UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
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 3
ARTICLES OF INCORPORATION
OF
IDS ENGINEERING, INC.
ARTICLE I
The name of the corporation is IDS ENGINEERING, INC.
ARTICLE II
The period of its duration is perpetual.
ARTICLE III
The purpose for which the corporation is organized is the transaction of
any and all lawful business for which corporations may be incorporated under the
Texas Business Corporation Act.
ARTICLE IV
The aggregate number of shares which the corporation shall have the
authority to issue is One Million (1,000,000) shares of no par value.
ARTICLE V
This corporation will not commence business until it has received for
the issuance of its shares consideration of the value of one Thousand and No/100
Dollars ($1,000.00), consisting of money, labor done or property actually
received.
<PAGE>
ARTICLE VI
The post off ice address of the initial Registered Off ice is 600
Century Plaza Dr. Bldg. 140 77073, and the name of its initial Registered Agent
at such address is William A. Coskey
ARTICLE VII
The number of initial Directors is one (1) and the name and address of
the Director is:
William A. Coskey
600 Century Plaza Dr., Bldg 140
Houston, Texas 77073
ARTICLE VIII
The name and address of the Incorporator is as follows:
Johnny J. Williams
13831 Northwest Freeway, Suite 155
Houston, Texas 77040
-2-
<PAGE>
THE STATE OF TEXAS
SECRETARY OF STATE
CERTIFICATE OF INCORPORATION
OF
IDS ENGINEERING, INC.
CHARTER NUMBER 01464129
THE UNDERSIGNEDI AS SECRETARY OF STATE OF THE STATE OF TEXAS, HEREBY
CERTIFIES THAT THE ATTACHED ARTICLES OF INCORPORATION FOR THE ABOVE NAMED
CORPORATION HAVE BEEN RECEIVED TN THIS OFFICE AND ARE FOUND TO CONFORM TO LAW.
ACCORDINGLY, THE UNDERSIGNED, AS SECRETARY OF STATE, AND BY VIRTUE OF
THE AUTHORITY VESTED IN THE SECRETARY BY LAW, HEREBY ISSUES THIS CERTIFICATE OF
INCORPORATION.
ISSUANCE OF THIS CERTIFICATE OF INCORPORATION DOES NOT AUTHORIZE THE USE
Of A CORPORATE NAME IN THIS STATE IN VIOLATION OF THE RIGHTS OF ANOTHER UNDER
THE FEDERAL TRADEMARK ACT OF 1946, THE TEXAS TRADEMARK LAW, THE ASSUMED BUSINESS
OR PROFESSIONAL NAME ACT OR THE COMMON LAW.
DATED OCT. 15, 1997
EFFECTIVE OCT. 15, 1997
Antonio 0. Garza, Jr Secretary of State
EXHIBIT 3.1
THE STATE OF TEXAS
SECRETARY OF STATE
OCT. 15, 1997
JOHNNY J. WILLIAMS
13831 NORTHWEST FRWY STE 155
HOUSTON, TX 77040
IDS ENGINFERING, INC.
CHARTER NUMBER 01464129-00
IT HAS BEEN OUR PLEASURE TO APPROVE AND PLACE ON RECORD THE ARTICLES OF
INCORPORATION THAT CREATED YOUR CORPORATION. WE EXTEND OUR REST WISHES FOR
SUCCESS IN YOUR NEW VENTURE.
AS A CORPOKATION, YOU ARE SUBJECT TO STATE TAX LAWS. SOME NON-PROFIT
CORPORATIONS ARE EXEMPT FROM THE PAYMENT OF FRANCHISE TAXES AND MAY ALSO BE
EXEMPT FROM THE PAYMENT OF SALES AND USE TAX ON THE PURCHASE OF TAXABLE ITEMS.
IF YOU FEEL THAT UNDER THE LAW YOUR CORPORATION IS ENTITLED TO BE EXEMPT YOU
MUST APPLY TO THE COMPTROLLER OF PUBLIC ACCOUNTS FOR THE EXEMPTION. THE
SECRETARY OF STATE CANNOT MAKE SUCH DETERMINATION FOR YOUR CORPORATION.
IF WE CAN BE OF FURTHER, SERVICE AT ANY TIME PLEASE LET US KNOW.
VERY TRULY YOURS,
Antonio 0. Garza, Jr., Secretary of State
EXHIBIT 3.2
ARTICLE ONE - CORPORATE CHARTER AND BYLAWS
1.01 CORPORATE CHARTER PROVISIONS
The Corporation's Charter authorizes One Million(1,000,000) shares to be
issued. The Officers and transfer agents issuing shares of the Corporation
shall not exceed this, matter. Such officers and agents shall advise the Board
at least Annually of the authorized shares remaining available to be issued.
No shares shall be issued for less than par value stated in the Articles of
Incorporation. Each Charter provision shall be observed until amended by
Restated Articles or Articles of Amendment duly filed with the Secretary of
State.
1.02 REGISTERED AGENT OR OFFICE - REQUIREMENT OF FILING CHANGES WITH
SECRETARY OF STATE
The address of the Registered Office provided in the initial Articles of
Incorporation, as duly placed of record with the Secretary of State for the
State of Texas is 600 Century Plaza Drive, Bldg. 140 Houston, Texas 77073.
The name of the Registered Agent of the Corporation at such address, as
duly set forth in its initial Articles of Incorporation, is WILLIAM A. COSKEY.
The Registered Agent or Office may be changed by filing appropriate
documents with the Secretary of State, and not otherwise. Such filing shall be
made promptly with each change. Arrangements for each change in Registered
Agent or Office shall ensure that the corporation is not exposed to the
possibility of a default judgment. Each successive Registered Agent shall be
of reliable character and well informed of the necessity of immediately
furnishing the papers of any lawsuit against the corporation to its attorneys.
1.03 INITIAL BUSINESS OFFICE
The address of the initial principal business office of the Corporation
is hereby established as 600 Century Plaza Drive, Bldg 140 Houston, Texas
77073.
The corporation may have additional business offices within the State of
Texas, and where it may be duly qualified to do
BYLAWS, PAGE 4
<PAGE>
business outside of Texas, as the Board of Directors may from time to time
designate, or the business of the Corporation may require.
1.04 AMENDMENT OF BYLAWS
The Board of Directors may alter, amend, or repeal these Bylaws, and
adopt new Bylaws. All such Bylaw changes shall take effect upon adoption by
the Directors, subject to repeal or change by the shareholders. Notice of
Bylaws changes shall be given in or before notice of the Shareholders, Meeting
following their adoption.
ARTICLE TWO - DIRECTORS AND DIRECTORS' MEETINGS
2.01 ACTION BY CONSENT OF BOARD WITHOUT MEETING
Any action required or permitted to be taken by the Board of Directors
may be taken without a meeting, and shall have the same force and effect as a
unanimous vote of Directors, if all members of the Board consent in writing to
the action. Such consent may be given individually or collectively.
2.02 TELEPHONE MEETINGS
Subject to the notice provisions required by these Bylaws and by the
Business Corporation Act, Directors of the Corporation may participate in and
hold a meeting by means of conference call or similar communication by which
all persons participating can hear each other. Participation in such a meeting
shall constitute presence in person at such meeting, except participation for
the express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
2.03 PLACE OF MEETING
Meetings of the Board of Directors shall be held at the business office
of the Corporation or at such other place within or without the State of Texas
as may be designated by the Board.
2.04 REGULAR MEETINGS
Regular meetings of the Board of Directors shall be held, without call
or notice, immediately following each annual meeting of the Shareholders of
this Corporation, and at such other regular times as the Directors may
determine.
BYLAWS, PAGE 5
<PAGE>
2.05 CALL OF SPECIAL MEETING
Special meetings of the Board of Directors for any purpose may be
called at any time by the President or, if the President is absent or unable or
refuses to act, by any Vice President or any two Directors. Written notices of
the special meetings, stating the time and place of the meeting, shall be mailed
ten days before, or telegraphed or personally delivered so as to be received by
each Director not later than two days before, the day appointed for the meeting.
Notice of meetings need not indicate an agenda. Generally a tentative agenda
will be included, but the meeting shall not be confined to any agenda included
with the notice.
Meetings provided in these Bylaws shall not be invalid for lack of notice
if all persons entitled to notice are' present at the meeting in person or by
proxy and do not object to the notice given; or if such persons consent to the
meeting in writing.
Upon receiving notice, the Secretary or other officer sending notice
shall sign and file in the Corporate Record Book a statement of the details of
giving notice to each Director. If such statement should later not be found in
the Corporate Record Book, due notice shall be presumed.
2.06 QUORUM
The presence at any Directors' Meeting of a majority of the authorized
number of Directors shall be necessary to constitute a quorum to transact any
business, except to adjourn. If a quorum is present, every act done or
resolution passed by a majority of the Directors present shall be the act of the
Board of Directors.
2.07 ADJOURNMENT - NOTICE OF ADJOURNED MEETINGS A quorum of the Directors
may adjourn any Directors' meeting
to meet again at a stated hour on a stated day. Notice of the time and place
where an adjourned meeting will be held need not be given to absent Directors if
the time and place is fixed at the adjourned meeting. In the absence of a
quorum, a majority of the Directors present may adjourn to a set time and place
if notice is duly given to the absent members, or until the time of the next
regular meeting of the Board.
2.08 CONDUCT OF MEETINGS
At every meeting of the Board of Directors, the Chairman of the Board of
Directors, if there is such an officer, and if not, the President, or in the
President's absence, a Vice President designated by the President, or in the
absence of such designation,
BYLAWS, PAGE 6
<PAGE>
a Chairman chosen by a majority of the Directors present, shall preside. The
Secretary of the Corporation shall act as Secretary of the Board of Directors.
When the Secretary is absent from any meeting, the Chairman may appoint any
person to act as Secretary of that meeting.
2.09 POWERS OF THE BOARD OF DIRECTORS
The business and affairs of the Corporation and all corporate powers
shall be exercised by or under authority of the Board of Directors, subject to
limitations imposed by law, the Articles of Incorporation, any applicable close
corporation, shareholders, agreement, or by these Bylaws.
2.10 BOARD COMMITTEES - AUTHORITY TO APPOINT
The Board of Directors may designate an executive committee and one or
more other committees to conduct business and affairs of the Corporation, to the
extent authorized by the resolution. The Board shall have the power at any time
to change the powers and membership of any committee, fill vacancies, and
dissolve any committee. Members of any committee shall receive such compensation
as the Board of Directors may from time to time provide. The designation of any
committee and the delegation of authority thereto shall not operate to relieve
the Board of Directors, or of any member thereof, of any responsibility imposed
by law.
2.11 TRANSACTIONS WITH INTERESTED DIRECTORS
Any contract or other transaction between the Corporation and any of its
Directors (or any corporation or firm in which any of its Directors are directly
or indirectly interested) shall be valid for all purposes notwithstanding the
presence of that Director at the meeting during which the contract or
transaction was authorized, and notwithstanding the Director's participation in
that meeting. This section shall apply only if the contract or transaction is
just and reasonable to the Corporation at the time it is authorized and
ratified, the interest of each Director is known or disclosed to the Board of
Directors, and the Board nevertheless authorizes or ratifies the contract or
transaction by a majority of the disinterested Directors present. Each
interested Director is to be counted in determining whether a quorum is present,
but shall not vote and shall not be counted in calculating the majority
necessary to carry the vote. This section shall not be construed to invalidate
contracts or transactions that would be valid in its absence.
BYLAWS, PAGE 7
<PAGE>
2.12 NUMBER OF DIRECTORS
The number of Directors of this Corporation shall be two (2).No Director
need be a Shareholder or a resident of Texas. The number of Directors may be
increased or decreased from time to time by amendment of these Bylaws. Any
decrease in the number of Directors shall not have the effect of shortening the
tenure which any incumbent Director would otherwise enjoy.
2.13 TERM OF OFFICE
Directors shall be entitled to hold office. until their successors are
elected and qualified. Election of-6irectors shall occur at each annual meeting
of the Shareholders and may be held at any special meeting of Shareholders
called specifically for that purpose.
2.14 REMOVAL FROM DIRECTORS
The entire Board of Directors or any individual Director may be removed
from office by a vote of Shareholders holding a majority of the outstanding
shares entitled to vote at an election of Directors. However, if less than the
entire Board is to be removed, no one of the Directors may be removed if the
votes cast against his removal would be sufficient to elect him if then
cumulatively voted at an election of the entire Board of Directors. No director
may be so removed except at an election of the class of Directors of which he is
a part. If any or all directors are so removed, new Directors may be elected at
the same meeting. Whenever a class or series of shares is entitled to elect one
or more Directors under authority granted by the Articles of Incorporation, the
provisions of this Paragraph apply to the vote of that class or series and not
to the vote of the outstanding shares as a whole.
2.15 VACANCIES
Vacancies on the Board of Directors shall exist upon the occurrence of
any of the following events: (a) the death, resignation, or removal of any
Director; (b) an increase in the authorized number of Directors, or (c) the
failure of the Shareholders to elect the full authorized number of Directors to
be voted for at any annual, regular, or special Shareholders, meeting at which
any Director is to be elected.
2.15(a) DECLARATION OF VACANCY
The Board of Directors may declare vacant the office of a Director if
the Director is adjudged incompetent by a court order,
BYLAWS, PAGE 8
<PAGE>
is convicted of a crime involving moral turpitude, or fails to accept the off
ice- of Director, in writing or by attending a meeting of the Board of
Directors, within thirty (30) days of notice of election.
2.15(b) FILLING VACANCIES BY DIRECTORS
Vacancies other than those caused by an increase in the number of
Directors may be filled by a majority vote of the remaining Directors, though
less than a' quorum., or by a sole remaining Director. Each Director so elected
shall hold office until a qualified successor is elected at a Meeting of the
shareholders.
