement for its 1998 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 30, 1998.
Transitional Small Business Disclosure Format (Check One) Yes [ ] NO [X]
<PAGE>
INDUSTRIAL DATA SYSTEMS CORPORATION
1997 FORM 10-KSB
TABLE OF CONTENTS
PART I
Item 1. Business........................................................... 3
Item 2. Properties.........................................................15
Item 3. Legal Proceedings..................................................16
Item 4. Submission of Matters to a Vote of Security Holders................16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters16
Item 6. Management's Discussion and Analysis of Financial Condition and
Results
of Operations......................................................17
Item 7. Financial Statements and Supplementary Data........................18
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure...............................................22
PART III
Item 9. Directors and Executive Officers of the Registrant.................38
Item 10. Executive Compensation.............................................38
Item 11. Security Ownership of Certain Beneficial Owners and Management.....38
Item 12. Certain Relationships and Related Transactions.....................38
Item 13. Exhibits and Reports on Form 8-K ..................................39
<PAGE>
PART I
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONNECTION WITH THE MORE DETAILED INFORMATION CONTAINED HEREIN AND IN THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS, AND THE NOTES THERETO, INCLUDED
ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-KSB. THE DISCUSSION IN THIS ANNUAL
REPORT ON FORM 10-KSB CONTAINS FORWARD LOOKING STATEMENTS WHICH INVOLVE RISKS
AND OTHER UNCERTAINTIES. REFERENCES TO THE "COMPANY" OR TO "IDDS" REFER TO
INDUSTRIAL DATA SYSTEMS CORPORATION. REFERENCES TO "IDS" REFER TO THE COMPANY'S
WHOLLY-OWNED SUBSIDIARY, INDUSTRIAL DATA SYSTEMS, INC. REFERENCES TO "IED" REFER
TO THE COMPANY'S WHOLLY-OWNED SUBSIDIARY, IDS ENGINEERING, INC. REFERENCES TO
"THERMAL" REFERS TO THE COMPANY'S WHOLLY-OWNED SUBSIDIARY, THERMAIRE, INC., DBA
THERMAL CORP. THE CONSOLIDATED HISTORICAL FINANCIAL STATEMENTS RELATED TO THESE
SUBSIDIARIES ARE INCLUDED IN THIS ANNUAL REPORT ON FORM 10-KSB.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Industrial Data Systems Corporation ("the Company") was incorporated in
the State of Nevada in June, 1994. The Company's principal executive offices are
located at 600 Century Plaza Drive, Building 140, Houston, Texas 77073. The
Company's telephone number is (281) 821-3200. The Company's common stock is
listed on the NASDAQ Electronic Bulletin Board under the symbol "IDDS".
The Company has never filed for protection under the bankruptcy protection
act, nor has the Company or any of its assets been in receivership or any other
similar proceedings.
The Company's revenue is derived from three operating segments: the
Industrial Products subsidiary known as Industrial Data Systems, Inc. ("IDS"),
the Consulting Engineering subsidiary known as IDS Engineering, Inc. ("IED"),
and the Commercial Air Handling subsidiary known as Thermaire, Inc. dba Thermal
Corp. ("Thermal"), which was acquired by the Company in February, 1997.
INDUSTRIAL DATA SYSTEMS, INC.
IDS is a Texas corporation which was formed in May, 1985 , a wholly-owned
subsidiary of the Company. IDS is a provider of specialized microcomputer
products that are targeted to be sold to the industrial market. IDS manufactures
and sells industrial and portable computers, microcomputers and color CRT
monitors under the Company's trade name, which include the SafeCase Series 3000,
4000, 5000 and 7000 and 400. The microcomputer and peripheral products are
designed to be used in industrial applications, which include manufacturing,
process control, discrete manufacturing, data acquisition and man-machine
interfaces. The computers and monitors that are manufactured by the Company are
different from conventional, commercial desktop and portable computers by its
architecture, packaging, functionality, integration services and value-added
software. The computer products manufactured by IDS are "open systems" that
support "off-the-shelf" software operated under DOS or Windows. IDS also derives
revenue from the integration and resale of industrial computer products
manufactured by other companies. Recently introduced products include the the
SafeCase 400 which are more fully described below.
IDS positions itself to provide engineered industrial personal computers.
IDS adds value to standard computer components by packaging these components in
enclosures which withstand tough environmental conditions and/or enclosures that
have a special form factor. IDS also adds value by integrating and technically
supporting advanced microcomputer systems.
THERMAIRE, INC. DBA THERMAL CORP.
The Company acquired Thermaire, Inc., a Texas corporation, doing business
as Thermal Corp. ("Thermal") on February 15, 1997. Mr. Joe Hollingsworth, the
former President and owner, acquired the industrial air handling subsidiary
assets of a predecessor business known as Thermal Engineering ("Old Thermaire")
in 1972, and operated the Company until 1990, at which time Old Thermaire was
sold to 20th Century Holding Company, as a wholly owned subsidiary. 20th Century
Holding Company encountered financial difficulties and filed for protection
under the bankruptcy code in July, 1992. The assets of Old Thermaire were placed
in receivership and Mr. Hollingsworth reaquired these assets in October, 1992,
with the intention of continuing the company in its present form. Thermal, was
incorporated on November 17, 1992. Throughout its history, Thermal has built a
prominent reputation in the commercial and industrial air handling industry for
its quality products which are distributed throughout the United States.
Thermal owns and operates a metal fabrication facility in Houston, Texas.
The use of Thermal's facility allows IED to secure turn-key engineering
contracts which require the delivery of certain manufactured components and
provides IDS with an alternative source of supply for its customized metal
enclosures. The Company believes that the benefits derived from the utilization
of the metal fabrication facility by IED and IDS, has a beneficial impact on the
financial condition of the Company.
IDS ENGINEERING, INC.
IED, is a Texas corporation formed in December, 1997, a wholly-owned
subsidiary of the Company. Until its incorporation, IED operated as Industrial
Data Systems, Inc. doing business as IDS Engineering. IED offers engineering
services to the pipeline division of major integrated oil companies. These
services are performed on facilities that include cross-country pipelines,
pipeline pump stations, compressor stations, metering facilities, underground
storage facilities, tank storage facilities and product loading terminals. The
management team of IED has the capability of developing a project from the
initial planning stages through detailed design and construction management. The
services provided include project scoping, cost estimating, engineering design,
material procurement, mechanical fabrication, in addition to project and
construction management.
IED has blanket service contracts currently in place to provide services
on a time and materials reimbursable basis. IED also performs services for its
clients on a turnkey lump sum basis. The Company has a long standing
relationship with Exxon Pipeline Company, Arco Pipeline Company, Marathon
Pipeline Company and Texas Eastern Products Pipeline Company. New business
relationships with other major oil companies are developed through in-house
personnel.
ACQUISITIONS
HISTORY
Industrial Data Systems, Inc. was established in 1985, to provide
engineering consulting services to the pipeline divisions of major integrated
oil companies. The Company grew slowly to ten employees in 1989. At that time, a
strategic decision was made by management to enter the industrial computer
marketplace. In 1989, the Company designed and built its first industrial
computer and in 1991, hired its first marketing manager. The Company continued
to support both businesses and developed its industrial computer business
through nationwide advertising. Its product sales grew through the creation of
new product lines.
ACQUISITION OF INDUSTRIAL DATA SYSTEMS, INC.
On August 1, 1994, the Company entered into an agreement to purchase all
of the issued and outstanding shares of Industrial Data Systems, Inc., in a
tax-free exchange of Common Stock. The Company issued 9,500,000 shares of its
Common Stock to William A. Coskey and Hulda L. Coskey, with each individual
beneficially holding 4,762,800, and 4,750,000, respectively. William A. Coskey
and Hulda L. Coskey beneficially held all of the issued and outstanding shares
of the Common Stock of Industrial Data Systems, Inc., a Texas corporation, at
the time of the acquisition. William A. Coskey held the positions of Chairman of
the Board, Chief Executive Officer and President of Industrial Data Systems,
Inc., and Hulda L. Coskey held the positions of Director, Vice President and
Secretary/Treasurer of Industrial Data Systems, Inc. The executive officers,
management team and beneficial ownership of securities held by the executive
officers were the same in both companies at the time of the transaction.
ACQUISITION OF THERMAIRE, INC. DBA THERMAL CORP.
The Company entered into an Agreement with the owners of Thermal on August
15, 1995 to acquire Thermal in a contingent purchase transaction. The Company
issued 600,000 shares of Common Stock which were held in an escrow account
pending completion of the acquisition by the Company exercising its option to
pay $600,000 and obtain a release of the shares. The Company's option to acquire
Thermal was later renegotiated and exercised on February 14, 1997 with the
exchange of 193,719 shares of Common Stock and $212,563 in cash. Upon completion
of the acquisition, the 600,000 shares of Common Stock previously included in
the original Escrow Agreement were canceled. In connection with this
transaction, Thermal purchased the previously leased facilities of Thermal, on
February 28, 1997 for a cash consideration of $500,000, subject to the
completion of the contingent purchase transaction. Bank financing in the amount
of $450,000 was obtained for the purpose of purchasing these facilities.
Financial statements of Thermal are consolidated with the Company's financial
statements prospectively from the date of acquisition.
FORMATION OF IDS ENGINEERING, INC.
