-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C3UDwacUZzKLFlVBovXtdQ8KAkzA6xfBo/kA425hnt2H7rVqjFGFI+WCG1oSOvEN 5FCE63lk3gHmbLKjt6UbrA== 0000899243-99-001796.txt : 19990817 0000899243-99-001796.hdr.sgml : 19990817 ACCESSION NUMBER: 0000899243-99-001796 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INDUSTRIAL DATA SYSTEMS CORP CENTRAL INDEX KEY: 0000933738 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 760157248 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-14217 FILM NUMBER: 99693055 BUSINESS ADDRESS: STREET 1: 600 CENTURY PLZ STREET 2: BLDG 140 CITY: HOUSTON STATE: TX ZIP: 77073-6016 BUSINESS PHONE: 2818213200 MAIL ADDRESS: STREET 1: 600 CENTURY PLAZA DR STREET 2: BLDG 140 CITY: HOUSTON STATE: TX ZIP: 77073-6016 10QSB 1 FORM 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 001-14217 INDUSTRIAL DATA SYSTEMS CORPORATION (Exact name of registrant as specified in its charter) NEVADA (State of incorporation or organization) 88-0322261 (I.R.S. Employer Identification Number) 600 CENTURY PLAZA DRIVE, BUILDING 140, HOUSTON, TEXAS 77073-6013 (Address of Principal Executive Offices) (Zip Code) (281) 821-3200 (Registrant's telephone number, including area code) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common equity as of the close of business June 30, 1999. Common Stock, $.001 Par Value, 13,073,718 QUARTERLY REPORT ON FORM 10-QSB FOR THE PERIOD ENDED JUNE 30, 1999 TABLE OF CONTENTS PAGE NUMBER ------ PART 1 FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Balance Sheets at June 30, 1999 and December 31, 1998.......................................... 1 Condensed Consolidated Statements of Operations for the Three Months and Six Months ended June 30, 1999 and June 30, 1998.............................................. 2 Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 1999 and June 30, 1998............... 3 Notes to Condensed Consolidated Financial Statements........ 4 ITEM 2 Management's Discussion and Analysis........................ 5 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings........................................... 13 Item 2. Changes in Securities....................................... 13 ITEM 3. Defaults Upon Senior Securities............................. 13 ITEM 4. Submission of Matters to a Vote of Security Holders......... 13 ITEM 5. Other Information........................................... 14 ITEM 6. Exhibits and Reports on Form 8-K............................ 14 Signature................................................... 15 i PART I FINANCIAL INFORMATION Item 1 Financial Statements INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1999 December 31, 1998 -------------- ------------------ (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents: $1,172,879 $1,225,821 Marketable securities, at market value - trading 667,197 676,647 Accounts receivable - trade, less allowance for doubtful accounts of approximately $40,000 for 1998 and $110,000 for 1999, respectively 2,013,367 2,913,128 Inventory 914,761 917,097 Notes receivable from stockholder 150,000 162,000 Deferred income taxes -- 8,000 Prepaid and other 340,230 228,115 ---------- ---------- Total current assets 5,258,434 6,130,808 ---------- ---------- PROPERTY AND EQUIPMENT, Net 1,104,932 1,050,568 OTHER ASSETS 40,966 1,500 GOODWILL, Net 50,850 745,760 ---------- ---------- Total assets $6,455,182 $7,928,636 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable to bank $ 338,254 $ 620,383 Current portion - Note payable to bank, term 10,827 52,530 Accounts payable 827,979 1,557,985 Income taxes payable 275,373 157,000 Accrued expenses and other current liabilities 601,381 695,619 ---------- ---------- Total current liabilities 2,053,814 3,083,517 Note payable to bank, term 401,727 422,483 DEFERRED INCOME TAX 14,000 14,000 ---------- ---------- Total liabilities 2,469,541 3,520,000 ---------- ---------- STOCKHOLDERS' EQUITY: Common stock, $.001 par value; 75,000,000 shares authorized; 13,073,718 shares issued in 1999, 13,073,718 shares issued in 1998 13,074 13,074 Additional paid-in capital 2,766,163 2,766,163 Retained earnings 1,221,727 1,644,722 ---------- ---------- 4,000,964 4,423,959 Treasury stock (15,323) (15,323) ---------- ---------- Total stockholders' equity 3,985,641 4,408,636 ---------- ---------- Total liabilities and stockholders' equity $6,455,182 $7,928,636 ========== ==========
