-----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, JwV5T8qaZLcxiYHdtUbR9khTgMC2HTUCp4BQD3gUhS1ZteAJuICObpkzxtD6CeuA 8lMkMW7gPEWOnIBHwqZjBg== 0000899243-01-501235.txt : 20010815 0000899243-01-501235.hdr.sgml : 20010815 ACCESSION NUMBER: 0000899243-01-501235 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 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: 1934 Act SEC FILE NUMBER: 001-14217 FILM NUMBER: 1707807 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 d10qsb.txt QUARTERLY REPORT FOR PERIOD JUNE 30, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 [ ] TRANSITION REPORT UNDER 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 corporation 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 filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 after the distribution of securities under a plan confirmed by court. 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, 2001. Common Stock, $.001 Par Value, 12,964,918 QUARTERLY REPORT ON FORM 10-QSB FOR THE PERIOD ENDED JUNE 30, 2001 TABLE OF CONTENTS
PAGE NUMBER ------ PART 1 FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Balance Sheets at June 30, 2001 and December 31, 2000.......................................... 1 Condensed Consolidated Statements of Operations for the Three Months and Six Months ended June 30, 2001 and June 30, 2000.............................................. 2 Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2001 and June 30, 2000............... 3 Notes to Condensed Consolidated Financial Statements........ 4 ITEM 2 Management's Discussion and Analysis........................ 5 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings........................................... 11 Item 2. Changes in Securities....................................... 11 ITEM 3. Defaults Upon Senior Securities............................. 12 ITEM 4. Submission of Matters to a Vote of Security Holders......... 12 ITEM 5. Other Information........................................... 12 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, 2001 December 31, 2000 -------------- ------------------ (unaudited) ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 322,905 $ 242,592 Municipal bond, at cost 400,000 400,000 Accounts receivable - trade, less allowance for doubtful accounts of approximately $19,000 for 2001 and $17,000 for 2000 3,907,218 3,555,933 Inventory 813,684 865,341 Cost and estimated earnings in excess of billings on uncompleted contracts 480,181 330,000 Prepaid and other 227,609 190,369 ---------- ---------- Total current assets 6,151,597 5,584,235 PROPERTY AND EQUIPMENT, NET 1,543,725 1,404,017 GOODWILL 10,350 18,450 OTHER ASSETS 346,541 45,563 ---------- ---------- Total assets $8,052,213 $7,052,265 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Notes payable to bank $ 374,991 $ 433,729 Current portion - long-term debt 21,238 21,238 Current portion - capital lease obligation 20,929 24,118 Accounts payable 1,133,515 1,333,003 Billings in excess of cost and estimated earnings on uncompleted contracts 70,608 0 Deferred income taxes 0 37,000 Income taxes payable 363,783 160,013 Accrued expenses and other current liabilities 747,011 387,680 ---------- ---------- Total current liabilities 2,732,075 2,396,781 NOTE PAYABLE TO BANK, TERM 355,387 365,368 CAPITAL LEASE OBLIGATION, NET OF CURRENT PORTION 158,845 120,212 DEFERRED INCOME TAX 16,000 11,000 ---------- ---------- Total liabilities 3,262,307 2,893,361 STOCKHOLDERS' EQUITY: Common stock, $.001 par value; 75,000,000 shares authorized; 12,964,918 shares issued and outstanding 12,965 12,965 Note receivable from stockholder (196,500) (196,500) Additional paid-in capital 2,640,154 2,640,154 Retained earnings 2,333,287 1,702,285 ---------- ---------- Total stockholders' equity 4,789,906 4,158,904 ---------- ---------- Total liabilities and stockholders' equity $8,052,213 $7,052,265 ========== ==========
See accompanying notes to these condensed 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, 2001 2000 2001 2000 ----------- ----------- ----------- ----------- OPERATING REVENUES: $ 5,149,490 $ 3,331,742 $11,103,396 $ 6,723,953 OPERATING EXPENSES: Cost of goods sold 3,715,135 2,630,377 8,342,236 5,029,627 Selling, general and administrative 866,269 881,712 1,621,166 1,594,287 Depreciation and amortization 66,603 41,126 99,196 86,754 ----------- ----------- ----------- ----------- Operating profit 501,483 (221,473) 1,040,798 13,285 OTHER INCOME (EXPENSE) Other income 18,123 17,723 32,754 32,012 Interest income, net (21,823) (21,342) (39,050) (38,344) ----------- ----------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE PROVISION (BENEFIT) FOR INCOME TAXES 497,783 (225,092) 1,034,502 6,953 PROVISION (BENEFIT) FOR INCOME TAXES 205,000 ( 71,254) 403,500 0 ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ 292,783 $ (153,838) $ 631,002 $ 6,953 =========== =========== =========== =========== BASIC AND DILUTED EARNINGS PER COMMON SHARE $ 0.023 $ (0.012) $ 0.049 $ 0.001 =========== =========== =========== =========== BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 12,964,918 12,964,918 12,964,918 12,964,918 =========== =========== =========== ===========
See accompanying notes to these consolidated financial statements. 2 INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, ------------------------------------------- 2001 2000 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 631,002 $ 6,953 Non-cash change in working capital 70,655 41,126 Changes in working capital (385,805) (258,120) --------- --------- Net cash provided (used) by operating activities $ 315,852 $(210,041) CASH FLOWS FROM INVESTING ACTIVITIES: Property and equipment acquired (202,263) (405,717) Purchase of marketable securities -- -- Addition of capital lease -- 151,471 --------- --------- Net cash used in investing activities $(202,263) $(254,246) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in notes payable (15,238) -- Repayment on notes payable, net (18,038) (52,217) --------- --------- Net cash used in financing activities $ (33,276) $ (52,217) --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 80,313 (516,504) CASH AND CASH EQUIVALENTS, at beginning of period $ 242,592 $ 663,972 --------- --------- CASH AND CASH EQUIVALENTS, at end of period $ 322,905 $ 147,468 ========= ========= Supplemental Cash Flow Information: Interest paid $ 21,823 $ 38,344 ========= ========= Income taxes paid $ 235,000 -- ========= ========= Non-Cash Equipment lease $ 43,700 -- ========= =========
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 10-KSB for the year ended December 31, 2000. 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, 2001; the results of operations for the three months and six months ended June 30, 2001 and 2000; and cash flows for the six months ended June 30, 2001 and 2000 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, 2001. 2. NOTE RECEIVABLE FROM STOCKHOLDER: At June 30, 2001, the Company had notes receivable due from a stockholder in the amount of $196,500. The notes were reclassified to the Equity section of the Balance Sheet at December 31, 2000, due to inactivity in principal and interest payments. 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. CAPITALIZED MERGER COSTS: At June 30, 2001, the Company had approximately $347,000 in capitalized costs related to the proposed Petrocon Engineering, Inc. merger transaction. 4 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 majority of the Company's revenues are produced by IDS Engineering, Inc., the Engineering segment. Revenues are generated from providing engineering consulting services to the pipeline divisions of major integrated oil and gas companies. Since the early part of 2000, this segment has expanded its scope of projects to include lump-sum turnkey contract jobs. The addition of sizable lump-sum contracts plus the growth in its billable staff working on time and material projects has resulted in a steady increase in the revenues generated by the Engineering segment. The addition of a business development office in Tulsa, Oklahoma in early 1999, to pursue engineering, procurement and construction (EPC) projects, has also added to revenue growth. As of June 30, 2001, the Tulsa operation has grown to approximately 50 employees and the Company believes the contribution of the Tulsa operation will result in expanded market exposure, greater revenue and increased profit margin potential from the EPC market, in future periods. The Engineering segment generated approximately 66% of the total revenues for the six months ended June 30, 2001. Additional revenues are generated through segments involved in the made-to-order manufacture of industrial equipment. Air handling equipment for commercial heating, ventilation and cooling systems manufactured by Thermal Corporation (Thermal), the Air Handling segment of the Company, comprised approximately 18% of the revenues for the six months ended June 30, 2001. The Company's other operating segment, the Manufacturing segment, which manufactures industrial grade battery backup systems, battery chargers and industrial grade computer systems, contributed approximately 16% of total revenues for the six months ended June 30, 2001. PROPOSED MERGER TRANSACTION On July 31, 2001, the Company entered into a definitive merger agreement relating to a proposed merger between a newly created indirect subsidiary of the Company and Petrocon Engineering, Inc. Management believes that, if the merger is consummated, it will have a significant impact on the Company's revenues and operations. In summary, the Company anticipates that its revenues will increase significantly as Petrocon's revenues for its year ended December 31, 2000 were approximately $68 million, while the Company's were approximately $17 million for the same period. The Company also expects that, if the merger is completed, the Company will provide a broader range of services over a larger geographic area. It is uncertain at this time what impact the Petrocon merger will have on the Company's results of operations. While the Company believes that the merger would result in some immediate expenses relating to consolidation of the operations of the two companies, the Company believes that the long-term 5 impact of the merger will be beneficial to the Company. For additional details, see Part II, Item 5 "Other Information" and Exhibit 2.23 incorporated by reference, in this Form 10-QSB. 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; 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. 6 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, --------------------------------------------- --------------------------------------------- 2001 2000 2001 2000 ------------------- -------------------- -------------------- --------------------- Amount % Amount % Amount % Amount % ----------- ----- ----------- ----- ----------- ----- ----------- ----- Revenue: Engineering $3,332,128 64.7 $2,057,850 61.8 $ 7,278,978 65.6 $3,649,511 54.3 Air Handling 1,005,474 19.4 761,039 22.8 1,966,584 17.7 1,589,657 23.6 Manufacturing 811,888 15.8 512,853 15.4 1,857,834 16.7 1,484,785 22.1 ---------- ----- ---------- ----- ----------- ----- ---------- ----- Total revenue $5,149,490 100.0 $3,331,742 100.0 $11,103,396 100.0 $6,723,953 100.0 ========== ===== ========== ===== =========== ===== ========== ===== Gross Profit: Engineering $ 979,565 29.4 $ 490,867 23.9 $ 1,806,884 24.8 $1,030,589 28.2 Air Handling 306,176 30.5 65,175 8.6 561,868 28.6 267,098 16.8 Manufacturing 148,614 18.3 145,323 28.3 392,408 21.1 396,639 26.7 ---------- ----- ---------- ----- ----------- ----- ---------- ----- Total gross profit $1,434,355 27.9 $ 701,365 21.1 $ 2,761,160 24.9 $1,694,326 25.2 ========== ===== ========== ===== =========== ===== ========== ===== Selling, general and administrative expenses $ 932,872 18.1 $ 922,838 27.7 $ 1,720,362 15.5 $1,681,041 25.0 Operating income $ 501,483 9.7 $ (221,473) (6.6) $ 1,040,798 9.4 $ 13,285 0.2 Other income (expense) (3,700) (0.1) (3,619) (0.1) (6,296) (0.1) (6,332) (0.1) ---------- ---------- ----------- ---------- Income (loss) from continuing operations before provision (benefit) for income $ 497,783 9.7 $ (225,092) (6.8) $ 1,034,502 9.3 $ 6,953 0.1 taxes ---------- ---------- ----------- ---------- Provision (benefit) for $ 205,000 4.0 $ (71,254) (2.1) $ 403,500 3.6 $ 0 0.0 income taxes ---------- ---------- ----------- ---------- Net income (loss) $ 292,783 5.7 $ (153,838) (4.6) $ 631,002 5.7 $ 6,953 0.1 ========== ========== =========== ==========