2.15(c) FILLING VACANCIES BY SHAREHOLBERS
Any vacancy caused by an increase in the number of Directors shall be
filled by the Shareholders at an annual meeting or at a special meeting called
for that purpose. The Shareholders may also elect a Director at any time to fill
any vacancy not filled by the Directors. Upon the resignation of a Director
tendered to take effect at a future time, the Board or the Shareholders may
elect a successor to take office when the resignation becomes effective.
2.16 COMPENSATION
Directors shall receive such compensation for their services as
Directors as shall be determined from time to time by resolution of the Board.
Any Director may serve the Corporation in any other capacity as an officer,
agent, employee, or otherwise, and receive compensation therefor.
2.17 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Board of Directors shall authorize the Corporation to pay or
reimburse any, present or former Director or officer of the Corporation any
costs or expenses actually and necessarily incurred by that officer in any
action, suit, or proceeding to which the officer is made a party by reason of
holding that position, provided, however, that no officer shall receive such
indemnification if finally adjudicated therein to be liable for negligence or
misconduct in office. This indemnification shall extend to good-faith
expenditures incurred in anticipation of threatened or proposed litigation. The
Board of Directors may, in proper cases, extend the indemnification to cover the
good-faith settlement of any such action, suit, or proceeding, whether formally
instituted or not.
BYLAWS, PAGE 9
<PAGE>
2.18 INSURING DIRECTORS, OFFICERS, AND EMPLOYEES
The Corporation may purchase and maintain insurance on behalf of any
Director, officer, employee, or agent of the Corporation, or on behalf of any
person serving at the request of the Corporation as a Director, officer,
employee, or agent of another corporation, partnership, joint venture, trust, or
other enterprise, against any liability asserted against that person and
incurred by that person in any such corporation, whether or not the Corporation
has the power to indemnify that person against liability for any of those acts.
ARTICLE THREE - SHAREHOLDERS' MEETINGS
3.01 ACTION WITHOUT MEETING
Any action that may be taken at a meeting of the Shareholders under any
provision of the Texas Business Corporation Act may be taken without a meeting
if authorized by a consent or waiver filed with the Secretary of the Corporation
and signed by all persons who would be entitled to vote on that action at a
shareholders, meeting. Each such signed consent or waiver, or a true copy
thereof, shall be placed in the minute book of the Corporation.
3.02 TELEPHONE MEETINGS
Subject to the notice provisions required by these Bylaws and by the
Business Corporation Act, Shareholders of the Corporation may participate in and
hold a meeting by means of conference call or similar communication by which all
persons participating can hear each other. Participation in such a meeting shall
constitute presence in person at such meeting, except participation for the
express purpose of objecting to the transaction of any business on the ground
that the meeting is not lawfully called or convened.
3.03 PLACE OF MEETINGS
Meetings of Shareholders shall be held at the business office of the
Corporation, or at such other place within or without the State of Texas as may
be designated by the Board of Directors or by the Shareholders.
3.04 NOTICE OF MEETINGS
The President, the Secretary, or the officer or persons calling a
Shareholders, Meeting, shall give notice, or cause it to be given, in writing to
each Director and to each Shareholder entitled to vote at the meeting at least
ten (10) but no more than fifty (50) days before the date of the meeting. Such
notice shall
BYLAWS, PAGE 10
<PAGE>
state the place, day and hour of the meeting, and , in case of a special
meeting, the purpose or purposes for which the meeting is called. Such written
notice may be given personally, by mail, or other means. Such notice shall be
addressed to each recipient at such address as appears on the Books of the
Corporation or was given by the recipient to the Corporation for the purpose of
notice. Any meeting provided herein shall not be invalid for lack of notice if
consent to the meeting is given in writing by all persons entitled to vote at
the meeting and is filed with the Secretary of the Corporation. Such consent may
be given either before or after the meeting. Notice of the reconvening of an
adjourned meetings is not necessary unless the meeting is adjourned more than
thirty days past the date stated in the notice in which care notice of the
adjourned meeting shall be given as in the case of any special meeting. Notice
may be waived by a written waiver signed either before or after the meeting by
the person entitled to the notice.
3.05 VOTING LIST
At least ten (10) days before each Shareholders, meeting, the officer or
agent having charge of the stock transfer books for shares of the Corporation
shall make a complete list of the Shareholders entitled to vote at that meeting
or any adjournment thereof, arranged in alphabetical order, with the address and
the number of shares held by each. The list shall be kept on file at the
registered office of the Corporation for a period of ten (10) days prior to the
meeting, and shall be subject--@o inspection by any Shareholder at any time
during usual business hours. The list shall also be produced and kept open at
the time and place of the meeting and shall be subject, during the whole time of
the meeting, to the inspection of any Shareholder. The original share transfer
books shall be PRIMA FACIE evidence as to the Shareholders entitled to examine
such list or transfer books or to vote at any meeting of Shareholders. However,
failure to prepare and to make the list available in the manner provided above
shall not affect the validity of any action taken at the meeting.
3.06 VOTES PER SHARE
Each outstanding share, regardless of class, shall be entitled to one
(1) vote on each matter submitted to a vote at a meeting of Shareholders, except
to the extent that the voting rights of the shares of any class or classes are
limited or denied pursuant to the Articles of Incorporation. A Shareholder may
vote either in person, or by proxy executed in writing by the shareholder, or by
the Shareholder's duly authorized attorney-in-fact.
BYLAWS, PAGE 11
<PAGE>
3.07 CUMULATIVE VOTING
Subject to any limitations stated in the Articles of Incorporation,
every Shareholder entitled to vote at any election for Directors may cumulate
votes. For this purpose, each Shareholder shall have a number of votes equal to
the number of Directors to be elected multiplied by the number of votes to which
the Shareholder's shares are entitled. The Shareholder may cast all these votes
for one candidate or may distribute the votes among any number of candidates.
The candidate receiving the highest number of votes are elected, up to the
number of vacancies to be filled. No Shareholder may cumulate votes unless that
Shareholder shall have given written notice of his or her intention to do so to
the Secretary of the Corporation on or before the day preceding the election at
which the votes will be cumulated. If any Shareholder gives written notice as
provided above, all Shareholders may cumulate their votes.
3.08 PROXIES
A Shareholder may vote either in person or by proxy executed in writing by
the Shareholder on his duly authorized attorney in fact. Unless otherwise
provided in the proxy or by law, each proxy shall be revocable and shall not be
valid after eleven (11) months from the date of its execution.
3.09 QUORUM
3.09(a) QUORUM OF SHAREHOLDERS
The presence (in person or by proxy) of the persons who are entitled to
vote a majority of the outstanding voting shares shall constitute the quorum
necessary for the transaction of business at a meeting of the Shareholders of
the Corporation. The vote of the holders of a majority of the shares entitled to
vote and represented at a meeting at which a quorum is present shall be the act
of the Shareholders, meeting.
3.09(b) ADJOURNMENT FOR LACK OR LOSS OF QUORUM
No business may be transacted in the absence of a quorum, or upon
withdrawal of enough Shareholders to leave less than a quorum, other than to
adjourn the meeting from time to time by the vote of a majority of the shares
the holders of which are present in person or by proxy.
BYLAWS, PAGE 12
<PAGE>
3.10 VOTING BY VOICE OR BALLOT
Elections for Directors need not be by ballot unless a Shareholder
demands election by ballot at the election before the voting begins.
3.11 CONDUCT OF MEETING
Meetings of the Shareholders shall be chaired by the President, or, in
the President's absence, a Vice President designated by the President, or, in
the absence of such designation, any other person chosen by a majority of the
Shareholders of the Corporation present in person or by proxy and entitled to
vote. The Secretary of the Corporation, or, in the Secretary Is absence, an
Assistant Secretary, shall act as Secretary of all meetings of Shareholders. In
the absence of the Secretary or Assistant Secretary, the Chairman shall appoint
another person to act as Secretary of the meeting.
3.12 FAILURE TO HOLD ANNUAL MEETING
If within any 13 -month period, an annual Shareholders' Meeting is not
held, any Shareholder may apply to a court of competent jurisdiction in the
county in which the principal office of the Corporation is located for a summary
order that an annual meeting be held.
3.13 SPECIAL MEETINGS
Special Shareholders' meetings may be called at any time by any of the
following: (a) the President; (b) the Board of Directors; (c) one or more
Shareholders holding in the aggregate one-tenth or more of all the shares
entitled to vote at the meetings. Special Shareholders, meetings may be called
for any purpose. The notice of a special Shareholders, meeting must state the
purpose or purposes of the meeting and absent consent of every shareholder to
the specific action taken, shall be limited to purposes plainly stated in the
notice, other provisions herein notwithstanding.
ARTICLE FOUR - OFFICERS
4.01 TITLE AND APPOINTMENT
The officers of the Corporation shall be President, a Secretary, and a
Treasurer. The Corporation may also have, at the discretion of the Board of
Directors, a Chairman of the Board, one or more Vice Presidents, one or more
Assistant Secretaries, and one or more Assistant Treasurers. Any two offices,
including President
BYLAWS, PAGE 13
<PAGE>
and Secretary, may be held by one person. All officers shall be elected by and
hold office at the pleasure of the Board of Directors, which shall fix the
compensation and tenure of all officers.
4.02 REMOVAL AND RESIGNATION
Any officer may be removed, either with or without cause, by vote of a
majority of the Directors, at any regular or special meeting of the Board, or,
except in case of an officer chosen by the Board of Directors, by any committee
or officer upon whom that power of removal may be conferred by the Board of
Directors. Such removal shall be without prejudice to the contract rights, if
any, of the person removed. Any officer may resign at any time by giving written
notice to the Board of Directors, the President, or the Secretary of the
Corporation. Any resignation shall take effect on the date of the receipt of
that notice or at any later time specified therein, and, unless otherwise
specified therein, the acceptance of that resignation shall not be necessary to
make it effective.
4.03 VACANCIES
Upon the occasion of any vacancy occurring in any office of the
Corporation, by reason of death, resignation, removal, or otherwise, the Board
of Directors may elect an acting successor to hold office for the unexpired
term, or until a permanent successor is elected.
4.04 CHAIRMAN OF THE CORPORATION
The Chairman, if there shall be such an officer, shall, if present,
preside at the meeting of the Board of Directors and exercise and perform such
other powers and duties as may from time to time be assigned to the Chairman by
the Board of Directors or prescribed by these Bylaws.
4.05 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the Board
of Directors to the Chairman, if there is an officer, the President shall be the
chief executive officer of the Corporation and shall, subject to the control of
the Board of Directors, have general supervision, direction, and control of the
business and officers of the Corporation. The President shall have the general
powers and duties of management usually vested in the office of President of a
Corporation; shall have such other powers and duties as may be prescribed by the
Board of Directors or the Bylaws; and shall be ex officio a member of all
standing
BYLAWS, PAGE 14
<PAGE>
committees, including the executive committee, in any. In addition the President
shall preside at all meetings of the Shareholders and in the absence of the
Chairman, or if there is no Chairman, at all meetings of the Board of Directors.
4.06 VICE PRESIDENT
Any Vice President shall have such powers and perform such duties as
from time to time may be prescribed by these Bylaws, by the Board of Directors,
or by the President. In the absence or disability of the President, the senior
or duly appointed Vice President, if any, shall perform all the duties of the
President, pending action by the Board of Directors. When so acting, such Vice
President shall have all the powers of, and be subject to all the restrictions
on, the President.
4.07 SECRETARY
The Secretary shall:
(A) See that all notices are duly given in accordance with the
provisions of these Bylaws or as required by law. In case of the absence or
disability of the Secretary, or the Secretary's refusal or neglect to act,
notice may be given and served by an Assistant Secretary or by the Chairman, the
President, any Vice President, or by the Board of Directors.
(B) Keep the minutes of corporate meetings, and the corporate record
book, as set out in Article 7.01 hereof.
(C) Maintain, in the official record book of the Corporation, a record
of all share certificates issued or canceled and all shares of the corporation
canceled or transferred.
(D) Be custodian of the Corporation's records, and of any seal which the
Corporation may from time to time adopt. When the Corporation exercises its
right to use a seal, the Secretary shall see that the seal is emblazoned on all
share certificates prior to their issuance and on all documents authorized to be
executed under seal in accordance with the provisions of these Bylaws.
(E) In general, perform all duties incident to the office of Secretary,
and such other duties as from time to time may be required by Bylaws 7.01, 7.02,
and 7.03, by these Bylaws generally, by the Board of Directors, or by the
President.
BYLAWS, PAGE 15
<PAGE>
4.08 TREASURER
The Treasurer shall:
(A) Have charge of the custody of, and be responsible for, all funds and
securities of the Corporation, and deposit all funds in the name of the
Corporation in those banks, trust companies, or other depositors that shall be
selected by the Board of Directors.
(B) Receive, and give receipt for, monies due and payable to the
Corporation.
(C) Disburse or cause to be disbursed the funds at the Corporation as
may be directed by the Board of Directors, taking proper vouchers for those
disbursements.
(D) If required by the Board of Directors or the President, give to the
Corporation a bond to assure the faithful performance of the duties of the
Treasurer's office and the restoration to the Corporation of all corporate
books, papers, vouchers, money, and other property of whatever kind in the
Treasurer's possession or control, in case of the Treasurer's death,
resignation, retirement or removal from office. Any such bond shall be in a sum
satisfactory to the Board of Directors.
(E) In general, perform all duties incident to the office of Treasurer
and such other duties as from time to time may be assigned to the Treasurer by
Bylaws 7.04 and 7.05, by these Bylaws generally, by the Board of Directors, or
by the President.