See accompanying notes to these consolidated financial statements. 1 INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended June 30 Six Months Ended June 30 June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998 -------------- -------------- -------------- -------------- OPERATING REVENUES: Engineering $ 1,426,819 $ 1,012,285 $ 2,680,668 $ 2,060,900 Air Handling 934,442 1,123,146 1,712,217 2,055,438 Power Systems 669,647 764,108 1,103,938 764,108 Products 187,842 309,023 358,022 959,704 Fabricating 48,236 0 318,618 0 ----------- ----------- ----------- ----------- 3,266,986 3,208,562 6,173,463 5,840,150 COST OF REVENUES: Engineering 978,167 668,280 1,756,306 1,470,609 Air Handling 711,304 747,837 1,320,801 1,487,387 Power Systems 494,246 508,002 782,523 508,002 Products 145,836 284,084 279,242 745,445 Fabricating 113,962 0 348,128 0 ----------- ----------- ----------- ----------- 2,443,515 2,208,203 4,487,000 4,211,443 ----------- ----------- ----------- ----------- GROSS PROFIT 823,470 1,000,359 1,686,463 1,628,707 Selling, general and administrative 610,254 487,982 1,229,677 915,100 Depreciation 23,572 25,029 89,511 54,881 OTHER INCOME (EXPENSE) Realized gains on marketable securities 0 (19,213) 0 43,151 Other income 63,904 20,907 86,252 37 Unrealized gain (loss) on marketable securities 52,753 9 48,558 (21,741) Interest income, net (16,784) (18,040) (30,830) (37,615) Impairment of goodwill (735,711) 0 (735,711) 0 ----------- ----------- ----------- ----------- (635,838) (16,337) (631,731) (16,168) ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE TAXES (446,194) 471,011 (264,456) 642,559 TAX PROVISION 100,383 255,972 158,539 237,985 NET INCOME (LOSS) (546,577) 215,039 (422,995) 404,573 =========== =========== =========== =========== BASIC AND DILUTED EARNINGS PER COMMON SHARE $(0.042) $0.016 $(0.032) $0.031 =========== =========== =========== =========== BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 13,073,718 13,023,718 13,073,718 13,023,718 =========== =========== =========== ===========
See accompanying notes to these consolidated financial statements. 2 INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, ----------------------------------------------------- 1999 1998 ----------------------- ---------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $ (422,995) $ 404,573 Non-Cash change in working capital 825,222 54,881 Changes in working capital (107,369) 89,627 ---------- --------- Net cash provided (used) by operating activities 294,857 548,631 CASH FLOWS FROM INVESTING ACTIVITIES: Property and equipment acquired (54,364) (60,773) Purchase of investments 9,450 (215,042) ---------- --------- Net cash provided (used) in investing activities (44,914) (275,815) ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Long term mortgage on land and buildings (20,756) (17,121) Repayment on notes payable, net (282,129) -- Borrowings from bank -- 50,000 ---------- --------- Net cash provided (used) in financing activities (302,885) 32,879 ---------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (52,942) 305,695 CASH AND CASH EQUIVALENTS, at beginning of period 1,225,821 457,701 ---------- --------- CASH AND CASH EQUIVALENTS, at end of period $1,172,879 $ 763,396 ========== ========= Supplemental Cash Flow Information: Interest paid $ 26,611 $ 37,615 Income taxes paid 70,000 106,000 * Non-cash transactions: 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
See accompanying notes to these consolidated financial statements. 3 INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: The condensed consolidated financial statements of Industrial Data Systems Corporation (the "Company") included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's latest Annual Report to Shareholders and the Annual Report on Form KSB/A for the year ended December 31, 1998. In the opinion of the Company, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position as of June 30, 1999; the results of operations for the three months and six months ended June 30, 1999 and 1998; and cash flows for the six months ended June 30, 1999 and 1998 have been included. The foregoing interim results are not necessarily indicative of the results of the operations for the full fiscal year ending December 31, 1999. 2. NOTE RECEIVABLE FROM STOCKHOLDER: At June 30, 1999, the Company had notes receivable due from a stockholder in the amount of $150,000. The notes are unsecured, due on demand and bear interest at a rate of 9% per annum. Interest on the notes is due annually. 3. ACQUISITIONS: In March 1998, the Company acquired Constant Power Manufacturing Incorporated, (CPM) in a stock purchase. The Company issued 300,000 shares of the Company's Common Stock for 100% of CPM's shares. Goodwill in the amount of $121,649 was generated from the acquisition. In November 1998, the Company acquired MLC Enterprises, Inc. a Texas corporation formed in August 1995, doing business as Marine and Industrial Fire & Safety (MIFS) and Marine and Industrial Supply Company (MISC). The Company issued 50,000 shares of the Company's Common Stock for 100% of MLC's shares. Cash consideration of $100,000 was paid to the previous principal as part of an employment contract. Goodwill in the amount of $784,961 was generated as a result of the