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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________________ TO ______________________
COMMISSION FILE NO. 001-14217
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, Suite 140, Houston, Texas 77073-6013
Issuer's telephone number (281) 821-3200
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
COMMON AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Exchange Act:
NOT APPLICABLE
Check whether the issuer: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months or for such
shortened period that the issuer was required to file such reports, 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 the registrant'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 issuer's revenues for fiscal year ended December 31, 1998 were
$13,432,825.
The aggregate market value of the voting stock held by non-affiliates of
the registrant on December 31, 1998 was $26,192,708.
The number of shares outstanding of the registrant's classes of stock on
December 31, 1998 is as follows:
$0.001 Par Value Common Stock...................13,073,718 shares
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 1999 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 30, 1999.
Transitional Small Business Disclosure Format: Yes No X
--- ---
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INDUSTRIAL DATA SYSTEMS CORPORATION
1998 FORM 10-KSB
TABLE OF CONTENTS
<TABLE>
PART I
<S> <C>
Item 1. Description of Business............................................... 1
Item 2. Description of Property...............................................15
Item 3. Legal Proceedings.....................................................16
Item 4. Submission of Matters to a Vote of Security Holders...................16
PART II
Item 5. Market for Common Equity and Related Stockholder Matters..............17
Item 6. Management's Discussion and Analysis or Plan of Operation.............18
Item 7. Financial Statements .................................................23
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure..................................................41
PART III
Item 9. Directors and Executive Officers; Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act.....................41
Item 10. Executive Compensation................................................41
Item 11. Security Ownership of Certain Beneficial Owners and Management........41
Item 12. Certain Relationships and Related Transactions........................41
PART IV
Item 13. Exhibits and Reports on Form 8-K .....................................42
Signatures......................................................................44
</TABLE>
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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. IN PARTICULAR, THE COMPANY'S BUSINESS AND FINANCIAL
AFFAIRS COULD BE ADVERSELY EFFECTED BY DECREASES IN OIL PRICES, BY INABILITY TO
GET PARTS FROM VENDORS AND BY ITS INABILITY TO RENEW ITS LINE OF CREDIT.
REFERENCES TO THE "COMPANY" OR TO "IDSC" 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. REFERENCES
TO "CPM" REFERS TO THE COMPANY'S WHOLLY OWNED SUBSIDIARY, CONSTANT POWER
MANUFACTURING, INC. REFERENCES TO "IDS FAB" REFERS TO THE COMPANY'S WHOLLY OWNED
SUBSIDIARY, IDS FABRICATED SYSTEMS, INC. DBA MARINE AND INDUSTRIAL FIRE AND
SAFETY AND MARINE AND INDUSTRIAL SUPPLY COMPANY. 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
IDSC was incorporated in the State of Nevada in June 1994. The
Company's Common Stock trades on the American Stock Exchange under the symbol
"IDS." Prior to June 16, 1998, the Company's Common Stock was traded 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 its five operating wholly owned
subsidiaries.
IDS
IDS is a Texas corporation, which was formed in May 1985, and is a
wholly owned subsidiary of the Company. IDS was originally formed 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.
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 4,750,000, respectively. At the time
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of acquisition, 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. William A. Coskey held the positions of
Chairman of the Board, Chief Executive Office 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.
IDS is a provider of specialized microcomputer products that are
targeted to be sold to the industrial market. IDS manufactures, provides systems
integration and resells industrial and portable computers, microcomputers and
color CRT monitors. The microcomputer and peripheral products are designed to be
used in industrial applications, which include manufacturing, process control,
discrete manufacturing, data acquisition, telecommunications and man-machine
interfaces. The computers and monitors that are manufactured by the Company are
different from conventional, commercial desktop and portable computers by their
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 seeks to add value to standard computer components by packaging
these components in enclosures that withstand tough environmental conditions
and/or enclosures that have a special form factor. IDS also seeks to add value
by integrating and technically supporting advanced microcomputer systems.
IED
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 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 IED 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 IED more clearly
distinguishes it from the Company's other operating segments.
IED offers engineering services to major integrated oil and gas
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
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basis. The Company has long standing relationships with several major oil and
gas pipeline companies. New business relationships with other major oil
companies are developed through in-house personnel.
THERMAL
The Company acquired Thermal Corp. (Thermal) on February 15, 1997. 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 its previously leased facilities 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.
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 laws in July 1992.
The assets of Old Thermaire were placed in receivership and Mr. Hollingsworth
reacquired these assets in October 1992, with the intention of continuing the
company in its present form. Thermal was incorporated on November 17, 1992 for
this purpose.
Throughout its history, Thermal has built a reputation in the
commercial and industrial air handling industry for its quality products which
are distributed throughout the United States.
CPM
On February 19, 1998, the Company signed a letter of intent to acquire
CPM, a Texas corporation formed in June, 1989. The acquisition was consummated
on March 25, 1998 with the exchange of 300,000 shares of the Company's Common
Stock for 100% of CPM's shares. CPM's previous owner, Jack Ripley, has remained
with CPM as Vice President of Sales and Marketing under an employment contract.
CPM's previous Sales Manager, Tilden Smith, has remained with CPM in the same
position under an employment contract.
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, uninterruptible power systems, regulation and isolation transformers
and power conditioners. CPM sells to industrial and commercial accounts across
the United States.
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IDS FAB
Effective November 1, 1998, the Company acquired MLC Enterprises, Inc.,
a Texas corporation formed on August 7, 1995, doing business as Marine and
Industrial Fire & Safety (MIFS) and Marine and Industrial Supply Company (MISC).
As agreed upon in the Stock Acquisition Agreement, the Company issued 50,000
shares of Common Stock and cash consideration of $100,000 in exchange for 100%
of MLC's shares. Immediately following the acquisition, the name of the company
was changed to IDS FAB and will continue to do business as MIFS. It is the
Company's intention to sell or otherwise dispose of the MISC portion of IDS FAB.
IDS FAB's previous owner, Michael Moore, has remained with the company as
Managing Director and Vice President of Sales under an employment contract.
IDS FAB operates in the fire safety, fabrication and oil-field supply
marketplaces. It's primary operating division, MIFS, designs, manufactures,
fabricates and distributes specialized safety equipment to petroleum related
facilities which are both offshore and onshore. MISC is an oil-field supplier
specializing in pipe, valves and fittings for the drilling and production
industry which primarily sells to one account.
PRODUCTS AND SERVICES
IDS
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. IDS also provides microcomputer systems that
are packaged into enclosures which have special form factors.
The SafeCase Series 4000 is a proprietary design of IDS.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.
IDS also derives revenue from the systems integration and resale of
industrial computer products manufactured by other companies. These products are
typically designed with enclosures that withstand tough environmental conditions
and/or with enclosures that have a special form factor. In the area of systems
integration and resale, IDS designates three series of industrial computer
products and systems. The SafeCase Series 3000 represents industrial
microcomputer systems which are suitable for installation in a standard 19 inch
equipment rack.
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The SafeCase Series 5000 represents color CRT computer monitor products which
are available in 14 inch, 17 inch and 20 inch diagonal models. The SafeCase
Series 7000 represents industrial microcomputer systems which are designed to
be mounted on a wall or attached to machinery or other equipment.
In 1996, the Company announced the introduction of the SafeCase Series
400 computer as its latest entry into the industrial portable computer market.
This computer was specified to be the industrial equivalent of a commercial
grade notebook computer. Primarily as a result of the compact nature of the
proposed design, IDS encountered technical problems during the product design
phase, which resulted in significant project delays. The Company felt it did not
have sufficient technical resources to complete this product. In addition, the
Company believed that the resulting higher cost of the product would limit its
marketability. Therefore, IDS entered into an agreement with a major customer to
license the manufacturing rights for the SafeCase Series 400 limiting the sale
of this product only in their marketplace. IDS also simultaneously sold this
customer all product related inventory at cost. The value of this product
licensing and inventory sale transaction was approximately $350,000. At the
present time, IDS does not intend to further pursue design or production of the
SafeCase Series 400 product.