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001 TOTAL REVENUE. Total revenue increased by $1,817,748 or 54.6% from $3,331,742 for the three months ended June 30, 2000, compared to $5,149,490 in 2001. Revenue from Engineering, which comprised 64.7% of total revenue for the three months ended June 30, 2001, increased by $1,274,278 or 61.9% over the same period in 2000. This increase was attributable to several contracts related to the Caspian Sea Pipeline (CPC) project and to the Company's expansion into the turnkey engineering, procurement and construction (EPC) projects and an increase in billable hours. Revenue generated by the Air Handling segment was 19.5% of the total revenue for the three months ended June 30, 2001. The Air Handling segment's revenue, increased by $244,435 or 32.1% from the same period in 2000. This increase was attributable to several sizable municipal orders and as the result of increased sales and marketing efforts. Revenue from the Manufacturing segment, which comprised 15.8% of the total revenue, increased by $299,035 or 58.3% over the same period in 2000. This increase is attributable to a return to more normal 7 revenues after abnormally low revenues were recorded during the three months ended June 30, 2000. Management believes the level of revenue generated by this segment in the 2001 period is more indicative of the Manufacturing segment's capabilities. GROSS PROFIT. Overall gross profit increased by $732,990 or 104.5% from $701,365 for the three months ended June 30, 2000 to $1,434,355 for the same period in 2001. The gross margin as a percentage of total revenues increased from 21.1% for the period ended June 30, 2000 to 27.9% for the same period in 2001. The increase in the overall gross margin was attributable to substantial increases in the gross profit margins contributed by the Engineering segment and the Air Handling segment. Each of these segments experienced higher sales revenues in the 2001 period, accompanied by increased gross margins. The Engineering segment produced a gross margin of 29.4%, a $488,698 increase from the three months ended June 30, 2000. This increase was primarily attributable to the CPC contract. The gross margin generated by the Air Handling segment in the three months ended June 30, 2001, substantially increased from the margin generated in the three months ended June 30, 2000. The 2001 margin increased by $241,001 or 369.8% over the same period in 2000. This increase is due to a concerted effort by the sales and marketing team to improve margins on quotes and to an increase in the number and size of municipal contracts secured during the three months ended June 30, 2001. A decrease in gross profit generated in the Manufacturing segment from 28.3% for the three months ended June 30, 2000 to 18.3% for the three months ended June 30, 2001 was due to higher direct labor and material costs in the 2001 period. Management believes the higher costs were due to a change in production management personnel, to disruption caused by relocation to a new facility and to the effects of flooding from hurricane Allison. The effects of these circumstances have been corrected and management is expecting the margins to improve in future periods. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by $10,034 or 1.1% from $922,838 for the three months ended June 30, 2000 compared to $932,872 for the same period in 2001. As a percentage of total revenue, selling, general and administrative expenses decreased from 27.7% for the three months ended June 30, 2000 to 18.1% for the same period in 2001. This change is due to the increase in revenues accompanied by stable selling, general and administrative expenses. OPERATING INCOME. Operating income increased by $722,956 from ($221,473) for the three months ended June 30, 2000, compared to $501,483 for the same period in 2001. Operating income increased as a percentage of total revenue from (6.6%) for the three months ended June 30, 2000 to 9.7% for the same period in 2001. The increase in operating income was a result of the higher gross profit generated and the decrease in selling, general and administrative expenses for the period ended June 30, 2001. OTHER INCOME (EXPENSE). Other expense increased slightly from $3,619 for the three months ended June 30, 2000 to $3,700 for the same period in 2001. This is the result of effective cash management to control the use of the Company's line of credit and minimize interest costs. NET INCOME (LOSS). Income from continuing operations increased by $446,621 from ($153,838) for the three months ended June 30, 2000 to $292,783 for the same period in 2001. Net income from continuing operations increased as a percentage of total revenue from (4.6%) for the three months ended June 30, 2000 to 5.7% for the same period in 2001. This increase was 8 attributable to the higher overall gross margin generated and to stable selling, general and administrative expenses. SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001 TOTAL REVENUE. Total revenue increased by $4,379,443 or 65.1% from $6,723,953 for the six months ended June 30, 2000, compared to $11,103,396 in 2001. Revenue from the Engineering segment, which comprised 54.3% of total revenue for the six months ended June 30, 2000 increased by $3,629,467 or 99.5% from $3,649,511 in 2000 to $7,278,978 for the same period in 2001. The increase was primarily attributable to the expanded scope of lump-sum turnkey projects active during the 2001 period and to an increase in the number of personnel with billable hours in the Engineering segment in the six months ended June 30, 2001. Revenue from the Air Handling segment, which comprised 17.7% of the total revenue for the six months ended June 30, 2001, increased by $376,927 or 23.7% from $1,589,657 in 2000 to $1,966,584 for the same period in 2001. This increase is attributable to several sizable municipal contracts completed during the six months ended June 30, 2001 and success of sales and marketing efforts. Revenue from the Manufacturing segment, which comprised 16.7% of the total revenue for the six months ended June 30, 2001, increased by $373,049 or 25.1% from $1,484,785 in 2000 to $1,857,834 for the same period in 2001. Sales revenue generated in the six months ended June 30, 2000 were, in management's opinion, below normal for what is expected from this segment. The increase recorded from the 2000 period is believed to be the result of a rebound to more normal revenues after abnormally low sales revenues during the 2000 period. GROSS PROFIT. Gross profit increased by $1,066,834 or 63.0% from $1,694,326 for the six months ended June 30, 2000 to $2,761,160 for the same period in 2001. The gross margin contributed by the Engineering segment increased by $776,295 from $1,030,589 for the six months ended June 30, 2000 to $1,806,884 for the period ended June 30, 2001. This increase is the result of the expanded number of lump-sum projects being done by the Engineering segment in the 2001 period. The Air Handling segment's gross margin increased by $294,770 or 110.4% from $267,098 for the six-month period ended June 30, 2000 to $561,868 for the six months ended June 30, 2001. Management believes this increase is a direct result of more accurate bidding on jobs, more aggressive sales and marketing efforts, as well as being awarded several municipal projects in the 2001 period, which produced higher margins. The Manufacturing segment's ross margin decreased from 26.7% for the six-month period ended June 30, 2000 to 21.1% for the six months ended June 30, 2001. Although the 2001 sales revenue increased by $373,049, the profit margin decreased. Management believes the decrease in gross profit is the result of production issues and other causes, discussed in the preceding section under the "Total Revenue" and "Gross Profit" categories. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by $39,321 or 2.3% from $1,681,041 for the six months ended June 30, 2000 compared to $1,720,362 for the same period in 2001. As a percentage of total revenue, selling, general and administrative expenses decreased from 25.0% for the six months ended June 30, 2000 to 15.5% for the same period in 2001. The decrease in selling, general and administrative expenses as a percentage of revenue is due to the increase in revenue from the 2000 period, accompanied by stable selling, general and administrative expenses. 9 OPERATING INCOME. Operating income increased by $1,027,513 from $13,285 for the six months ended June 30, 2000 to $1,040,798 for the same period in 2001. Operating income increased as a percentage of total revenue from 0.2% for the six months ended June 30, 2000 to 9.4% for the same period in 2001. This increase in operating income was a result of increased revenues, higher gross profits and stable selling, general and administrative expenses. OTHER INCOME (EXPENSE). Other expense decreased by $36 from $6,332 for the six months ended June 30, 2000 to $6,296 for the same period in 2001. This minimal change is due primarily to cash management activities to minimize the use of the Company's line of credit. NET INCOME (LOSS). Income from continuing operations increased by $624,049 from $6,953 for the six months ended June 30, 2000 to $631,002 for the same period in 2001. This increase was due to the increase in gross margins and to the stability of the Company's selling, general and administrative expenses. 