On October 15, 1997 the consulting engineering segment of the Company,
formerly known as Industrial Data Systems, Inc. doing business as IDS
Engineering, was incorporated in the State of Texas and now operates as IDS
Engineering, Inc. (IED). The Company issued all of its 1,000 shares of Common
Stock to Industrial Data Systems Corporation. William A. Coskey was appointed
Chairman of the Board, President and Treasurer of IDS Engineering, Inc., and
Hulda L. Coskey was appointed the positions of Director, Vice President and
Secretary of the newly formed corporation. The management structure and
operations of the newly formed corporation remain unchanged. The Company
believes that the restructuring of IDS Engineering, Inc. more clearly
distinguishes it from it's two other operating segments.
LETTER OF INTENT TO ACQUIRE CONSTANT POWER MANUFACTURING, INC.
The Company signed a letter of intent, February 19, 1998, to acquire
Constant Power Manufacturing, Inc. (CPM). CPM is a Houston-based power systems
manufacturer. Stipulated in the letter of intent, IDDS will exchange 300,000
shares of the Company's common stock for 100% of CPM's shares. CPM had 1997
revenues of approximately $3.5 MM and pretax profits of approximately 13%. It is
expected that this transaction will be accretive to the Company's per share
earnings and will close prior to March 31, 1998.
CPM is a thirteen year old company firmly established in the
uninterruptible and conditioned power systems marketplace. CPM manufactures
proprietary products and packages systems in a wide array of power ranges which
include: battery chargers and monitoring systems, DC power supplies, DC/AC
inverters, UPS systems, regulation and isolation transformers and power
conditioners. CPM sells to industrial and commercial accounts across the United
states.
It is anticipated that the Company will realize increased operating
efficiencies due to reduced overhead resulting from the combination of CPM and
IDDS's other subsidiary companies.
PRODUCTS AND SERVICES
INDUSTRIAL PRODUCTS
The Company's Industrial Products subsidiary ("IDS") provides Intel
microprocessor-based microcomputer systems and system components that are
extremely dependable and can withstand harsh weather conditions and demanding
work environments. These computer systems are designed to withstand a wide
fluctuation in temperatures, shock waves, vibration, electromagnetic and radio
frequency interference, in addition to airborne dust particles and excessive
moisture.
The SafeCase Series 3000 is a microcomputer designed to be operated at
sites where temperature, vibration and airborne dust particles are of primary
concern. This microcomputer is designed to accommodate either active motherboard
CPUs or passive backplanes with plug-in CPUs. Being extremely adaptable, it can
be configured to accommodate various types of CPU boards, in addition to the
installation of various floppy and hard drives. The microcomputer enclosure is
constructed of 16 gauge steel and is pressurized by a filtered push-pull fan
cooling system to prevent dust particles and other matter from entering into the
computer. All of the computer components are modularly installed and shock
mounted. The SafeCase Series 3000 is suitable for installation in a standard 19"
equipment rack.
The SafeCase Series 4000 is a durable, rugged portable computer designed
to be operated under extremely harsh environmental conditions normally
encountered at industrial and commercial locations. The computer is constructed
with a four slot passive backplane and three full-size open bus slots to allow
the user to customize it with industry standard add-in boards. These computers
are designed with dual cooling fans to control heat build-up, are fully gasketed
to prevent the penetration of moisture and dust particles, and has a shock
mounted disk drive which together enhance its service life. The locations and
sites under which these computers are generally operated are unlike the
environmental conditions under which the plastic notebook and laptop computers
are operated. To complement the durability of the SafeCase Series 4000, its
sturdy aluminum carrying case has been designed to withstand excessive
mechanical loads.
The SafeCase Series 5000 is a color CRT computer monitor designed with a
resolution of 1024 x 768 pixels, positive pressure fan and filter which protects
against internal damage from airborne dust particles, and is mountable in a 19"
equipment rack. This monitor can be interfaced with a touch screen adapter. The
color CRT computer monitor is available in 14" and 20" diagonal models.
The SafeCase Series 7000 is a microcomputer designed for applications
which require an industrial computer to be mounted on a wall or attached to
machinery or other equipment. The features of this microcomputer include a six
slot passive backplane and plug-in CPU board, a positive pressure, filtered
cooling system, two drives which will accommodate either floppy or hard disks in
addition to a 150 watt power supply.
INTRODUCTION OF SAFECASE SERIES 400
On August 14, 1996, the Company announced the introduction of the SafeCase
Series 400 computer as its latest entry into the industrial portable computer
market. This computer is the industrial equivalent of a contemporary commercial
grade notebook computer. The size of the computer is 9" wide by 12" in length
and 5" in height and provides the same basic footprint as commercial grade
laptop computers, and complements the performance, durability and reliability of
the Company's other industrial computers. The SafeCase Series 400 is designed to
be utilized in an environment with mild and severe weather conditions, from
light rain to gusting winds and temperatures ranging from nine to 50 degrees
Celsius, and is constructed to withstand shock at 10G and vibration loads of
0.5mm within a five to 100 Hz range. The SafeCase Series 400 is a fully featured
portable computer with an introduction price of $4,995. The Company has
experienced delays in the design and product testing phase of the SafeCase 400,
and initial deliveries of this computer are now scheduled to commence during the
second quarter of 1998.
THERMAL
Thermal has manufactured quality air handling equipment since 1945. Tens
of thousands of Thermal air handlers remain in service after 30-40-50 years of
service and longer. Because Thermal stocks a larger number of fans and
manufactures coils, dampers, curbs and most other accessories, they aim to offer
the quickest delivery available in the industry, usually six to eight weeks,
depending on order size and scope. Thermal also reserves production capacity to
accomplish premium, expedited deliveries of two to four weeks, when necessary.
Thermal is renowned for their design and manufacturing expertise and flexibility
which is often required to meet the special needs for custom installations.
Thermal's product lines consist of a variety of cooling, heating and ventilating
equipment. The wide range of sizes and models in each product line coupled with
Thermal's manufacturing flexibility provides vast freedom in air handling
equipment choice. Thermal's quality air handling products include Central Plant
Air Conditioners, Multizone Air Conditioners, High Pressure Air Conditioners,
and Air Cooled Condensers. Thermal also manufactures Fan Coil Units, Cooling and
Heating Coils, and Roof Top Air Handlers. Thermal distributes its products
exclusively through its United States and international network of non-stocking
sales representatives.
Central plant air handlers can be built to specification in either a
single or multizone configuration, from 1,000 to 50,000 CFM. The design of these
units allows for either horizontal or vertical applications. Single wall models
are constructed in modular sections and double wall units feature unitized
construction. Basic designs and high quality materials have been field-proven
for over fifty years. The welded frame construction allows panels to be removed
without affecting the structural integrity of the unit. All units are built
using heavy gauge, galvanized panels on die-formed and welded galvanized steel
frames. On double wall insulated units, the most often specified design, all
wall panels and doors are fully gasketed and removable. All fans are statically
and dynamically balanced during assembly. Custom features include but are not
limited to viewglass windows, factory applied epoxy and custom coatings,
variable pitch drives, internal motor base with spring isolators, solid or
stainless steel fan shafts, spiral or plate fin coils, motor and unit controls,
filter gauges, and convenience outlets.
Rooftop air handlers can be built to specification in either a single or
multizone configuration, from 1,000 to 32,000 CFM. Standard features for all
rooftop air handlers include a structural channel base, galvanized steel frame,
galvanized steel panels, pitched roof with continuous ridge cap and integral
drip ledge, 2' - 1.5 pcf insulation, DIDW fan and ODP motor mounted on 1'
deflection spring isolators, 2' 30% pleated filters and pitched, double wall
drain pan. Custom units can feature plenum fan, gravity economizer, internal
piping vestibule motor controls and special base designed for field rollproof
unloading.
CONSULTING ENGINEERING SERVICES
IED offers engineering services to the pipeline division of major
integrated oil companies. These services are performed on facilities that
include cross-country pipelines, pipeline pump stations, compressor stations,
metering facilities, underground storage facilities, tank storage facilities and
product loading terminals. The management team of IED has the capability of
developing a project from the initial planning stages through detailed design
and construction management. IED's expertise offers its clients a wide range of
services from a single source provider. The services provided include project
scoping, feasibility studies, cost estimating, engineering design, material
procurement, mechanical fabrication, analyzing and implementing automation and
control systems, along with project and construction management. Typical
engineering projects include revamps or expansions of existing pipelines as well
as new construction.
PRODUCT DEVELOPMENT
IDS's engineering strategy is to continue to develop differentiated
microprocessor based capabilities that can be delivered in "open-systems" using
industry standard technology. Through this product development strategy, IDS is
able to provide highly reliable and readily available microcomputers that are
compatible with "off-the-shelf" application software and hardware. These
microcomputers can also provide a much greater degree of system availability to
users by focusing on reliability as its main feature. Product development during
calendar 1998 will be concentrated on the completion of and revisions to the
previously announced SafeCase 400 product. Revisions will also be made to the
current SafeCase 4000 product line to increase functionality and reduce cost. In
addition, the Company will continue to extend its products offerings to include
high-end computer platforms. These enhancements will include the latest Pentium
and/or Pentium Pro processors.