4.09 ASSISTANT SECRETARY OR ASSISTANT TREASURER
The Assistant Secretary or Assistant Treasurer shall have such powers
and perform such duties as the Secretary or Treasurer, respectively, or as the
Board of Directors or President may prescribe. In case of the absence of the
Secretary or Treasurer, the senior Assistant Secretary or Assistant Treasurer,
may respectively perform all of the functions of the Secretary or Treasurer.
4.10 COMPENSATION
The compensation of the officers shall be fixed from time to time by
the Board of Directors, and no officer shall be prevented from receiving a
salary by reason of the fact that the officer is also a Shareholder or a
Director of the Corporation, or both.
BYLAWS, PAGE 16
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ARTICLE FIVE - AUTHORITY TO EXECUTE INSTRUMENTS
5.01 NO AUTHORITY ABSENT SPECIFIC AUTHORIZATION
These Bylaws provide certain authority for the execution of
instruments. The Board of Directors, except as otherwise provided in these
Bylaws, may additionally authorize any officer or officers, agent or agents, to
enter into any contract or execute and deliver any instrument in the name of and
on behalf of the Corporation, and such authority may be general or confined to
specific instances. Unless expressly authorized by these Bylaws or the Board of
Directors, no officer, agent, or employee shall have any power or authority to
bind the Corporation by any contract or engagement nor to pledge its credit not
to render it liable pecuniarily for any purpose or in any amount.
5.02 EXECUTION OF CERTAIN INSTRUMENTS
Formal contracts of the Corporation, promissory notes, deeds, deeds of
trust, mortgages, pledges, and other evidences of indebtedness of the
Corporation, other corporate documents, and certificates of ownership of liquid
assets held by the Corporation shall be signed or endorsed by the President or
any Vice President and by the Secretary or the Treasurer, unless otherwise
specifically determined by the Board of Directors or otherwise required by law.
ARTICLE SIX - ISSUANCE AND TRANSFER OP-Z-SHARES
6.01 CLASSES AND SERIES OF SHARES
The Corporation may issue one or more classes or series of shares, or
both. Any of these classes or series may have full, limited, or no voting
rights, and may have such other preferences, rights, privileges, and
restrictions as are stated or authorized in the Articles of Incorporation. All
shares of any one class shall have the same voting rights, conversion,
redemption, and other rights, preferences, privileges, and restriction, unless
the class is divided into series. If a class is divided into series, all the
shares of any one series shall have the same voting rights, conversion,
redemption, and other rights, preferences, privileges, and restrictions. There
shall always be a class or series of shares outstanding that has complete voting
rights except as limited or restricted by voting rights conferred on some other
class or series of outstanding shares.
BYLAWS, PAGE 17
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6.02 CERTIFICATES FOR FULLY PAID SHARES
Neither shares nor certificates representing shares may be issued by
the Corporation until the full amount of the consideration has been received.
When the consideration has been paid to the Corporation, the shares shall be
deemed to have been issued and the certificate representing the shares shall be
issued to the shareholder.
6.03 CONSIDERATION FOR SHARES
Shares may be issued for consideration as maybe fixed from time to time
by the Board of Directors at not less than the par value stated in the Articles
of Incorporation. The consideration paid for the issuance of shares shall
consist of money paid, labor done, or property actually received, and neither
promissory notes nor the promise of future services shall constitute payment nor
partial payment for shares of the Corporation.
6.04 REPLACEMENT OF CERTIFICATES
No replacement share certificates shall be issued until the former
certificates for the shares represented thereby shall have been surrendered and
canceled, except that replacements for lost or destroyed certificates may be
issued, upon such terms, conditions, and guarantees as the Board may see fit to
impose, including the filing of sufficient indemnity.
6.05 SIGNING CERTIFICATES - FACSIMILE SIGNATURES
All share certificates shall be signed by the officer designated by the
Board of Directors. The signatures of the foregoing officers may be facsimiles
if the certificate is countersigned by a transfer agent or registered by a
registrar, either of which is not the Corporation itself or an employee of the
Corporation. If the officer who has signed or whose facsimile signature has been
placed on the certificate has ceased to be such officer before the certificate
issued, the certificate may be issued by the corporation with the same effect as
if he or she were such officer on the date of its issuance.
6.06 TRANSFER AGENTS AND REGISTRARS
The Board of Directors may appoint one or more transfer agents or
transfer clerks, and one or more registrars, at such times and places as the
requirements of the Corporation may necessitate and the Board of Directors may
designate. Each registrar appointed, if any, shall be an incorporate bank or
trust company, either domestic or foreign.
BYLAWS, PAGE 18
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6.07 CONDITIONS OF TRANSFER
The party in whose name shares of stock stand on the books of the
Corporation shall be deemed the owner thereof as regards the Corporation,
provided that whenever any transfer of shares shall be made for collateral
security, and not absolutely, and prior written notice thereof shall be given to
the Secretary of the Corporation, or to its transfer agent, if any, such fact
shall be stated in the entry of the transfer.
6.08 REASONABLE DOUBTS AS TO RIGHT TO TRANSFER
When a transfer of shares is requested and there is reasonable doubt as
to the right of the person seeking the transfer, the Corporation or its transfer
agent, before recording the transfer of the shares of on its books or issuing
any certificate therefor, may require from the person seeking the transfer
reasonable proof of that person's right to transfer. If there remains a
reasonable doubt of the right to the transfer, the Corporation may refuse a
transfer unless the person gives adequate security or a bond of indemnity
executed by a corporate surety or by two individual sureties satisfactory to the
Corporation as to form, amount, and responsibility of sureties. The bond shall
be conditioned to protect the Corporation, its officers, transfer agents, and
registrars, or any of them, against any loss, damage, expense, or other
liability to the transfer or the issuance of a new certificate for shares.
ARTICLE SEVEN - CORPORATE RECORDS AND FISCAL YEAR
7.01 MINUTES OF CORPORATE MEETINGS
The corporation shall keep at the registered or principal office, or
such other place as the Board of Directors may order, a book recording the
minutes of all the meetings of its Directors and of its Shareholders, with the
time and place of each meeting, whether such meeting was regular or special, a
copy of the notice given of such meeting, or of the written waiver thereof, and,
if special, how the meeting was authorized. The record book shall further show
the names of those present at Directors' meetings, the number of shares present
or represented at Shareholders I meetings, and the proceedings of all meetings.
7.02 SHARE REGISTER
The Corporation shall keep at the registered or principal office, or at
the transfer agent, a share register, showing the names of the Shareholders,
their addresses, the number and class of shares issued by each, the number and
date of certificates issued
BYLAWS, PAGE 19
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for such shares, and the number and date of cancellation of every certificate
surrendered for cancellation. The above specified information may be kept on an
information storage device such as electronic data processing equipment,
provided that the equipment is capable of reproducing the information in clearly
legible form for the purpose of inspection by any Shareholder, Director,
Officer, or agent of the Corporation during regular business hours. If the
Corporation elects taxation under Internal Revenue Code 1244 or Subchapter S,
the officer issuing shares shall ensure the appropriate requirements regarding
issuance of shares are maintained in effect.
7.03 BOOKS OF ACCOUNT
The Corporation shall maintain correct and adequate accounts of its
properties and business transactions, including accounts of its assets,
liabilities, receipts, disbursement, gains, losses capital, surplus, and shares.
The corporate bookkeeping procedures shall conform to accepted accounting
practices for the business or businesses in which the corporation is engaged.
Subject to the foregoing, the chart of financial accounts shall be taken from,
and designed to facilitate preparation of, current corporate tax returns. Any
surplus, including earned surplus, paid-in surplus, and surplus arising from a
reduction of stated capital, shall be classified according to source and shown
in a separate account. If the Corporation elects taxation under Internal Revenue
Code 1244 or Subchapter S, the officers and agents maintaining the books of
account and issuing shares shall ensure that the appropriate requirements are
maintained in effect.
7.04 FISCAL YEAR
The fiscal year of the Corporation shall be as determined by the Board
of Directors and approved by the Internal Revenue Service. The Treasurer shall
forthwith arrange a consultation with the Corporation's tax advisers, to
determine if the Corporation is to have a fiscal year other than the calendar
year. If so, the Treasurer shall file an election with the Internal Revenue
Service as early as possible, and all correspondence with the I.R.S., including
the application for the Corporation's Employer Identification Number, shall
reflect such non-calendar year election.
BYLAWS, PAGE 20
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ARTICLE EIGHT - ADOPTION OF INITIAL BYLAWS
The foregoing bylaws were adopted by the Board of Directors on October
22, 1997.
WILLIAM A. COSKEY, Director
Corporate
Seal
Attested to, and certified by:
HULDA L. COSKEY, Secretary
EXHIBIT 10
August 18, 1997
8,137 Sq. Ft. Leasable Area
15031 Woodham Dnve
Suite#390
Houston, Texas 77073
LEASE AGREEMENT
THIS LEASE AGREEMENT IS MADE AND ENTERED INTO BY AND BETWEEN:
319 CENTURY PLAZA ASSOCIATES LTD.
HEREINAFTER REFERRED TO AS "LANDLORD", AND
INDUSTRIAL DATA SYSTEMS, INC.
HEREINAFTER REFERRED TO AS "TENANT".
WITNESSETH:
1. PREMISES AND TERM.
In consideration of the obligation of Tenant to pay rent as herein provided, and
in consideration of the other terms, provisions and covenants hereof, Landlord
hereby demises and leases to Tenant, and Tenant hereby takes from Landlord
certain premises ("Premises") located at15031 Woodham Drive, Suite #390,
HOUSTON, TEXAS comprised of approximately 8,137 SQUARE FEET OF RENTABLE area
within Century Plaza a 171,125 square foot business park situated within the
County of Harris, State of Texas, more particularly described on Exhibit "A"
attached hereto and incorporated herein by reference, together with all rights,
privileges, easements, appurtenances and immunities belonging to or in any way
pertaining to the Premises.
TO HAVE AND TO HOLD the same for a TERM COMMENCING ON OCTOBER 1. 1997
("Commencement Date") AND ENDING SEPTEMBER 30, 2002 thereafter; provided,
however, that in the event the "Commencement Date" is a date other than the
first day of a calendar month, said term shall extend for said number of months
in addition to the remainder of the calendar month following the "Commencement
Date".
Subject to the warranty and the completion of the improvements described or
referred to in Exhibit "B" and to be more specifically defined in architectural
plans to be compiled and drafted prior to construction of premises said
construction plans to be mutually acceptable to both Landlord and Tenant,
Landlord warrants that the Premises will be cleaned and the lighting and air
conditioning systems will be operational as expressed in Exhibit "B" attached
hereto. After such Commencement Date Tenant shall, upon demand, execute and
deliver to Landlord a letter of acceptance of delivery of the Premises (See
Exhibit "B") in the form set forth as Exhibit "C" attached hereto (see Exhibit
"C "Acceptance of Premises).
2. RENT and SECURITY DEPOSIT.
A.. As part of the consideration for the execution of this Lease, and
for the Lease and use of the Premises, Tenant covenants and agrees and promises
to pay as rental to Landlord or Landlord's assignees, THE AMOUNT OF $3,946.45
PER MONTH FOR MONTHS 1 THROUGH 24, THEN $4,190.56 PER MONTH FOR MONTHS 25
THROUGH 48, AND THEN 4,312.61 PER MONTH FOR MONTHS 49 THROUGH 60. The first such
monthly installment shall be due and payable on the date hereof and the
appropriate monthly installment shall be due and payable in advance without
demand, deduction or set off, other than as provided for herein, on or before
the first day of each calendar
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month succeeding the Commencement Date (other than as provided for herein)
during the hereby demised term, except that the rental payment for any
fractional calendar month at the Commencement or end of the Lease period shall
be prorated. Failure by Tenant to pay any monthly installment of rent by the
fifth (5th) day of the month of any amount so due shall be considered an event
of default in accordance with the provisions of Paragraph 18(a) of this Lease
Agreement.
B. Tenant agrees to pay Landlord, as additional rental, all charges for
any service, goods, or materials furnished by Landlord at Tenants request which
are not required to be furnished by Landlord under this Lease, (as well as all
other sums payable by Tenant hereunder), within ten (10) business days after
Landlord renders a statement therefore to Tenant. All past due additional rental
amounts shall bear interest of 18% per annum, however if the maximum legal rate
is less than 18% then the interest rate shall be the maximum legal rate from the
date due until paid.
3. USE.
THE PREMISES SHA11 BE USED ONLY FOR LIGHT MANUFACTURING, GENERAL OFFICE,
RECEIVING, STORING, SHIPPING AND SELLING PRODUCTS, MATERIALS, MERCHANDISE AND
SERVICES AND FOR SUCH OTHER LAWFUL PURPOSES AS MAY BE RELATED TO TENANTS
BUSINESS AND SERVICES PROVIDED BY TENANT. Tenant shall conduct such activities
in such a manner as to not constitute a violation of any deed restrictions
encumbering the premises which are now recorded in the real property records of
Harris County, Texas. Outside storage, including, without limitation, trucks and
other vehicles, is prohibited without Landlords prior written consent, which
shall not be unreasonably withheld. Tenant shall obtain, at its own cost and
expense, any and all licenses and permits necessary for any such use. Tenant
shall comply with all governmental laws, ordinances and regulations applicable
to the use of the Premises, and shall promptly comply with all governmental
orders and directives for the correction, prevention and abatement of nuisances
created by Tenant in, upon, or in connection with the Premises, all at Tenants
sole expense. Tenant shall not permit any objectional or unpleasant odors,
smoke, dust, gas, noise or vibrations to emanate from the Premises, nor take any
other action which would constitute a nuisance or would disturb or endanger any
other Tenants of the building situated on the Premises or unreasonably interfere
with their use of their respective Premises. Without Landlord's prior written
consent, Tenant shall not receive, store or otherwise handle any product,
material or merchandise which is explosive or highly inflammable. Tenant will
not permit the Premises to be used for any purpose or in any manner, (including,
without limitation, any method of storage) which would render the insurance
thereon void or the insurance risk more hazardous or. cause the State Board of
Insurance or other insurance authority to disallow any sprinkler credits (see
Section 17 of this Lease).