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, 2001, 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. As of April 24, 2001 the Company renewed its Line of Credit loan with Frost National Bank in the principal amount of $1,250,000. The Company had, as of June 30, 2001, $885,000 in additional advances available under its line of credit with the new bank. The Company's line of credit, which provides for maximum borrowings of $1,250,000 and bears interest at prime plus 0.500% per annum, is for a term of two years and matures on April 24, 2003. The line of credit is secured by accounts receivable, inventory and the personal guarantees of certain stockholders and officers of the Company. The Company's working capital was $3,419,522 and $3,187,454 at June 30, 2001 and December 31, 2000, respectively. The Company's liquidity has been and will be further impacted by expenses associated with the proposed Petrocon merger discussed previously in the "Proposed Merger Transaction" section and in "Item 5 Other Information" in this Form 10-QSB. The Company has incurred and will incur certain costs related to the merger including legal, accounting and investment advisory fees, which it must pay even if the merger does not close. Should the proposed merger take place, the Company's liquidity will be further impacted by the costs associated with merging the operations of the two companies, which include but are not limited to the need to replace the Company's existing credit facility with a substantially larger facility. The Merger Agreement requires, as a condition of closing, that Petrocon obtain a $15,000,000 revolving line of credit and that Petrocon deliver a $3,000,000 promissory note to Equus II Incorporated, currently an investor in and lender to Petrocon. While the Company believes that its existing resources, together with its cash flow following the merger, will be sufficient to pay these debts in accordance with their respective terms, there can be no assurance that this will be the case. 10 CASH FLOW Operating activities used net cash totaling $210,041 for the six months ended June 30, 2000 and generated $315,853 for the six months ended June 30, 2001. This was due to the operating profit produced in the 2001 period. Trade accounts receivable increased $351,285 since December 31, 2000, due to the increase in revenues during the six months ended June 30, 2001. Inventory decreased by $51,657 for the same period. Investing activities used cash totaling $254,246 for the six months ended June 30, 2000 and used cash totaling $202,263 for the same period in 2001. The cash used during the 2001 period was used for the purchase of fixed assets. As of June 30, 2001, the Company had a portfolio of bonds, which had a fair market value of $400,000. Financing activities used cash totaling $33,276 for the six months ended June 30, 2001, which was used for repayment on the line of credit, repayment on the term note for Thermal's facilities and for equipment lease payments. The Company has additional financing amounts of $885,000 available on its line of credit at June 30, 2001. The line of credit has been used principally to finance accounts receivable and inventory purchases. ASSET MANAGEMENT The Company's cash flow from operations has been affected primarily by the timing of its collection of trade accounts receivable. The Company typically sells its products and services on short-term credit terms and seeks to minimize its credit risk by performing credit checks and conducting its own collection efforts. The Company had net trade accounts receivable of $3,907,218 and $2,431,932 at June 30, 2001 and 2000, respectively. The number of days' sales outstanding in trade accounts receivable was 66 days and 34 days, respectively. Bad debt expenses have been insignificant for each of these periods. PART II OTHER INFORMATION ITEM 1. 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 legal proceedings that would have a material affect on its operations. ITEM 2. CHANGES IN SECURITIES Not Applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable. 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of the Shareholders of the Company was held on June 28, 2001 at 10:00 a.m. at the corporate offices of the Company in Houston, Texas. A total of 12,860,514 share of common stock, which is 99.19% of the shares outstanding on May 31, 2001 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. 12,849,429 0 11,085 Hulda L. Coskey 12,846,929 0 13,585 David W. Gent, P.E. 12,849,429 0 11,085 Gordon R. Wingate 12,850,654 0 9,860 Ken J. Hedrick 12,852,854 0 7,660 2. Ratification of the appointment of Hein + Associates LLP as the Company's independent auditors. These were all the matters submitted to the Shareholders at the Annual Meeting of the Shareholders. ITEM 5. OTHER INFORMATION On July 31, 2001 the Company entered into a definitive Agreement and Plan of Merger, a copy which has been incorporated by reference as Exhibit 2.23 in this Form 10-QSB, relating to a proposed merger between a newly created subsidiary of the Company and Petrocon Engineering, Inc. of Beaumont, Texas. The Company expects to file a Registration Statement on Form S-4 relating to the securities to be issued in the merger transaction and seeking stockholder approval of the proposed transaction. No offer of the securities will be made until such Registration Statement has been declared effective by the Securities and Exchange Commission. The merger requires approval of a majority of the Company's issued and outstanding shares. In addition, the Board of Directors has elected to require, as a condition of the merger, the approval of a majority of the shares represented at the meeting that are not held by the Company's 73% stockholder, Alliance 2000, Ltd. The Agreement and Plan of Merger provides for the for 9.8 million shares of the Company's common stock and assumption of approximately $12.1 million of Petrocon debt for all of Petrocon's outstanding capital stock. The closing of the acquisition is expected to occur in October, subject to normal closing conditions. The Petrocon acquisition will significantly increase the size and geographic scope of the Company's engineering consulting business. The assets of Petrocon include cash, trade receivables, work-in-progress, property and equipment, goodwill and other assets. 12 Under the merger agreement, an indirect, wholly owned subsidiary of the Company will be merged into Petrocon, and the Petrocon shareholders will receive 9,800,000 shares of IDS common stock. In addition, Petrocon currently owes approximately $9,000,000 to Equus II Incorporated. This debt, together with warrants held by Equus to acquire stock in Petrocon, will be exchanged for (I) promissory notes in the amount of $2,000,0000 which will be paid at the closing of the merger, (ii) a promissory note in the amount of $3,000,000 which will be paid by the Company over four years; and (iii) a promissory note for the balance owed to Equus which will be exchanged for 2,500,000 shares of convertible preferred stock of IDS. Concurrently with the merger, and as a condition to the closing of the merger, IDS will acquire a $15,000,000 revolving line of credit from Fleet Capital Corporation. The terms of the merger, including the amount of consideration paid by the Company to the Petrocon shareholders, was determined through arms-length negotiations between the Company and Petrocon, and was based on a variety of factors, including the historical financial performance of IDS. The merger agreement provides that shareholders of Petrocon who hold more than 100,000 shares of Petrocon common stock will put a portion of the IDS common stock received by them into escrow to cover certain liabilities, including certain obligations under stock option agreements, that may arise following the closing. The merger agreement provides that a voting agreement will be signed at the closing of the merger, and that the parties to the voting agreement will vote their shares in favor of three nominees of IDS, two nominees of Petrocon, one nominee of Equus, and one independent director. The initial directors are expected to be William A. Coskey, P.E., Hulda L. Coskey, David W. Gent, P.E., Michael L. Burrow, Jimmie N. Carpenter, Randall B. Hale, and David C. Roussel. Petrocon Background Petrocon Engineering, Inc. provides a broad range of services to the refining, chemical, petrochemical, exploration, production, co-generation, manufacturing, process control and advanced automation sectors. Petrocon subsidiaries include: Petrocon Construction Resources, Inc., which focuses on field inspection services, process plant operations and construction management; Petrocon Systems, Inc., which is a full service control systems integration and advanced automation technology company; Triangle Engineers and Construtors, Inc., which provides engineering, design and construction services to refining, chemical and petrochemical industries; and RPM Engineering, Inc./Barnard and Burk Industries, a multi-discipline engineering company located in Baton Rouge, Louisiana. Petrocon has approximately 800 employees and had 2000 revenues of approximately $68 million. It has offices in Houston and Beaumont, Texas and in Baton Rouge and Lake Charles, Louisiana. Petrocon Financial Statements The Petrocon audited balance sheet and related statement of income, stockholders' equity and cash flows for the year ended December 31, 2000 and the unaudited balance sheet and related statement of income and cash flow for the six months ended June 30, 2001, will be filed as soon as practicable, but not later than 60 days after the due date for the filing of this report on Form 10-QSB. 13 The pro forma results of operations of the Company for the year ended December 31, 2001 and the six months ended June 30, 2001, as if the acquisition had occurred at the beginning of each respective period and a pro forma balance sheet as of June 30, 2001, will be filed by amendment as soon as practicable, but not later than 60 days after the due date for the filing of this report on Form 10-QSB. On August 1, 2001 the Company issued a Press Release announcing the signing of the definitive merger agreement with Petrocon Engineering, Inc., which is incorporated by reference as Exhibit 99.2. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits Exhibit 2.23 Agreement and Plan of Merger by and between Industrial Data Systems Corporation, IDS Engineering Management, LC, PEI Acquisition, Inc. and Petrocon Engineering, Inc. Exhibit 3.10 Articles of Incorporation of IDS Engineering Management, LC Exhibit 3.11 Regulations of IDS Engineering Management, LC Exhibit 3.12 Articles of Incorporation PEI Acquisition, Inc. Exhibit 3.13 Bylaws of PEI Acquisition, Inc. Exhibit 10.42 Standard Industrial Lease Agreement between Houston Industrial Assets, L.P. and Constant Power Manufacturing, Inc. dated May 30, 2001 Exhibit 99.2 Press Release dated August 1, 2001 announcing signing of definitive merger agreement with Petrocon Engineering, Inc. b. Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 2001. 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 10, 2001 By: /s/ Hulda L. Coskey -------------------------------- Hulda L. Coskey, Chief Financial Officer, Secretary and Treasurer 15 EX-2.23 3 dex223.txt AGREEMENT AND PLAN OF MERGER EXHIBIT 2.23 AGREEMENT AND PLAN OF MERGER BY AND BETWEEN INDUSTRIAL DATA SYSTEMS CORPORATION, A NEVADA CORPORATION AND IDS ENGINEERING MANAGEMENT, LC A TEXAS LIMITED LIABILITY COMPANY AND PEI ACQUISITION, INC. A TEXAS CORPORATION AND PETROCON ENGINEERING, INC. A TEXAS CORPORATION JULY 31, 2001 TABLE OF CONTENTS Page 1. THE MERGER..................................................... 2 1.1 The Merger............................................... 2 1.2 Effective Time of the Merger............................. 2 1.3 Closing.................................................. 2 1.4 Surviving PEI............................................ 2 1.5 Effect on the Capital Stock of Parent, LC, Sub and PEI... 3 1.6 Escrow................................................... 