Thermal's product development strategy for 1998 will be the redesign of
their line of rooftop air handlers. Engineering and redesign will be focused on
making the unit larger yet narrower to better fit shipping platforms and reduce
freight costs. Thermal is in the final completion stages of obtaining ETL
certification which will open new markets for its products to municipalities and
other industries requiring such certification.
IED will continue to provide quality engineering services to the pipeline
industry in 1998. In 1997, IED joined forces in an alliance partnership with a
worldwide engineering and construction company in order to compete for larger
projects in the pipeline industry. IED has an active business development
program with the purpose of entering into blanket engineering service contracts
with new pipeline industry clients.
COMPETITION
INDUSTRIAL PRODUCTS
IDS competes against various companies across its different product lines.
IDS's line of industrial portable computers compete with products manufactured
by Fieldworks, Dolch and Kontron. IDS's industrial computer products which are
mountable in a 19" equipment rack compete with products from Advantek, Contec
and Industrial Computer Source. There is also competition from much larger
suppliers of commercial grade computers, such as Compaq, Dell, Toshiba and IBM.
This commercial competition effectively sets pricing for its product line, since
IDS's customers are willing to pay a premium for industrial grade computers
which is usually limited to approximately two times the equivalent of commercial
grade products.
Management believes that its industrial computer products compete
effectively based on its engineering responsiveness to specific industrial
market requirements, the resulting functional specialization of its products,
and its strategy of focusing on relatively "sheltered" market niches where major
competitors have difficulty in tailoring their offerings to specific application
requirements. These strategies help offset the greater name recognition and
broader service and support resources of IDS's major competitors.
IDS is engaged in business activities that are targeted to industrial
markets which are less competitive and typically generate greater profit
margins. Management believes that the principal competitive factors in the
business in which it operates are price and performance, product availability,
technical expertise, adherence to industry standards, financial stability,
service support and reputation. Pricing competition for IDS's products is from
large manufacturers of commercial grade computer products. IDS's pricing of its
computer product line is governed by pricing in the commercial market.
Some of the IDS's current and potential competitors have longer operating
histories and financial, sales, marketing, manufacturing, distribution,
technical and other competitive resources which are substantially greater than
those of IDS. As a result, IDS's competitors may be able to adapt more quickly
to changes in customer demands or to commit resources to sales and service of
its products than IDS has available. Such competitors could also seek to
increase their presence in the markets where IDS is providing sales and services
by creating strategic alliances with other competitors, by offering new or
improved products and services to IDS's customers or increasing their efforts to
gain and retain market share through competitive pricing.
THERMAL
Thermal operates in a highly competitive environment with many other
organizations which are substantially larger and have greater financial
resources. Management believes that the principal competitive factors in its
market include time to market, flexibility and design of its products, breadth
of product features, product quality, customer service, and price. Thermal
competes with other air handling equipment manufacturers on the basis of
quality, quick delivery and its capability to provide custom applications.
Thermal is cost competitive with many well respected manufacturers, such as
Pace, Temtrol, and Buffalo. Thermal has distinguished itself by being responsive
to customer's request for custom products and is able to expedite delivery of
these units faster than other commercial manufacturers due to the flexibility of
their manufacturing facility and staff.
CONSULTING ENGINEERING
IED operates in a highly competitive environment with many other
organizations which are substantially larger and have greater financial and
other resources. IED competes with other consulting engineering companies on the
basis of price, performance, and on the basis of its experience as a provider of
quality personnel to perform projects. The pricing competition of IED has
intensified as a result of an increase in temporary personnel contracting
agencies who can perform services at a higher volume level and lower profit
margin. Because the engineering business may require small amounts of capital,
market entry can be rather effortless for a potential new competitor possessing
acceptable professional qualifications. Therefore, IED competes with a wide
array of both national and regional specialty firms.
BUSINESS STRATEGY
IDS intends to increase market share and market penetration through its
existing product line, and also increase its sales through strategic
relationships with other computer manufacturers. IDS continues to actively
pursue OEM contracts with several major suppliers in the industrial computer and
desktop workstation marketplace. In December 1997, IDS opened a sales
distribution channel in the Connecticut area with the hiring of a full-time
sales representative who is primarily responsible for expansion of market
presence in the northeastern portion of the United States.
Thermal continues to aggressively expand its sales representative network,
marketplace, and product lines. Plans are in place to restructure certain areas
of production which will have a positive affect on net profit margins.
In order to achieve its growth objective, the Company continues the
expansion of its national marketing network to increase sales of its current
line of proprietary industrial computer products and commercial air handling
products. This expansion into new locations within the United States requires
additional in-house sales personnel and sales representatives.
The Company also intends to continue to pursue potential acquisitions of
complementary businesses. The success of this strategy depends not only upon the
Company's ability to acquire complementary businesses on a cost-effective basis,
but also upon its ability to integrate acquired operations into its organization
effectively, to retain and motivate key personnel and to retain customers of
acquired firms. There can be no assurance that the Company will be able to find
suitable acquisition candidates or be successful in acquiring or integrating
such businesses. Furthermore, there can be no assurance that financing required
for any such transactions will be available on satisfactory terms.
SALES AND MARKETING
INDUSTRIAL PRODUCTS
Revenues derived from IDS are approximately 30% in-house direct sales,
approximately 65% from sales representatives and approximately 5% from catalog
distributors sales. IDS's SafeCase Series of computer products are primarily
marketed through commissioned third-party sales representatives. These sales
representatives are teamed with in-house sales managers and are assigned to
territories within the United States. Management believes that this method of
selling leads to increased account penetration, proper management of its
products, and enhanced customer service which create and maintain the foundation
for long-term relationships with its customers. IDS's in-house sales personnel
receive a salary in addition to commission, which is based upon a percentage of
their sales. Management believes that its past and future growth depends in
large measure on its ability to attract and retain qualified sales
representatives and sales management personnel. IDS promotes its products and
services through general and trade advertising, participation in trade shows and
through telemarketing and most recently through on-line Internet communication
via IDS's home page. IDS's records reflect that approximately 30% of its sales
of SafeCase series originates through word-of-mouth referrals from existing
customers and industry members, such as manufacturer's representatives. IDS also
has an arrangement with two catalog distributors that offer industrial computer
products and related peripherals. Additionally, the sales personnel of IDS seek
to capitalize on customer relationships that have been developed by its IED
personnel in conjunction with engineering projects. Sales leads developed by
this synergy are then jointly pursued. IDS's customer base of over 200 accounts
consists primarily of Fortune 500 companies in all industry segments within the
United States.
All in-house sales personnel are located at the Company's principal
executive offices in Houston, Texas. Additionally, IDS has hired a direct
regional sales manager in the Connecticut area who is responsible for
establishing sales distribution channels in the northeastern United States.
THERMAL
Revenues derived from Thermal's operation are 100% from non-stocking sales
representatives.
CONSULTING ENGINEERING SUBSIDIARY
Revenues derived from the Company's IED are 100% direct in-house sales.
GOVERNMENT CONTRACTS
Sales to branches of the United States government have accounted for less
than 1% of IDS and IED total revenue. Thermal's sales to United States
government agencies accounts for approximately 5 to 10% of its total revenue.
CUSTOMERS
The Company's top ten customers (which varied from period to period) accounted
in the aggregate for approximately 82% and 77% of the Company's total revenue
during 1996 and 1997, respectively. Exxon Pipeline Co., its major customer in
1996, accounted for 39% of the Company's total revenue in that period and Baker
Hughes Inteq, its major customer in 1997, accounted for 16% of the Company's
total revenue in that period.
Currently, the top ten customers are:
Baker Hughes Inteq Texaco Titleist & Footjoy Worlwide
ARCO Pipeline Co. SAIC Jacobs Engineering
EXXON Pipeline Co. Texas Eastern Products Hollingsworth Equipment
Marathon Pipeline Co. Pipeline
Based upon historical results and existing relationships with customers,
the Company believes that although efforts are being made to diversify its
client base a substantial portion of its total revenue and gross profit will
continue to be derived from sales to existing customers. There are no long-term
commitments by such customers to purchase products or services from the Company.
Sales of IDS's computer products are typically made on a purchase order basis. A
significant reduction in orders from any of the Company's largest customers
could have a material adverse effect on the Company's financial condition and
results of operations. Similarly, the loss of any one of the Company's largest
customers or the failure of any one of such customers to pay its accounts
receivable on a timely basis could have a material adverse effect on the
Company's financial condition and results of operations. There can be no
assurance that the Company's largest customers will continue to place orders
with the Company or that orders by such customers will continue at their
previous levels. There can be no assurance that the Company's customers for its
engineering services will continue to enter into contracts with the Company for
such services or that existing contracts will not be terminated.
CUSTOMER SERVICE AND SUPPORT
The Company provides service and technical support to its customers in
varying degrees depending upon the product line and on customer contractual
arrangements. The Company's Houston based technical support staff provides
initial telephone trouble shooting services for end-user customers and
distributors. These services include isolating and verifying reported product
failures, authorizing product returns and tracking completion of repaired goods
in support of customer requirements. Technical support also provides on-site
engineering support in the event that a technical issue can not be resolved over
the telephone. The Company generally provides end-user purchasers of its systems
with a one year warranty.