IED
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.
THERMAL
Thermal has manufactured quality air handling equipment since 1945.
Because Thermal stocks a larger number of fans and manufactures coils, dampers,
curbs and most other accessories, it aims 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 well known
for its 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
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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 cubic feet per minute
(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 view glass 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 to 1.5 pounds per cubic foot (pcf) insulation, double inlet double
width fan and open drip proof motor mounted on 1 foot deflection spring
isolators, 2 foot 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.
CPM
CPM designs, manufactures, and sells standard and custom back-up and
conditioned power systems including battery chargers, battery monitors, DC power
supplies, converters, inverters, Uninterruptible Power Systems, regulation and
isolation transformers, power conditioners, power distribution systems and solar
photo-voltaic systems. Additionally, CPM provides field service support for
installation and maintenance of these products. Most of the products
manufactured by CPM are made pursuant to specifications required for a
particular order. The products sold by CPM are utilized by refineries,
petrochemical plants, utilities, offshore platforms and other commercial,
industrial and governmental facilities.
IDS FAB
IDS FAB designs, engineers and fabricates fire protection systems and
equipment for the energy and marine industries worldwide, through the MIFS
portion of the business. Systems and equipment manufactured by MIFS includes
foam skids, CO2 suppression systems, deluge systems, fire pumps, oscillating
fire monitors and remote controlled fire monitors. MIFS also distributes fire
protection products manufactured by other companies, including Chubb, Kidde,
Akron and Elkhart. MIFS also fabricates process piping and skids which are not
related to the fire protection industry, but are utilized by MIFS's energy and
marine
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customers. MIFS provides field service support for installation and
maintenance of these products and systems. Most of the systems manufactured
by MIFS are made pursuant to specifications required for a particular order.
The products and systems sold by MIFS are utilized by refineries,
petrochemical plants, offshore drilling rigs, offshore production platforms
and other industrial facilities. MISC, the oilfield supply of the business,
buys and resells oilfield equipment, primarily to one account.
PRODUCT DEVELOPMENT
IDS
IDS is currently not developing any new proprietary product designs. In
order to satisfy customer requirements, IDS makes frequent modifications to its
proprietary SafeCase 4000 design. Revisions also are being made to this product
to increase functionality and reduce cost. Being an integrator and re-seller of
industrial microcomputer systems, IDS is continuously evaluating products in its
marketplace which serves to increase its range of offerings and enhance its
ability to sell systems to its customers. In this activity, IDS evaluates
microcomputer enclosures, CPU boards, components and peripheral products from a
variety of manufacturers.
IED
IED continues to provide engineering services to the pipeline industry
as its base of business. During 1998, IED signed two new blanket service
contracts with pipeline industry clients. In February 1999, the Company
announced the opening of a satellite office in Tulsa, Oklahoma which will
facilitate the expansion of its market area. IED plans to increase its range of
engineering capabilities and begin marketing its services to new industries such
as the refining, petrochemical and process industries.
THERMAL
During 1998, Thermal redesigned their line of rooftop air handlers in
order to increase capacity and provide for a narrower unit to better fit
shipping platforms and reduce freight costs. Thermal also was successful in
obtaining Environmental Testing Laboratories certification for its products,
which will open new markets for its products to municipalities and other
industries requiring such certification. During 1999, Thermal plans to add the
in-house capability of manufacturing industry certified plate-fin coils with
0.625 inch diameter tubing. Thermal believes the addition of this plate-fin coil
production line will improve its competitive position in the marketplace by
reducing product costs and production time. Thermal currently purchases all
plate-fin coils from outside sources.
CPM
CPM is currently in the developmental stages of designing a proprietary
battery monitor product. The proposed product will continuously monitor
parameters associated with battery systems, including current, voltage and
temperature. The battery monitor will provide status and historical information
about the battery system to which it is connected, and also will have a
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feature to optimize recharging. In 1999, CPM will also be redesigning some of
its existing charger line in order to improve cost effectiveness as well as
to decrease manufacturing time required to produce these products.
IDS FAB
IDS FAB currently has no products or services under development.
COMPETITION
IDS
IDS competes against various companies across its different product
lines. IDS' line of industrial portable computers compete with products
manufactured by Fieldworks, Dolch and Panasonic. IDS' industrial computer
products which are mountable in a 19 inch 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' 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 tailoring their offerings to specific application
requirements. These strategies help offset the greater name recognition and
broader service and support resources of IDS' 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' products is from
large manufacturers of commercial grade computer products. IDS' pricing of its
computer product line is governed by pricing in the commercial market.
Some of the IDS' 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' 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' customers or increasing their efforts
to gain and retain market share through competitive pricing.
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IED
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 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.
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 requests 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.
CPM
CPM is engaged in a highly competitive business which is characterized
by a small number of larger companies that dominate the bulk of the market and a
large number of similarly sized companies that compete for a limited share of
the market. In the opinion of management, the competitive position of CPM is
dependent on the ability of to provide quality products to a customer's
specifications, on a timely basis, at a competitive price, utilizing
state-of-the-art materials, design and production methods. Some of CPM's
principal competitors are larger and have greater capital and management
resources. However, management believes that it can capitalize on its ability to
provide custom packaged systems more effectively than its competition.
IDS FAB
IDS FAB's business is also highly competitive. IDS FAB competes with a
variety of industrial and safety supply distributors, many of which may have
greater financial and other resources than IDS FAB. IDS FAB competes not only
with companies of similar size selling to customers within the same geographic
area but also with much larger distributors that provide integrated supply
programs and outsourcing services which may be able to supply their products in
a more efficient and cost-effective manner than does IDS FAB. However, IDS FAB
remains competitive through its product application, engineering and fabricating
expertise offered by its professional staff and it's after-the-sale services
provided by IDS FAB.
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BUSINESS STRATEGY
IDS intends to increase market penetration by focusing on systems
integration and the resale of industrial microcomputer products that are
manufactured by outside sources. IDS believes that it does not have the
personnel or financial resources to broaden its line of proprietary industrial
computer products. In addition, the Company believes that an effort to develop a
broad line of proprietary industrial computer products cannot be financially
justified, given the rapid pace of change and resulting short product lifetimes
typical of the computer industry. IDS will seek to add value by integrating and
technically supporting advanced microcomputer systems primarily comprised of
components from outside sources. IDS has continued to develop and expand its
market presence in the eastern and mid-western portion of the United States
since the opening of its sales office in Connecticut in 1997.
IED's strategy is to increase revenues per employee by developing and
marketing the capability of performing turnkey or EPC (Engineering, Procurement
and Construction) projects. IED has traditionally only been responsible for the
engineering portion of its projects, which is normally between five to fifteen
percent of the project's total installed cost. On the majority of projects to
date, IED has invoiced for hours worked by its personnel with billing rates that
are specified in client generated blanket services contracts. In order to
execute this EPC strategy, IED will have to greatly enhance its project proposal
and bidding capability. In the first quarter of 1999, IED has hired two people
with extensive EPC project proposal experience. While executing this EPC
strategy, IED plans to expand its area of engineering expertise beyond its
traditional focus on the pipeline industry. IED plans to market its services and
submit proposals outside of the pipeline industry, which over a period of time,
will serve to diversify its client base.
Thermal continues to focus on establishing and supporting a qualified
sales representative network within the U.S. The planned addition in 1999 of a
plate-fin coil manufacturing line will help reduce product costs and production
time.