7 1.7 Exchange of Certificates................................. 7 1.8 Stock Transfer Books..................................... 8 1.9 Dissenting Shares........................................ 9 1.10 No Further Ownership Rights in PEI Common Stock.......... 9 1.11 Lost, Stolen or Destroyed Certificates................... 9 1.12 Shareholder Approval..................................... 9 1.13 Tax and Accounting Consequences.......................... 10 2. REPRESENTATIONS AND WARRANTIES OF PARENT....................... 10 2.1 Organization, Etc........................................ 10 2.2 Capitalization of Parent................................. 10 2.3 Parent Series A Stock.................................... 11 2.4 Subsidiaries............................................. 11 2.5 Interim Operations of Sub and LC........................ 11 2.6 Authority................................................ 11 2.7 Consents................................................. 12 2.8 Proprietary Rights....................................... 12 2.9 Title.................................................... 12 2.10 Defaults................................................. 12 2.11 Full Authority........................................... 13 2.12 Parent's SEC Documents................................... 13 2.13 Investment Company....................................... 14 2.14 Undisclosed Liabilities.................................. 14 2.15 Taxes.................................................... 14 2.16 Legal Actions............................................ 14 2.17 Parent Contracts; Parent Plans........................... 15 2.18 No Material Adverse Change............................... 15 2.19 Predecessors............................................. 16 2.20 Affiliate Relationships.................................. 16 2.21 Disclosure............................................... 16 2.22 Other Disclosures........................................ 16 2.23 Tax Reorganization Representations....................... 18 2.24 Brokers.................................................. 19 2.25 Labor and Employment Matters............................. 19 2.26 Employee Benefit Plans................................... 20 2.27 Environmental Matters.................................... 22 2.28 Accounts Receivable...................................... 23 2.29 Inventories.............................................. 23 2.30 Purchase Commitments and Outstanding Bids................ 23 2.31 Payments................................................. 23 2.32 Customers and Suppliers.................................. 24 3. REPRESENTATIONS AND WARRANTIES OF PEI.......................... 24 3.1 Organization, Etc........................................ 24 3.2 Capitalization of PEI.................................... 24 3.3 Subsidiaries............................................. 25 i 3.4 Authority............................................... 25 3.5 Consents................................................ 25 3.6 Proprietary Rights...................................... 25 3.7 Title................................................... 26 3.8 Defaults................................................ 26 3.9 Full Authority.......................................... 26 3.10 PEI's SEC Documents..................................... 26 3.11 Investment Company...................................... 27 3.12 Undisclosed Liabilities................................. 27 3.13 Taxes................................................... 27 3.14 Legal Actions........................................... 27 3.15 PEI Contracts; PEI Plans................................ 28 3.16 No Material Adverse Change.............................. 28 3.17 Predecessors............................................ 29 3.18 Affiliate Relationships................................. 29 3.19 Disclosure.............................................. 29 3.20 Other Disclosures....................................... 29 3.21 Brokers................................................. 31 3.22 Labor and Employment Matters............................ 31 3.23 Employee Benefit Plans.................................. 32 3.24 Environmental Matters................................... 34 3.25 Accounts Receivable..................................... 34 3.26 Inventories............................................. 34 3.27 Purchase Commitments and Outstanding Bids............... 34 3.28 Payments................................................ 35 3.29 Customers and Suppliers................................. 35 4. CERTAIN COVENANTS, AGREEMENTS AND PRE-CLOSING MATTERS.......... 35 4.1 Tax Matters............................................. 35 4.2 Access.................................................. 36 4.3 Approval of the Merger Proxy............................ 36 4.4 Operations in the Ordinary Course....................... 36 4.5 Transactions Affecting Business and Properties.......... 36 4.6 Negotiations............................................ 37 4.7 Renewal of Real Estate Leases........................... 37 4.8 Articles of Incorporation and Bylaws.................... 37 4.9 Current Information..................................... 38 4.10 Corporate Approvals..................................... 38 4.11 Consents................................................ 38 4.12 Contracts............................................... 38 4.13 Insurance............................................... 39 4.14 Compliance with Laws.................................... 39 5. CONDITIONS PRECEDENT; CLOSING DELIVERIES....................... 39 5.1 Conditions Precedent to the Obligations of PEI.......... 39 5.2 Conditions Precedent to the Obligations of Parent....... 40 5.3 Deliveries by Parent at the Closing..................... 43 5.4 Deliveries by PEI at the Closing........................ 44 5.5 Deliveries by Sub and Surviving PEI at the Closing...... 46 6. SURVIVAL, INDEMNIFICATION, ARBITRATION......................... 46 6.1 Survival................................................ 46 6.2 Indemnification by Significant PEI Shareholders......... 47 6.3 Indemnification by Parent............................... 48 6.4 Procedures for Indemnification.......................... 48 6.5 Subrogation............................................. 49 6.6 Arbitration............................................. 50 7. TERMINATION.................................................... 51 7.1 Events of Termination................................... 51 ii 7. 2 Effect of Termination................................... 52 8. MISCELLANEOUS.................................................. 52 8.1 Notice.................................................. 52 8.2 Further Documents....................................... 53 8.3 Assignability........................................... 53 8.4 Exhibits and Schedules.................................. 53 8.5 References to Sections, Exhibits and Schedules.......... 53 8.6 Entire Agreement........................................ 53 8.7 Headings................................................ 54 8.8 Controlling Law......................................... 54 8.9 Public Announcements.................................... 54 8.10 No Third Party Beneficiaries............................ 54 8.11 Amendments and Waivers.................................. 54 8.12 No Employee Rights...................................... 54 8.13 When Effective.......................................... 55 8.14 Takeover Statutes....................................... 55 8.15 Number and Gender of Words.............................. 55 8.16 Invalid Provisions...................................... 55 8.17 Multiple Counterparts................................... 55 8.18 No Rule of Construction................................. 55 8.19 Expenses................................................ 55 8.20 Time of the Essence..................................... 56 8.21 Attorneys' Fees......................................... 56 iii EXHIBITS Exhibit 1.5(c)(iii) Form of Certificate of Designation of Preferences, Limitations and Relative Rights of Parent Series A Stock Exhibit 1.6(a) Form of Indemnification Escrow Agreement Exhibit 1.6(b) Form of Option Escrow Agreement Exhibit 5.2(c)-1 Form of $2 Million Notes Exhibit 5.2(c)-2 Form of $3 Million Note Exhibit 5.2(c)-3 Form of Remainder Note Exhibit 5.2(c)-4 Form of Equus Settlement Agreement and Plan of Reorganization Exhibit 5.2(j) Form of Lockup Agreement Exhibit 5.3(d) Form of Option Pool Agreement Exhibit 5.3(f) Form of Voting Agreement Exhibit 5.3(m) Equus Call Option Exhibit 5.4(f) Form of Release Exhibit 5.4(h) Form of Significant PEI Shareholders' Voting Agreement Exhibit 6.6 Exceptions to Commercial Rules of Arbitration SCHEDULES Schedule 1.4(a) Directors and Officers of Surviving PEI, Its Subsidiaries and Officers of Parent Schedule 1.5(c)(ii) Significant PEI Shareholders Schedule 2.2 Parent Convertible Securities Schedule 2.4 Parent Subsidiaries Schedule 2.9 Parent Title to Assets Schedule 2.14 Parent Undisclosed Liabilities Schedule 2.15 Parent Tax Return Extensions Schedule 2.16 Parent Legal Actions Schedule 2.18 Parent Material Adverse Changes Schedule 2.22(a) Parent Products Schedule 2.22(b) Parent Real Property Schedule 2.22(c) Parent Assets Schedule 2.22(e) Parent Insurance Schedule 2.22(f) Parent Financial Institutions Schedule 2.22(g) Parent Governmental Licenses and Permits Schedule 2.22(h) Parent Debts Schedule 2.22(i) Parent Proprietary Rights Schedule 2.22(j) Parent Contracts Schedule 2.22(l) Parent Officers and Directors Schedule 2.25 Parent Labor Disputes Schedule 2.26(a) Parent Plans Schedule 2.26(d) Parent Plan Compliance Schedule 2.26(f) Parent Plan Tax Qualification Schedule 2.26(i) Parent Plan Retiree Welfare Coverage Schedule 2.27(b) Parent Environmental Liabilities iv Schedule 2.32 Parent Customers and Suppliers Schedule 3.2 PEI Shareholders and Convertible Securities Schedule 3.3 PEI Subsidiaries Schedule 3.5 PEI Consents Schedule 3.7 PEI Title to Assets Schedule 3.8 PEI Defaults Schedule 3.12 PEI Undisclosed Liabilities Schedule 3.13 PEI Tax Return Extensions Schedule 3.14 PEI Legal Actions Schedule 3.16 PEI Material Adverse Changes Schedule 3.17 PEI Predecessors Schedule 3.18 PEI Affiliate Relationships Schedule 3.20(a) PEI Products Schedule 3.20(b) PEI Real Property Schedule 3.20(c) PEI Assets Schedule 3.20(d) PEI Consigned Property Schedule 3.20(e) PEI Insurance Schedule 3.20(f) PEI Financial Institutions Schedule 3.20(g) PEI Governmental Licenses and Permits Schedule 3.20(h) PEI Debts Schedule 3.20(i) PEI Proprietary Rights Schedule 3.20(j) PEI Contracts Schedule 3.20(l) PEI Officers and Directors Schedule 3.22 PEI Labor Disputes Schedule 3.23(a) PEI Plans Schedule 3.23(d) PEI Plan Compliance Schedule 3.23(f) PEI Plan Tax Qualification Schedule 3.23(i) PEI Plan Retiree Welfare Coverage Schedule 3.29 PEI Customers and Suppliers Schedule 4.5 Transactions Affecting Business and Properties Schedule 5.4(d) PEI Employees to Sign Employment Agreements v DEFINED TERMS "ACTION" shall have the meaning set forth in Section 2.27(a). "AFFILIATE" shall have the meaning set forth in Section 2.20. "AGREEMENT" shall have the meaning set forth in the preamble. "ALLIANCE" shall have the meaning set forth in Recital D. "ALTERNATIVE TRANSACTION" shall have the meaning set forth in Section 4.6. "APPLICABLE