DEPENDENCE UPON SUPPLIERS
The Company's business depends upon its ability to obtain an adequate
supply of products and parts at competitive prices and on reasonable terms. The
Company's suppliers are not obligated to have products on hand for timely
delivery to the Company nor can they guarantee product availability in
sufficient quantities to meet the Company's demands. There can be no assurance
that such products will be available as required by the Company at prices or on
terms acceptable to the Company. The Company procures a majority of its
computers, computer systems and computer components from distributors in order
to obtain competitive pricing, maximize product availability and maintain
quality control. In some cases, IDS's computer components are purchased through
a single source. IDS does not always have a long term purchasing contract in
place to purchase computer components from single sources. In the normal course
of business, IDS executes blanket purchase orders with its major suppliers for a
period of one year in order to maintain competitive pricing and service. The
purchase orders include provisions for the delivery, on a monthly basis, of an
adequate supply of computer parts to fulfill the Company's orders for a one year
period.
IDS relies on a few key contract manufacturers for the manufacture of some
components used in the assembly of its microcomputers.. Suntronic, Inc. and
Arrow Manufacturing, Inc., provide contract assembly of PC boards to the
Company, on an as needed basis. No long term contracts are in place for the use
of these services. IDS's single source suppliers are Microbus, Inc., Zero
Enclosures, and Promed Keyboard Group. These manufacturers are the single
sources for IDS's CPU boards, enclosures and keyboards, respectively. Although
such subcontracting arrangements offer cost and capacity advantages, and would
eliminate the need to incur certain capital expenditures associated with
manufacturing, reliance on third party manufacturers gives IDS less control over
the manufacturing process for these components than if it undertook such
activities itself. Any failure of such subcontractors to manufacture and deliver
components as planned, or any problems with the quality of such components,
could have a material adverse effect on IDS's operations.
IDS purchases from other manufacturers substantially all peripheral
devices and components used in its products. A majority of the components and
peripherals are available from a number of different suppliers, although certain
major items are procured from single sources. Management believes that alternate
sources could be developed for such single source items, if necessary, however,
in the event that certain peripheral or component shortages were to occur, it
could have an adverse effect on IDS's operations.
Thermal's key supplier of stock fans is Lau Company. Fans are purchased on
individual purchase orders. Thermal has increased its stocking level of this
component, because of the potential delays in manufacturing which would be
caused by its inability to procure this important element.
There can be no assurance that the Company will be able to continue to
obtain the necessary components from its single sources on terms acceptable to
the Company, if at all. There can be no assurance that such relationship will
continue or that, in the event of a termination of its relationship, it would be
able to obtain alternative sources of supply without a material disruption in
the Company's ability to provide products to its customers. Any material
disruption in the Company's supply of products would have a material adverse
effect on the Company's financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE
The business in which IDS competes is characterized by rapid technological
change and frequent introduction of new products and product enhancements. IDS's
success depends in large part on its ability to identify and obtain products
that meet the changing requirements of the marketplace. The metal enclosures for
IDS's SafeCase 4000 portable computer are subject to manufacturer and
distributor allocations due to its customized design. The LCD flat panel display
used in the SafeCase 4000 portable computer may also be subject to distributor
allocations due to its high demand in the marketplace. IDS could experience
delays in the receipt of these integral products. During the past five years
since this product was introduced, IDS has not encountered any delays in the
delivery of these products. There can be no assurance that IDS will be able to
identify and offer products necessary to remain competitive or avoid losses
related to obsolete inventory and drastic price reductions. IDS attempts to
maintain a level of inventory required to meet its near term delivery
requirements by relying on the ready availability of products from its principal
suppliers. Accordingly, the failure of IDS's suppliers to maintain adequate
inventory levels of computer products demanded by its existing and potential
customers and to react effectively to new product introductions could have a
material adverse affect on the Company's financial condition and results of
operations. Failure of IDS to gain sufficient access to new products or product
enhancements could also have a material adverse affect on the Company's
financial condition and results of operations.
PATENTS, TRADEMARKS, LICENSES
The Company's success depends in part upon its proprietary technology, and
relies primarily on trade secrecy and confidentiality agreements to establish
and protect its rights in its proprietary technology. The Company does not own
the rights to any U.S. or foreign patents. There can be no assurance that the
Company's present protective measures will be adequate to prevent unauthorized
use or disclosure of its technology or independent third party development of
the same or similar technology. Although the Company's competitive position
could be affected by its ability to protect its proprietary and trade secret
information, the Company believes other factors, such as the technical expertise
and knowledge of the Company's management and technical personnel, and the
timeliness and quality of support services provided by the Company, to be more
significant in maintaining the Company's competitive position.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 110
individuals within its three subsidiaries; approximately seven were employed in
sales, marketing and customer services, forty were employed in engineering,
fifty-five were employed in technical production positions and nine were
employed in administration, finance and MIS. The Company believes that its
ability to recruit and retain highly skilled and experienced technical, sales
and management personnel has been, and will continue to be, critical to its
ability to execute its business plan. None of the Company's employees are
represented by a labor union or are subject to a collective bargaining
agreement. The Company believes that relations with its employees are good.
ITEM 2. DESCRIPTION OF PROPERTY
FACILITIES
The Company leases its principal executive offices in Houston, Texas,
which consists of approximately 18,155 square feet that has been divided into
administrative offices and engineering offices. An additional 12,000 square feet
of office space for computer production operations and warehouse facilities was
leased adjacent to the principal office of the Company on January 1, 1998. The
lease which will expire on August 31, 2002, is for a five year term. Management
believes that it has the ability to sustain a 100% sales growth without having
to expand its facilities or relocate its offices.
As a result of the acquisition of Thermal, the land and property
previously leased by Thermal was purchased by Thermal for $500,000, consisting
of $50,000 cash advance from the Company and a note payable in the amount of
$450,000. This property consists of 4.5995 acres of land improved with a 37,725
square foot concrete tiltwall office/manufacturing facility located in Houston,
Texas Thermal owns and occupies a 37,735 square foot facility on approximately
4.5 acres which consists of approximately 2,500 square feet of office space and
35,200 square feet of manufacturing area located in Houston, Texas.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in various legal proceedings
arising in the ordinary course of business. To management's knowledge, the
Company is not currently involved in any material legal proceedings and is not
aware of any legal proceeding threatened against it.
ITEM 4. SUBMISSION OR MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of the year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $.001 par value per share, is quoted on the
NASDAQ Electronic Bulletin Board System under the symbol "IDDS".
HIGH LOW
---- ---
YEAR ENDED DECEMBER 31, 1996
First Quarter.................................. 1.125 0.750
Second Quarter................................. 0.875 0.375
Third Quarter.................................. 4.250 0.875
Fourth Quarter................................. 7.250 3.125
YEAR ENDED DECEMBER 31, 1997
First Quarter.................................. 9.000 6.500
Second Quarter................................. 10.620 7.500
Third Quarter.................................. 10.000 8.370
Fourth Quarter 10.500 4.500
The foregoing figures, are based on information published by Dow Jones
Retrieval Service, do not reflect retail markups or markdowns and may not
represent actual trades.
Management believes that the Company has received positive response from
the investment community as a result of recent press releases regarding product
development of the SafeCase 400 and the letter of intent to acquire Constant
Power Manufacturing, Inc. The press releases are distributed through PR Newswire
which distributes to Dow Jones, Bloomberg, Reuters, AP, UPI and other investor
wire services. These press releases are also distributed to numerous
publications in Texas.
As of December 31, 1997, the Common Stock was held by approximately 323
stockholders of record.
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on the Common
Stock. The payment of dividends in the future will depend on the Company's
earnings, capital requirements, operating and financial position and general
business conditions. The Company intends to retain any future earnings for
reinvestment in its business and does not intend to pay cash dividends in the
foreseeable future. The Company has not entered into any agreement which
restricts its ability to pay dividends on its Common Stock in the future. See
"Management's Discussion and Analysis or Plan of Operations."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
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 this Annual Report on Form
10-KSB.
OVERVIEW
The Company was formed in 1985 to engage in the business of 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 the IED segment. In 1989, the Company introduced its
Industrial Products segment and has continued to introduce new products to the
marketplace. In 1997, with the acquisition of Thermal, the Company expanded into
the manufacture and distribution of air handling equipment for HVAC systems. The
Industrial Products segment has generated sales as a percent of total revenue of
37.4% and 24.5%, for 1996 and 1997, respectively, while the IED segment has
generated sales as a percent of total revenue of 62.6% and 40.3% for the same
period and the Thermal segment has generated sales as a percent of total revenue
of 35.2% for 1997.
The gross margin varies between each of its operating segments. Computer
product sales have produced a gross margin ranging from 28.6% in 1996 to 31.4%
in 1997 due to the increase in sales volume between 1996 and 1997. The gross
margin for pipeline engineering services, which reflects direct labor costs, has
ranged from 28.3% in 1996 to 24.7% in 1997. The gross margin produced by Thermal
in 1997 was 20.2%. The variation is primarily attributable to the pricing and
the mix of services provided, and to the level of direct labor as a component of
cost during any given period. The overall gross margin for Industrial Data
Systems Corporation, which includes both product sales and pipeline consulting
services in 1996, has varied between 28.4% in 1996 to 24.8% in 1997, which
includes product sales, pipeline consulting and Thermal sales. This variation
reflects the different mix of product sales and the effect of Thermal's sales.