CPM plans to expand its marketing activities beyond the Texas-Gulf
Coast region. As of February 1999, CPM has signed contracts with three sales
representative firms outside of this region. CPM is focusing on obtaining a
reliable source for industrial quality uninterruptible power supply (UPS)
systems. CPM is currently evaluating this marketplace and plans to either
strategically align itself with an outside UPS supplier or initiate its own UPS
design project.
With the expansion of IED's project scope into the EPC arena, it is
anticipated that increased opportunities will arise for growth in the IDS FAB
subsidiary through the cross-selling of fabrication services.
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
10
<PAGE>
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
The Company's various subsidiaries derive revenues from in-house direct
sales, sales representatives and catalog distributor sales. IDSC's industrial
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. The
Company's in-house sales personnel are normally compensated utilizing incentive
commissions which are based on either a percentage of revenues or gross
profitability which can be attributed to their efforts. 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.
The Company's subsidiaries promote their products and services through
general and trade advertising, participation in trade shows and through
telemarketing and most recently through on-line Internet communication via
IDSC's corporate home page which provides links to each of the subsidiaries
webpages. Much of the Company's business is repeat business, and the source of
new customers has been largely through word-of-mouth referrals from existing
customers and industry members, such as manufacturer's representatives.
The Company's sales personnel focus on building long-term relationships
with customers and, through their product and industry expertise, providing
customers with product application, engineering and after-the-sale services.
Additionally, the sales personnel of IDSC subsidiaries seek to capitalize on
customer relationships that have been developed by each subsidiary through
cross-selling of the various products and services offered by each subsidiary.
Sales leads developed by this synergy are then jointly pursued.
CUSTOMERS
IDSC's customer base consists primarily of Fortune 500 companies in
numerous industry segments within the United States.
The Company's largest ten customers (which varied from period to
period) accounted in the aggregate for approximately 77% and 63% of the
Company's total revenue during 1997 and 1998, respectively.
Currently, the Company's major customers include:
IDS: Baker Hughes Inteq, SAIC
IED: EXXON Pipeline Co., Marathon Pipeline Co., Jacobs Engineering
THERMAL: Hollingsworth Equipment, South Texas Equipment
CPM: Powell Equipment, Gulf Interstate
11
<PAGE>
IDS FAB: Baker Hughes Processing, Chevron, Amfels, Texaco
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 IDSC's subsidiaries 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 support staff provides initial telephone
troubleshooting 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
provides limited warranty coverage for its products for varying time periods
depending on a variety of factors.
DEPENDENCE UPON SUPPLIERS
The Company's businesses depend upon the 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
components from distributors in order to obtain competitive pricing, maximize
product availability and maintain quality control.
In some cases, IDS' 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 period
of one year
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<PAGE>
IDS purchases from other manufacturers substantially all peripheral
devices and components used in its products and systems. 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' operations.
The business in which IDS competes is characterized by rapid
technological change and frequent introduction of new products and product
enhancements. IDS' success depends in large part on its ability to identify and
obtain products that meet the changing requirements of the marketplace. IDS
could experience delays in the receipt of these integral 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'
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.
Thermal currently stocks key components due to long lead times. 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.
All of CPM's products are manufactured using components and materials
that are readily available from numerous domestic suppliers. CPM has
approximately ten principal suppliers of components and each of those could be
replaced with several competitors; therefore, CPM anticipates no difficulty in
obtaining components in sufficient quantities and in a timely manner to support
its manufacturing and assembly operations.
IDS FAB acquires its products through numerous original equipment
manufacturers, fabricators and distributors. The company believes that
alternative sources of supply could be obtained in a timely manner if any of
these relationships were canceled. The company does not believe that the loss of
any one of these relationships with its distributors would have a material
adverse effect on the financial condition or results of operations of IDS FAB.
Representative manufacturers of products distributed by IDS FAB include Chubb,
Kidde, Keystone Valve, Elkhart and Akron.
There can be no assurance that IDSC's subsidiaries will be able to
continue to obtain the necessary components from any of its single sources on
terms acceptable to the Company, if at all. There can be no assurance that such
relationships 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
13
<PAGE>
Company's financial condition and results of operations. No one manufacturer
or vendor provides products that account for 10% or more of the Company's
revenues.
PATENTS, TRADEMARKS, LICENSES
The Company's success depends in part upon its proprietary technology,
and it 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.
The Company currently has no patents, trademarks, licenses or royalty
agreements.
GOVERNMENT REGULATIONS
Certain of the Company's subsidiaries are subject to various laws and
regulations relating to its business and operations, and various health and
safety regulations as established by the Occupational Safety and Health
Administration. The Company is not currently aware of any situation or condition
that it believes is likely to have a material adverse effect on its results of
operations or financial condition.
RESEARCH AND DEVELOPMENT
Research and development cost for 1998 was $25,049. 1997 expenditures
for research and development was $148,259. As of December 31, 1998 there were no
ongoing research and development activities.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 135
individuals within its five subsidiaries; approximately twelve were employed in
sales, marketing and customer services; fifty-one were employed in engineering;
fifty-four were employed in technical production positions; and seventeen were
employed in administration, finance and management information systems. 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.
14
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
FACILITIES
Except as noted below, the Company leases its principal executive
offices in Houston, Texas, which consist of approximately 20,525 square feet
that has been divided into administrative, sales, and engineering offices.
Approximately 12,000 square feet of this space is currently utilized for
production operations and warehouse space for the IDS and CPM operations. On
September 1, 1998 the Company leased 2,370 square feet of adjoining office space
for expansion of its' IED operation. As a result of this expansion, a fourth
amendment of its lease was executed which extended the lease to August 31, 2002.
On February 10, 1999, IED signed a lease for its newly established
office in Tulsa, Oklahoma. This office space consists of 5,400 square feet in a
one-story office building. The lease is for a term of two years, ending on
February 28, 2001. The base monthly rent is $2,925. with an additional Common
Area fee of $225. per month. Management believes that it has the ability to
sustain substantial additional 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. The balance on this note at December 31, 1998 was $420,830. 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.
As a result of the acquisition of CPM, the Company was able to allocate
a portion of its available space occupied by IDS to serve as office and
manufacturing space for the CPM. In consolidating its facilities, the Company
was successful in reducing overhead and increasing operating efficiencies by
vacating the existing space leased by CPM.
The newly acquired, IDS FAB subsidiary leases a 12,650 square foot
office/warehouse building situated on approximately 25,000 square feet of land
in Houston, Texas. The term of the lease is three years from December 1, 1997
and ending on November 30, 2000 unless sooner terminated. A deposit in the
amount of $3,795.00 for the last month's rent was paid in advance. This facility
serves as the IDS FAB's sales office, warehouse, and fabrication plant. From
time to time, IDS FAB subleases property adjacent to its fabrication facility on
an as-needed basis to facilitate implementation of large projects. At year-end
1998, IDS FAB was the sublessor of 16,500 square feet of office/warehouse space.
The term of the sublease was for three months from October 8, 1998 and ending
January 8, 1999 unless sooner terminated at a monthly rate of $4,950. The
sub-lease was renewed for a ninety (90) day period terminating March 8, 1999.
At the time of the acquisition by the Company, IDS FAB had additional
leased office/warehouse space of approximately 3,915 square feet in Houston,
Texas. The operations of
15
<PAGE>
the two business units had been consolidated into the existing lease space
occupied by the MIFS unit leaving this space unoccupied. The original term of
the lease was for 36 months beginning December 15, 1996 and ending December
14, 1999; however, IDSC was able to negotiate a Lease Termination Agreement
that allowed for early termination of the lease effective November 18, 1998
for payment of $1,570. By doing so, the Company was successful in reducing
overhead and increasing operating efficiencies.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in various legal proceedings
arising in the ordinary course of business. 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 fiscal year ended December 31, 1998.
16
<PAGE>
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
American Stock Exchange effective June 16, 1998, under the symbol "IDS. Prior to
June 16, 1998, the Company's Common Stock was traded on the NASDAQ Electronic
Bulletin Board under the symbol "IDDS."