acquisition. Subsequent to the acquisition, MLC's name was changed to IDS Fabricated Systems, Inc. (IDS FAB). Operations at IDS FAB have currently been suspended pending further review. See Part 1, Item 2. The shares of Common Stock issued by the Company have been reflected as issued and outstanding. The operating results of CPM and IDS FAB have been included in the Company's consolidated financial statements since the respective acquisition dates. The 4 following table reflects proforma information as if these transactions had occurred at January 1, 1998. (in 000's, except per share data). For the Three Months For the Six Months Ended June 30, 1998 Ended June 30, 1998 -------------------------- --------------------------- Total Revenue $4,100 $7,010 Net Income 450 535 Income per Share .03 .04 4 IMPAIRMENT OF GOODWILL: During the three months ended June 30, 1999, the Company took a $735,711 non- cash write-off of goodwill associated with the acquisition of MLC Enterprises, Inc. (MLC), now known as IDS Fabricated Systems, Inc. (IDS Fab). This write-off is non-deductible for tax purposes and the tax provision has been calculated on the operating profit prior to accounting for this amount. Operations of this subsidiary have currently been suspended pending further review. 5. COMMITMENTS AND CONTINGENCIES: LEGAL PROCEEDINGS On April 7, 1999, the former principal of MLC filed a lawsuit against the Company alleging breach of an employment contract in addition to other related claims. The Company does not believe there is any merit to the claims of the plaintiff in this case and has taken and will continue to take steps to vigorously defend against such claims. In connection with this matter, the Company has filed a counterclaim seeking damages and rescission of the MLC acquisition agreement and each party has filed an action for injunctive relief. The Company does not believe that this litigation will have a material adverse effect on the Company's financial position, results of operations or liquidity. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion is qualified in its entirety by, and should be read in conjunction with, the Company's Condensed Consolidated Financial Statements including the notes thereto, included elsewhere herein. OVERVIEW The Engineering segment of the Company generates the majority of the revenues for the Company. These revenues are generated by providing engineering consulting services to the pipeline divisions of major integrated oil and gas companies. In October 1998, the engineering consulting segment, which had previously operated as Industrial Data Systems, Inc. dba IDS Engineering, was incorporated as a Texas corporation under the name of IDS Engineering, Inc. (IED). Early in 1999, IED opened a business development office in Tulsa, Oklahoma to pursue turnkey engineering, procurement and construction (EPC) projects. The Company believes this 5 avenue of business development will expand its market exposure and generate greater revenue potential than the specialized areas it has been primarily involved in previously. The Company generates other revenues through segments involved in the made-to-order manufacture of industrial equipment. Its computer products segment provides industrial grade portable and rack mounted computers for commercial use. The computer hardware market has become increasingly competitive with a larger number of companies competing for the same amount of business. Due to a steady decline in sales revenue in this segment, the Company is actively considering other electronically based product lines and is also investigating opportunities in computer systems service and consulting. The Company believes it can redirect its efforts to maintain this segment as a revenue and profit producing segment. In 1997, the Company acquired Thermal Corporation (Thermal), which fabricates air handling equipment for commercial heating ventilation and cooling systems. Within the next quarter, Thermal anticipates the installation of new machinery to produce a major component of the jobs it builds. This equipment is expected to increase profit margins and to expand Thermal's scope of business by creating another product line to sell. The Company acquired Constant Power Manufacturing, Inc., the Power Systems segment, in March 1998. This segment manufactures industrial grade battery backup systems and battery chargers. With the development of a new battery charger systems to add to its product line, the Company believes the revenue and profit margin of this segment will improve in the upcoming quarters. MLC Enterprises, Inc. (MLC), now known as IDS Fabricated Systems, Inc., the Fabricating segment, was acquired in November 1998. This segment designed and fabricated fire detection, fire prevention and fire fighting equipment for the oil and gas industry. The