Revenue from computer product sales accounted for 24.5% of the Company's total
revenue for the year ended December 31, 1997. Revenue from pipeline engineering
consulting services accounted for 40.3% of the Company's total revenue for the
year ended December 31, 1997. Revenue from air handling equipment sales
accounted for 35.2% of the Company's total revenue for the year ended December
31, 1997.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data derived from the Company's consolidated statements of operations
and indicates percentage of total revenue for each item.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1996 1997
-------------------- -----------------------
AMOUNT % AMOUNT %
---------- ------ ------------ ------
<S> <C> <C> <C> <C>
Revenue:
Computer Products ............ $2,068,517 37.4 $ 2,581,633 24.5
Consulting Services .......... 3,468,443 62.6 4,239,466 40.3
Thermal ...................... -- 0.0 3,702,898 35.2
---------- ------ ------------ ------
Total revenue ............... 5,536,960 100.0 $ 10,523,977 100.0
Gross Profit:
Computer Products ............ 591,303 28.6 810,982 31.4
Consulting Services .......... 980,899 28.3 1,046,371 24.7
Thermal ...................... -- 0.0 748,444 20.2
---------- ------ ------------ ------
Total gross profit ........... 1,572,202 28.4 2,605,797 24.8
Selling, general and ........... 1,914,818
administrative expenses ....... 1,049,879 19.0 1,914,818 18.2
Depreciation ................... 33,689 0.6 97,101 .9
---------- ------ ------------ ------
Operating income ........... 488,616 8.8 593,878 5.6
Other income (expense) ......... 120,169 2.2 (3,134) (.03)
---------- ------ ------------ ------
Income before provision for
income taxes ............ 608,785 11.0 590,744 5.6
Provision for income taxes ..... 206,367 3.7 208,249 2.0
---------- ------ ------------ ------
Net income after income taxes .. $ 402,418 7.3 $ 382,495 3.6
========== ====== ============ ======
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
TOTAL REVENUE. Total revenue increased by $4,987,017 or 90.0% from $
5,536,960 in 1996 to $10,523,977 in 1997. Revenue from the Industrial Products
segment, which comprised 24.5% of total revenue in 1997 increased by $513,116 or
24.8%. The increase in Industrial Products segment revenue was generally
attributable to increased sales to new and existing customers which resulted
from the hiring of additional sales personnel, in addition to the introduction
of new product lines. Revenue from the IED which comprised 40.3% of total
revenue in 1997 increased by $771,023 or 22.2%. Revenue from Thermal comprised
35.2% of total revenue in 1997.
IED revenue is derived from engineering services provided to the pipeline
division of major integrated oil companies. These services are performed on
facilities that include cross-country pipelines, pipeline pump stations,
compressor stations, metering facilities, underground storage facilities, tank
storage facilities and product loading terminals. The IED has the capability of
developing a project from the initial planning stages through detailed design
and construction management. The services provided include project scoping, cost
estimating, engineering design, material procurement, mechanical fabrication, in
addition to project and construction management. The IED has ten blanket service
contracts currently in place to provide services on a time and materials
reimbursable basis. The IED also performs services for its clients on a turnkey
lump sum basis.
The IED client base consists of major oil companies such as Exxon Pipeline
Company, Arco Pipeline Company, Marathon Pipeline Company, Praxair, Inc.,
Sonsub, CNG Transmission and Texas Eastern Products Pipeline Company. New
business relationships with other major oil companies are developed through
in-house personnel.
The 1997 increase in IED revenue was due to additional engineering
consulting projects resulting from increased drilling and exploration activity
in the oil and gas industry and from the recent industry trend to outsource more
engineering projects to consulting firms such as IED.
GROSS PROFIT. Gross profit increased by $1,033,595 or 65.7% from
$1,572,202 in 1996 to $2,605,797 in 1997. The gross margin for the IED decreased
from 28.3 % in 1996 to 24.7% in 1997. The decrease was attributable to increased
payroll and related direct costs not offset by increases in billing rates. The
gross margin for the IDS segment increased from 28.6 % in 1996 to 31.4 % in
1997. This increase was primarily attributable to an increase in sales blend of
products that have higher gross margins and an increase in overall sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $864,939 or 82.4 % from $1,049,879 in 1996
to $1,914,818 in 1997. As a percentage of total revenue, selling, general and
administrative expenses decreased from 19.0% in 1996 to 18.2% in 1997. The
dollar increase was primarily attributable to an increase in general and
administrative expenses and sales compensation to accommodate the Company's
growth and the acquisition of Thermal's operations. Personnel costs, the largest
other component of general and administrative expenses, increased at a slower
rate than total revenue. Certain general and administrative expenses are
relatively fixed, and the Company was able to leverage these expenses as revenue
increased during 1997.
The following table details the significant increases in selling, general
and administrative expense increases for the year ended December 31, 1997:
<TABLE>
<CAPTION>
SELLING, GENERAL AND $ INCREASE 1996 % OF % OF 1997
ADMINISTRATIVE EXPENSE TO 1997 INCREASE REVENUE COMMENTS
- - ---------------------- ------- -------- ------- --------
<S> <C> <C> <C>
Building lease expense 9,386 9.5% 1% Scheduled increase
Administrative expense 458,408 82.0% 10% Transfer of certain officer from Engineering Dept. to Admin.
Dept. and additional admin costs related to the addition of
Thermal
IDS sales expenses 406,513 83.0% 9% Reflects additional sales salaries and additional commission
expense for 1997
</TABLE>
OPERATING INCOME. Operating income increased by $105,262 or 21.5 % from
$488,616 in 1996 to $593,878 in 1997. Operating income decreased as a percentage
of total revenue from 8.8% in 1996 to 5.6 % in 1997. The dollar increase in
operating income was a result of a increased revenues, but the decrease as a
percentage of total revenue was attributable to lower gross margins for IED and
Thermal, coupled with increased selling, general and administrative expenses.
OTHER INCOME (EXPENSE). Other income decreased by $123,303 or 102.6 % from
$120,169 in 1996 to ($3,134) in 1997. This decrease was primarily due to smaller
gains on marketable securities, and by additional interest expense due to higher
utilization of the Company's line of credit and other financing costs.
NET INCOME. Net income after taxes decreased by $19,923 or 5.0% from
$402,418 in 1996 to $382,495 in 1997. Net income after taxes decreased as a
percentage of total revenue from 7.3% in 1996 to 3.6% in 1997.
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
December 31, 1997, the Company's cash position, including marketable securities,
was sufficient to meet its working capital requirements. The Company had, as of
December 31, 1997, $325,000 in additional advances available under its line of
credit with a bank. This line of credit provides for maximum borrowings of
$350,000, which bears interest at prime plus 1% is for a term of one year,
matures on May 12, 1998, and will be renewed at that time. 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 established with its
bank, an additional line of credit for Thermal, which will provide for maximum
borrowings of $400,000. As of December 31, 1997, the Company had no additional
advances available under this line of credit. This line of credit bears interest
at prime plus 1% and is for a term of one year, maturing on May 12, 1998, and
will be renewed at that time. This line of credit is secured by accounts
receivable and inventory of Thermal, and the personal guarantees of certain
stockholders and officers of the Company.
On August 2, 1996, the Company issued 2,499,999 shares of its common stock
in exchange for promissory notes due February 15, 1997, totaling $999,999. These
notes were subsequently paid in full on January 27, 1997. The Company believes
that it has sufficient working capital and does not intend to sell shares of its
common stock within the next twelve months.
The Company's working capital was $2,579,571 and $1,957,813 at December
31, 1996 and December 31, 1997, respectively.
CASH FLOW
Operating activities provided net cash totaling $128,863 and ($818,061)
during 1996 and 1997, respectively. The Company has not generated significant
cash flow from operating activities due to the working capital requirements
resulting from the rapid growth of the Company. Trade accounts receivable
decreased $28,773 and increased $1,301,632 for the years ended December 31, 1996
and 1997, respectively. Inventory increased by $81,582 and $300,149 for the same
periods.
Investing activities used cash totaling, $234,920 and $1,066,995
respectively, during the years ended December 31, 1996 and 1997. In 1996, the
Company's investing activities that used cash was primarily related to cash
advances to an affiliate Thermal and capital expenditures. In 1997, the
Company's investing activities that used cash was primarily related to the
acquisition of Thermal and capital expenditures.
As of December 31, 1997, the Company had a portfolio of marketable
securities which had a fair market value of $375,045 and consisted of bonds and
mutual funds. The mutual funds that the Company has available for sale are open
end stock funds which are managed by Aim, Pioneer, and 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 provides
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 generally available cash reserves.
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 provided cash totaling $507,325 and $1,367,657 during
1996 and 1997. During 1997, $811,929 was provided from the issuance of Common
Stock. Additionally, financing activities provided an increase in borrowings of
$554,913 under its line of credit. The Company has additional financing amounts
available on its line of credit ($325,000 at December 31, 1997). The line of
credit has been used principally to finance accounts receivable and inventory
purchases. The $787,437 received in January 1997 from the sale of securities was
expected to be used for working capital and to purchase Thermal. Additional bank
financing in the amount of $450,000 was obtained for the purchase of the
facilities that Thermaire, Inc. dba Thermal Corp. had been leasing.