CORPORATE LAW" shall have the meaning set forth in Section 1.1. "ARBITRATOR" shall have the meaning set forth in Section 6.6(b). "BENEFIT ARRANGEMENTS" shall have the meaning set forth in Section 2.26(a). "BOARD OF ARBITRATION" shall have the meaning set forth in Section 6.6(b). "CANCELLED SHARES" shall have the meaning set forth in Section 1.5(c)(i). "CERTIFICATE OF DESIGNATION" shall have the meaning set forth in Section 1.5(c)(iii). "CLOSING" shall have the meaning set forth in Section 1.3. "CLOSING DATE" shall have the meaning set forth in Section 1.3. "CODE" shall have the meaning set forth in Recital F. "CONTRACT" shall have the meaning set forth in Section 2.22(j). "CONTROL" shall have the meaning set forth in Section 2.20. "CONTROLLED COMPANY" shall have the meaning set forth in Section 2.26(a). "CONVERTED SHARE" shall have the meaning set forth in Section 1.5(c)(xi). "COURY DEBT" shall have the meaning set forth in Recital B. "COURY WARRANTS" shall have the meaning set forth in Section 1.5(c)(x). "CURRENT PARENT SEC DOCUMENTS" shall have the meaning set forth in preamble to Section 2. "DESIGNATED PLANS" shall have the meaning set forth in Section 2.26(a). "DISSENTING SHARES" shall have the meaning set forth in Section 1.9(a). "EFFECTIVE TIME" shall have the meaning set forth in Section 1.2. "ENVIRONMENTAL LAWS" shall have the meaning set forth in Section 2.27(c)(i). "ENVIRONMENTAL LIABILITIES" shall have the meaning set forth in Section 2.27(c)(ii). "EQUUS" shall have the meaning set forth in Recital C. "EQUUS DEBT" shall have the meaning set forth in Recital C. "EQUUS SETTLEMENT AGREEMENT" shall have the meaning set forth in Section 5.2(c). "EQUUS WARRANTS" shall have the meaning set forth in Recital C. "ERISA" shall have the meaning set forth in Section 2.26(a). "EXCHANGE ACT" shall have the meaning set forth in Section 1.12. "EXCHANGE AGENT" shall have the meaning set forth in Section 1.7(a). "HAZARDOUS SUBSTANCES" shall have the meaning set forth in Section 2.27(c)(iii). "INDEMNIFICATION ESCROW AGREEMENT" shall have the meaning set forth in Section 1.6(a). "INDEMNIFIED PARTY" shall have the meaning set forth in Section 6.4(a). "INDEMNIFYING PARTY" shall have the meaning set forth in Section 6.4(a). "INDEMNITY ESCROW" shall have the meaning set forth in Section 1.5(c)(ii). "IRS" shall have the meaning set forth in Section 2.26(c). "LATEST PARENT BALANCE SHEET" shall have the meaning set forth in Section 2.28. "LATEST PEI BALANCE SHEET" shall have the meaning set forth in Section 3.25. "LC" shall have the meaning set forth in the preamble. "LOCKUP AGREEMENT" shall have the meaning set forth in Section 5.2(j). "LOST PEI CERTIFICATE" shall have the meaning set forth in Section 1.11. "MERGER" shall have the meaning set forth in Recital A. vi "MERGER CONSIDERATION" shall have the meaning set forth in Section 1.5(c). "MERGER FILING" shall have the meaning set forth in Section 2.7. "MERGER PROXY" shall have the meaning set forth in Section 1.12. "OPTION ESCROW" shall have the meaning set forth in Section 1.5(c)(ii). "OPTION ESCROW AGENT" shall have the meaning set forth in Section 1.5(c)(v). "OPTION ESCROW AGREEMENT" shall have the meaning set forth in Section 1.6(b). "OTHER OWNERSHIP INTERESTS" shall have the meaning set forth in Section 2.2. "PARENT" shall have the meaning set forth in the preamble. "PARENT CERTIFICATES" shall have the meaning set forth in Section 1.7(b). "PARENT COMMON STOCK" shall have the meaning set forth in Recital E. "PARENT INDEMNIFIED PARTIES" shall have the meaning set forth in Section 6.2. "PARENT MATERIAL ADVERSE EFFECT" shall have the meaning set forth in Section 2.1. "PARENT RELATED DOCUMENTS" shall have the meaning set forth in Section 2.6. "PARENT SEC DOCUMENTS" shall have the meaning set forth in Section 2.12. "PARENT SERIES A STOCK" shall have the meaning set forth in Recital E. "PARENT STOCK" shall have the meaning set forth in Section 1.7(a). "PEI" shall have the meaning set forth in the preamble. "PEI CERTIFICATES" shall have the meaning set forth in Section 1.7(b). "PEI COMMON STOCK" shall have the meaning set forth in Recital B. "PEI CONTRACT" shall have the meaning set forth in Section 3.20(j). "PEI DESIGNATED PLANS" shall have the meaning set forth in Section 3.23(a). "PEI INDEMNIFIED PARTIES" shall have the meaning set forth in Section 6.3. "PEI MATERIAL ADVERSE EFFECT" shall have the meaning set forth in Section 3.1. "PEI RELATED DOCUMENTS" shall have the meaning set forth in Section 3.4. "PEI SHAREHOLDER DEBT" shall have the meaning set forth in Recital B. "PEI SHAREHOLDERS" shall have the meaning set forth in Section 1.6(a). "PERSON" shall have the meaning set forth in Section 1.5(c)(ii). "PLANS" shall have the meaning set forth in Section 2.26(a). "PRO RATA SHARE" shall have the meaning set forth in Section 1.5(c)(v). "PROPRIETARY RIGHTS" shall have the meaning set forth in Section 2.8. "REGULATED ACTIVITY" shall have the meaning set forth in Section 2.27(c)(iv). "REMAINDER NOTE" shall have the meaning set forth in Section 5.2(c). "REMAINING OPTION SHARES" shall have the meaning set forth in Section 1.5(c)(ix). "RPM WARRANTS" shall have the meaning set forth in Section 1.5(c)(x). "SEC" shall have the meaning set forth in Section 1.12. "SECURITIES ACT" shall have the meaning set forth in Section 1.12. "SHAREHOLDER REPRESENTATIVE" shall have the meaning set forth in Section 6.4(a). "SIGNIFICANT PEI SHAREHOLDER" shall have the meaning set forth in Section 1.5(c)(ii). "SUB" shall have the meaning set forth in the preamble. "SUBSIDIARY" shall have the meaning set forth in the preamble to Section 2. "SURRENDERED SHARES" shall have the meaning set forth in Section 1.5(c)(vii). "SURVIVAL PERIODS" shall have the meaning set forth in Section 6.1. "SURVIVING PEI" shall have the meaning set forth in Section 1.1. "SURVIVING OPTIONS" shall have the meaning set forth in Section 1.5(c)(iv). "TAX RETURNS" shall have the meaning set forth in Section 2.15. "$2 MILLION NOTES" shall have the meaning set forth in Section 5.2(c). "$3 MILLION NOTE" shall have the meaning set forth in Section 5.2(c). vii AGREEMENT AND PLAN OF MERGER This AGREEMENT AND PLAN OF MERGER (this "AGREEMENT"), dated as of July 31, 2001, is entered into by and between Industrial Data Systems Corporation, a Nevada corporation ("PARENT"), IDS Engineering Management, LC, a Texas limited liability company all of whose membership interests are held by Parent ("LC"), PEI Acquisition, Inc., a Texas corporation all of whose capital stock is owned by LC (the "SUB"), and Petrocon Engineering, Inc., a Texas corporation ("PEI"). RECITALS: A. The respective Boards of Directors of PEI, Parent, LC and Sub have each approved the merger of Sub with and into PEI (the "MERGER") pursuant to this Agreement and the applicable statutes of the State of Texas. B. Prior to the Merger, all of the debt (as of the date of this Agreement) owed by PEI to certain of its shareholders (the "PEI SHAREHOLDER DEBT") will be converted into shares of common stock, $0.001 par value per share, of PEI (the "PEI COMMON STOCK"), except for up to $190,000 of the PEI Shareholder Debt which shall be paid in cash at the Closing (as herein defined) and that portion of the PEI Shareholder Debt held by Gary Coury (the "COURY DEBT"). C. Also, prior to the Merger, PEI will deliver to Equus II Incorporated, a Delaware corporation ("EQUUS"), in renewal, rearrangement and extension of the approximately $9.0 million of outstanding debt owed by PEI to Equus (the "EQUUS DEBT") and the cancellation of all of the outstanding warrants to acquire PEI securities held by Equus (the "EQUUS WARRANTS"): (i) the $2 Million Notes (as herein defined); (ii) the $3 Million Note (as herein defined); and (iii) the Remainder Note (as herein defined). D. At the Closing, Alliance 2000, Ltd., a Texas limited partnership ("ALLIANCE"), will grant certain employees of the parties and to Equus an option to purchase up to 2,800,000 shares of Parent Common Stock (as herein defined) currently held by Alliance. In addition, at the Closing, Parent shall cancel the debt owed by Alliance to Parent in the principal amount of approximately $150,000, together with interest thereon. E. Pursuant to the Merger, the issued and outstanding shares of PEI Common Stock will be converted into the right to receive shares of common stock, $0.001 par value per share, of Parent (the "PARENT COMMON STOCK"), the Equus Debt evidenced by the $2 Million Notes will be paid in full, and the Equus Debt evidenced by the Remainder Note will be paid and satisfied by the issuance to Equus of 2,500,000 shares of the Series A Convertible Preferred Stock, $0.001 par value per share, of Parent (the "PARENT SERIES A STOCK"). F. For federal income tax purposes, the parties intend that the Merger shall qualify as a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "CODE"). 1 NOW, THEREFORE, in consideration of the premises and the representations, warranties and agreements herein contained, the parties hereto agree as follows: 1. THE MERGER 1.1 The Merger. Subject to the terms and conditions hereof, and in accordance with the Texas Business Corporation Act (the "APPLICABLE CORPORATE LAW"), at the Effective Time (as defined in Section 1.2), Sub shall be merged with and into PEI and the separate existence of Sub shall thereupon cease. PEI shall by virtue of the Merger continue its corporate existence under the laws of the State of Texas and become an indirect wholly owned subsidiary of Parent. PEI, as the surviving entity following the Merger, is sometimes referred to in this Agreement as "SURVIVING PEI." 1.2 Effective Time of the Merger. Appropriate Articles of Merger under the Applicable Corporate Law shall be prepared, executed and submitted for filing with the Secretary of State of the State of Texas at the Closing. The date that the Merger becomes effective, in accordance with the Articles of Merger, is referred to as the "EFFECTIVE TIME." 1.3 Closing. For purposes of this Agreement, the term "CLOSING DATE" shall mean the date of the Closing, which shall in no event be later than October 31, 2001. The closing of the transactions contemplated by this Agreement (the "CLOSING") shall occur within three business days of the satisfaction or waiver of all conditions precedent described in Section 5, at the offices of counsel to Parent in Houston, Texas. The parties may agree in writing on another date, time or place for the Closing. At the Closing, the parties will deliver or cause to be delivered the documents described in Section 5. 