Company believes that certain representations about the financial strength and prospects of MLC Enterprises, Inc., made to the Company prior to its acquisition of MLC, were inaccurate. In addition, the Company believes that business opportunities that would have otherwise been available to MLC, have been lost or diverted as a result of the actions or inaction of MLC's former managing director. As a result of these factors, operations at IDS FAB have currently been suspended pending further review of available options. Among a variety of alternatives, the Company is considering recommencing operations at IDS FAB either as a specialty fire and safety fabricator or as a general fabrication facility; however, the Company is also considering permanently ceasing operations of that subsidiary. 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 $75,000 and an estimated additional $175,000 will be spent 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'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 major financial institutions, which have indicated that they are Y2K 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. However, the effect of non-compliance by external agents is not readily determinable. 6 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 maintained manually in case of third party utility failures, such as electrical and telephone systems. Under a "most likely worst-case Year 2000 scenario," if any of the Company's significant vendors or customers experienced a material business interruption, or if the Company lost a significant vendor or customer due to Year 2000 non- compliance issues or 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 position, results of operations or 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 Certain information contained in this Quarterly Report on Form 10-QSB (including statements contained in Part 1, Item 2. "Management's Discussion and Analysis" and in Part II, Item 1. "Legal Proceedings"), as well as other written and oral statements made or incorporated by reference from time to time by the Company and its representatives in other reports, filings with the Securities and Exchange Commission, press releases, conferences, or otherwise, may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. This information includes, without limitation, statements concerning the Company's future financial position, and results of operations; planned capital expenditures; business strategy and other plans for future operations; the future mix of revenues and business; commitments and contingent liabilities; Year 2000 issues; and future demand and industry conditions. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. When used in this report, the words "anticipate." "believe," "estimate," "expect," "may," and similar expressions, as they relate to the Company and its management, identify forward- looking statements. The actual results of future events described in such forward-looking statements could differ materially from the results described in the forward-looking statements due to the risks and uncertainties set forth within this Quarterly Report on Form 10-QSB generally. 7 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.
Quarter Ended June 30 Six Months Ended June 30 1999 1998 1999 1998 ---------------------- --------------------- --------------------- --------------------- Amount % Amount % Amount % Amount % ------------ ------- ------------ ------ ------------ ------ ------------ ------ Revenue: Engineering $1,426,819 43.7 $1,012,285 31.5 2,680,668 43.4 $2,060,900 35.3 Air Handling 934,442 28.6 1,123,146 35.0 1,712,217 27.7 2,055,438 35.2 Power Systems 669,647 20.5 764,108 23.8 1,103,938 17.9 764,108 13.1 Products 187,842 5.7 309,023 9.6 358,022 5.8 959,704 16.4 Fabricating 48,236 1.5 0 0.00 318,618 5.2 0 0.0 ---------- ------ ---------- ----- ---------- ----- ---------- ----- Total revenue $3,266,986 100.0 $3,208,562 100.0 $6,173,463 100.0 $5,840,150 100.0 ========== ====== ========== ===== ========== ===== ========== ===== Gross Profit: Engineering $ 448,652 31.4 $ 344,005 34.0 $ 924,362 34.5 $ 590,291 28.6 Air Handling 223,138 23.9 375,309 33.4 391,416 22.9 568,051 27.6 Power Systems 175,401 26.2 256,106 33.5 321,415 29.1 256,106 33.5 Products 42,006 22.4 24,939 8.1 78,778 22.0 214,259 22.3 Fabricating (65,726) (136.3) 0 0.0 (29,510) (9.3) 0 0.0 ---------- ------ ---------- ----- ---------- ----- ---------- ----- Total gross profit $ 823,470 25.2 $1,000,359 31.2 $1,686,463 27.3 $1,628,707 27.9 ========== ====== ========== ===== ========== ===== ========== ===== Selling, general and administrative expenses 610,254 18.7 487,982 15.2 1,229,677 19.9 915,100 15.7 Depreciation 23,572 0.7 25,029 0.8 89,511 1.4 54,881 0.9 ---------- ------ ---------- ----- ---------- ----- ---------- ----- Operating income $ 189,644 5.8 $ 487,348 15.2 $ 367,276 5.9 $ 658,726 11.3 ========== ====== ========== ===== ========== ===== ========== ===== Other income (expense) (635,838) (19.5) (16,337) (0.5) (631,731) (10.2) (16,168) (0.3) Income (Loss) before provision for income taxes $ (446,194) (13.7) $ 471,011 14.7 $ (264,456) (4,3) $ 642,558 11.0 Provision for income taxes 100,383 3.1 255,972 8.0 158,539 2.6 237,385 4.1 ---------- ---------- ---------- ---------- Net Income (Loss) $ (546,577) (16.7) $ 215,039 6.7 $ (422,995) (6.9) $ 404,573 6.9 ========== ====== ========== ===== ========== ===== ========== =====