Upon the consummation of the acquisition of Thermal on February 15, 1997
the Company immediately implemented a cost reduction program which reduced the
operating costs during the first quarter of 1997. During this time, the Company
also experienced a backlog of orders from its commercial and industrial
customers which are currently being filled. The revenues generated from the sale
of its products combined with its ongoing efforts in controlling costs will
provide the Company with sufficient cash to meet working capital requirements
during the next twelve months. The Company anticipates that the acquisition of
Thermal will increase revenues by approximately 54% during the next twelve
months.
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 trade accounts receivable of $593,739 and $2,268,864 at
December 31, 1996 and 1997, respectively. The number of days' sales outstanding
in trade accounts receivable was 39 days and 78 days, respectively. Bad debt
expenses have been insignificant (approximately .01%) for each of these periods.
ITEM 7. FINANCIAL STATEMENTS
The audited financial statements for Industrial Data Systems
Corporation, Inc., as of December 31, 1997 are attached hereto and made part
hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no changes in or disagreements with the Company's accountants
on accounting and financial disclosure.
<PAGE>
INDUSTRIAL DATA SYSTEMS CORPORATION
AND SUBSIDIARIES
INDEX
PAGE
----
INDEPENDENT AUDITOR'S REPORT............................................. 24
CONSOLIDATED BALANCE SHEETS - December 31, 1997 and 1996................. 25
CONSOLIDATED STATEMENTS OF INCOME - Years Ended December 31, 1997
and 1996............................................................ 26
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - Years Ended
December 31, 1997 and 1996.......................................... 27
CONSOLIDATED STATEMENTS OF CASH FLOWS - Years Ended
December 31, 1997 and 1996.......................................... 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................... 29
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Industrial Data Systems Corporation
We have audited the accompanying consolidated balance sheets of Industrial Data
Systems Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the consolidated financial position of
Industrial Data Systems Corporation and Subsidiaries as of December 31, 1997 and
1996, and the results of their operations and cash flows for the years then
ended, in conformity with generally accepted accounting principles.
HEIN + ASSOCIATES LLP
Houston, Texas
February 27, 1998
<PAGE>
INDUSTRIAL DATA SYSTEMS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------
1996 1997
----------- -----------
ASSETS
CURRENT ASSETS Cash and cash equivalents:
Cash in bank ................................. $ 637,217 $ 77,684
Mutual funds ................................. 337,883 380,017
----------- -----------
975,100 457,701
Marketable securities, at market value:
Trading ...................................... 400,348 375,045
Available-for-sale ........................... 56,781
----------- -----------
457,129 375,045
Account receivable - trade, less allowance
for doubtful accounts of approximately $11,000
and $3,000 in 1996 and 1997, respectively .... 593,739 2,268,864
Note receivable from an affiliate .............. 84,936 --
Inventory ...................................... 221,096 884,342
Note receivable from sale of common stock ...... 799,999 --
Notes receivable from stockholders ............. 50,000 200,000
Advances to affiliate .......................... 30,000 5,546
Prepaid assets and deferred costs .............. 48,858 66,152
----------- -----------
Total current assets ....................... 3,260,857 3,424,904
----------- -----------
PROPERTY AND EQUIPMENT, net ..................... 122,578 1,044,381
OTHER ASSETS .................................... 2,000 6,228
Goodwill ........................................ -- 59,841
----------- -----------
Total assets ............................... $ 3,385,435 $ 5,368,100
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank, revolving .............. $ 325,000 $ 425,000
Current portion - Note payable to bank, term . -- 34,242
Accounts payable ............................. 57,698 697,255
Income taxes payable ......................... 128,065 79,698
Accrued expenses and other current liabilities 170,523 230,896
----------- -----------
Total current liabilities .................. 681,286 1,467,091
Note payable to bank, term ................... 420,671
DEFERRED INCOME TAX ............................. 34,010 41,334
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 75,000,000
shares authorized; 13,129,999 shares
issued in 1996; 12,723,718 shares
issued in 1997 ............................... 13,130 12,724
Additional paid-in capital ..................... 1,829,684 2,216,713
Retained earnings .............................. 842,395 1,224,890
Net unrealized gain on marketable securities ... 1,068 --
----------- -----------
2,686,277 3,454,327
Treasury stock, 19,800 and 18,800 in 1996
and 1997, respectively, at cost .............. (16,138) (15,323)
----------- -----------
Total stockholders' equity ................. 2,670,139 3,439,004
----------- -----------
Total liabilities and stockholders' equity ... $ 3,385,435 $ 5,368,100
=========== ===========
See accompanying notes to these consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
----------------------------
1996 1997
------------ ------------
OPERATING REVENUES:
Computer product sales ...................... $ 2,068,517 $ 2,581,633
Engineering services ....................... 3,468,443 4,239,446
Air handling sales .......................... -- 3,702,898
------------ ------------
Total revenues .......................... 5,536,960 10,523,977
OPERATING EXPENSES:
Cost of revenues:
Computer products ......................... 1,477,214 1,770,651
Engineering services ...................... 2,487,544 3,193,075
Air handling .............................. -- 2,954,454
------------ ------------
Total cost of revenues .................. 3,964,758 7,918,180
Selling, general and administrative ......... 1,049,897 1,914,818
Depreciation ................................ 33,689 97,1101
------------ ------------
1,083,586 2,011,919
------------ ------------
Operating profit ........................ 488,616 593,878
OTHER INCOME (EXPENSE):
Realized gains on marketable securities, net 86,824 52,358
Net unrealized gains (losses) on
marketable securities ..................... 20,389 (26,334)
Interest income (expense), net .............. (456) (28,024)
Other income ................................ 13,412 (1,134)
------------ ------------
120,169 (3,134)
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES ....... 608,785 590,744
PROVISION FOR INCOME TAXES:
Federal ..................................... 185,468 176,830
State ....................................... 20,899 24,095
Deferred .................................... 34,010 7,324
------------ ------------
206,367 208,249
------------ ------------
NET INCOME ..................................... $ 402,418 $ 382,495
============ ============
BASIC EARNINGS PER COMMON SHARE ................ $ .04 $ .03
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ..... 10,056,735 12,723,718
============ ============
See accompanying notes to these consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN (LOSS)
COMMON STOCK ADDITIONAL ON
---------------------- PAID-IN RETAINED MARKETABLE TREASURY
SHARES AMOUNT CAPITAL EARNINGS SECURITIES STOCK TOTAL
----------- -------- ---------- ---------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, January 1, 1996 ...................... 10,630,000 $ 10,630 $ 817,397 $ 439,977 $ 1,289 $(33,675) $ 1,235,618
Stock issuance ($.40 share), net of $10,000 of
offering costs ............................ 2,499,999 2,500 987,499 -- -- -- 989,999
Purchases of treasury stock (10,500 shares) .... -- -- -- -- -- (8,188) (8,188)
Sale of stock from treasury (29,400 shares) .... -- -- 24,788 -- -- 25,725 50,513
Change in unrealized gain on
marketable securities .......................... -- -- -- -- (221) -- (221)
Net income ..................................... -- -- -- 402,418 -- -- 402,418
----------- -------- ---------- ---------- ------- -------- -----------
BALANCES, December 31, 1996 .................... 13,129,999 13,130 1,829,684 842,395 1,068 (16,138) 2,670,139
----------- -------- ---------- ---------- ------- -------- -----------
Recission of stock options previously issued
for contingent transaction ..................... (600,000) (600) -- -- -- -- (600)
Stock issuance in conjunction with acquisition . 193,719 194 387,029 -- -- -- 387,223
Sale of stock from treasury (1,000 shares) ..... -- -- -- -- -- 815 815
Change in unrealized gain on
marketable securities .......................... -- -- -- -- (1,068) -- (1,068)
Net income ..................................... -- -- -- 382,495 -- -- 382,495
----------- -------- ---------- ---------- ------- -------- -----------
BALANCES, December 31, 1997 .................... 12,723,718 $ 12,724 $2,216,713 $1,224,890 $ -- $(15,323) $ 3,439,004
=========== ======== ========== ========== ======= ======== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------
1996 1997
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................... $ 402,418 $ 382,495
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .................. 33,689 97,101
Deferred income tax expense .................... 14,617 7,324
Increase in trading securities, net ............ (161,925) (82,044)
Changes in, net of assets
acquired in acquisition:
Accounts receivable - trade .................. 28,773 (1,301,632)
Inventory .................................... (81,582) (300,149)
Accounts payable ............................. (55,780) 425,640
Income tax payable ........................... (38,921) (47,813)
Accrued expenses and other
current liabilities ......................... 52,809 4,939
Other, net ..................................... (65,235) (3,922)
--------- -----------
Net cash provided by operating activities .... 128,863 (818,061)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Thermal Corporation ................. -- (212,563)
Note receivable from affiliate ................... (84,936) 84,936
Advances on note receivable from stockholder ..... (50,000) (150,000)
Capital expenditures ............................. (49,984) (833,822)
Purchases of available-for-sale securities ....... (24,000) 24,000
Proceeds from sale of
available-for-sale securities .................. 4,000 (4,000)
Advances to affiliate ............................ (30,000) 24,454)
--------- -----------
Net cash used in investing activities ......... (234,920) (1,066,995)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable, net ................... 275,000 554,912
Proceeds from issuance of common stock, net ...... 190,000 811,929
Purchase of treasury stock ....................... (8,188) --
Sales of stock from treasury ..................... 50,513 815
--------- -----------
Net cash provided by financing activities ..... 507,325 1,367,656
--------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........... 401,268 (517,399)
CASH AND CASH EQUIVALENTS, at beginning of year ..... 573,832 975,100
--------- -----------
CASH AND CASH EQUIVALENTS, at end of year ........... $ 975,100 $ 457,701
========= ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid .................................... $ 12,350 $ 12,458
Income taxes paid ................................ $ 241,483 $ 160,631
========= ===========
NON-CASH TRANSACTIONS:
Issuance of common stock (600,000 shares)
during 1995 in connection with
a contingent business acquisition
(see Note 13) ................................. $ -- $ (600)
Issuance of common stock in
conjunction with purchase
of Thermal in 1997 ............................... $ -- $ 387,225
Common stock issued in exchange
for notes receivable (see Note 9) ................ $ 799,999 $ --
========= ===========
See accompanying notes to these consolidated financial statements.