1.4 Surviving PEI. (a) Articles, Bylaws, Directors and Officers and Name of Surviving PEI. As a result of the Merger, (i) the Articles of Incorporation of PEI, as in effect immediately prior to the Effective Time, a copy of which has been provided to Parent, shall be the Articles of Incorporation of Surviving PEI, (ii) the Bylaws of PEI as in effect immediately prior to the Effective Time, a copy of which has been provided to Parent, shall be the Bylaws of Surviving PEI, and (iii) the directors and officers of PEI and its Subsidiaries immediately prior to the Effective Time shall resign and the directors and officers of Surviving PEI and its Subsidiaries shall be as set forth on Schedule 1.4(a), until the earlier of their resignation or removal or until their respective successors are duly elected or appointed, as the case may be. The name of the surviving corporation shall be "Petrocon Engineering, Inc." In addition, the persons identified on Schedule 1.4(a) shall serve as officers of Parent as specified on such Schedule, until the earlier of their resignation or removal or until their respective successors are duly elected or appointed. (b) Assets and Liabilities of Surviving PEI. As of and after the Effective Time, Surviving PEI shall possess all the rights, privileges, immunities and franchises of a public as well as of a private nature previously belonging to Sub and PEI; and all property (real, personal and mixed), and all debts due on whatever account, including subscriptions to shares, 2 and all other choses in action, and all and every other interest of or belonging to or due to each of Sub and PEI shall be transferred to, and vested in, Surviving PEI without further act or deed; and all such property, rights and privileges, powers and franchises and all and every other interest shall be thereafter the property of Surviving PEI as they were of Sub and PEI; and the title to any real estate, or interest therein, whether by deed or otherwise, shall not revert or be in any way impaired by reason of the Merger. Surviving PEI shall be responsible and liable for all the liabilities and obligations of Sub and PEI, and any claim existing, or action or proceeding pending, by or against Sub or PEI may be prosecuted against Surviving PEI. Neither the rights of creditors nor any liens upon the property of Sub or PEI shall be impaired by the Merger, and all debts, liabilities and duties of each of Sub and PEI shall attach to Surviving PEI, and may be enforced against it to the same extent as if such debts, liabilities and duties had been incurred or contracted by it, all in accordance with the Applicable Corporate Law and the terms of this Agreement. 1.5 Effect on the Capital Stock of Parent, LC, Sub and PEI. As of the Effective Time, by virtue of the Merger, and without further action on the part of any holder of shares of capital stock of or membership interests in PEI, Sub, Parent or LC: (a) Parent Capital Stock. Each share of capital stock of Parent issued and outstanding at the Effective Time shall remain outstanding and shall be unchanged at and after the Merger. (b) LC Membership Interests. The outstanding membership interests in LC shall remain outstanding and shall be unchanged at and after the Merger. (c) PEI Capital Stock. At the Effective Time, all issued and outstanding shares of the capital stock of PEI immediately prior to the Effective Time shall be converted into the right to receive shares of the capital stock of Parent as follows (the "MERGER CONSIDERATION"): (i) All shares of PEI Common Stock that are owned by PEI or any of its subsidiaries as treasury stock shall be cancelled and retired and shall cease to exist and no stock of Parent or other consideration shall be delivered in exchange therefor (the "CANCELLED SHARES"). (ii) All issued and outstanding shares of PEI Common Stock shall be cancelled and converted into the right to receive an aggregate of 9,800,000 shares of Parent Common Stock; provided however, that (x) 1,000,000 of the 9,800,000 shares of the Parent Common Stock shall be deducted from the Merger Consideration to be delivered to the Significant PEI Shareholders (as herein defined) and placed in escrow (the "INDEMNITY ESCROW") pursuant to Section 1.6(a) and (y) the number of shares of Parent Common Stock issuable upon exercise of the Surviving Options (as herein defined) shall be deducted from the Merger Consideration to be delivered to the Significant PEI Shareholders and placed in escrow (the "OPTION ESCROW") pursuant to Section 1.6(b). Each share certificate evidencing Parent Common Stock to be issued to any Significant PEI Shareholder shall, for the period required by the Lockup Agreement (as herein defined), have the following legend: 3 THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A CONTRACTUAL RESTRICTION ON TRANSFER AND MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED, EXCEPT AS SET FORTH IN THAT CERTAIN LOCKUP AGREEMENT BETWEEN THE COMPANY AND THE HOLDER HEREOF, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICES OF THE COMPANY. In addition, the transfer agent for the Company shall be given instructions not to permit the transfer of the shares represented by such certificates prior to the date set forth in the legend. Notwithstanding the foregoing, however, Significant PEI Shareholders may have the legend removed in accordance with the terms of the Lockup Agreement. "SIGNIFICANT PEI SHAREHOLDER" means any Person, other than Gary Coury, who, immediately prior to the Effective Time, owns or controls, together with such Person's Affiliates and through one or more certificates, 100,000 or more shares of PEI Common Stock, including, without limitation the Persons listed on Schedule 1.5(c)(ii). "PERSON" means and includes natural persons, corporations, limited liability companies, limited partnerships (including family limited partnerships), limited liability partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organization, whether or not legal entities, and governments and agencies and political subdivisions thereof and their respective permitted successors and assigns (or in the case of a governmental person, the successor functional equivalent of such Person). (iii) Parent shall issue, in full and final satisfaction of the Remainder Note, 2,500,000 shares of Parent Series A Stock. The terms of the Parent Series A Stock will be as set forth on the form of the Certificate of Designation of Preferences, Limitations and Relative Rights with respect to the Parent Series A Stock attached as Exhibit 1.5(c)(iii) (the "CERTIFICATE OF DESIGNATION"). (iv) At the Effective Time, each PEI option that is an outstanding and unexercised non-qualified stock option or incentive stock option (within the meaning of Section 422 of the Code) immediately prior thereto and each warrant that represents a right to acquire securities in PEI, including the RPM Warrants (as herein defined) and the Coury Warrants (as herein defined), that is outstanding and unexercised shall cease to represent a right to acquire shares of PEI Common Stock and shall be assumed by Parent and converted automatically into an option or warrant, as the case may be (together, the "SURVIVING OPTIONS"), to purchase shares of Parent Common Stock in an amount and at an exercise price determined as provided below (and otherwise subject to the terms of Section 424(a) of the Code (in the case of incentive stock options) and the agreements and plans pursuant to which such options and warrants were issued evidencing grants thereunder): (A) the number of shares of Parent Common Stock to be subject to the Surviving Options shall be equal to the product of the number of shares of PEI Common Stock subject to the original PEI options or warrants multiplied by the per share Merger Consideration received by the holders of PEI Common Stock (provided that such number of shares shall be rounded to the nearest whole share); and (B) the exercise price per share of Parent Common Stock under the Surviving Options shall be equal to the exercise price per share of PEI 4 Common Stock under the option or warrant, divided by the per share Merger Consideration received by the holders of PEI Common Stock (provided that such exercise price shall be rounded to the nearest cent). (v) Upon the exercise of any Surviving Option (other than a cashless exercise): (a) Parent shall immediately deliver the aggregate exercise price received by Parent (less any social security and Medicare taxes required to be paid in by Parent as a result of such exercise) to the Escrow Agent for the Option Escrow (the "OPTION ESCROW AGENT") for deposit in the Option Escrow, (b) the Option Escrow Agent shall deliver the share certificate or certificates representing such shares to Parent and promptly cause Parent to, and Parent promptly shall, cancel a number of shares of Parent Common Stock held by the Option Escrow Agent equal to the number of shares of Parent Common Stock issuable upon the exercise of such Surviving Option, (c) Parent shall deliver to the Option Escrow Agent a certificate for any shares evidenced by the cancelled certificates that remain outstanding, and (d) Parent shall issue to the Person exercising the Surviving Option the number of shares of Parent Common Stock issuable upon such exercise. The Option Escrow Agent shall promptly deliver to each Significant PEI Shareholder a portion of the consideration received from Parent upon the exercise of any Surviving Option (other than a cashless exercise) equal to the Merger Consideration received by such Significant PEI Shareholder divided by the aggregate Merger Consideration received by all Significant PEI Shareholders (a "PRO RATA SHARE"); provided however, that if any Significant PEI Shareholder's Pro Rata Share is less than $500, the Option Escrow Agent may hold such funds in escrow, in a non-interest bearing account, until the amount of the disbursements due to such Significant PEI Shareholder aggregate at least $500. (vi) Upon the expiration of any Surviving Option, the Option Escrow Agent shall transfer to each Significant PEI Shareholder such shareholder's Pro Rata Share of the shares issuable upon exercise of such expiring Surviving Option; provided, however, that if any Significant PEI Shareholder's Pro Rata Share of the shares issuable upon the exercise of such expiring Surviving Option is fewer than 500 shares, the Option Escrow Agent may hold such shares in escrow until the shares to be transferred to such Significant PEI Shareholder under this Agreement aggregate at least 500 shares. Fractional shares shall be rounded to the nearest whole share. (vii) In the event of any cashless exercise of any Surviving Options, Parent shall issue to the Person exercising the Surviving Option the number of shares of Parent Common Stock issuable upon exercise of such Surviving Option after deduction of the number of shares of Parent Common Stock or Surviving Options owned by such Person necessary to pay the cashless exercise price (the "SURRENDERED SHARES"), and the Option Escrow Agent shall surrender to Parent a number of shares of Parent Common Stock equal to the number of shares of Parent Common Stock issued to the Person exercising such Surviving Option. In addition, the Option Escrow Agent shall transfer to each Significant PEI Shareholder from the Option Escrow a number of shares of Parent Common Stock equal to such Significant PEI Shareholder's Pro Rata Share of the Surrendered Shares; provided, however, that if any Significant PEI Shareholder's Pro Rata Share of such Surrendered Shares is less than 500 shares, the Option Escrow Agent may hold such shares in escrow until the aggregate number of undisbursed shares attributable to such Significant PEI Shareholder's Pro Rata Share (together with any undisbursed 5 shares attributable to such Significant PEI Shareholder's Pro Rata Share pursuant to Section 1.5(c)(vi)) is 500 or more shares. (viii) In addition to the foregoing, at any time and from time to time, Parent shall, upon the written request of the Option Escrow Agent and the holder of any Surviving Option and within ten business days of such request, issue to such holder the number of