4. TAXES.
A. Landlord agrees to pay, before they become delinquent, all taxes,
assessments, and governmental charges of any kind and nature whatsoever
(hereinafter collectively referred to as ("taxes") lawfully levied or assessed
against the Premises. If the Tenant's proportionate share of Taxes on the
Premises, during a real estate tax year, occurring within the term hereof or
during any renewal or extension of this term, shall exceed an amount equal to of
the taxes expended for Century Plaza for the year 1996. Tenant shall pay to
Landlord as additional rent, upon demand, the amount of such excess. In the
event any such amount is not paid within ten (10) days after the date of
Landlord's invoice to Tenant, the unpaid amount shall bear interest at a rate of
18% per annum or if the maximum legal rate is less than 18% then the interest
rate shall be the maximum legal rate from the date due until paid.
B. Tenant's "proportionate share", as used in this Lease, shall mean a
fraction, the numerator of which is the net rentable square footage of the space
contained in the Premises and the denominator of which is the net rentable
square footage of the entire space contained in the building(s) of which the
Premises is a part, as further defined in Subparagraph 27 0. Tenants
proportionate share as herein defined is equal to 4.8%.
C. If at any time during the term of this Lease the present method of
taxation shall be changed so that in lieu of the whole or any part of any taxes,
assessments or governmental charges levied, assessed or
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imposed on real estate and the improvements thereon, there shall be levied,
assessed or imposed on Landlord a capital levy or other tax directly on the
rents received therefrom and/or a franchise tax, assessment, levy or charge
measured by or based, in whole or in part, upon such rents from the Premises,
then all such taxes, assessments, levies or charges or the part thereof so
measured or based, shall be deemed to be included within the term "taxes" for
the purposes hereof.
D. The Landlord shall have the right to employ a tax consulting firm to
attempt to assure a fair tax burden on the building and grounds of which the
Premises is a part within the applicable taxing jurisdictions.
Tenant shall pay to Landlord the amount of Tenants "proportionate share" (as
defined in Subparagraph 4 B above) of the cost of such service.
E. Any payment to be made pursuant to this Paragraph 4 with respect to
the real estate tax year in which this Lease commences or terminates shall be
prorated.
F. Tenant shall pay all ad valorem and similar taxes or assessments
levied upon or applicable to all equipment, fixtures, furniture, and other
property placed by Tenant in the Premises and all license and other fees or
charges imposed on the business conducted by Tenant on the Premises.
5. LANDLORD'S REPAIRS-TO THE DEMISED PREMISES.
Landlord shall, at his expense, maintain only the roof, foundation, and
the structural soundness of the exterior walls of the building in good repair,
reasonable wear and tear excepted. Tenant shall repair and pay for any damage
caused by the negligence of Tenant, or Tenant's employees, agents or invites, or
caused by Tenant's default hereunder. The term "walls" as used herein shall not
include windows, glass or plate glass, doors, special store fronts or office
entries. Tenant shall immediately give Landlord written notice of defect or need
for repairs, after which Landlord shall have reasonable opportunity to repair
same or cure such defect. Landlord's liability with respect to any defects,
repairs or maintenance for which Landlord is responsible under any of the
provisions of this Lease shall be limited to cost of such repairs or maintenance
or the curing of such defect. Landlord shall also maintain the parking areas,
driveways, alleys and other common areas of the project of which the premises
are a part, in good and clean condition and any other areas not the direct
responsibility of the Tenant.
6. TENANT'S REPAIRS.
A.. Tenant shall, at his own cost and expense, keep and maintain all
parts of the Premises (except those for which Landlord is expressly responsible
under the terms of this Lease) in good condition, promptly making all necessary
repairs and replacements, including, but not limited to, windows, glass and
plate glass doors, special store fronts or office entries, interior walls and
finish work, floors and floor covering, downspouts, gutters, heating and air
conditioning systems, truck doors, plumbing work and fixtures, termite and pest
extermination, regular removal of trash and debris, keeping the whole of the
Premises in a clean and sanitary condition. Tenant shall not be obligated to
repair any damage caused by fire, tornado or other casualty covered by the
insurance to be maintained by Landlord pursuant to Subparagraph 13 A below,
except that Tenant shall be obligated to repair all wind damage to glass, except
with respect to tornado or hurricane damage.
B. Tenant shall not damage any demising wall or disturb the integrity
and support provided by any demising wall and shall, at its sole cost and
expense, promptly repair any damage or injury to any demising wall caused by
Tenant or its employees, agents or invites.
C. Tenant and its employees, customers and licensees shall have the
right to use the parking areas, if any, subject to such reasonable rules and
regulations as Landlord may from time to time prescribe and subject to rights of
ingress and egress of other Tenant's. Landlord shall perform the paving and
landscape maintenance, exterior painting, common sewage line, plumbing, and care
for the grounds around the building of which the
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Premises is a part, and Tenant shall be liable for its proportionate share (as
defined in Subparagraph 4 B above) of the cost and expense. If Tenant or any
other particular Tenant of the building of which the Premises is a part can be
clearly identified as being responsible for obstructions or stoppage of the
common sanitary sewage line, then Tenant, if Tenant is responsible, or such
other responsible Tenant, shall pay the entire cost thereof, upon demand, as
additional rent. In accordance with Section 7B Tenant shall pay, when due, its
share, determined as aforesaid, of such costs and expenses along with the other
Tenants of the building to Landlord, upon demand, as additional rent, for the
amount of its share as aforesaid of such costs and expenses in the event
Landlord elects to perform or cause to be performed such work. In the event any
such amount is not paid within ten (10) days after the date of Landlord's
invoice to Tenant, the unpaid amount shall bear interest of 18% per annum or if
the maximum legal rate is less than 18% then the interest rate shall be the
maximum rate allowed by law from the date due until paid.
D. Subject to the provisions of Exhibit "B", Tenant shall, at its own
cost and expense maintain and service all hot water, heating and air
conditioning systems and equipment within the Premises. This maintenance should
include regular filter changes and lubrication of equipment, as well as other
prudent preventive maintenance procedures.
Landlord's representatives will inspect and service the heating and air
conditioning equipment prior to the Commencement Date and will certify the
equipment to be operational on the Commencement Date and will warrant said
equipment as operational pursuant to the terms described in Exhibit "B" attached
herein.
7. COMMON AREA MAINTENANCE.
A.. Landlord agrees to pay for all common area expenses associated with
the property as described in Section 6C and this section 7 of the lease. These
services shall include, but are not limited to, general landscaping, mowing of
grass, care of shrubs (including the replacement of dead or diseased plants);
operation and maintenance of lawn sprinkler system, operation and maintenance of
exterior security lighting and parking lot lighting, water service and sewer
charges, repainting of the exterior surface of truck doors, handles, downspouts,
and other parts of the building which require periodic preventative maintenance,
and the prorata share of Century Plaza common area maintenance and security
service charges. If tenants proportionate share of these common area expenses on
the premises, during a lease year, occurring within the term hereof and during
any renewal and extension of this ten-n, shall exceed an amount equal to 4.8% of
the common area expenses expended for Century Plaza for the year 1996, then
Tenant shall pay to Landlord as additional rent, upon demand, the amount of such
excess. In the event that any such amount is not paid within ten (10) days after
the date of Landlord's invoice to tenant, the unpaid amount shall bear interest
at a rate of 18% per annum whereas the maximum legal rate is less than 18%, then
the interest rate shall be the maximum legal rate from the date due until paid.
B. Tenants "proportionate share" as used in this lease shall mean a
fraction, the numerator of which is the net rentable square footage of the space
contained in the premises and the denominator of which is the net rentable
square footage of the entire space contained in the building(s) of which the
premises is a part, as further defined in sub-paragraph 27.0. Tenants
proportionate share as herein defined is equal to 4.8%.
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8. ALTERATIONS.
Tenant shall not make any alterations, additions or improvements to the
Premises (including, but not limited to, roof and wall penetrations) without the
prior written consent of Landlord, which consent shall not be unreasonably
withheld. If Landlord consents to Tenant's contractors doing the work, Landlord
may require, at Landlord's sole option, that Tenant provide, at Tenant's
expense, a lien and completion bond in an amount equal to one, and one half
(1-1/2) times any and all estimated costs of improvements, additions or
alterations in the Premises to insure Landlord against any liability for
mechanic's and materialmen's liens which may arise in accordance with Paragraph
23 of this Lease Agreement and to insure completion of the work. Tenant may,
without the consent of Landlord, but at its own cost and expense and in a good
workmanlike manner, erect such shelves, bins, equipment, machinery and trade
fixtures as it may deem advisable, without altering the basic character of the
building or improvements and without overloading or damaging the building or
improvements, and in each case complying with all applicable governmental laws,
ordinances, regulations and other requirements. All alterations, additions,
improvements and partitions erected by Tenant shall be and remain the property
of Tenant during the term of this Lease and Tenant shall, unless Landlord
otherwise elects as hereinafter provided, remove all alterations, additions,
improvements, and partitions erected by Tenant and restore the Premises to their
original condition by the date of termination of this Lease or upon earlier
vacating of the Premises; provided, however, that if Landlord so elects prior to
termination of this Lease or upon earlier vacating of the Premises, such
alterations, additions, improvements, and partitions (other than shelves, bins,
equipment, machinery, and trade fixtures) shall become the property of Landlord
as of the date of termination of this Lease or upon earlier vacating of the
Premises and shall be delivered up to the Landlord with the Premises. All
shelves, bins, equipment, machinery and trade fixtures installed by Tenant may
be removed by Tenant prior to the termination of this Lease if Tenant so elects,
and shall be removed by the date of termination of this Lease or upon earlier
vacating of the Premises if required by Landlord. Upon any such removal, Tenant
shall restore the Premises to their original condition which existed at the time
of Tenants occupancy, reasonable wear and tear excepted. All such removals and
restoration shall be accomplished in a good workmanlike manner so as not to
damage the primary structure or structural qualities of the building and other
improvements situated on the Premises. It is understood that building sprinkler
systems are not required by law or ordinance at this time; however, if such a
system is required by ordinance or building code, it will be installed at
Landlord's expense.
9. SIGNS.
Tenant shall have the right to install signs upon the Premises only when
first approved in writing by Landlord and subject to any applicable governmental
laws, ordinances, regulations, Landlord's standard sign criteria and other
requirements, which approval shall not be unreasonably withheld. At Landlord's
written request, Tenant shall be responsible for the removal of all such signs
by the termination of this Lease. Such installations and removals shall be made
in a reasonable manner so as to avoid injury or defacement. Landlord agrees that
Tenant shall be allowed to install Tenant's trade name to a maximum of two of
the property monument signs erected at the street frontage when said signage
space is available. Location of name on monument(s) signs will be based on
availability. Tenant shall be responsible for lettering and installation of
signage.
10. INSPECTION.
Landlord and Landlord's agents and representatives shall have the right
to enter and inspect the Premises at any reasonable time during business hours
and upon 24 hours prior notice (except that no notice shall be required in the
case of an emergency), for the purpose of ascertaining the condition of the
Premises or in order to make such repairs as may be required or permitted to be
made by Landlord under the terms of this Lease. Landlord shall make reasonable
effort to contact Tenant prior to said inspection or entry, but shall not be
obligated to do so. During the period that is three (3) months prior to the end
of the term hereof, Landlord and Landlord's agents and representatives shall
have the right to enter the Premises at any reasonable time during business
hours for the purpose of showing the Premises and shall have the right to erect
on the Premises a suitable sign indicating the Premises are available. Tenant
shall give written notice to Landlord at least (30) days
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prior to vacating the Premises and shall arrange to meet with Landlord for a
joint inspection of the Premises prior to vacating. In the event of Tenant's
failure to give such notice or arrange such joint inspection, Landlord's
inspection at or after Tenants vacating the Premises shall be presumed correct
for purposes of determining Tenant s responsibility for repairs and restoration.
11. UTILITIES.
Landlord agrees to provide, at its cost, water, electricity and
telephone service connections into the Premises; but Tenant shall Pay for all
water, gas, heat, light, power, telephone, sewer, and other utilities and
services used on or from the Premises, together with any taxes, penalties,
surcharges or the like pertaining thereto and any maintenance charges for
utilities and shall furnish all electric light bulbs and tubes. If any such
services are not separately metered to Tenant, Tenant shall pay its
proportionate share as determined by Landlord of all charges jointly metered
with other premises. Landlord shall in no event be liable for any interruption
or failure of utility services on the Premises resulting from causes beyond the
control of the Landlord.
12. ASSIGNMENT AND SUBLETTING.
Tenant shall not have the right to assign this Lease or to sublet the
whole or any part of the Premises without the prior written consent of Landlord,
which consent shall not be unreasonably withheld. Notwithstanding any permitted
assignment or subletting, Tenant shall at all times remain directly, primarily
and fully responsible and liable for the payment of the rent herein specified
and for compliance with all of its other obligations under the terms, provisions
and covenants of this Lease. Upon the occurrence of an "event of default" as
hereinafter defined, if the Premises or any part thereof are then assigned or
sublet, Landlord, in addition to any other remedies herein provided, or provided
by law, may, at its option, collect directly from such assignee or subtenant all
rents becoming due to Tenant under such assignment or sublease and apply such
rent against any sums due to Landlord from Tenant hereunder, and no such
collection shall be construed to constitute a novation or a release of Tenant
from the further performance of Tenant's obligations hereunder. However, any and
all rents collected from said sub-Tenant or assignee shall be credited toward
any remaining rents or charges for which Tenant remains liable under the terms
of this Lease.