<PAGE>
INDUSTRIAL DATA SYSTEMS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION - The accompanying consolidated financial statements include
the accounts of Industrial Data Systems Corporation (IDDS or the Company),
a Nevada corporation, and its wholly-owned subsidiaries Industrial Data
Systems, Inc., a Texas corporation, (IDS), IDS Engineering, Inc., a Texas
corporation (IED), and Thermaire, Inc., a Texas corporation, dba Thermal
Corporation (Thermal). All significant intercompany balances and
transactions have been eliminated in consolidation.
INVENTORY - Inventory is composed of computer components, sheet metal,
copper tubing, blower fans and fan motors and is carried at the lower of
cost or market value, with cost determined on the first-in, first out
(FIFO) method of accounting. The inventory at December 31, 1997 consisted
of computer components, sheet metal, copper tubing, blower fans and fan
motors and at December 31, 1996 it consisted of computer components.
MARKETABLE SECURITIES - 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 stockholders' 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. Trading
securities are stated at fair value, with unrealized gains and losses
recognized in earnings. The Company records the purchases and sales of
marketable securities and records realized gains and losses on the trade
date. Realized gains or losses on the sale of securities are recognized on
the specific identification method.
PROPERTY AND EQUIPMENT - All property and equipment other than building and
improvements is stated at cost, adjusted for accumulated depreciation.
Depreciation is calculated using an accelerated method over the estimated
useful lives of the related assets, which is five years. Depreciation on
the building is calculated using a straight-line method over the useful
life, which is 40 years. Leasehold improvements are amortized over the term
of the related lease.
INCOME TAXES - The Company accounts for deferred income taxes in accordance
with the asset and liability method, whereby deferred income taxes are
recognized for the tax consequences of temporary differences by applying
enacted statutory tax rates applicable to future years to differences
between the financial statement and tax bases of its existing assets and
liabilities. The provision for income taxes represents the current tax
payable or refundable for the period plus or minus the tax effect of the
net change in the deferred tax assets and liabilities during the period.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash in bank
and investments in highly liquid money market mutual funds.
USE OF ESTIMATES - The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
requires the Company's management to make estimates and assumptions that
affect the amounts reported in these financial statements and accompanying
results. Actual results could differ from these estimates.
NEW ACCOUNTING PRONOUNCEMENTS - The Financial Accounting Standards Board
(FASB) issued SFAS No. 121 entitled IMPAIRMENT OF LONG-LIVED ASSETS, SFAS
No. 121, which became effective beginning February 1, 1996, provides that
in the event that facts and circumstances indicate that the cost of
operating assets or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset would be
compared to the carrying amount of the asset to determine if a writedown to
market value or discounted cash flow is required. SFAS No. 121 did not have
a material impact on its operating results or financial condition of the
Company upon implementation.
The FASB also issued SFAS No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION,
effective for fiscal years beginning after December 15, 1995. This
statement allows companies to choose to adopt the statement's new rules for
accounting for employee stock-based compensation plans. For those companies
which choose not to adopt the new rules, the statement requires disclosures
as to what earnings per share would have been if the new rules had been
adopted. Management adopted the disclosure requirements of the statement
during fiscal 1996, however, have entered into no such transactions.
The FASB also issued SFAS No. 128, entitled EARNINGS PER SHARE, during
February 1997. The new statement , which is effective for financial
statements issued after December 31, 1997, including interim periods,
establishes standards for computing and presenting earnings per share. The
new statement requires retroactive restatement of all prior-period earnings
per share data presented. The Company has adopted the provisions and have
reflected its earnings per share accordingly for both years presented
herein.
The FASB also issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME and SFAS
No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. SFAS No. 130 establishes standards for reporting and display
of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except
those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are
required to be recognized under current accounting standards as components
of comprehensive income be reported in a financial statement that displays
with the same prominence as other financial statements. SFAS No. 131
supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise. SFAS No. 131 establishes standards on the way that public
companies report financial information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating
segments as components of a company about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
SFAS Nos. 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Because of the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any,
the standards may have on the future financial statement disclosures.
Results of operations and financial position, however, will be unaffected
by implementation of these standards.
2. MARKETABLE SECURITIES:
Marketable securities at December 31, 1996 are summarized as follows:
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- -------- --------- --------
Trading:
Common stocks . $225,027 $ 40,981 $ (10,258) $255,750
Bond .......... 100,000 -- -- 100,000
Other ......... 25,000 19,598 -- 44,598
-------- -------- --------- --------
350,027 60,579 (10,258) 400,348
Available-for-sale:
Mutual fund ... 55,713 1,068 -- 56,781
-------- -------- --------- --------
$405,740 $ 61,647 $ (10,258) $457,129
======== ======== ========= ========
<PAGE>
Marketable securities at December 31, 1997 are summarized as follows:
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ------- -------- --------
Trading:
Common stocks . $ -- $ -- $ -- $ --
Bond ......... 300,000 -- -- 300,000
Other ......... 50,000 25,045 -- 75,045
-------- ------- -------- --------
Available-for-sale:
Mutual fund ... -- -- -- --
-------- ------- -------- --------
$350,000 $25,045 $ -- $375,045
======== ======= ======== ========
3. AFFILIATE RECEIVABLES
The Company has several notes receivable due from stockholders. The notes
receivable are unsecured, due on demand and bear interest at a rate of 9%
per annum. Interest on the notes is due annually.
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of:
DECEMBER 31,
---------------------------
1996 1997
----------- -----------
Land .................................... $ -- $ 90,000
Furniture and fixtures .................. 43,610 87,875
Computer equipment ...................... 153,459 232,865
Building ................................ -- 605,000
Shop equipment .......................... -- 126,446
Leasehold improvements .................. -- 10,715
Construction-in-process ................. -- 61,527
----------- -----------
197,069 1,214,428
Accumulated depreciation and amortization (74,491) (170,047)
----------- -----------
$ 122,578 $ 1,044,381
=========== ===========
The construction-in-process has no depreciation recorded against it as of
December 31, 1997.
<PAGE>
5. NOTE PAYABLE TO BANK
The Company has a line of credit for Industrial Data Systems, Inc with a
bank of $350,000 at prime plus 1% (9.5% at December 31, 1997). The line of
credit, which expires on May 12, 1998, is collateralized by accounts
receivable, inventory of IDS. There was $25,000 outstanding under the line
at December 31, 1997. Interest on the outstanding borrowings is due and
payable monthly.
The Company has a line of credit for Thermal Corporation with a bank of
$400,000 at prime plus 1% (9.5% at December 31,1997). The line of credit,
which expires on May 12, 1998, is collateralized by accounts receivable,
inventory of Thermal and is guaranteed by all stockholders of the Company.
There was $400,000 outstanding under the line at December 31, 1997.
Interest on the outstanding borrowings is due and payable monthly.
The Company has a term note payable with a bank of $450,000 at 8.88%
(Ordinary Interest). The loan which expires on February 28, 2002, is
collateralized by land and building acquired in purchase of Thermal
Corporation (see Note 13). There was $436,384 outstanding under this note
at December 31, 1997. Interest on the outstanding amount is due and payable
monthly.
Future maturities of long-term debt are as follows:
YEARS ENDING DECEMBER 31,
-------------------------
1998 $459,242
1999 107,794
2000 19,440
2001 21,238
2002 362,199
--------
$969,913
6. LEASE:
The Company leases office space under two non-cancelable operating leases.
Total rent expense for the years ended December 31, 1997 and 1996 was
$109,000 and $99,000, respectively. Future minimum rentals due under the
non-cancelable operating leases with an original term of at least one year
are as follows:
YEARS ENDING DECEMBER 31,
-------------------------
1998 $175,000
1999 181,000
2000 145,106
2001 72,000
2002 78,000
--------
$651,000
<PAGE>
7. PROFIT SHARING PLAN:
The Company has a 401(k) profit sharing plan covering substantially all
employees. Under the terms of the plan, the Company will make matching
contributions equal to 50% of employee contributions up to 3% of employee
compensation, as defined. Employees may make contributions up to 15% of
their compensation, subject to certain maximum contribution limitations.
The employer's contributions vest on a schedule of 25% per year for four
years. The Company made contributions to the plan of $72,000 and $45,000
for the years ended December 31, 1997 and 1996, respectively.
8. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS:
The Company manufactures and distributes industrial and portable computers
and computer monitors and air handling equipment for air conditioning and
heating systems to commercial companies primarily in the southern states
and provides pipeline engineering services primarily to major integrated
oil and gas companies. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral. The Company
assesses its credit risk and provides an allowance for doubtful accounts
for any accounts which it deems doubtful for collection.