shares of Parent Common Stock specified by the Option Escrow Agent and such holder in such request, provided that contemporaneous with such written request, (w) the Surviving Option held by such holder is cancelled, (x) the Option Escrow Agent surrenders to Parent for cancellation a number of shares of Parent Common Stock equal to the number of shares that the Option Escrow Agent and such holder have requested Parent to issue in such request, (y) if Parent is required to withhold taxes, such taxes, together with any amount of social security and Medicare taxes required to be paid in by Parent, are delivered to Parent, and (z) the number of shares remaining in the Option Escrow is equal to or greater than the aggregate number of shares issuable upon exercise of all then outstanding Surviving Options after giving effect to the issuance of such requested shares of Parent Common Stock and the cancellation of any Surviving Options in connection therewith. (ix) Upon the expiration or cancellation of all Surviving Options, the Option Escrow Agent shall transfer to each Significant PEI Shareholders its Pro Rata Share of the remaining shares of Parent Common Stock (the "REMAINING OPTION SHARES"). With respect to any transfers of shares of Parent Common Stock to any Significant PEI Shareholder in connection with the Remaining Option Shares, fractional shares shall be rounded to the nearest whole share. (x) All warrants issued by PEI that are outstanding immediately prior to the Effective Time and exercisable for shares of PEI Common Stock shall have been converted into PEI Common Stock as a result of the exercise of such warrants or cancelled as of the Effective Time other than the warrants to purchase up to 292,693 shares of PEI Common Stock owned by Richard Mitchen and Robert A. Marks granted under the Warrant Purchase Agreement dated October 17, 1996 among PEI, Willie E. Rigsby and Robert A. Marks (the "RPM WARRANTS") and the warrants to purchase up to 30,499 shares of PEI Common Stock issued by PEI on or about January 29, 1999 to Gary Coury in connection with the issuance of the Coury Debt (the "COURY WARRANTS"); provided that some or all of the RPM Warrants and the Coury Warrants may or may not have been exercised and to the extent unexercised as of the Closing shall be replaced by Parent in accordance with the provisions of Section 1.5(c)(iv) and satisfied from the Option Escrow to the extent such replacement warrants are ever exercised. (xi) The shares of PEI Common Stock converted into the right to receive the Merger Consideration (each a "CONVERTED SHARE") shall, by virtue of the Merger and without any action on the part of the holder thereof, at the Effective Time no longer be outstanding and shall at such time be cancelled and retired and shall cease to exist, and each holder of any Converted Shares shall thereafter cease to have any rights with respect to such Converted Shares, except, upon the surrender of certificates representing such Converted Shares as set forth in Section 1.7, the right to receive the Merger Consideration at the times and in the manner set forth below. 6 (xii) Fractional shares of Parent Common Stock will not be issued in exchange for PEI Common Stock. In lieu of any fractional share, Parent shall deliver a cash amount equivalent (rounded to the nearest cent) to the amount obtained by multiplying such fraction by the current market price per share of the Parent Common Stock (as determined by the Parent Board of Directors acting in good faith) on the Closing Date. All fractional shares of Parent Common Stock to be received by such holder shall be aggregated, it being the intention of the parties that no holder of PEI Common Stock will receive cash in an amount equal to or greater than the value of one full share of Parent Common Stock. However, if the amount due to any PEI Shareholder is less than $1.00, such amount shall be deemed surrendered. No interest shall be payable with respect to the payment of such cash amount. (xiii) The Parent and the Escrow Agent may delegate to the Parent's transfer agent any of their duties hereunder relating to the cancellation and issuance of shares or to the delivery of checks in lieu of fractional shares to the PEI Shareholders. 1.6 Escrow. (a) Of the shares of Parent Common Stock to be issued to each of the shareholders of PEI (the "PEI SHAREHOLDERS") at Closing, 1,000,000 shares will be deducted from the Merger Consideration to be delivered to the Significant PEI Shareholders and be held in escrow pursuant to an escrow agreement (the "INDEMNIFICATION ESCROW AGREEMENT") in the form of the Indemnification Escrow Agreement attached as Exhibit 1.6(a). (b) Of the shares of Parent Common Stock to be issued to the PEI Shareholders at the Closing, a number of shares of Parent Common Stock equal to the number of shares of Parent Common Stock issuable upon the exercise of the Surviving Options will be delivered to the Option Escrow Agent to be held in escrow pursuant to the terms of an escrow agreement (the "OPTION ESCROW AGREEMENT") in the form of Option Escrow Agreement attached as Exhibit 1.6(b). 1.7 Exchange of Certificates. (a) At or before the Effective Time, Parent shall supply, or cause to be supplied, to Parent's transfer agent (the "EXCHANGE AGENT"), in trust for the benefit of the holders of PEI Common Stock and Equus (other than the Cancelled Shares), for exchange in accordance with this Section 1.7, certificates evidencing shares of Parent Common Stock and Parent Series A Stock (together, the "PARENT STOCK") issuable pursuant to this Agreement in exchange for outstanding PEI Common Stock and the Remainder Note, respectively. (b) As soon as reasonably practicable after the Effective Time (but in no event more than ten days thereafter), Parent shall instruct the Exchange Agent to mail to Equus and to each holder of record of a certificate or certificates which immediately prior to the Effective Time evidenced outstanding shares of PEI Common Stock (the "PEI CERTIFICATES"), other than Cancelled Shares, (i) a letter of transmittal, which letter shall specify, among other conditions, that delivery shall be effected, and risk of loss and title to the PEI Certificates shall pass, only upon proper delivery of the PEI Certificates to the Exchange Agent; (ii) instructions to effect the 7 surrender of the PEI Certificates in exchange for certificates evidencing shares of Parent Stock (the "PARENT CERTIFICATES") and, in lieu of any fractional shares thereof, cash; and (iii) instructions to convert the Remainder Note (as hereinafter defined) to 2,500,000 shares of Parent Series A Stock issued to Equus. Upon surrender of a PEI Certificate for cancellation to the Exchange Agent, together with such letter of transmittal, duly executed, and such other customary documents as may be reasonably required by Parent or the Exchange Agent, the holder of such PEI Certificate shall be entitled to receive in exchange therefor (x) a Parent Certificate evidencing that whole number of shares of Parent Stock which such holder has the right to receive in respect of the shares of PEI Common Stock formerly evidenced by such PEI Certificate in accordance with applicable provisions hereof and (y) cash in lieu of a fractional share of Parent Stock to which such holder is entitled, and the PEI Certificate so surrendered shall forthwith be cancelled. Until surrendered, each outstanding PEI Certificate which represented shares of PEI Common Stock, shall be deemed from and after the Effective Time, for all corporate purposes other than the payment of dividends, to evidence the ownership of the number of full shares of Parent Stock into which such shares of PEI Common Stock may be exchanged in accordance herewith and the right to receive an amount in cash in lieu of the issuance of any fractional shares. (c) No dividends or other distributions with respect to Parent Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered PEI Certificate with respect to the Parent Stock such holder is entitled to receive until such holder has surrendered his PEI Certificate. Subject to applicable law, following the surrender of any PEI Certificate, there shall be paid to the record holder of the Parent Certificates issued in exchange therefor, without interest, at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of Parent Stock. (d) If any Parent Certificate is to be issued in a name other than that in which the PEI Certificate surrendered in exchange therefor is registered, it shall be a condition of the issuance thereof that the PEI Certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer and that the Person requesting such exchange shall have paid to Parent, or any agent designated by Parent, any transfer or other taxes required by reason of the issuance of a Parent Certificate in any name other than that of the registered holder of the PEI Certificate surrendered. (e) Neither Parent nor PEI shall have any liability to any holder of PEI Common Stock for any Merger Consideration (or dividends or distributions with respect thereto) which is delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. 1.8 Stock Transfer Books. At the Effective Time, the stock transfer books of PEI shall be closed, and there shall be no further registration of transfers of PEI Common Stock on the records of PEI. 8 1.9 Dissenting Shares. (a) Notwithstanding any provision of this Agreement to the contrary, any shares of PEI Common Stock held by a holder who has exercised appraisal rights for such shares in accordance with the Applicable Corporate Law and who, as of the Effective Time, has not effectively withdrawn or lost such appraisal rights (the "DISSENTING SHARES"), shall not be converted into, or represent a right to receive, the Merger Consideration. Such holders shall be entitled only to such rights as are granted by the Applicable Corporate Law with respect to such Dissenting Shares; provided however, all Dissenting Shares held by holders who fail to perfect or who effectively withdraw or lose their rights to appraisal of such shares under the Applicable Corporate Law shall be converted into and become exchangeable for the right to receive, without interest thereon, the Merger Consideration upon surrender of their PEI Certificates. (b) Parent shall give PEI prompt written notice of any demands received by Parent to require Parent to purchase Dissenting Shares, the withdrawal of any such demands, and any other notices or instruments served pursuant to the Applicable Corporate Law and received by Parent. Parent shall not, except with the prior written consent of PEI, voluntarily make any payment with respect to any Dissenting Shares or offer to settle, or settle, any such demands with respect thereto. 1.10 No Further Ownership Rights in PEI Common Stock. The Merger Consideration delivered upon the surrender of PEI Certificates in accordance with the terms hereof shall be deemed to have been delivered in full satisfaction of all rights pertaining to such PEI Certificates, and there shall be no further registration of transfers on the records of Surviving PEI of shares of PEI Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, PEI Certificates are presented to Surviving PEI for any reason, they shall be cancelled and exchanged for the Merger Consideration as described in Section 1.5. 