Notwithstanding the terms above, Landlord reserves the right to either:
1) enter into a new Lease Agreement with the proposed assignee or subtenant and
terminate the Lease coincident with occupancy by the new Tenant and commencement
of the new Lease; or, 2) Landlord and Tenant may mutually agree to terminate
this Lease.
13. INSURANCE; FIRE AND CASUALTY DAMAGE.
A.. Landlord agrees to maintain standard fire and extended coverage
insurance covering the building, of which the Premises are a part, in any amount
not less than ninety (90) percent (or such greater percentage as may be
necessary to comply with the provisions of any co-insurance clauses of the
policy) of the "replacement cost" thereof, as such term is defined in the
Replacement Cost Endorsement to be attached thereto insuring against the perils
of Fire, Lightning and Extended Coverage, such coverages and endorsements to be
defined, provided and limited in the standard bureau forms prescribed by the
insurance regulatory authority for the State of Texas for use by insurance
companies admitted in the State of Texas for the writing of such insurance on
risks located within the State of Texas and such policy shall include a waiver
by the insurer of all rights of subrogation as set forth in Paragraph "F" below.
Subject to the provisions of Subparagraphs 13 C, 13 D, and 13 E below,-such
insurance shall be for the sole benefit of Landlord and under its sole control.
In addition Landlord agrees to maintain general liability coverage insurance in
an amount deemed prudent and necessary by Landlord or required by mortgagee
presently (or in the future) holding a mortgage and/or deed(s) of trust
constituting a lien against the building of which the Premises are a part. If
the annual premiums charged Landlord for insurance exceed the standard premium
rates because the nature of the Tenant's operation results in extra hazardous
exposure, and if Landlord permits such operations, then Tenant, upon receipt of
appropriate premium notices, shall reimburse Landlord for such increase in such
premiums as additional rent hereunder. Tenant shall
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maintain, at its own expense, fire and extended coverage insurance on all of its
personal property, including removable trade fixtures located in the Premises
and on all additions and improvements made by Tenant and not required to be
insured by Landlord. In addition, Tenant shall reimburse Landlord annually, as
additional rent and upon receipt of notice from Landlord, for Tenant's
proportionate share of all amounts paid by Landlord for insurance premiums which
exceed an amount equal to 4.8% of amount paid by Landlord for insurance premiums
under this Lease for the year 1996. In the event the Premises constitute a
portion of a multiple occupancy building, Tenant shall be responsible for
reimbursing Landlord for Tenant's full proportionate share of such excess, as
such share is defined in Subparagraph 4 B above. Said payments shall be made to
Landlord within thirty (30) days after presentation to Tenant of Landlord's
statement setting forth the amount due. Any payment to be made pursuant to this
Subparagraph A with respect to the year in which this Lease commences or
terminates shall bear the same ratio to the payment which would be required to
be made for the full year as the part of such year covered by the term of this
Lease bears to a full year. In the event any such additional rental amount is
not paid within ten (10) days after the date of Landlord's invoice to Tenant,
the unpaid amount shall bear interest from the date due until paid at a rate of
18% per annum unless the maximum legal rat less than 18%.
B. If the Premises should be damaged or destroyed by fire, tornado or
other casualty, Tenant shall give immediate written notice thereof to Landlord.
C. If the Premises should be totally destroyed by fire, tornado, or
other casualty, or if they should be so damaged thereby that rebuilding or
repairs cannot, in Landlord's estimation be completed within two hundred (200)
days after the date upon which Landlord is notified by Tenant of such damage,
(Landlord to notify Tenant of its determination to terminate within 15 days
following Tenant notification to Landlord of such damage) this Lease shall
terminate and the rent shall be abated during the unexpired portion of this
Lease, effective upon the date of the occurrence of such damage.
D. If the Premises should be damaged by any peril covered by the
insurance to be provided by Landlord under Subparagraph 13 A above, but only to
such extent that rebuilding or repairs can, in Landlord's estimation, be
completed within two hundred (200) days after the date upon which Landlord is
notified by Tenant of such damage (Landlord to notify Tenant of its-
determination to rebuild within 15 days following Tenants notification to
Landlord of such damage), this Lease shall not terminate, and Landlord shall, at
its sole cost and expense, thereupon proceed with reasonable diligence to
rebuild and repair such building to substantially the condition in which it
existed prior to such damage, except thatt Landlord shall not be required to
rebuild, repair or replace any part of the partitions, fixtures, additions and
other improvements which may have been placed in, on or about the Premises by
Tenant. If the Premises are untenantable in whole or in part following such
damage, the rent payable hereunder during the period in which they are
untenantable shall be reduced to such extent as may be fair and reasonable under
all of the circumstances. In the event that Landlord should fail to complete
such repairs and rebuilding within two hundred (200) days after the date upon
which Landlord is notified by Tenant of such damage, Tenant may, at its option,
terminate this Lease by delivering written notice of termination to Landlord as
Tenant's exclusive remedy, whereupon all rights and obligations hereunder shall
cease and terminate. Landlord will make reasonable efforts to make temporary
space available to Tenant at the terms and conditions consistent with this
Lease, should the demised premises become damaged and untenantable and require
rebuilding pursuant to this paragraph.
E. Notwithstanding anything herein to the contrary, in the event the
holder of any indebtedness secured by a mortgage or deed of trust covering the
building of which the Premises are a part requires that the insurance proceeds
be applied to such indebtedness, then Landlord shall have the right to terminate
this Lease by delivering written notice of termination of Tenant within fifteen
(15) days after the date of the occurrence of such damage but not thereafter,
whereupon all rights and obligations hereunder shall cease and terminate.
F. Landlord and Tenant each hereby release the other, and their
officers, directors, employees, agents and invitees from any loss or damage to
the property caused by fire or any other
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perils insured through or under them by way of subrogation, or otherwise for any
loss or damage to property caused by fire or any other perils insured in
policies of insurance covering such property, even if such loss or damage shall
have been caused by the fault or negligence of the other party or anyone for
whom such party may be responsible. Both Landlord and tenant agree that they
will cause their insurance carriers to include a waiver of subrogation and a
clause or endorsement in their policies. If extra cost shall be charged
therefor, each party shall advise the other thereof and of the amount of the
extra cost, and the other party, at its election, may pay the same, but shall
not be obligated to do so.
G. If the Premises should be damaged or destroyed by a casualty other
than a peril covered by the insurance to be provided under Subparagraph 13 A
above, and the casualty or loss was the result of an action or failure to act by
Tenant or Tenant's employees, agents, guests, customers, representatives or
invites, Tenant shall at its sole cost and expense thereupon proceed with
reasonable diligence to rebuild and repair the Premises to substantially the
condition in which they existed prior to such damage or destruction, subject to
Landlord's approval of the plans and specifications for such rebuilding and
repairing.
14. LIABILITY.
Landlord shall not be liable to Tenant or Tenant's employees, agent,
patrons or visitors, or to any other person whomsoever, for any injury to person
or damage to property on or about the Premises, resulting from and/or caused in
part or whole by the negligence or misconduct of Tenant, its agents, servants,
employees, or of any other person entering upon the Premises, or caused by the
buildings and improvements located on the Premises becoming out of repair, or
caused by leakage of gas, oil, water or steam or by electricity emanating from
the Premises, or due to any cause whatsoever, subject to the waiver, and release
contained in Section 13F, Tenant hereby covenants and agrees that it will at all
times indemnify and hold safe and harmless the property, the Landlord
(including, without limitation, the trustee and beneficiaries if Landlord is a
trust), Landlord's agents and employees from any loss, liability, claims, suits,
costs, expenses, including, without limitation, attorney's fees and damages,
arising out of any damage or injury caused in whole or in part by the negligence
or misconduct of Tenant, as agents, servants or employees except to the extent
that injury to persons or damage to property is caused in whole or in part by
the negligence of Landlord or the failure of Landlord to repair any part of the
Premises which Landlord is obligated- to repair and maintain hereunder within a
reasonable time after the receipt of written notice from Tenant of needed
repairs. Tenant shall procure and maintain throughout the term of this Lease a
policy or policies of insurance, at its sole cost and expense, insuring both the
Landlord and Tenant against all claims, demands or actions arising out of or in
connection with Tenants operations in maintenance and use of the Premises; and
(iv) Tenant's liability assumed under this Lease, the limits of such policy or
policies to be the amount of not less than One Million and 11/100 Dollars
($1,000,000.00) for bodily injury or death of one person, Three Hundred Thousand
and 11/100 Dollars ($300,000.00) for any one occurrence, and not less than One
Hundred Thousand and 11/100 Dollars ($100,000,00) for property damage or
destruction, including loss of use thereof. All such policies shall be procured
by Tenant from responsible insurance companies satisfactory to Landlord.
Certificates of Insurance evidencing the herein stated coverage requirements,
shall be delivered to Landlord prior to the commencement date of the lease. Not
less than fifteen (15) days prior to the expiration date of any such policies,
certificates evidencing the renewals thereof shall be delivered to Landlord.
Such policies shall further provide that not less than thirty (30) days written
notice shall be given to Landlord before such policy may be canceled or changed
to reduce insurance provided thereby.
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15. CONDEMNATION.
A.. If the whole or any substantial part of the Premises should be taken
for any public or quasi-public use under any governmental law, ordinance or
regulation, or by right of eminent domain, or by private purchase in lieu
thereof and the taking would prevent or materially interfere with the use of the
Premises for the purpose for which they are being used, this Lease shall
terminate and the rent shall be abated during the unexpired portion of this
Lease, effective when the physical taking of said premises shall occur.
B. If part of the Premises shall be taken for any public or quasi-public
use under any governmental law, ordinance or regulation, or by right of eminent
domain, or by private purchase in lieu thereof, and the taking does not prevent
or materially interfere with the use of the Premises, and this Lease is not
terminate as provided in the subparagraph above, this Lease shall not terminate
but the rent payable hereunder during the unexpired portion of this Lease shall
be reduced to such extent as may be fair and reasonable under all of the
circumstances.
C. In the event of any such taking or private purchase in lieu thereof,
Landlord and Tenant shall be entitled to receive and retain all compensation
awarded according to the respective interest of Landlord and Tenant in any
condemnation proceedings.
16. HOLDING OVER.
Tenant will, at the termination of this Lease by lapse of time or
otherwise, yield up immediate possession to Landlord. If Landlord agrees in
writing that Tenant may hold over after the expiration or termination of this
Lease, unless the parties hereto otherwise agree in writing on the terms of such
holding over, the hold over Tenancy shall be subject to termination by Landlord
at any time upon not less than thirty (30) days advance written notice, or by
Tenant at any time upon not less dm thirty (30) days advanced written notice,
and all of the other terms and provisions of this Lease shall be applicable
during that period. It is agreed that possession of the whole or part of the
Leased Premises by Lessee after the expiration of the stated term or any
extension or renewal thereof, by lapsed time or otherwise, shall operate and be
construed as a tenancy at sufferance at a monthly rental of $8,625.22, which
monthly rental is agreed to be reasonable rental at the expiration of the stated
term or any extension or renewal. No holding over by the Tenant, whether with or
without consent of Landlord, shall operate to extend this Lease except as
otherwise expressly provided. The preceding provisions of this paragraph 16
shall not be construed as Landlord's consent for Tenant to hold over.
17. HAZARDOUS MATERIALS.
Section 17.01. Without Landlord's prior written consent, Tenant shall
not cause or permit any Hazardous Material to be brought upon, kept or used in
or about the Premises by Tenant, its agents, employees, contractors or invites,
except for small quantities of such Hazardous Material if any, necessary to
Tenant's business.
Section 17.02. Any Hazardous Material permitted on the Premises as
provided in Section (3) three of this Lease, and all containers therefor, shall
be used, kept, stored and disposed of in a manner that complies with all
federal, state and local laws or regulations applicable to this
hazardousMaterial.
Section 17.03. Tenant shall not discharge, leak or emit, or permit to be
discharged, leaked or emitted, any material into the atmosphere, ground, sewer
system or any body of water, if that material (as is reasonably determined by
the Landlord or any governmental authority) does or may pollute or contaminate
the same or may adversely affect (a) the health, welfare or safety of persons,
whether located on the Premises or elsewhere, or (b) the condition, use or
enjoyment of the building or any other real or personal property and which would
result in a violation of applicable environmental laws.
Section 17.04. At the commencement of each Lease Year, Tenant shall
disclose to Landlord the names and approximate amounts of all Hazardous Material
that Tenant intends to store, use or dispose of on the
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Premises in the coming Lease Year. In addition, at the commencement of each
lease Year (beginning with the second Lease Year), Tenant shall disclose to
Landlord the names and amounts of all Hazardous Material that to Tenant's
knowledge were actually used, stored or disposed of on the Premises, if those
materials were not previously identified to Landlord at the commencement of the
previous Lease Years.
Section 17.05. As used herein, the term "Hazardous Material" means (a)
any "hazardous waste" as defined by the Resource Conservation and Recovery Act
of 1976,, as amended from time to time, and regulations promulgated thereunder;
(b) any "hazardous substance" as defined by the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended from time to time,
and regulations promulgated thereunder; (c) any oil, petroleum products and
their by-products, other than those used in automotive or recreational activity,
boats or motorcycles which are stored on the Premises in accordance with all
applicable laws and minor leakage and spills which are, upon written request of
Landlord, promptly cleaned up.