The Company maintains deposits in banks which may exceed the amount of
federal deposit insurance available. Management periodically assesses the
financial condition of the institutions and believes that any possible
deposit loss is minimal.
The Company had sales to five major customers totaling approximately
$6,630,000 for 1997, representing 63% of total revenues for the year. For
1996, the Company had sales to one major customer totaling approximately
$2,967,000 which represents 39% of total revenues for that year. At
December 31, 1997, amounts due from three customers who individually had
amounts due in excess of 10% of trade receivables, totaled $1,111,000 At
December 31, 1996, amounts due from customers in excess of 10% of trade
accounts receivable amounted to $299,000 all of which was due from a
single customer.
9. STOCKHOLDERS' EQUITY:
In 1996, the Company issued 2,499,999 shares of common stock in exchange
for five non-interest bearing notes totaling $999,999. During fiscal 1996,
the Company received payment on one of the notes totaling $200,000. In
January 1997, the four remaining notes were paid in full and the Company
received the remaining $799,999.
The Company issued 193,719 shares of common stock as part of the
acquisition of Thermal Corporation (see Note 13).
<PAGE>
10. FEDERAL INCOME TAXES:
The total tax expense reported herein differs from what would be expected
by applying a statutory rate (34%) because of the effect on deferred taxes
of the acquisition of Thermal during 1997.
The Company has deferred tax assets and liabilities at December 31, 1996
and 1997 as follows:
1996 1997
-------- --------
Deferred tax assets ...................... $ 4,235 $ 57,639
Deferred tax liabilities ................. (38,245) (98,973)
-------- --------
Net deferred tax ......................... $(34,010) $(41,334)
======== ========
The Company's net deferred tax liability at December 31, 1997 and 1996
represents the accumulated federal income taxes computed on the excess of
tax depreciation over financial statement depreciation, and the unrealized
gain on trading marketable securities recognized as income, for financial
statement purposes versus upon their ultimate sale for tax purposes.
In 1996, the Company filed a consolidated federal income tax return with
the company it acquired in 1997 (see Note 13). The 1996 amounts reflected
herein represent the Company's tax activity as if it filed a separate
return, which would not vary significantly from allocating its portion of
the consolidated amounts.
11. SEGMENT INFORMATION:
The Corporation operates in three business segments: (1) the manufacture
and distribution of portable computers and computer monitors to commercial
companies; (2) provides engineering consulting services primarily to major
integrated oil and gas companies and (3) the manufacture and distribution
of air handling equipment for HVAC systems to commercial companies. Sales,
operating income, capital expenditures and depreciation set forth in the
following table are the results of the three segments. The amount in
corporate and eliminations includes amounts to eliminate intercompany
items, including notes receivable and notes payable.
<TABLE>
<CAPTION>
(in thousands) REVENUES OPERATING EARNINGS IDENTIFIABLE ASSETS
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
----------------------- ------------------------ ------------------------
1996 1997 1996 1997 1996 1997
------ ------- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Products Subsidiary(IDS) ................ $2,069 $ 2,582 $185 $190 $455 $ 996
Engineering Subsidiary(IED) ............. 3,468 4,239 304 310 459 1,625
Thermal ................................. -- 3,703 -- 94 -- 2,002
------ ------- ---- ---- ------ ------
Total ...................... $5,537 $10,524 $489 $594 $ 914 $4,623
====== ======= ==== ==== ====== ======
General corporate $2,471 $ 745
------ ------
Total Assets $3,385 $5,368
====== ======
</TABLE>
<PAGE>
Years ended December 31,
------------------------
1996 1997
---- ----
Depreciation and Amortization, net of amounts included
in cost of services and rentals:
Products Subsidiary(IDS) ............................. $ 4 $ 5
Engineering Subsidiary(IED) .......................... 24 29
General corporate .................................... 6 8
Thermal .............................................. -- 55
--- ----
Total .......................................... $33 $ 97
=== ====
Capital Expenditures:
Products Subsidiary(IDS) ............................. $19 $ 60
Engineering Subsidiary(IED) .......................... 31 97
Thermal .............................................. -- 677
--- ----
Total .......................................... $50 $834
=== ====
12. TRANSACTION WITH AFFILIATE:
During 1996, the Company employed an individual to perform the general
manager function at the company it acquired in 1997 (see Note 13). The
Company incurred salary and related payroll costs for this individual
totaling approximately $93,000 in 1996.
In July 1997, the Company entered into a management contract with BHC
Management Corporation (BHC), a Texas Corporation. As compensation for
services provided hereunder, Industrial Data Systems, Inc.(IDS), agreed to
pay BHC the sum of $4,000 per month plus expenses not to exceed $500 per
month. The principals of BHC are stockholders of IDS.
13. ACQUISITION:
In February 1997, the Company acquired Thermaire, Inc. dba Thermal
Corporation (Thermal) in a stock purchase. The Company paid $600,000,
consisting of $212,563 in cash and 193,719 shares of the Company's common
stock, which may be put back to the Company for $2 per share at the option
of the holder. Additionally, the Company purchased the facilities that
Thermal had been leasing from an affiliate for $500,000. The Company
obtained bank financing totaling $450,000 related to the acquisition of
these facilities. The acquisition has been accounted for on the purchase
method of accounting. Goodwill arising as a result of this transaction
totaled approximately $85,000. Previously, in 1995, the Company had issued
600,000 shares of its common stock to Thermal on a contingent basis. These
shares were held in an escrow account pending completion of the
acquisition, at which time these shares were released from escrow and
cancelled. The aforementioned 193,719 shares were issued under revised
terms of the purchase agreement.
The operating results of Thermal have been included in the company's
consolidated financial statements since the date of acquisition.
<PAGE>
The following unaudited proforma consolidated results of operations for the
years ended December 31, 1997 and 1996 assumes the Thermal acquisition
occurred as of January 1, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996
------------------------------------- ----------- ----
Net sales ................................. $10,947 $7,941
Net earnings .............................. 379 342
Earnings per share: ....................... .03 .03
In management's opinion, the unaudited proforma combined results of
operations are not indicative of the actual results that would have
occurred had the acquisition been consumated at the beginning of fiscal
1996 or of future operations of the combined companies under the ownership
and management of the Company.
14. SUBSEQUENT EVENT:
In February 1998, the Company announced it had signed a letter of intent to
acquire Constant Power Manufacturing, Inc. (CPM), a Houston based power
systems manufacturer. Stipulated in the letter of intent, the Company will
exchange 300,000 shares of the Company's common stock for 100% of CPM's
shares. CPM had 1997 revenues of approximately $3.5 million and pretax
profits of approximately 13% of said revenues.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no changes in and disagreements with the Company's accountants
on accounting and financial disclosure.
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference in the Company's definitive proxy
statement for its 1998 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 30, 1998.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated herein by reference in the Company's definitive proxy
statement for its 1998 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 30, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference in the Company's definitive proxy
statement for its 1998 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 30, 1998.
ITEM 12. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
Incorporated herein by reference in the Company's definitive proxy
statement for its 1998 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 30, 1998.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
<PAGE>
DESCRIPTION AND INDEX OF EXHIBITS
*3 Articles of Incorporation, IDS Engineering, Inc., dated October 15,
1997
*3.1 Corporate Charter, IDS engineering, Inc., dated October 15, 1997
*3.2 Bylaws, IDS Engineering, Inc., dated October 15, 1997
*10 Lease agreement between Industrial Data Systems, Incorporated, a Texas
corporation, and 319 Century Plaza Associates, Ltd., dated August 18,
1997
*10.1 First Amendment to Lease Agreement between Industrial Data Systems,
Incorporated, a Texas corporation, and 319 Century Plaza Associates,
Ltd., dated September 19, 1997.
*10.2 Second Amendment to Lease Agreement between Industrial Data Systems,
Incorporated, a Texas corporation, and 319 Century Plaza Associates,
Ltd., dated November 19, 1997.
21 Subsidiaries of the Registrant
27 Financial Data Schedule
- - ---------------
* To be filed by amendment.
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Industrial Data Systems, Inc. Incorporated in the State of Texas
IDS Engineering, Inc. Incorporated in the State of Texas
Thermaire, Inc. dba Thermal Corp. Incorporated in the State of Texas
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 457,701
<SECURITIES> 375,045
<RECEIVABLES> 2,268,864
<ALLOWANCES> (3,000)
<INVENTORY> 884,342
<CURRENT-ASSETS> 4,257,650
<PP&E> 1,214,428
<DEPRECIATION> (170,047)
<TOTAL-ASSETS> 5,368,100
<CURRENT-LIABILITIES> 1,467,091
<BONDS> 426,121
0
0
<COMMON> 12,724
<OTHER-SE> 3,439,004
<TOTAL-LIABILITY-AND-EQUITY> 5,368,100
<SALES> 6,284,531
<TOTAL-REVENUES> 10,523,977
<CGS> 4,725,105
<TOTAL-COSTS> 7,918,180
<OTHER-EXPENSES> 2,011,919
<LOSS-PROVISION> (3,000)
<INTEREST-EXPENSE> (28,024)
<INCOME-PRETAX> 590,744
<INCOME-TAX> 208,249
<INCOME-CONTINUING> 382,495
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 382,495
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