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
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
YEAR ENDED DECEMBER 31, 1998
First Quarter.................................... 6.750 3.125
Second Quarter................................... 6.000 3.250
Third Quarter.................................... 8.688 6.000
Fourth Quarter................................... 9.375 5.875
</TABLE>
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.
As of December 31, 1998, the Common Stock was held by approximately 170
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 Operation."
17
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion is qualified in its entirety by, and should be
read in conjunction with, the Company's Consolidated Financial Statements
including the Notes thereto, included elsewhere in 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 from 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
Products segment has generated sales as a percent of total revenue of 24.5% and
11.4%, for 1997 and 1998, respectively, while the Engineering segment has
generated sales as a percent of total revenue of 40.5% and 32.8% for the same
periods. The Air Handling segment has generated sales as a percent of total
revenue of 34.9% and 27.6%, for 1997 and 1998, respectively. In 1998, with the
acquisition of CPM, the Company expanded into the manufacture and distribution
of uninterrupitable power systems and battery charger units and with the
acquisition of IDS FAB, the Company expanded into the design and fabrication of
fire detection, fire prevention equipment, environmental and safety equipment.
The Power Systems segment generated sales as a percent of total revenue of 22.5%
for the nine months ended December 31, 1998, and the Fabricating segment
generated sales as a percent of total revenue of 5.7% for the two month period
ended December 31, 1998.
The gross margin varies between each of its operating segments. The
Product segment has produced a gross margin ranging from 31.4% in 1997 to 20.2%
in 1998 due to the decrease in sales volume between 1997 and 1998. The gross
margin for Engineering segment which reflects direct labor costs, has ranged
from 24.7% in 1997 to 28.7% in 1998. The gross margin produced by the Air
Handling segment decreased from 20.2% in 1997 to 19.3% in 1998. The Power
Systems segment produced a gross margin in 1998 of 30.7%. The Fabricating
segment produced a gross margin of (17.1%) for a two-month period ended December
31, 1998. The overall gross margin for Industrial Data Systems Corporation
(IDSC), which includes Products, Engineering and Air Handling was 24.8% in 1997.
The 1998 overall gross margin which includes Products, Engineering, Air
Handling, Power Systems for nine months and Fabricating for two months was
23.0%.
YEAR 2000 (Y2K) ISSUES AND CONSEQUENCES
The Company's program to address its Year 2000 issues has progressed as
planned. Testing of the Company's internal hardware systems has been completed
and all systems have been brought into Y2K compliance. Upgrading of
non-compliant software systems is underway and will be completed by the end of
the third quarter of 1999. Costs expended to address Year 2000 issues has been
approximately $50,000 and an estimated additional $200,000 will be spent
18
<PAGE>
to correct Year 2000 issues. The cost to address these issues is being funded
from internally-generated cash flow and are expensed as incurred.
The Company does not own or maintain any computer controlled machinery
or operations outside its primary offices and production facilities, which would
be effected by non-complaint Year 2000 components. Nor does the Company rely on
electronic data transmissions for critical business functions such as taking
orders, issuing purchase orders or receiving payments.
Over the past three years, the Company has required Year 2000 compliant
components on all parts procured for its manufacturing process and has received
certification from the manufacturers and suppliers to this effect. The Company
does not rely heavily upon any single vendor for goods and services and does not
have significant suppliers or vendors who share information systems.
The Company's program to deal with Year 2000 issues includes evaluation
of the effects of third-party non-compliance and the effect that non-compliance
would have on the Company's ability to do business. The Company has banking
relations with one major financial institution, which has indicated that they
are Year 2000 compliant. The Company does not believe that the inability of
external agents to complete their Year 2000 remediation process in a timely
manner will have a material effect on the financial position or results of
operation of the Company. No material adverse effects have been identified, but
the Company intends to continue its evaluation process throughout the 1999 year.
There can be no guarantee that the Company's current efforts or its
contingency plan will successfully address all the contingencies that may arise.
The Company has defined critical activities which would be manually maintained
in case of third party utility failures, such as electrical and telephone
systems. In the event the Company is unsuccessful in addressing all its Year
2000 issues, there could be material adverse effects on the Company's financial
condition and liquidity. Disruptions in the economy generally resulting from
Year 2000 issues could adversely effect the Company's ability to do business.
The amount of potential liability or lost revenue cannot be reasonably estimated
at this time.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statement, which are statements of
future expectation and not facts. Actual results or development might differ
materially from those included in the forward-looking statements because of
factors such as competition and industry restructuring, changes in economic
conditions, changes in laws, regulations, regulatory policies or public
policies, technological developments, and other presently unknown or unforeseen
factors.
19
<PAGE>
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,
------------------------
1997 1998
---- ----
AMOUNT % AMOUNT %
------ --- ------ ---
<S> <C> <C> <C> <C>
Revenue:
Computer Products............................ $ 2,581,633 24.5 $ 1,535,915 11.4
Consulting Services......................... 4,239,466 40.3 4,406,585 32.8
Thermal..................................... 3,702,898 35.2 3,707,672 27.6
Constant Power.............................. 00 0.0 3,016,286 22.5
IDS Fabricated Systems...................... 00 0.0 766,367 5.7
-------------- -------- ------------- -------
Total Revenue............................... $ 10,523,977 100.0 $ 13,432,825 100.0
Gross Profit:
Computer Products............................ 810,982 31.4 309,727 20.2
Consulting Services.......................... 1,046,371 24.7 1,263,454 28.7
Thermal...................................... 748,444 20.2 715,547 19.3
Constant Power............................... 00 0.0 926,760 30.7
IDS Fabricated Systems....................... 00 0.0 (131,124) (17.1)
-------------- -------------
Total Gross Profit............................. $ 2,605,797 24.8 $ 3,084,724 23.0
Selling, general and administrative expenses..... 1,914,818 18.2 2,203,008 16.4
Depreciation..................................... 97,101 .9 170,564 1.3
-------------- -------- ------------- -------
Operating income............................. 593,878 5.6 711,152 5.3
Other income (expense) (3,134) (.03) (5,494) (.04)
Income before provision for
Income Taxes............................. 590,744 5.6 705,208 5.3
Provision for income taxes....................... 208,249 2.0 285,376 2.1
-------------- -------- ------------- -------
Net income after income taxes.................... $ 382,495 3.6 $ 419,832 3.1
-------------- -------- ------------- -------
-------------- -------- ------------- -------
</TABLE>
20
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
TOTAL REVENUE. Total revenue increased by $2,908,848 or 27.6% from
$10,523,977 in 1997 to $13,432,825 in 1998. Revenue from the Products
segment, which comprised 24.5% of total revenue in 1997, decreased by
$1,045,718 or 40.5%. The decrease in Products segment revenue was generally
attributable to the overall decline in sales. Revenue from the Engineering
segment comprised 40.3% of total revenue in 1997 increased by $141,139 or
3.3%. Revenue from the Air Handling segment 35.2% of total revenue in 1997
increased by $44,744 or 1%.
No sales were recorded in 1997 for CPM or IDS FAB since each was acquired
during 1998. CPM contributed $3,016,286 to the total revenue in 1998 during
the nine months from April 1 to December 31, 1998, and IDS FAB contributed
$766,367 to the total revenues during the two months from November 1 to
December 1, 1998.