Section 17.06. Tenant hereby agrees that it shall be fully liable for
all costs and expenses related to the use, storage and disposal of Hazardous
Material kept on the Premises by the Tenant, and the Tenant shall give immediate
notice to the Landlord of any violation or potential of the provisions of
Section 17.02. Tenant shall defend, indemnify and hold harmless Landlord and its
agents from and against any claims, demands, penalties, fines, liabilities,
settlements, damages, costs or expenses (including without limitation,
attorneys' and consultants' fees, court costs and litigation expenses) of
whatever kind of nature, known or unknown, contingent or otherwise, arising out
of or in any way related to the presence, disposal, release or threatened
release by Tenant of any such Hazardous Material brought on to the premises by
Tenant or Tenant's employees. The provisions of this section 17.06 shall be in
addition to any other obligations and liabilities Tenant may have to Landlord at
law or in equity and shall survive the transactions contemplated herein and
shall survive the termination of this Lease.
Section 17.07. INDEMNIFICATION. Subject to the waiver and release
contained in Section 13F, Landlord and Tenant hereby agree to indemnify and hold
the other party and the other party's agent and employees harmless from any and
all claims, damages, liabilities or expenses arising out of (a) Tenant's use of
the Premises, (b) any act, omission or negligence of the other party, its agents
or employees. Tenant agrees to procure and keep in force during their term
hereof a contractual liability endorsement to its public liability policy
specifically endorsed to cover the indemnity provision of this section. Each
party further releases the other party, and the other party's agent and
employees from liability for any damages sustained by either party or any other
person claiming by, through or under either party due to the Premises, or any
party thereof or any appurtenances thereto becoming out of repair, or due to the
happening of any accident including, but not limited to, any damage caused by
water, snow, windstorm, tornado, gas, steam, electrical wiring, sprinkler system
plumbing, heating and air conditioning apparatus and from any acts or omissions
of co-tenants or other occupants of the premises. Landlord and Landlord's agents
and employees shall not be liable for any damage to or loss of Tenants personal
property, inventory, fixtures or improvements, from any cause whatsoever except
the affirmative acts or proven gross negligence of Landlord, and then only to
the extent not covered by insurance required to be obtained by each party in
accordance with Section 13 and 14 hereof.
Section 17.08. COMPLIANCE WITH LAW. Each party, with respect to its
designated responsibilities under the law, shall, during the Term of this
Lease,, at its sole cost and expense, comply with all valid laws, ordinances,
regulations, orders and requirement, of any governmental authority which may be
applicable to the use, manner of use or occupancy of, the premises, whether or
not the same shall interfere with the use or occupancy of the Premises provided,
however Tenant shall have no obligation to make structural repairs to the
premises. Each party shall give prompt notice to the other party of any notice
it receives of the violation of any law or requirement of any public authority
with respect to the Premises or use or occupation thereof. 18. EVENTS OF
DEFAULT.
The following events shall be deemed to be events of default by Tenant
under this Lease:
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(a) Tenant shall fail pay any installment of the rent herein reserved
when due, or any payment with respect to taxes hereunder when due, or any other
payment or reimbursement to Landlord required herein when due, and such failure
shall continue for a period of five (5) days from the date such payment was due.
(b) Tenant shall make a transfer in fraud of creditors, or shall make an
assignment for the benefit of creditors.
(c) Tenant shall file a petition under any section or chapter of the
National Bankruptcy Act, as amended, or under any similar law or statute of the
United States or any state thereof; or Tenant shall be adjudged bankrupt or
insolvent in proceedings filed against Tenant thereunder.
(d) A receiver or trustee shall be appointed for all or substantially
all of the assets of Tenant.
(e) Tenant shall desert or vacate any substantial portion of the
Premises and fails to pay rental as it may become due.
(f) Tenant shall fail to comply with any term, provision or covenant of
this Lease (other than the foregoing in this Paragraph 18), and shall not
commence and diligently proceed to cure such failure within (30) days after
written notice thereof to Tenant.
19. REMEDIES.
Upon the occurrence of any of such events of default described in
Paragraph 18 hereof, Landlord shall have the option to pursue any one or more of
the following remedies without any notice or demand whatsoever.
(a) Terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may,
without prejudice to any other remedy which it may have for possession or
arrearages in rent, enter upon and take possession of the Premises and expel or
remove Tenant and any other person who may be Copying such Premises or any part
thereof, without being liable for prosecution or any claim of damages therefor;
and Tenant agrees to pay Landlord, on demand, the amount of rent reserved for
the remainder of the term hereof together with reasonable and customary costs of
reletting, less any sums received by Landlord from reletting said premises.
(b) Enter upon and take possession of the Premises and expel or remove
Tenant and any other person who may be occupying such Premises or any part
thereof, without being liable for prosecution or any claim for damages therefor,
and relet the Premises and receive the rent therefor, and Tenant agrees to pay
the Landlord, or demand, any deficiency that may arise by reason of such
reletting. In the event Landlord is successful in reletting the Premises at a
rental in excess of that agreed to be paid by Tenant pursuant to the terms of
this Lease, Landlord and Tenant each mutually agree that Tenant shall not be
entitled, under any circumstances, to such excess rental, and Tenant does hereby
specifically waive any claim to such excess rental.
(c) Terminate this Lease and treat the event of default as an entire
breach of the Lease and Tenant immediately shall become liable to Landlord for
damages for the entire breach in the amount equal to the amount by which the
total rent now due and payable as adjusted by the amount of additional rent
which would be payable by Tenant during the unexpired balance of the term of
this Lease and all other payments due for the balance of the term is in excess
of the fair market rent value of the Premises for the balance of the term as of
the time of default, both discounted at the rate of six (6) percent per annum to
the then present value. Such amount shall be due and payable upon Lessor's
notice to Lessee of termination of the Lease and shall bear interest until paid
at the maximum annual rate permitted by law.
(d) Enter upon the Premises, without being liable for prosecution or any
claim for damages therefor, and do whatever Tenant is obligated to do under the
terms of this Lease; and Tenant agrees to reimburse Landlord, on demand, for any
expenses which Landlord may incur in thus effecting compliance with
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Tenant's obligations under this Lease.
(e) Alter locks and other security devices at the Premises, without
being liable for prosecution or any claim of damages therefor, and such
alteration of locks and security devices shall not be deemed or unauthorized or
constitute a conversion.
(f) Receive payment from Tenant, in addition to any sum provided to be
paid above, for any and all of the following expenses for which Tenant shall be
considered liable:
1. Broker's fees incurred by Landlord in connection with
reletting the whole or any part of the Premises;
2. The cost of removing and storing Tenants or other property
brought in to the premises by Tenant, Tenant's employees,
customers, agents or invitees;
3. The cost of repairing, altering, remodeling or otherwise putting
Premises into condition acceptable to a new Tenant or Tenants in
accordance with the plans attached herein as Exhibit "B" and
"B-1", plus a reasonable charge to cover overhead; and
4. All reasonable expenses incurred by Landlord in enforcing
Landlord's remedies.
In the event Tenant fails to pay any installment of rent hereunder as
and when such installment is due and has failed to pay such sum within ten (10)
days of the date when due, to help defray the additional cost to Landlord for
processing such late payments Tenant shall pay to Landlord on demand a late
charge in an amount equal to five (5) percent of such installment; and the
failure to pay such amount within ten (10) days after demand therefor shall be
an event of default hereunder. The provision for such late charge shall be in
addition to all of Landlord's other rights and remedies hereunder or at law and
shall not be construed as liquidated damages or as limiting Landlord's remedies
in any manner.
Pursuit of any of the foregoing remedies shall not preclude pursuit of
any of the other remedies herein provided or another remedies provided by law,
nor shall pursuit of any remedy herein provided constitute a forfeiture or
waiver of any rent due to Landlord hereunder or of any damages accruing to
Landlord by reason of the violation of any of the terms, provisions and
covenants herein contained. No act or thing done by the landlord or its agents
during the term hereby granted shall be deemed a termination of this Lease or
any acceptance of the surrender of the Premises, and no agreement to terminate
this Lease or accept a surrender of said Premises shall be valid unless it is in
writing and signed by Landlord. No waiver by Landlord of any violation or breach
of any of the terms, provisions and covenants herein contained shall be deemed
or construed to constitute a waiver of any other violation or breach of any of
the other terms, provisions and covenants herein contained. Landlord's
acceptance of the payment of rental or other payments hereunder after the
occurrence of an event of default shall not be construed as a waiver of such
default, unless Landlord so notifies Tenant in writing. Forbearance by Landlord
to enforce one or more of the remedies herein provided upon an event of default
shall not be deemed or construed to constitute a waiver of such default or of
Landlord's right to enforce any such remedies with respect to such default of
any subsequent default. If, on account of any breach or default by Tenant in
Tenants obligations under the terms and conditions of this Lease, it shall
become necessary or appropriate of Landlord to employ or consult with an
attorney concerning any of Landlord's rights or remedies hereunder or to enforce
or defend any of the Landlord's rights or remedies hereunder, Tenant agrees to
pay any reasonable attorney's fees so incurred.
20. LANDLORD'S LIEN.
In addition to any statutory lien for rent in Landlord's favor, Landlord
shall have, and Tenant hereby grants to Landlord, a continuing security interest
for all rentals and other sums of money becoming due hereunder from Tenant, upon
all goods, ware, equipment fixtures, furniture, inventory, accounts, contract
rights,
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chattel paper and other personal property of Tenant situated on the premises,
and such property shall not be removed therefrom without the consent of Landlord
until all arrearage in rent as well as any and all other sums of money then due
to Landlord hereunder shall fast have been paid and discharged. In the event of
a default under this Lease, Landlord shall have, in addition to any other
remedies provided herein or by law, all rights and remedies under the Uniform
Commercial Code, including, without limitation, the right to sell the property
described in this Paragraph 20 at public or private sale upon five (5) days
notice to Tenant. Tenant hereby agrees to execute such financing statements and
other instruments necessary or desirable in Landlord's discretion to perfect the
security interest hereby created. Any statutory lien for rent is not hereby
waived, the express contractual lien herein granted being in' addition and
supplementary thereto.
21. MORTGAGES.
Tenant accepts this Lease subject and subordinate to any mortgage(s)
and/or deed(s) of trust now or at any time hereafter constituting a lien or
charge upon the Premises or the improvements situated thereon; provided,
however, that if the mortgagee, trustee or holder of any such mortgage or deed
of trust elects to have Tenant's interest in this Lease superior to any such
instrument, then by notice to Tenant from such mortgagee, trustee, or holder,
this Lease shall be deemed superior to such lien, whether this Lease was
executed before or after said mortgage or deed of trust. Tenant shall at any
time hereafter on demand execute any instruments, releases or other documents
which may be required by any mortgagee for the purpose of subjecting and
subordinating this Lease to the lien of any such mortgage. Landlord and
mortgagee agree to provide tenant with a mutual recognition attornment agreement
as form, scope and substance to be acceptable to mortgagee which will provide
that the Tenants possession and other rights hereunder will not be disturbed as
long as Tenant continues to perform its obligations under the terms of the
lease.
22. LANDLORD'S DEFAULT.
A.. In the event Landlord should default in any of its obligations
hereunder, Tenant shall simultaneously give Landlord and Landlord's mortgagee
(provided that Landlord has given Tenant the address of such mortgagee) written
notice specifying such default and Landlord shall thereupon have thirty (30)
days in which to cure any such default. In addition, Landlord's mortgagee shall
have the right (but not the obligation) to cure or remedy such default during
the period that is permitted to Landlord hereunder plus an additional period of
thirty (30) days, and Tenant will accept such curative or remedial action taken
by Landlord's mortgagee with the same effect as if such action had been taken by
the Landlord.
B. Upon the failure of Landlord or Landlord's mortgagee to cure such
default in accordance with the provisions of Paragraph 22 A hereof, Tenant shall
be authorized and empowered to pay any such items for and on behalf of Landlord,
and the amount of any item so paid by Tenant for and an behalf of Landlord,
together with any interest or penalty required to be paid in connection
therewith, shall be payable on demand by Landlord to Tenant; provided, however,
that Tenant shall not be authorized and empowered to make any payment under the
terms of this Paragraph 22 unless the item paid shall be superior to Tenant's
interest hereunder. Tenant's exclusive remedy shall be an action for damages
against Landlord, and Tenant hereby waives the benefit of any laws granting it a
lien upon the property of Landlord and/or upon rent due Landlord, In the event
Tenant pays any mortgage debt in full, in accordance with this paragraph, it
shall, at its election, be entitled to the mortgage security by assignment or
subrogation.
23. MECHANIC'S LIEN
Tenant shall have no authority, express or implied, to create or place any
lien or encumbrance of any kind or nature whatsoever upon, or in any manner to
bind, the interests, of Landlord in the Premises or to charge the rentals
payable hereunder for any claim in favor of any person dealing with Tenant,
including those who may furnish materials or perform labor for any construction
or repairs., and each such claim shall affect and each such lien shall attachh
to, if at all, only the leasehold interest granted to Tenant by this instrument.
Tenant covenants and agrees that it will pay or cause to be paid all sums
legally due and payable by it on account of any
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labor performed or materials furnished in connection with any work performed on
the Premises on which any lien is or can be validly and legally asserted against
its leasehold interest in the Premises or the improvements thereon, and that it
will save and hold Landlord harmless from any and all cost or expense based on
or arising out of asserted claims or liens against the leaschold estate or
against the right, title and interest of the Landlord in the Premises which
arises out of or in connection with work performed by Tenant or Tenant's
contractors on the premises.