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999 TOTAL REVENUE. Total revenue increased by $58,424 or 1.8% from $3,208,562 for the three months ended June 30, 1998, compared to $3,266,986 in 1999. Revenue from Engineering, which comprised 43.7% of total revenue for the three months ended June 30, 1999, increased by $414,535 or 41.0% over the same period in 1998. This increase is due to the wider scope of projects the Engineering segment is now undertaking and the expansion into the turnkey engineering, procurement and construction (EPC) projects. Revenue from Products, which comprised 5.7% of total revenue for the three months ended June 30, 1999, decreased for the same period in 1998, by $121,182 or 39.2%. The decrease in Products revenue was attributable to increased market competition and the loss of a sizable account. Revenue from the Air Handling segment, which comprised 28.6% of total revenue for the three months ended June 30, 1999, decreased by $188,704 or 16.8% from 1998 period. The 1998 period was substantially higher than average due to a sizable job completion in the three months 8 ended June 30, 1998. As a result, the revenue for the 1999 period showed a decrease. Revenue from the Power Systems segment which accounted for 20.5% of total revenue for the three months ended June 30, 1999, was $669,647, a decrease of $94,461 or 12.4% from the 1998 period. This decrease is attributable to a short-term drop in sales during the second quarter of 1999 as a result of a decline in capital expenditures caused by approval delays on prospective quotes. Revenue contribution from the Fabricating segment for the three months ended June 30, 1999 was $48,236 or 1.5% of the total revenue generated during that period. GROSS PROFIT. Gross profit decreased by $176,888 or 17.7% from $1,000,359 for the three months ended June 30, 1998 to $823,470 for the same period in 1999. The gross margin as a percentage of total revenues decreased from 31.2% for the three month period ended June 30, 1998 to 25.2% for the same period in 1999. The decrease in gross margin was attributable to drops in the gross profit margins the Air Handling and Power Systems segments. Each of these segments experienced tighter market conditions generated by increased competition during the three months ended June 30, 1999. The gross margin for the Products segment increased from 8.1% for the period ended June 30, 1998 to 22.4% for the same period in 1999. This increase was attributable to reduction in direct production costs as a result of declining sales. The gross margin for the Engineering segment decreased slightly from 34.0% for the period ended June 30, 1998 to 31.4% for the same period in 1999. The gross margin for the Air Handling segment decreased from 33.4% for the period ended June 30, 1998 to 23.9% for the same period in 1999. This decrease was due to a higher than normal margin being recorded in the 1998 period generated by a sizable job completed during that period. The gross margin for the Power Systems segment decreased from 33.5% for the period ended June 30, 1998 to 26.2% for the same period in 1999. A major effect on the overall decrease in gross margin was the negative effect brought about by the Fabricating segment for the three-month period ending June 30, 1999, which generated a negative gross margin of 136.3%. This is primarily attributable to the cost related to the acquisition of IDS FAB and the additional expense related to maintaining another production and office facility. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by $122,272 or 25.1% from $487,982 for the three months ended June 30, 1998 compared to $610,254 for the same period in 1999. As a percentage of total revenue, selling, general and administrative expenses increased from 15.2% for the three months ended June 30, 1998 to 18.7% for the same period in 1999. The increase was due to additional costs related to the acquisition of IDS FAB. OPERATING INCOME. Operating income decreased by $297,704 or 61.1% from $487,348 for the three months ended June 30, 1998, compared to $189,644 for the same period in 1999. Operating income decreased as a percentage of total revenue from 15.2% for the three months ended June 30, 1998 to 5.8% for the same period in 1999. The decrease in operating income was a result of the decreases in gross margins and the increase in selling, general and administrative expenses. OTHER INCOME (EXPENSE). Other expense increased by $619,501 from $16,337 for the three months ended June 30, 1998 to $635,838 for the same period in 1999. This increase was due to the non-cash write-off of goodwill from the acquisition of MLC in the amount of $735,711. 