GROSS PROFIT. Gross profit increased by $478,477 or 18.4% from
$2,605,797 in 1997 to $3,084,724 in 1998. The gross margin for the Industrial
Products decreased from 31.4% in 1997 to 20.2% in 1998. The gross margin for the
IED increased from 24.7% in 1997 to 28.7% in 1998. This increase was
attributable to changes in the scope of jobs being performed generating higher
margins. The gross margin for the Thermal segment decreased slightly from 20.2%
in 1997 to 19.3% in 1998. The CPM segment generated a gross margin of 30.7% for
1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $288,190 or 15.1% from $1,914,818 in 1997
to $2,203,008 in 1998. As a percentage of total revenue, selling, general and
administrative expenses decreased from 18.2% in 1997 to 16.4% in 1998. The
increase was attributable to the acquisitions of CPM and IDS FAB which added
additional personnel costs and increased overall general and administrative
expenses. The increases were more than offset by the increased revenue generated
by the additional operations.
OPERATING INCOME. Operating income increased by $116,824 or 19.7% from
$593,878 in 1997 to $710,702 in 1998. Operating income decreased as a percentage
of total revenue from to 5.6% in 1997 to 5.3% in 1998.
NET INCOME. Net income after taxes increased by $37,337 or 9.8% from
$382,495 in 1997 to $419,832 in 1998. Net income after taxes decreased as a
percentage of total revenue from 3.6% in 1997 to 3.1% in 1998.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has satisfied its cash requirements
principally through operations, and as needed through its line of credit. As
of December 31, 1998, the Company's cash position, including marketable
securities, was, in management's judgment sufficient to meet its working
capital requirements. The Company had, as of December 31, 1998, $1,150,000 in
additional advances available under its line of credit with a bank. This line
of credit provides for maximum borrowings of $1,150,000, which bears interest
at prime plus 1% is for a term of one year and matures on May 12, 1999, the
Company expects the line of credit 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 an additional term note which matures May 12, 1999, in the amount of
$375,000 and bears interest at prime plus 1%. This note also is secured by
accounts receivable, inventory and the personal guarantees of certain
stockholders. Interest on the outstanding balance of this note is paid on a
monthly basis. At its maturity on May 12, 1999, the Company expects that the
line of credit term note will be renewed.
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 $3,047,291 and $2,790,559 at December
31, 1997 and December 31, 1998, respectively.
CASH FLOW
Operating activities provided (used) net cash totaling ($818,061)
and $551,975 during 1997 and 1998, respectively. The Company has not
generated significant cash flow from operating activities due to the working
capital requirements resulting from its rapid growth. Trade accounts
receivable over the prior year increased $1,301,632 and decreased $660,162
for the years ended December 31, 1997 and 1998, respectively. Inventory
increased by $300,149 and decreased $177,745 for the same periods.
Investing activities used cash totaling $1,066,995 and generated
$208,515 respectively, during the years ended December 31, 1997 and 1998. In
1997, the Company's investing activities that used cash was primarily related to
the acquisition of Thermal and capital expenditures. In 1998, the Company's
investing activities generated cash from the acquisitions of CPM and IDS FAB,
which were executed primarily with the common stock of the Company.
As of December 31, 1998, the Company had a portfolio of marketable
securities with a fair market value of $676,647 and consisted of bonds and
mutual funds. The mutual funds that the Company owns are open-end stock funds
managed by Aim, Pioneer, and Smith Barney & Co. These mutual fund investments
are generally held for longer than one year. These securities are traded by the
Company as part of its plan to provide additional cash for working capital
requirements.
The marketable securities to be held until 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.
22
<PAGE>
Financing activities provided cash totaling $1,367,657 and $7,630
during 1997 and 1998. During 1997, $811,929 was provided from the collection of
notes receivable that were received as consideration for sales of Common Stock
in 1996. 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 ($1,150,000 at December 31, 1998 and at
March 30, 1999). The line of credit has been used principally to finance
accounts receivable and inventory purchases. Additional bank financing in the
amount of $450,000 was obtained for the purchase of the facilities that Thermal
had been leasing.
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 $2,268,864 and $2,193,128
at December 31, 1997 and 1998, respectively. The number of days' sales
outstanding in trade accounts receivable was 78 days and 70 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, as of December 31, 1998 and 1997 are attached hereto and made part
hereof.
23
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEPENDENT AUDITOR'S REPORT....................................... 26
CONSOLIDATED BALANCE SHEET - December 31, 1998..................... 27
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME -
Years Ended December 31, 1998 and 1997..................... 28
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - Years Ended
December 31, 1998 and 1997................................. 29
CONSOLIDATED STATEMENTS OF CASH FLOWS - Years Ended
December 31, 1998 and 1997................................. 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS......................... 31
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Industrial Data Systems Corporation
We have audited the accompanying consolidated balance sheet of Industrial Data
Systems Corporation and Subsidiaries as of December 31, 1998, and the related
consolidated statements of income and comprehensive income, stockholders' equity
and cash flows for the years ended December 31, 1998 and 1997. 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, 1998,
and the results of their operations and their cash flows for the years ended
December 31, 1998 and 1997, in conformity with generally accepted accounting
principles.
HEIN + ASSOCIATES LLP
Houston, Texas
March 10, 1999
26
<PAGE>
INDUSTRIAL DATA SYSTEMS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,225,821
Marketable securities, at market value -
Trading 676,647
Accounts receivable - trade, less allowance for doubtful
accounts of approximately $40,000 2,913,128
Inventory 917,097
Notes receivable from stockholders 162,000
Deferred income taxes 8,000
Prepaid and other 228,115
---------------
Total current assets 6,130,808
PROPERTY AND EQUIPMENT, net 1,050,568
OTHER ASSETS 1,500
GOODWILL 745,760
---------------
Total assets $ 7,928,636
---------------
---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 620,383
Current maturities of long-term debt 52,530
Accounts payable 1,557,985
Income taxes payable 157,000
Accrued expenses and other current liabilities 695,619
---------------
Total current liabilities 3,083,517
LONG-TERM DEBT 422,483
DEFERRED INCOME TAXES 14,000
COMMITMENTS AND CONTINGENCIES (Notes 7, 8, 13 and 15)
STOCKHOLDERS' EQUITY :
Common stock, $.001 par value;75,000,000 shares authorized;
13,073,718 shares issued 13,074
Additional paid-in capital 2,766,163
Retained earnings 1,644,722
---------------
4,423,959
Treasury stock, 15,323 shares, at cost (15,323)
---------------
Total stockholders' equity 4,408,636
---------------
Total liabilities and stockholders' equity $ 7,928,636
---------------
---------------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE>
INDUSTRIAL DATA SYSTEMS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1998
---------------- ----------------
<S> <C> <C>
OPERATING REVENUES $ 10,523,977 $ 13,432,825
OPERATING EXPENSES:
Cost of goods sold 7,918,180 10,348,551
Selling, general and administrative 1,914,818 2,203,008
Depreciation and amortization 97,101 170,564
--------------- ---------------
9,930,099 12,722,123
--------------- ---------------
Operating profit 593,878 710,702
OTHER INCOME (EXPENSE):
Realized gains on marketable securities, net 52,358 14,510
Net unrealized gains (losses) on marketable securities (26,334) 3,772
Interest income 36,357 55,070
Interest expense (64,381) (78,846)
Other income (1,134) -
--------------- ---------------
(3,134) (5,494)
--------------- ---------------
INCOME BEFORE PROVISION FOR INCOME TAXES 590,744 705,208
PROVISION FOR INCOME TAXES:
Federal 176,830 292,810
State 24,095 24,900
Deferred 7,324 (32,334)
--------------- ---------------
208,249 285,376
--------------- ---------------
NET INCOME 382,495 419,832
OTHER COMPREHENSIVE LOSS -
Unrealized loss on securities (1,068) -
--------------- ---------------
COMPREHENSIVE INCOME $ 381,427 $ 419,832
--------------- ---------------
--------------- ---------------
BASIC EARNINGS PER COMMON SHARE $ .03 $ .03
--------------- ---------------