24. ASSIGNMENT BY LANDLORD.
Landlord shall have the right to assign or transfer, in whole or in part,
every feature of its rights and obligations hereunder and in the building or
real property of which the Premises is a part.
group of individuals, and howsoever made shall be in all things respected and
recognized by Tenant. Provided Tenant is in full compliance with the terms of
the lease hereunder, Tenants rights shall not be disturbed.
25. DISCLAIMER.
This Lease and the obligation of Tenant to pay rent hereunder and the
obligation of Tenant and Landlord to perform all of the other covenants and
agreements hereunder on the part of the Tenant and Landlord to be performed,
shall not be affected, impaired or executed because Tenant or Landlord is unable
to fulfill any of its covenants and obligations under this Lease, expressly or
impliedly to be performed by Tenant or Landlord, if Landlord is prevented or
delayed from doing so by reason of strikes, power outages, or by any reason or
cause whatsoever beyond Landlord's control. Reasons beyond Landlord's control
shall include, but not be limited to, governmental preemption in connection with
a National Emergency or by any reason of any rule, order or regulation of any
governmental agency, federal, state, county or municipal authority or any
department or subdivision thereof, or by reason of the conditions of supply and
demand which have been or are affected by war or other emergency.
26. NOTICES.
Each provision of this instrument or of any applicable governmental laws,
ordinances, regulations and other requirements with reference to the sending,
mailing or delivery of any notice or the making of any payment by Landlord to
Tenant or with reference to the sending, mailing or delivery of any notice or
the making of any payment by Tenant to Landlord shall be deemed to be complied
with when and if the following steps are taken:
(a) All rent and other payments required to be made by Tenant to
Landlord hereunder shall be payable to Landlord at the address herein below set
forth or at such other address as Landlord may specify from time to time by
written notice delivered in accordance herewith. Tenant's obligation to pay rent
and any other amounts to Landlord under the terms of this Lease shall not be
deemed satisfied until such rent and other amounts have been actually received
by Landlord.
(b) All payments required to be made by Landlord to Tenant hereunder
shall be payable to Tenant at the address hereinbelow set forth, or at such
other address within the continental United States as Tenant may specify from
time to time by written notice delivered in accordance herewith. All such
payments shall be sent by Certified U.S. Mail, return receipt requested.
(c) Any notice or document required or permitted to be delivered
hereunder shall be deemed to be delivered, whether actually received or not, two
(2) days following being deposited in the United States Mail, postage prepaid,
Certified or Registered Mail, addressed to the parties hereto at the respective
addresses set out below, or at such other address as they have theretofore
specified by written notice delivered in accordance herein with.
Landlord: Tenant:
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319 CENTURY PLAZA ASSOCIATES LTD. INDUSTRIAL DATA SYSTEMS, INC.
CENTURY PLAZA DR., SUITE C-1 600 CENTURY PLAZA DR., SUITE C-140
c/o INVESTEX GLOBAL, INC. Houston, Texas 77073
14950 Heathrow Forest Pkwy, #100 Attn: Mr. Bill Coskey
Houston, Texas 77032 Attn: Ms. Hulda Coskey
ALSO
CGI Properties
2037 Pierce Street
San Francisco, CA 94115
If and when included within the term "Landlord", as used in this instrument,
there is more than one person, firm or corporation, all shall jointly arrange
among themselves for their joint execution of such a notice specifying some
individual at some specific address for the receipt of notices and payments to
Landlord; if and when included within the term "Tenant", as used in this
instrument, there is more than one person, firm or corporation, all shall
jointly arrange among themselves for their joint execution of such a notice
specifying some individual at some specific address within the continental
United States for the receipt of notices and payments to Tenant. All parties
included within the terms "Landlord" and "Tenant", respectively, shall be bound
by notices given in accordance with the provisions to this Paragraph to the same
effect as if each had received such notice.
27. MISCELLANEOUS.
A.. Words of any gender used in this Lease shall be held and construed
to include any other gender, and words in the singular number shall be held to
include the plural, unless the context otherwise requires.
B. The terms, provisions and covenants and conditions contained in this
Lease shall apply to, inure to the benefit of, and be binding upon, the parties
hereto and upon their respective heirs, legal representatives, successors and
permitted assigns, except as otherwise herein expressly provided.
C. Whenever a clause or provision of this Lease requires Landlord's
consent or approval, Landlord agrees not to withhold or delay its consent or
approval unreasonably.
D. The captions inserted in this Lease are for the convenience only and
in no way define, limit or otherwise describe the scope or intent of this Lease,
or any provision hereof, or in any way affect the interpretation of this Lease.
E. Tenant agrees, if requested in writing by Landlord, to furnish to
Landlord, a copy of Tenant's current financial statement and/or annual report.
Such information will be furnished within twenty (20) business days of request.
F. This Lease may not be altered, changed or amended except by an
instrument in writing signed by both parties hereto.
G. All obligations of Tenant or Landlord hereunder not fully performed
as of the expiration or earlier termination of the term of this Lease shall
survive the expiration or earlier termination of the term hereof, including,
without limitation, all Tenants payment obligations with respect to taxes and
insurance and all obligations concerning the condition of the Premises. Tenant
shall also, prior to vacating the Premises, pay to Landlord the amount, as
estimated by Landlord, of Tenant's obligation hereunder for real estate taxes
and insurance premiums for the year in which the Lease expires or terminates.
Tenants obligation to pay Landlord for said Real Estate Taxes and Insurance
premiums for that portion of the year in which the Lease expires or is
terminated shall be pro-rated for the portion of that year during which the
premises are leased and/or occupied by
15
<PAGE>
the Tenant.
H. If any clause or provision of this Lease is illegal, invalid or
unenforceable under present or future laws effective during the term of this
Lease, then and in that event, it is the intention of the parties hereto that
the remainder of this lease shall not be affected thereby, and it is also the
intention of the parties to this Lease that, in lieu of each clause or provision
of this Lease that is illegal, invalid or unenforceable, there be added as a
part of this Lease contract a clause or provision as similar in terms to such
illegal, invalid or unenforceable clause or provision as may be possible and be
legal, valid and enforceable.
I. This Lease shall not be valid or binding unless and until accepted by
Landlord in writing and a fully executed copy delivered to both parties hereto.
J. All references in this Lease to "the date hereof' or similar
references shall be deemed to refer to the last date, in point of time, on which
all parties hereto have executed this Lease.
K. Tenant agrees, from time to time within ten (10) business days after
request of Landlord, to deliver an estoppel certificate to Landlord or
Landlord's designee. Such estoppel certificate shall state that this Lease is in
full force and effect, the date to which rent has been paid, the unexpired term
of this Lease and such other matters pertaining to this Lease as may be
reasonably requested by Landlord.
L. Landlord and Tenant acknowledge and agree that this Lease shall be
interpreted and enforced in accordance with the laws of the State of Texas and
all obligations and duties are performable exclusively in Houston, Harris
County, Texas.
M. Each party agrees to furnish to the other, within twenty (20) days of
demand, a corporate resolution, proof of due authorization by partners, or other
appropriate documentation evidencing the due authorization of such party to
enter into this Lease.
N. This Lease may be signed in any number of counterparts, each of which
shall be an original for all purposes, but all of which taken together shall
constitute only one agreement. The production of any executed counterpart of
this Lease shall be sufficient for all purposes without producing or accounting
for the other counterparts hereof.
0. Any reference to a building on the demised Premises, means the plural
"buildings" in a multiple building complex. All expenses, for example, but not
limited to taxes, property insurance, and common area maintenance, are prorated
for the total net rentable area in all buildings.
P. MORTGAGE BY LANDLORD - Landlord shall have the right to transfer,
assign, pledge, grant a security interest in, mortgage or convey in whole or in
part the Building and any and all of its rights under this Lease, and nothing
herein shall be construed as restriction upon Landlord's so doing.
Q. SUBORDINATION - This Lease is and shall be subject and subordinate in
all respects to any and all mortgages, deeds of trust and ground leases now or
hereafter placed on the Building or the land upon which the Building is
situated, and to all renewals, modifications, consolidations, replacements and
extensions thereof.
R. ATTORNMENT - If the interest of Landlord is transferred to any person
or entity by reason of foreclosure or other proceedings for enforcement of any
mortgage, deed of trust or security interest or by delivery of a deed in lieu of
foreclosure or other proceedings, or by reason of sale, assignment or other
transfer of Landlord's interest in the Building, Tenant at the request and at
the option of any such lender or transferee, shall immediately attorn to such
person or entity. Tenant shall, at Landlord's request, execute an agreement
providing for subordination of the Lease.
S. RELOCATION OPTION - If Landlord determines to utilize the Leased
Premises for other purposes
16
<PAGE>
during the term of this Lease, Tenant agrees to relocate to other space in the
Property designated by Landlord, provided such other space is of equal or larger
size than the Leased Premises. Landlord shall pay all out-of-pocket expenses of
any such relocation, including the expenses of moving and reconstruction of all
Tenant furnished and Landlord furnished improvements. In the event of such
relocation, this Lease shall continue in full force and effect without any
change in the terms or conditions of this Lease, but with the new location
substituted for the old location set forth in Section 1.4 of this Lease. If for
any reason Landlord determines that it is necessary to abate or remove any
material from the Leased Premises, including, but not limited to,
asbestos-containing material, Landlord agrees to temporarily relocate Tenant to
a different location in the center until the abatement or removal process is
completed. Landlord hereby agrees to pay all costs and expenses in connection
with said temporary relocation. In the event of said temporary relocation, this
Lease shall continue in full force and effect without any change in the terms or
conditions of this Lease.
T. NON-WAIVER - Failure on the part of Landlord to complain of any
action or non-action on the part of Tenant, no matter how long the same may
continue, shall not be deemed to be a waiver by Landlord of any of its rights
under this Lease. Further, it is covenanted and agreed that no waiver at any
time of any of the provisions hereof by Landlord shall be construed as a waiver
of any of the other provisions hereof and that a waiver at any time of any of
the provisions hereof shall be construed as a waiver at any subsequent time of
the same provisions. the consent or approval by Landlord to or of any action by
Tenant requiring Landlord's consent or approval shall not be deemed to waive or
render unnecessary Landlord's consent or approval to or of any subsequent
similar act by Tenant.
U. FEASIBILITY - Whenever in this Lease there is imposed upon Landlord
the obligation to use its best efforts, reasonable efforts or diligence,
Landlord shall be required to do so only to the extent the same is economically
feasible and otherwise will not impose upon Landlord excessive financial or
other burdens.
V. INDEPENDENT COVENANTS - The obligation of Tenant to pay rent and
other monetary obligations provided to be paid by Tenant under this Lease and
the obligation of Tenant to perform Tenant's other covenants and duties under
this Lease constitute independent, unconditional obligations of Tenant to be
performed at all times provided for under this Lease, save and except only when
an abatement thereof or reduction therein is expressly provided for in this
Lease and not otherwise. Notwithstanding any of the other terms or provisions of
this Lease and notwithstanding any other circumstances whatsoever, it is the
intent and agreement of Landlord and Tenant that so long as Tenant has not been
wrongfully evicted from the Lease Premises, the doctrine of independent
covenants shall apply in all matters relating to this Lease including, without
limitation, the obligation of Landlord to perform Landlord's covenants under
this Lease, as well as the obligation of Tenant to pay rent and all other
monetary obligations of Tenant and perform Tenant's other covenants, duties and
obligations under this Lease.
W. WARRANTY DISCLAIMER - Landlord and Tenant expressly acknowledge and
agree, as a moving and material part of the consideration for Landlord's
entering into this Lease with Tenant, that Landlord has made no warranties to
Tenant as to the use or condition of the Leased Premises or the Building, either
express or implied, and Landlord and Tenant expressly disclaim any implied
warranty or any other warranty express or implied regarding the Leased Premises
or the building and also expressly acknowledge and agree that Tenant's
obligation to pay rent hereunder is not dependent upon the condition of the
Leased Premises or the Building or the performance by Landlord of its
obligations hereunder, and that Tenant will continue to pay the rent provided
for herein without abatement, setoff or deduction, notwithstanding any breach by
Landlord of its duties or obligations hereunder, express or implied. Tenant
expressly waives to the extent not prohibited by applicable law any claims under
federal, state or other law that Tenant might otherwise have against Landlord
relating to the use, characteristics or conditions of the Leased Premises or the
Building. Landlord and Tenant expressly agree that there are no, and shall not
be nay, implied warranties of merchantability, habitability, fitness for a
particular purpose or any other kind arising out of this Lease and all express
or implied warranties in connection herewith are expressly disclaimed and
waived, save and except warranty of title, subject to all matters affecting
title, whether or not of record in Harris County, Texas.
17
<PAGE>
X. WAIVER OF CONSUMER RIGHTS - I, Tenant, waive my rights under the
Deceptive Trade Practices-Consumer Protection Act, Section 17.41 Et. Seq., Texas
Business and Commerce Code, a law that gives consumers special rights and
protections. After consultation with an attorney of my own selection, I
voluntarily consent to this waiver. My attorney is JOHN WILLIAMS. I am not in a
significantly disparate bargaining position as related to Landlord.