9 NET INCOME (LOSS) Net income after taxes decreased by $761,616 from $215,039 for the three months ended June 30, 1998 to ($546,577) for the same period in 1999. Net income after taxes decreased as a percentage of total revenue from 6.7% for the three months ended June 30, 1998 to (16.7%) for the same period in 1999. This decrease was attributable to the reduced gross margins generated in several of the segments, increases in selling, general and administrative expenses and to the non-cash write-off of goodwill. SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 Financial data reflected for the six months ended June 30, 1998 includes only three months (April - June) for Constant Power Manufacturing, Inc. (Power Systems) operations. TOTAL REVENUE. Total revenue increased by $333,312 or 5.7% from $5,840,150 for the six months ended June 30, 1998, compared to $6,173,463 in 1999. Revenue from the Products segment, which comprised 16.4% of total revenue for the six months ended June 30, 1998, decreased by $601,683 or 62.7%. The decrease in the Product segment revenue was due to market saturation of computer hardware vendors, ineffective sales and marketing efforts and the loss of some major accounts, due to competition. Revenue from the Engineering segment, which comprised 35.3% of total revenue for the six months ended June 30, 1998 increased by $619,768 or 30.1% from $2,060,900 in 1998 to $2,680,668 for the same period in 1999. The increase was due to the expanded scope of projects completed by the Engineering segment and to the addition of new clients. Revenue from the Air Handling segment, which comprised 35.2% of the total revenue for the six months ended June 30, 1998, decreased by $343,221 or 16.7% from $2,055,438 in 1998 to $1,712,217 for the same period in 1999. This decrease is primarily attributable to tighter market conditions during the six- month period in 1999 and higher than average revenues in the 1998 period. Revenue from the Power Systems segment increased by $339,830 for the six months ended June 30, 1999. This increase was due mainly because the 1998 revenue included only three months of revenue contribution from this segment. GROSS PROFIT. Gross profit increased by $57,756 or 3.5% from $1,628,707 for the six months ended June 30, 1998 to $1,686,463 for the same period in 1999. The gross margin for the Product segment decreased slightly from 22.3% in the six months ended June 30, 1998 to 22.0% for the same period in 1999. The gross margin for the Engineering segment increased from 28.6% for the period ended June 30, 1998 to 34.5% for the same period in 1999. This increase is the result of the expanded scope of projects being done by the Engineering segment in the 1999 period. The Air Handling segment's gross margin decreased from 27.6% for the six month period ended June 30, 1998 to 22.9% for the six months ended June 30, 1999. This was attributable to the decrease in revenue from the 1998 period to the 1999 period. The Power Systems segment's gross margin dropped from 33.5% for the six-month period ended June 30, 1998 to 29.1% for the 1999 period. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by $314,576 or 34.4% from $915,100 for the six months ended June 30, 1998 compared to $1,229,677 for the same period in 1999. As a percentage of total revenue, selling, general and administrative expenses increased from 15.7% for the six months ended June 30, 1998 to 19.9% for the same period in 1999. The increase was attributable to additional selling, general and administrative expenses related to the acquisitions of CPM and IDS FAB. 10 OPERATING INCOME. Operating income decreased by $291,450 or 44.2% from $658,726 for the six months ended June 30, 1998, compared to $367,276 for the same period in 1999. Operating income decreased as a percentage of total revenue from 11.3% for the six months ended June 30, 1998 to 5.9% for the same period in 1999. The decrease in operating income was a result of reduced gross profits and increased selling, general and administrative expenses. OTHER INCOME (EXPENSE) Other expense increased by $615,564 from $16,167 for the six months ended June 30, 1998 to $631,731 for the same period in 1999. This increase was due to the non-cash write-off of $735,711 of goodwill related to the acquisition of MLC, which was taken during the second quarter of 1999. NET INCOME (LOSS) Net income before taxes decreased by $907,013 or 141.2% from $642,588 for the six months ended June 30, 1998 to ($264,455) for the same period in 1999. Net income after taxes decreased by $827,567 or 204.6% from $404,573 for the six months ended June 30, 1998 to ($422,995) for the same period in 1999. Net income after taxes decreased as a percentage of total revenue from 6.9% for the six months ended June 30, 1998 to (6.9%) for the same period in 1999. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has satisfied its cash requirements principally through borrowings under its line of credit and through operations. As of June 30, 1999, the Company's cash position, including marketable securities, was sufficient to meet its working capital requirements for at least the next twelve months. The Company has no current plans to raise additional funds in the next twelve months. The Company had, as of June 30, 1999, $840,000 in additional advances available under its line of credit with a bank. The Company's line of credit which provides for maximum borrowings of $1,150,000 and bears interest at prime plus 1% per annum, is for a term of one year and matures on June 30, 2000. The line of credit is secured by accounts receivable, inventory and the personal guarantees of certain stockholders and officers of the Company. In June 1998, the Company consolidated its line of credit into one line for all subsidiaries. The Company's working capital was $3,047,291 and $3,204,620 at December 31, 1998 and June 30, 1999, respectively. CASH FLOW Operating activities provided net cash totaling $548,631 for the six months ended June 30, 1998 and generated $294,857 for the six months ended June 30, 1999. Goodwill relating to the acquisition of MLC Enterprises, Inc. (now known as IDS Fabricated Systems, Inc. and referred herein as "IDS FAB") was written down during the second quarter 1999. The amount of this non-cash charge was $735,711 which represents all the remaining goodwill associated with the acquisition of this subsidiary. Operations at IDS FAB have currently been suspended pending further review. As a result of this acquisition, the Company acquired a subsidiary with significant vendor debt. The Company believes that IDS FAB will be able to arrange payment terms with vendors on a basis that will be satisfactory to the vendors. However, there can be no assurance that this will be the case. If IDS FAB is not able to negotiate satisfactory payment terms, it will need to consider other available alternatives with respect to the disposition of its business. 11 Trade accounts receivable decreased $899,761 since December 31, 1998, due to collection of outstanding amounts. Inventory increased by $2,336 for the same period. Investing activities used cash totaling $275,815 for the six months ended June 30, 1998 and used cash totaling $44,914 for the same period in 1999. The cash used during the period ended June 30, 1998 was primarily related to the purchase of CPM and in the 1999 period it was used for the purchase of fixed assets. As of June 30, 1999, the Company had a portfolio of marketable securities which had a fair market value of $667,197 and consisted of common stocks, bonds and mutual funds. The common stocks and bonds that the Company holds consists of securities which are traded on three national exchanges - the New York Stock Exchange, the American Stock Exchange and the NASDAQ National Market System. These securities are frequently traded by the Company. The mutual funds that the Company has available for sale are open-end stock funds which are managed by Smith Barney & Co. These mutual fund investments are generally held for longer than a one-year period. These securities are traded by the Company as part of its plan to provide additional cash for working capital requirements. The marketable securities to be held to maturity are stated at amortized cost. Marketable securities classified as available-for-sale are stated at market value, with unrealized gains and losses reported as a separate component of stockholder's equity, net of deferred income taxes. If a decline in market value is determined to be other than temporary, any such loss is charged to earnings. Marketable securities accounted for as trading securities are stated at market value, with unrealized gains and losses charged to income. William A. Coskey, the Company's President and Chief Executive Officer, is responsible for managing the Company's portfolio of marketable securities. The funds used in this portfolio were from generally available from cash reserves. The Company has implemented a policy that restricts it from purchasing any securities on margin, and also limits the investment of any one security or mutual fund to represent no more than 10% of the Company's investment portfolio. The Company believes that the risks associated with its investment