--------------- ---------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 12,756,564 12,947,280
--------------- ---------------
--------------- ---------------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
28
<PAGE>
INDUSTRIAL DATA SYSTEMS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
Common Stock Additional
-------------------------------- Paid-in Retained
Shares Amount Capital Earnings
--------------- --------------- --------------- ---------------
<S> <C> <C> <C>
BALANCES, December 31, 1996 13,129,999 $ 13,130 $ 1,829,684 $ 842,395
Rescission of stock previously issued for
contingent transaction (600,000) (600) - -
Stock issuance in conjunction with acquisition 193,719 194 387,029 -
Sale of stock from treasury (1,000 shares) - - - -
1996 offering costs - - (40,000) -
Change in unrealized gain on marketable
securities - - - -
Net income - - - 382,495
------------- ------------- ------------- -------------
BALANCES, December 31, 1997 12,723,718 12,724 2,176,713 1,224,890
Stock issuances in conjunction with acquisitions 350,000 350 589,450 -
Net income - - - 419,832
------------- ------------- ------------- -------------
BALANCES, December 31, 1998 13,073,718 $ 13,074 $ 2,766,163 $ 1,644,722
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
<CAPTION>
Accumulated
Comprehensive Treasury
Loss Stock Total
--------------- --------------- ---------------
<S> <C> <C> <C>
BALANCES, December 31, 1996 $ 1,068 $ (16,138) $ 2,670,139
Rescission of stock previously issued for
contingent transaction - - (600)
Stock issuance in conjunction with acquisition - - 387,223
Sale of stock from treasury (1,000 shares) - 815 815
1996 offering costs - - (40,000)
Change in unrealized gain on marketable
securities (1,068) - (1,068)
Net income - - 382,495
------------- ------------- -------------
BALANCES, December 31, 1997 - (15,323) 3,399,004
Stock issuances in conjunction with acquisitions - - 589,800
Net income - - 419,832
------------- ------------- -------------
BALANCES, December 31, 1998 $ - $ (15,323) $ 4,408,636
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
29
<PAGE>
INDUSTRIAL DATA SYSTEMS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1997 1998
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 382,495 $ 419,832
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization 97,101 170,564
Deferred income tax expense 7,324 (32,334)
Increase in trading securities, net (82,044) (301,602)
Changes in operating assets and liabilities, net of assets
acquired in business combinations:
Accounts receivable - trade (1,301,632) 660,162
Inventory (300,149) 177,745
Accounts payable 425,640 (832,867)
Income taxes payable (47,813) 77,302
Accrued expenses and other current liabilities 4,939 270,488
Other, net (3,922) (57,315)
--------------- ---------------
Net cash provided by (used in) operating activities (818,061) 551,975
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Thermal Corporation (212,563) -
Purchase of IDS Fabricated Systems, Inc., net of cash received - 125,387
Purchase of Constant Power Manufacturing, Inc., net of cash received - 112,289
Note receivable from affiliate 84,936 -
Payments (advances) on note receivable from stockholder (150,000) 50,000
Capital expenditures (833,822) (84,707)
Purchases of available-for-sale securities 24,000 -
Proceeds from sale of available-for-sale securities (4,000) -
Repayments from affiliate 24,454 5,546
--------------- ---------------
Net cash provided by (used in) investing activities (1,066,995) 208,515
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable, net 554,913 -
Short-term repayments - (12,470)
Long-term borrowings - 20,100
Proceeds from notes receivable issued for issuance of common stock,
net 811,929 -
Sales of stock from treasury 815 -
--------------- ---------------
Net cash provided by financing activities 1,367,657 7,630
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (517,399) 768,120
CASH AND CASH EQUIVALENTS, at beginning of year 975,100 457,701
--------------- ---------------
CASH AND CASH EQUIVALENTS, at end of year $ 457,701 $ 1,225,821
--------------- ---------------
--------------- ---------------
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 12,458 $ 81,000
Income taxes paid $ 160,631 $ 232,632
--------------- ---------------
--------------- ---------------
NON-CASH TRANSACTIONS:
Issuance of common stock in conjunction with purchase of Thermal
Corporation $ 387,223 $ -
Issuance of common stock in conjunction with purchase of IDS
Fabricated Systems, Inc. $ - $ 289,800
Issuance of common stock in conjunction with purchase of Constant
Power Manufacturing, Inc. $ - $ 300,000
Assumption of $200,000 note payable in conjunction with purchase of
IDS Fabricated Systems, Inc. $ - $ 200,000
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
30
<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 ("IDSC" or
the "Company"), a Nevada corporation, and its wholly-owned subsidiaries
Industrial Data Systems, Inc., a Texas corporation, dba IDS Technical
Services ("IDS"); Thermaire, Inc., a Texas corporation, dba Thermal
Corporation ("Thermal"); Constant Power Manufacturing, Inc. ("CPM"), a
Texas corporation, IDS Engineering, Inc. ("IED"), a Texas corporation;
and IDS Fabricated Systems, Inc. ("IDS FAB"), a Texas corporation. All
significant intercompany balances and transactions have been eliminated
in consolidation.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash in
bank and investments in highly liquid money market mutual funds.
INVENTORY - Inventory is composed primarily of raw materials and
component parts (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.
REVENUE RECOGNITION - The Company's revenues are composed of product
sales and engineering service revenue. The Company recognizes service
revenue when such services are performed and product sales upon shipment
to the customer.
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 is stated at cost,
adjusted for accumulated depreciation. Depreciation on all property and
equipment, other than land, building and improvements, 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.
31
<PAGE>
INDUSTRIAL DATA SYSTEMS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOODWILL - The Company capitalizes the excess purchase price over the
fair value of net assets acquired ("goodwill") and amortizes this
intangible asset on a straight-line basis over 5-10 years.
LONG-LIVED ASSETS - The Company reviews for the impairment of long-lived
assets and certain identifiable intangibles whenever events or changes
in circumstances indicate that the carrying amount of an asset may not
be recoverable. An impairment loss would be recognized when estimated
future cash flows expected to result from the use of the asset and its
eventual disposition is less than its carrying amount. The Company has
not identified any such impairment losses.
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.
EARNINGS PER SHARE - Basic earnings per share was computed by dividing
net income by the weighted average common shares outstanding as of
December 31, 1997 and 1998. There were no dilutive securities at
December 31, 1997 and 1998.
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.
SIGNIFICANT ESTIMATE - The Company's management has made significant
estimates related to the realizability of the Company's goodwill
associated with the acquisition of IDS-FAB (see Note 14). The estimation
process involved in determining if assets have been impaired is
inherently uncertain since it requires estimates of current market
yields as well as future events and conditions, which could change these
estimates in the near term.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of financial
instruments, primarily accounts receivable, accounts payable and notes
payable, closely approximate the carrying values of the instruments due
to the short-term maturities of such instruments.
32
<PAGE>
INDUSTRIAL DATA SYSTEMS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPREHENSIVE INCOME - Comprehensive income is defined as all changes in
stockholders' equity, exclusive of transactions with owners, such as
capital investments. Comprehensive income includes net income or loss,
changes in certain assets and liabilities that are reported directly in
equity, such as translation adjustments on investments in foreign
subsidiaries and certain changes in minimum pension liabilities.
RECLASSIFICATIONS - Amounts in prior years' financial statements are
reclassified as necessary to conform with the current year's
presentation. Such reclassifications had no effect on net income.
1. MARKETABLE SECURITIES
Marketable securities at December 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Trading:
Common stocks $ 291,830 $ 2,456 $ - $ 294,286
Bond 300,000 - - 300,000
Other 50,000 32,361 - 82,361
------------- ------------- ------------- -------------
$ 641,830 $ 34,817 $ - $ 676,647
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
2. 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. During the
years ended December 31, 1997 and 1998, the Company recognized interest
income of approximately $10,000 and $18,000, respectively, on these
notes.