Executed by the parties this 19 day of AUGUST, 1997
319 CENTURY PLAZA INDUSTRIAL DATA SYSTEMS, INC.
ASSOCIATES LTD.
s/s MR. JOHN COSTELLO s/s WILLIAM COSKEY
BY: MR. JOHN COSTELLO BY: WILLIAM COSKEY
ITS GENERAL PARTNER PRESIDENT
Addenda and Exhibits incorporated for all purposes:
Exhibit A - Site Plan and Premises to be Leased Exhibit A- I -Option to
Renew Exhibit B - Construction & Warranty Exhibit C - Certificate of
Acceptance Exhibit D - Right of First Notice
18
<PAGE>
Exhibit "A"
Site Plan/Lease Premises Depicted
<PAGE>
EXHIBIT "A-1"
OPTION TO RENEW
Landlord hereby grants Tenant the option to renew and extend this Lease for
one additional (5) five year option term(s) at the then prevailing market
rental rates for comparable space within the Century Plaza Development and
upon all the rest of the terms and conditions of this Lease excepting that
Tenant has only ONE (1) option(s) as described herein to extend and renew this
Lease, but in no case shall the rent for the renewal period be less than the
rate paid by Tenant in the final year of the primary lease term. Said option
may be exercised only if Tenant is in full compliance of the terms and
conditions of this Lease. Additionally, within one-hunded eighty days (180)
days of the expiration of the initial term of this Lease, Tenant is required
to notify Landlord in writing of Tenants intent to exercise said renewal
option.
319 CENTURY PLAZA ASSOCIATES LTD. INDUSTRIAL DATA SYSTEMS, INC.
-------------------------------- --------------------------------
/s/ JOHN W. COSTELLO /s/ WILLIAM COSKEY
BY: JOHN W. COSTELLO BY: WILLIAM COSKEY
TITLE: GENERAL PARTNER TITLE:PRESIDENT
<PAGE>
EXHIBIT "B"
CONSTRUCTION AND WARRANTY:
Tenant agrees to take the lease premises in an "as is" "where is" condition with
the exception of the warranty outlined below.
Warranty
Landlord shall make certain that the existing heating and air-conditioning
systems, plumbing and electrical systems within the space are in good
operational order prior to tenant's commencement of the construction referenced
below.
Construction
Tenant shall contract to have all construction performed in the lease premises
including but not limited to construction of offices, technical area,
electrical, air-conditioning, and plumbing upgrades as needed,
carpeting/flooring, painting etcetra, and perform all construction within the
premises at its sole cost and expense. Landlord will review and approve all
construction plans by tenant and contractors, which approval may not be
unreasonably withheld and which shall be deemed given if Landlord does not
object in writing within 15 days of receipt of said plans. Tenant may utilize
and contract with Landlord's recommended contractors for said construction and
may request Landlord's representative coordinate said construction. All
contracts for construction shall be between the Tenant and the contractors
and/or subcontractors. Upon completion of the improvements, delivery of a City
of Houston Certificate of Occupancy (if applicable) and fully executed Lien
Release from all contractors on the construction, copies of all insurance
certificates and name and contact numbers of all contractors and subcontractors,
Tenant shall be reimbursed by Landlord the lesser of 1) actual expenses of
construction or 2) $35,000 thirty-five thousand dollars ("construction sum").
Landlord to the extent it shall desire, reserves the right to pay any sums due
any contractor on the construction and shall receive a credit on the
construction sum in the amount of said payments. Tenant indemnifies and holds
harmless Landlord from any claims, valid or not, and mechanics or materialman's
lien due to the construction. Landlord's sole responsibility hereunder shall be
the construction sum and tenant shall be responsible for all other costs and
expenses.
SIGNAGE:
Tenant agrees to, within thirty (30) days of occupancy of the Premises install
an exterior sign similar to those currently found on the building at Century
Plaza Business Park. Said signage shall be at Tenant's sole cost and expense.
Additionally, Tenant shall be allowed to install signage on two of the existing
street monuments contingent upon available space. Said signage shall be first
approved by Landlord prior to installation.
<PAGE>
CERTIFICATE OF ACCEPTANCE
EXHIBIT "C"
15031 Woodham Drive
BUILDING: CENTURY
Plaza SUITE:.#390
LANDLORD: 319 CENTURY PLAZA ASSOCIATES LTD.
TENANT: INDUSTRIAL DATA SYSTEMS, INC.
This certificate is being executed pursuant to the Lease dated 8/18/97 for space
in the Building named above, executed on the day of between the Landlord named
above "Landlord"), and the Tenant named above ("Tenant").
Tenant certifies to and agrees with Landlord and Landlord's successors, assigns,
prospective purchasers and prospective lenders that:
1. Landlord has fully completed any construction work and leasehold
improvements required of Landlord under the terms of the Lease and/or any
other agreement between Landlord and Tenant concerning the Premises, (with
the exception of a final punchlist dated and attached hereto).
2. The Premises are tenantable, Landlord has no further obligation of
construction, and Tenant acknowledges that the lease is in full force and
effect. Further, the Premises are suitable for the Permitted Use specified
in the lease, (with the exception of a final punchlist dated and attached
hereto).
3. Tenant has taken possession of and has accepted the Premises, and the Base
Rent and additional rent are presently accruing in accordance with the terms
of the Lease.
4. The Term of the Lease will expire the 30 day of SEPTEMBER, 2002, unless
sooner terminated or extended pursuant to any provision of the Lease.
5. All capitalized terms not defined herein shall have the meaning assigned to
them in the Lease.
Certified and Agreed this day of 19 .
------ ----------- ----
TENANT
INDUSTRIAL DATA SYSTEMS, INC.
By
Name: WILLIAM COSKEY
Title: PRESIDENT
<PAGE>
EXHIBIT "D"
RIGHT OF FIRST NOTICE
So long as Tenant has never been and currently is not in default of the terms
and provisions of the Lease, and in consideration of Tenant fulfilling all
terms, conditions, covenants and obligations of this Lease, if, at any time
during the term of this Lease, Landlord receives interest from a third party to
lease the adjacent approximate 4,174sf to the south of the Premises (the "Rightt
of First Notice Space") Landlord shall use commercially reasonable efforts to
notify Tenant of said interest prior to leasing it to any other tenant.
Tenant shall have five (5) days from receipt of notice and a proposal of terms
from Landlord regarding the Right of First Notice Space, to notify Landlord in
writing of it's intent to lease such space at the proposed terms. If Tenant does
notify of it's intent therein, Tenant shall have an additional five (5) days in
which to execute and return to Landlord leases on the entire Right of First
Notice Space with the terms and conditions of the Lease mutually acceptable to
Landlord and Tenant. Unless Tenant shall notify Landlord and execute the
required documents, Landlord shall be free to lease the Right of First Notice
Space to any individual or entity. Following notification, if Tenant does not
lease the Right of First Notice space in accordance with this paragraph, this
Right of First Notice shall become null and void and of no further effect.
Notwithstanding the foregoing, if, at the time the Right of First Notice Space
would become available, the remaining term of this Lease is less than two years,
Tenant must extend the term of the Lease for a period to be at least three (3)
years in order to exercise Tenant's rights under this provision. If a firm
proposal has been submitted to the interested third party, Tenant shall lease
the Right of First Notice Space under those terms and conditions proposed to the
third party.
Exhibit 10.1
FIRST AMENDMENT TO LEASE
STATE OF TEXAS
COUNTY OF HARRIS
This First Amendment to Lease ("Amendment') is made and entered into as
of 9/16 , 1997 by and between 319 Century Plaza Associates, Ltd. ("Landlord")
and Industrial Data
Systems, Inc. ("Tenant").
RECITALS
A. WHEREAS, Landlord and Tenant entered into a Lease Agreement dated August
18th, 1997 (the "Lease") for certain Premises known as 15031 Woodham
Drive, Suite #390, Houston, Texas 77073 consisting of approximately 8,137
square feet of leaseable area and;
B. WHEREAS, Landlord and Tenant desire to modify the Lease so as to modify
certain terms and provisions outlined in the original Lease, to allow for
the increase of square footage of the Premises that Tenant will occupy
under the terms and conditions of the original Lease and this First
Amendment to Lease; and;
C. WHEREAS, Landlord and Tenant hereby agree that no other document has been
executed or exchanged between the parties hereto other than the original
Lease Agreement specified above and that there are no side letters or any
oral agreements between the parties and:
D. WHEREAS, Landlord and Tenant agree that all defined terms used in this
Amendment shall have the same meaning assigned to them in the original
Lease, unless the context herein expressly provides otherwise.
NOW, THEREFORE, for one dollar ($1.00) and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Landlord and Tenant hereby agree as follows:
AGREEMENTS
1. Effective immediately upon full execution of this First Amendment, Landlord
and Tenant mutually agree to expand the "Leased Premises" by 4,174 square
feet of leaseable area ("Expansion Premises") making a total leaseable area
of 12,311 square feet (See Attached Exhibit "A" Site Plan and Expansion
Premises).
2. Landlord and Tenant agree that the monthly base rental scheduled in the
original Lease shall be modified and scheduled as follows:
October 15, 1997 - October 31, 1997: $2,719.25
November 1, 1997 - April 30, 1998: $4,958.65 per month
May 1, 1998 - October 31, 1999: $5,970.84 per month
November 1, 1999 - October 31, 200 1: $6,040.17 per month
November 1, 2001 - October 31,2002: $6524.83 per month
3. Landlord and Tenant mutually agree to change the commencement date to
October 15, 1997 and the expiration date to October 31, 2002.
4. Taxes, common area maintenance, and insurance charges as specified in the
Lease under Section 4, Section 7, and Section 13, shall be modified to
allow that Tenant's proportionate share of these costs shall be equal to
7.19% of the expenses as defined in these paragraphs of the Lease. All
other defining terms and calculations of assessments and charges pursuant
to these paragraphs shall remain as specified in the original Lease with
the exception of the provisions relating to this modification and Tenant's
proportionate share.
5. Except as otherwise stated herein, all other terms and conditions of the
original Lease agreement dated August 18th, 1997 shall remain in full force
and effect and shall apply to the expansion premises located at 15031
Woodharn Drive, Suite #360 Houston, Texas 77073.
6. This Amendment shall be binding upon and inure to the benefit of landlord
and Tenant and their successors and assigns; however, this provision shall
not permit any additional transfer or assignment of the Lease by Tenant
which is otherwise limited by the terms of the Lease and this Amendment
required by Landlord's consent.
IN WITNESS WHEREOF, the parties have executed this First Amendment to
Lease as of this 16TH day of SEPTEMBER, 1997.
Exhibit List:
Exhibit "A" - Site Plan and Expansion Premises
TENANT: LANDLORD:
INDUSTRIAL DATA SYSTMES, INC. 319 CENTURY PLAZA ASSOCIATES LTD.
BY: /s/ WILLIAM COSKEY BY: /s/ JOHN W. COSTELLO
NAME: WILLIAM COSKEY BY: JOHN W. COSTELLO
TITLE: PRESIDENT TITLE: GENERAL PARTNER
DATE: 9/16/97 DATE: 9/16/97
EXHIBIT 10.2
SECOND AMENDMENT TO LEASE
STATE OF TEXAS
COUNTY OF HARRIS
This Second Amendment to Lease ("Amendment') is made and entered into as
of November 1997, by and between 319 Century Plaza Associates, Ltd. ("Landlord")
and Industrial Data Systems, Inc. (Tenant").
RECITALS
A.. WHEREAS, Landlord and Tenant entered into a Lease Agreement dated August
18th, 1997 (the "Lease') for certain Premises known as 15031 Woodham Drive,
Suite #390, Houston, Texas 77073 consisting of approximately 8, 137 square
feet of leaseable area and;
B. WHEREAS, Landlord and Tenant entered into a First Amendment dated
September 16, 1997, adding 4,174 square feet of leased Premises and;
C. WHEREAS. Landlord and Tenant desire to modify the Lease so as to
modify certain terms and provisions outlined in the original Lease and First
Amendment and to restate the term of the lease and the schedule of rent and;
D.WHEREAS, Landlord and Tenant hereby agree that no other document has been
executed or exchanged between the parties hereto other than the original Lease
Agreement and First Amendment ,specified above and that there are no side
letters or any oral agreements between the parties and,
E.WHEREAS, Landlord and Tenant agree that all defined terms used in this Second
Amendment shall have the same meaning assigned to them in the original Lease
and First Amendment, unless the context herein expressly provides otherwise.
NOW, THEREFORE, for one dollar ($1.00) and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Landlord and Tenant hereby agree as follows-
AGREEMENTS
1. Landlord and Tenant agree that the monthly base rental schedule
in the original Lease shall be
modified and scheduled as follows:
January 1, 1998 - June 30, 1998 $4,958.65
July 1, 1998 - December 31, 1999 $5,970.84
January 1, 2000 - December 31, 2001 $6,040.17
January 1, 2002 - December 31, 2002 $6,524.83
<PAGE>
2. Landlord and Tenant mutally agree to change the commencement date to
January 1, 1998 and the expiration date to December 31, 2002.
3 Line 4 of Exhibit "C" shall substitute "December 31, 2002"
for "30 days of September, 2002."
4. Except as otherwise stated herein, all other terms and conditions of
the original Lease Agreement datedAugust 18th, 1997 as amended by the
First Amendment shall remain in full force and effect and shall apply
to the Leased Premises located at 15031 Woodham Drive, Suite #360,
Houston, Texas 77073.
5. This Second Amendment shall be, binding upon and inure to the benefit
of Landford and Tenant and their successors and assigns; however,
this provision shall not permit any additional transfer or assignment
of the Lease by Tenant except as allowed under the terms of the
Lease.
IN WITNESS WHEREOF, the parties have executed this Second Amendment
to Lease as of this 20TH day of November, 1997.
TENANT: LANDLORD:
INDUSTRIAL DATA SYSTEMS, INC. 319 CENTURY PLAZA ASSOCIATES LTD.
BY: /s/ WILLIAM A. COSKEY BY: /s/ JOHN W. COSTELLO
NAME: WILLIAM A. COSKEY NAME: JOHN W. COSTELLO
TITLE: PRESIDENT TITLE: GENERAL PARTNER
DATE: 11/19/97 DATE: 11/20/97
FILE: 1997/costids.doc
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>