portfolio are slightly higher than the risk of loss in a Standard & Poor's 500 Index Fund. This higher risk is due to the less diverse distribution of the Company's portfolio as compared to the broadly based Standard & Poor's 500 Stock Index. Financing activities used cash totaling $302,885 for the six months ended June 30, 1999, which was used for repayment on the line of credit and repayment on the term note for Thermal's facilities. The Company has additional financing amounts of $840,000 available on its line of credit at June 30, 1999. The line of credit has been used principally to finance accounts receivable and inventory purchases. The Company's Board of Directors authorized a stock repurchase plan on June 29, 1999 authorizing the repurchase of up to 400,000 shares of the Company's common stock over a 24 month period. The funds for this plan are expected to come from surplus cash or operating funds. The plan was initiated in July 1999 with the purchase of 20,000 shares. The effects of this transaction will be reported in the third quarter ending September 30, 1999. Under the repurchase plan, an additional 380,000 shares remain authorized for repurchase. 12 ASSET MANAGEMENT The Company's cash flow from operations has been affected primarily by the timing of its collection of trade accounts receivable. The Company typically sells its products and services on short-term credit terms and seeks to minimize its credit risk by performing credit checks and conducting its own collection efforts. The Company had net trade accounts receivable of $2,913,128 and $2,013,367 at June 30, 1998 and 1999, respectively. The number of days' sales outstanding in trade accounts receivable was 64 days and 59 days, respectively. Bad debt expenses have been insignificant for each of these periods. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On April 7, 1999, the former principal of MLC filed a lawsuit against the Company alleging breach of an employment contract in addition to other related claims. The Company does not believe there is any merit to the claims of the plaintiff in this case and has taken and will continue to take, steps to vigorously defend against such claims. In connection with this matter, the Company has filed a counterclaim seeking damages and rescission of the MLC acquisition agreement and each party has filed an action for injunctive relief. The Company does not believe that this litigation will have a material adverse effect on the Company's financial position, results of operations or liquidity. Effective April 9, 1999 Michael Moore resigned as a member of the board of IDS FAB. The remaining members of the Board of Directors unanimously accepted the resignation of Mr. Moore. He was removed as an officer of IDS FAB and terminated as an employee on April 23, 1999. ITEM 2. CHANGES IN SECURITIES Not Applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of the Shareholders of the Company was held on June 8, 1999 at 2:00 p.m. at the corporate offices of the Company in Houston, Texas. A total of 12,296,555 shares of common stock, which is 94.1% of the shares outstanding on April 27, 1999 were represented at the meeting, either in person or by proxy. Two proposals were approved by the shareholders with the vote tabulations noted as follows: 1. The following directors were elected to serve until the next Annual Meeting of Shareholders and until their successors have been elected and qualified. DIRECTORS: FOR AGAINST ABSTAIN --- ------- ------- William A. Coskey, P.E. 12,281,055 0 15,500 Hulda L. Coskey 12,281,055 0 15,500 David W. Gent, P.E. 12,281,055 0 15,500 Gordon R. Wingate 12,281,055 0 15,500 Ken J. Hedrick 12,281,055 0 15,500 13 2. Ratification of the appointment of Hein + Associates, LLP as the Company's independent auditors. FOR AGAINST ABSTAIN --- ------- ------- 12,283,555 3,000 10,000 These were the only matters submitted to the Shareholders at the Annual Meeting of the Shareholders. ITEM 5. OTHER INFORMATION Not Applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits Exhibit 27 Financial Data Schedule b. Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 1999. 14 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INDUSTRIAL DATA SYSTEMS CORPORATION Dated: August 16, 1999 By: /s/ Hulda L. Coskey -------------------------------- Hulda L. Coskey, Chief Financial Officer, Secretary and Treasurer 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S QUARTERLY REPORT ON FORM 10-QSB FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS JUN-30-1999 DEC-31-1998 1,172,879 667,197 2,123,326 109,959 914,761 5,258,434 1,474,001 (369,069) 6,455,182 2,053,814 401,727 0 0 13,074 3,985,641 6,455,182 3,492,795 6,173,463 2,730,694 4,487,000 1,950,919 0 30,830 (264,456) 158,539 (422,995) 0 0 0 (422,995) (0.032) (0.032)
-----END PRIVACY-ENHANCED MESSAGE-----