33
<PAGE>
INDUSTRIAL DATA SYSTEMS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31,
1998:
<TABLE>
<S> <C>
Land $ 90,000
Furniture and fixtures 110,118
Computer equipment 258,044
Building 605,000
Shop equipment 203,031
Leasehold improvements 85,118
-------------
1,351,311
Accumulated depreciation and amortization (300,743)
-------------
$ 1,050,568
-------------
-------------
</TABLE>
4. NOTES PAYABLE
The Company entered into a Revolving Credit Note with a bank on July 12,
1998 in the amount of $1,150,000, bearing interest at prime + 1% (8.75%
at December 31, 1998) and maturing on May 12, 1999. The Company made no
draws under the agreement during the year ended December 31, 1998.
In June of 1998, the Bank lines of credit for IDS and Thermal were
converted into a term note that matures on May 12, 1999. The note bears
interest at prime + 1% (8.75% at December 31, 1998). The outstanding
balance due at December 31, 1998 was $375,000. The note is
collateralized by the accounts receivable and inventory of the Company.
The Company assumed a term note payable with a bank of $200,000 bearing
interest at 6.9% as part of the acquisition of IDS-FAB (see Note 14).
This note, which expires on June 25, 1999, is collateralized by a
certificate of deposit at the bank. The entire $200,000 was outstanding
at December 31, 1998. Interest on the outstanding amount is due and
payable monthly.
The Company is financing a portion of its insurance each year on a
short-term basis, with a balance of $45,383 at December 31, 1998.
34
<PAGE>
INDUSTRIAL DATA SYSTEMS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM DEBT
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 the purchase of Thermal
(see Note 14). There was $420,671 outstanding under this note at
December 31, 1998. Interest on the outstanding amount is due and payable
monthly.
The Company is financing a portion of its insurance over 23 months
bearing interest at 7.95% with a remaining balance of $54,342 at
December 31, 1998.
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
<S> <C>
1999 $ 52,530
2000 39,046
2001 21,238
2002 362,199
--------------
Total 475,013
Less current portion (52,530)
--------------
Long-term debt $ 422,483
--------------
--------------
</TABLE>
6. LEASES
The Company leases office space under two non-cancelable operating
leases. Total rent expense for the years ended December 31, 1998 and
1997 was $205,000 and $109,000, respectively. Future minimum rentals due
under the non-cancelable operating leases with an original term of at
least one year are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
<S> <C>
1999 $ 195,000
2000 198,000
2001 203,000
2002 165,000
--------------
$ 761,000
--------------
--------------
</TABLE>
35
<PAGE>
INDUSTRIAL DATA SYSTEMS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan (the "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 $93,000 for the years ended December 31, 1997
and 1998, respectively.
8. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company manufactures and distributes industrial and portable
computers and computer monitors, power systems and battery chargers, and
air handling equipment for air conditioning and heating systems to
commercial companies primarily in the southern states and provides
pipeline engineering and fabricated systems and 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.
For the year ended December 31, 1997, the Company had sales to five
major customers in the Engineering and Thermal segments totaling
approximately $6,630,000, representing 63% of total revenues for the
year. For the year ended December 31, 1998, the Company had sales to one
major customer in the Engineering segment totaling approximately
$2,533,000 which represents 19% of total revenues. At December 31, 1998,
amounts due from three customers who individually had amounts due in
excess of 10% of trade receivables totaled $1,068,000.
36
<PAGE>
INDUSTRIAL DATA SYSTEMS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. STOCKHOLDERS' EQUITY
In 1997, the Company issued 193,719 shares of common stock as part of
the acquisition of Thermal Corporation (see Note 14).
In 1998, the Company issued 300,000 shares of common stock as part of
the CPM acquisition and 50,000 shares as part of the IDS-FAB acquisition
(see Note 14).
10. FEDERAL INCOME TAXES
The following is a reconciliation of expected to actual income tax
expense:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1998
----------------- ----------------
<S> <C> <C>
Federal income tax expense at 34% $ 200,853 $ 239,770
State and foreign taxes 15,902 16,434
Nondeductible expenses 1,665 16,775
Other (10,171) 12,397
--------------- ---------------
$ 208,249 $ 285,376
--------------- ---------------
--------------- ---------------
</TABLE>
The components of the Company's deferred tax liability consisted of the
following as of December 31, 1998:
<TABLE>
<S> <C>
Deferred tax asset:
Allowance for doubtful accounts $ 8,000
Tax accounting change from cash basis to accrual basis -
IDS-FAB acquisition 143,000
Deferred tax liabilities:
Tax accounting change from cash basis to accrual basis -
CPM Acquisition (142,000)
Depreciation (15,000)
---------------
Deferred tax liability, net $ (6,000)
---------------
---------------
</TABLE>
37
<PAGE>
INDUSTRIAL DATA SYSTEMS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SEGMENT INFORMATION
The Company operates in five business segments: (1) the manufacture and
distribution of industrial computer systems to industrial and commercial
companies; (2) engineering consulting services primarily to major
integrated oil and gas companies; (3) the manufacture and distribution
of air handling equipment for HVAC systems to commercial companies; (4)
the manufacture and distribution of uninterruptible power systems and
battery chargers; and (5) the design and fabrication of fire and safety
equipment primarily for the oil and gas industry. Sales, operating
income, identifiable assets, capital expenditures and depreciation set
forth in the following table are the results of the five segments. The
amount in corporate and eliminations includes amounts to eliminate
intercompany items, including notes receivable and notes payable.
Segment information for the years 1997 and 1998 was as follows:
<TABLE>
<CAPTION>
(Thousands)
-----------------------------------------------------------------------------------------------------------
1 9 9 7
-----------------------------------------------------------------------------------------------------------
Air Power
Products Engineering Handling Systems Fabricating Corporate Total
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales from
external
customers $ 2,582 $ 4,265 $ 3,677 $ - $ - $ - $10,524
Operating earnings 190 310 94 - - - 594
Depreciation and
amortization 5 29 55 - - 8 97
Total assets 996 1,625 2,002 - - 745 5,368
Capital
expenditures $ 60 $ 97 $ 677 $ - - $ - $ 834
-----------------------------------------------------------------------------------------------------------
1 9 9 8
-----------------------------------------------------------------------------------------------------------
Net sales from
external
customers $ 1,536 $ 4,407 $ 3,708 $ 3,016 $ 766 $ - $13,433
Operating earnings (362) 603 60 638 (228) - 711
Depreciation and
amortization 29 47 59 - - 36 171
Total assets 536 2,100 1,755 1,677 1,646 215 7,929
Capital
expenditures $ 25 $ 19 $ 32 $ - $ 4 $ 5 $ 85
-----------------------------------------------------------------------------------------------------------
</TABLE>
12. TRANSACTION WITH AFFILIATE
In July 1997, the Company entered into a management contract with BHC
Management Corporation ("BHC"), a Texas corporation. As compensation for
services provided hereunder, 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. The total payments made to BHC during 1998 and
1997 were approximately $48,000.
13. ACQUISITIONS
38
<PAGE>
INDUSTRIAL DATA SYSTEMS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 1997, the Company acquired 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 have been 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. This
acquisition has been accounted for on the purchase method of accounting.
The purchase price exceeded the fair value of the net assets acquired by
approximately $60,000. 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.
In April 1998, the Company acquired CPM in a stock purchase. The Company
paid $500,000, consisting of $200,000 in cash and 300,000 shares of the
Company's common stock, which may be put back to the Company for $1 per
share at the option of the holder. This acquisition has been accounted
for on the purchase method of accounting. The purchase price exceeded
the fair value of the net assets acquired by approximately $132,000. The
operating results of CPM have been included in the Company's
consolidated financial statements since the date of acquisition.
In November 1998, the Company acquired IDS FAB in a stock purchase. The
Company paid $389,800, consisting of $100,000 in cash and 50,000 shares
of the Company's common stock, whose fair market value at the date of
exchange was $289,800. This acquisition has been accounted for on the
purchase method of accounting. The purchase price exceeded the fair
value of the net assets acquired by approximately $593,000. The
operating results of IDS FAB have been included in the Company's
consolidated financial statements since the date of acquisition.
The following unaudited proforma consolidated results of operations of
the years ended December 31, 1997 and 1998 assumes the Thermal, CPM and
IDS-FAB acquisitions occurred as of January 1, 1997.
<TABLE>
<CAPTION>
(thousands, except per share data) 1997 1998
-------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 16,695 $ 19,488
Net earnings 737 306
Basic earnings per share .06 .02
-------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
INDUSTRIAL DATA SYSTEMS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In management's opinion, the unaudited proforma combined results of
operations are not indicative of the actual results that would have
occurred had the acquisitions been consummated at the beginning of
fiscal 1997 or of future operations of the combined companies under the
ownership and management of the Company.
14. YEAR 2000
The Company has begun to address possible remedial efforts in connection
with computer software that could be affected by the Year 2000 problem.
The Year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a
major system failure or miscalculations. The Year 2000 problem may
impact or be impacted by other entities with which the Company transacts
business.
40
<PAGE>
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.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
Incorporated herein by reference in the Company's definitive proxy
statement for its 1999 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 30, 1999.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated herein by reference in the Company's definitive proxy
statement for its 1999 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 30, 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference in the Company's definitive proxy
statement for its 1999 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 30, 1999.
ITEM 12. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
Incorporated herein by reference in the Company's definitive proxy
statement for its 1999 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 30, 1999.
41
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
A. FINANCIAL STATEMENTS
The consolidated financial statements are contained herein as listed on
the "Index" on page ? hereof.
B. REPORTS ON FORM 8-K
There were no Current Reports on Form 8-K filed by the Company during
the quarter ended December 31, 1998 that have not been previously reported in
the Company's Quarterly Reports on Form 10-Q.
C. EXHIBITS
The following Exhibits are incorporated by reference on this Annual
Report on Form 10-KSB for the year ended December 31, 1998
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
*2.16 Stock Acquisition Agreement between MLC Enterprises, Inc.
and Industrial Data Systems Corporation, dated November 13,
1998
*2.17 Escrow Agreement by and between Industrial Data Systems
Corporation, Michael L. Moore and MLC Enterprises, Inc. and
Johnny J. Williams (Escrow Agent) dated November 13, 1998
*2.18 MLC Enterprises, Inc. Written Consent of all Directors in
Lieu of Meeting Resolving MLC Enterprises, Inc. to enter
into Stock Acquisition Agreement (Exhibit 2.16)
*2.19 MLC Enterprises, Inc. Certificate of Corporate Resolution
*2.20 Employment Agreement dated November 1, 1998 by and between
MLC Enterprises, Inc. and Michael L. Moore
*2.21 Amendment to Employment Agreement (Exhibit 2.20) dated
January 16, 1999
*2.22 Industrial Data Systems Corporation Written Consent of All
Directors in Lieu of Meeting Resolving Purchase of MLC
Enterprises, Inc.
*3.6 Bylaws, MLC Enterprises, Inc. dated November 13, 1998
effective August 7, 1995
*3.7 Corporate Charter, MLC Enterprises, Inc., dated August 7,
1995
*3.8 Amended Articles of Incorporation, MLC Enterprises, Inc.,
dated November
42
<PAGE>
13, 1998
*3.9 Certificate of Amendment for IDS Fabricated Systems, Inc.
formerly MLC Enterprises, Inc.
*10.24 Fourth Amendment to Lease between Industrial Data Systems,
Inc., a Texas corporation and 600 C.C. Business Park Ltd.,
dated September 1, 1998
*10.25 Lease Agreement between IDS Engineering, Inc. and d/b/a
Wilshire Square, dated February 8, 1999
*10.26 Lease Agreement between MLC Enterprises, Inc.dba Marine and
Industrial Supply and Trust Management Company, dated
November 5, 1997
*10.27 Sublease between Marine and Industrial Supply Company and
Input/Output, Inc., dated October 8, 1998
*10.28 Lease Agreement between MLC Enterprises, Inc. dba Marine and
Industrial Supply and Vantage Houston, Inc., as Agent for
Greenbriar Holdings Houston, Ltd., dated December 15, 1996
*10.29 Termination of Lease between MLC Enterprises, Inc. dba
Marine and Industrial Supply and Vantage Houston, Inc., as
Agent for Greenbriar Holdings Houston, Ltd., dated November
18, 1998
21 Subsidiaries of the Registrant
27 Financial Data Schedule
</TABLE>
(1) Exhibits incorporated by reference on this Annual Report on Form 10-KSB
for the Year ended December 31, 1998.
(*) To be filed by amendment on the Company's Annual Report on Form 10-KSB/A
for the year ended December 31, 1998.
43
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange act of 1934,
the Registrant has caused this Annual Report on Form 10-KSB to be signed on its
behalf by the undersigned, thereunto duly authorized.
INDUSTRIAL DATA SYSTEMS CORPORATION
Dated: March 31, 1999
By:
-------------------------------------
William A. Coskey, P.E., Chairman of the Board,
President and Chief Executive Officer
By:
-------------------------------------
Hulda L. Coskey, Chief Financial Officer,
Secretary, Treasurer, Director
By:
-------------------------------------
David W. Gent, P.E., Director
By:
-------------------------------------
Gordon R. Wingate, Director
By:
-------------------------------------
Ken J. Hedrick, Controller, Director
44
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange act of 1934,
the Registrant has caused this Annual Report on Form 10 KSB to be signed no its
behalf by the undersigned, thereunto duly authorized.
INDUSTRIAL DATA SYSTEMS CORPORATION
Dated: March 31, 1999
By: /s/ William A. Coskey
----------------------------
William A. Coskey, P.E., Chairman of the Board,
President and Chief Executive Officer
By: /s/ Hulda L. Coskey
----------------------------
Hulda L. Coskey, Chief Financial Officer,
Secretary, Treasurer, Director
By: /s/ David W. Gent
----------------------------
David W. Gent, P.E., Director
By: /s/ Gordon R. Wingate
----------------------------
Gordon R. Wingate, Director
By: /s/ Ken J. Hedrick
----------------------------
Ken J. Hedrick, Controller, Director
45
<PAGE>
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
Constant Power Manufacturing, Inc. Incorporated in the State of Texas
IDS Fabricated Systems, Inc. dba Incorporated in the State of Texas
Marine and Industrial Fire & Safety and
Marine and Industrial Supply Company
fka MLC Enterprises, Inc.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR ENDED DECEMBER 31, 1998 AND
IS QUALIFIED IN ITS ENTIRITY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,225,821
<SECURITIES> 676,647
<RECEIVABLES> 2,953,128
<ALLOWANCES> (40,000)
<INVENTORY> 917,097
<CURRENT-ASSETS> 6,130,808
<PP&E> 1,351,310
<DEPRECIATION> (300,743)
<TOTAL-ASSETS> 7,928,636
<CURRENT-LIABILITIES> 3,083,517
<BONDS> 422,483
0
0
<COMMON> 13,074
<OTHER-SE> 4,395,562
<TOTAL-LIABILITY-AND-EQUITY> 7,928,636
<SALES> 13,432,825
<TOTAL-REVENUES> 13,432,825
<CGS> 10,348,551
<TOTAL-COSTS> 2,373,572
<OTHER-EXPENSES> 290,870
<LOSS-PROVISION> (40,000)
<INTEREST-EXPENSE> (78,846)
<INCOME-PRETAX> 705,208
<INCOME-TAX> 285,376
<INCOME-CONTINUING> 419,832
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 419,832
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