1.11 Lost, Stolen or Destroyed Certificates. If any PEI Certificate shall have been lost, stolen or destroyed (a "LOST PEI CERTIFICATE"), the Parent or the Exchange Agent may, in their sole discretion, require the holders of the Lost PEI Certificate to file a sworn affidavit confirming the loss of such PEI Certificate and to deliver a bond in such sum as they may reasonably direct as indemnity against any claim that may be made against Parent or the Exchange Agent with respect to the Lost PEI Certificate. The Parent shall subsequently use its commercially reasonable best efforts to cause the Exchange Agent to deliver to the registered owner of the Lost PEI Certificate such Merger Consideration as may be required pursuant to this Agreement. 1.12 Shareholder Approval. Both Parent and PEI shall prepare the necessary proxy materials (which shall be included in a Registration Statement and Joint Proxy Statement on Form S-4 (the "MERGER PROXY") to be filed with the U.S. Securities and Exchange Commission (the "SEC")), to obtain at a shareholders' meeting the required consent, approval or ratification of their respective shareholders in accordance with the Securities Act of 1933, as amended ("SECURITIES ACT"), the Securities Exchange Act of 1934, as amended ("EXCHANGE ACT"), the Applicable Corporate Law and this Agreement, as necessary for the consummation of the transactions contemplated by this Agreement. After the Merger Proxy is approved by the SEC, Parent and PEI shall distribute the Merger Proxy to their respective shareholders and they shall 9 each conduct a shareholders' meeting to approve the matters set forth in the Merger Proxy. The Merger Proxy and related documents shall be in form and substance satisfactory to Parent and PEI. Parent and PEI shall each pay one-half of the distribution and printing expenses, registration fees and listing fees related to the Merger Proxy; provided however, if the transactions contemplated hereby are not consummated because one of the parties fails to obtain shareholder approval, that party shall pay all of such costs. Parent and PEI shall each pay their own financial advisory fees. 1.13 Tax and Accounting Consequences. It is intended by Parent and PEI that the Merger shall constitute a tax-free reorganization for federal income tax purposes within the meaning of Section 368(a) of the Code. Parent and PEI hereby adopt this Agreement as a "plan of reorganization" within the meaning of Section 1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations. None of Parent, Sub, LC, PEI or any PEI Shareholder will take any actions that disqualify the Merger for such treatment. 2. REPRESENTATIONS AND WARRANTIES OF PARENT Parent hereby represents and warrants to PEI and the PEI Shareholders that, except as otherwise disclosed in the Disclosure Schedules or in Parent's Forms 10-KSB for the year ended December 31, 2000 and 10-QSB for the quarter ended March 31, 2001 filed with the SEC (the "CURRENT PARENT SEC DOCUMENTS"), the following statements are true and correct as to Parent and each of its Subsidiaries. For purposes of this Agreement, an entity shall be deemed to be a "SUBSIDIARY" of a second entity if the second entity holds, directly or indirectly through its ownership of one or more Subsidiaries, more than more than 50% of the total outstanding voting power of shares of stock (or equivalent ownership or controlling interest) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or general partners thereof. 2.1 Organization, Etc. Parent and each of its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation and is duly qualified or licensed as a foreign corporation authorized to do business in all other states in which any of its assets or properties may be situated or where the business of Parent or each of its Subsidiaries, respectively, is conducted, except where the failure to obtain such qualification or license will not have a Parent Material Adverse Effect. For purposes of this Section 2, the term "PARENT MATERIAL ADVERSE EFFECT" shall mean an adverse effect on the properties, assets, financial position, results of operations, long-term debt, other indebtedness, cash flows or contingent liabilities of Parent or each of its Subsidiaries in an amount of $100,000 or more. 2.2 Capitalization of Parent. The total authorized capital stock of Parent consists of 75,000,000 shares of Parent Common Stock, of which 12,964,918 shares are issued and outstanding as of the date of this Agreement. No shares are held as treasury stock of Parent. Each issued and outstanding share of capital stock of Parent is duly and validly authorized and issued, fully paid and non- assessable, and was not issued in violation of the preemptive rights of any past or present shareholder. Except as disclosed on Schedule 2.2, there are no outstanding convertible or exchangeable securities, shares of capital stock, subscriptions, calls, options, 10 warrants, rights or other agreements or commitments of any character relating to the issuance or sale of any shares of capital stock of, or other equity ownership interest in, Parent. Parent has no liability, contingent or otherwise, to any Person or entity in connection with preemptive or contractual subscription rights or the offer, sale, purchase, surrender or cancellation of any shares of capital stock, convertible or exchangeable securities, warrants, options, rights or other agreements or commitments of any character relating to the issuance and sale of the capital stock of, or other equity ownership in (collectively, "OTHER OWNERSHIP INTERESTS"), Parent or other voting interests or securities of Parent. The shares of Parent Common Stock and the Parent Series A Stock to be issued pursuant to the Merger are, or at the time of issuance will be, duly authorized and, when issued in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable. The issuance of the Parent Common Stock to the PEI Shareholders and the issuance of the Parent Series A Stock to Equus in accordance with the terms of this Agreement will transfer to the PEI Shareholders and to Equus valid title to such shares, free and clear of all liens, pledges, mortgages, security interests, conditional sales contracts and encumbrances. 2.3 Parent Series A Stock. At the Effective Time, the Parent Series A Stock will be, upon its issuance, duly authorized, validly issued, fully paid, and nonassessable. At the Effective Time, the underlying Parent Common Stock then and thereafter issuable upon conversion of the Parent Series A Stock will be duly reserved for issuance, and, when issued upon conversion of the Parent Series A Stock, will be duly authorized, fully paid and nonassessable. 2.4 Subsidiaries. The Subsidiaries of Parent are disclosed in Schedule 2.4. Each Significant Subsidiary (as such term is defined in Rule 1-02 of Regulation S-X under the Securities Act) of Parent has been named in the Parent SEC Documents. Schedule 2.4 contains, with respect to each Subsidiary of Parent, its name and jurisdiction of incorporation and, with respect to each Subsidiary of Parent that is not wholly owned, the number of issued and outstanding shares of capital stock and the number of shares of capital stock owned by Parent or a Subsidiary of Parent. All the outstanding shares of capital stock of each Subsidiary of Parent are validly issued, fully paid and non-assessable, and those owned by Parent or by a Subsidiary of Parent are owned free and clear of any security interests, pledges, options, rights of first refusal, liens, claims, encumbrances or any other limitation or restriction (including a restriction on the right to vote or sell the same except as may be provided as a matter of law). Except as set forth in Schedule 2.4, there are no existing options, warrants, calls or other rights, agreements or commitments of any character relating to the issued or unissued capital stock or other securities of any of the Subsidiaries of Parent. 2.5 Interim Operations of Sub and LC. Sub was formed solely for the purpose of engaging in the transactions contemplated hereby, has engaged in no other business activities and has conducted its operations only as contemplated hereby. LC has solely engaged in the transactions contemplated hereby, has engaged in no other business activities and has conducted its operations only as contemplated hereby. 2.6 Authority. Each of Parent, LC and Sub has the requisite right, power and authority to execute, deliver and perform this Agreement and all documents and instruments referred to in this Agreement or contemplated hereby (the "PARENT RELATED DOCUMENTS") and to 11 consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of each of Parent, LC and Sub. This Agreement has been duly and validly executed and delivered by each of Parent, LC and Sub, and assuming the due authorization, execution and delivery by PEI, constitutes a valid and binding agreement of each of Parent, LC and Sub, enforceable against each of Parent, LC and Sub in accordance with its terms. All of the Parent Related Documents, when duly executed and delivered by Parent, LC and Sub, will constitute legal, valid and binding obligations of each of Parent, LC and Sub, enforceable against each of Parent, LC and Sub in accordance with their respective terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (whether applied in a proceeding at law or in equity). 2.7 Consents. No approval, consent, order or action of or filing with any court, administrative agency, governmental authority or other third party is required for the execution, delivery or performance by each of Parent, LC or Sub of this Agreement or the Parent Related Documents or the consummation by each of Parent, LC or Sub of the transactions contemplated hereby, except for (i) the filing of articles of merger, in form mutually acceptable to each of Parent and PEI, with the Secretary of State of the State of Texas (the "MERGER FILING"), (ii) the filing of the Merger Proxy with the SEC, (iii) such filings as may be required under federal and state securities laws, and (iv) approval by (x) Parent's stockholders (including a majority of the stockholders other than Alliance and its Affiliates) of the matters to be submitted to them for approval pursuant to the Merger Proxy and the American Stock Exchange and (y) the SEC. Parent and each of its Subsidiaries have obtained all the licenses and permits that are legally required for the continued operation of their respective businesses after the Effective Time, except such licenses and permits, the absence of which will not have a Parent Material Adverse Effect. 2.8 Proprietary Rights. Parent and each of its Subsidiaries has full and sufficient rights to use all trade names, brand names, trademarks, service marks and logos and to use and practice all technology, proprietary information, know- how or patented ideas, designs or inventions (collectively "PROPRIETARY RIGHTS") necessary for the present operation of its businesses and the marketing, distribution, sale and use of the materials used and the products sold by Parent and each of its Subsidiaries. To Parent's knowledge, (i) none of the ownership, access to, use or practice of the Proprietary Rights by Parent or any of its Subsidiaries infringes on the rights of any other party and (ii) all Proprietary Rights are valid and enforceable. 2.9 Title. Except as set forth on Schedule 2.9, Parent and each of its Subsidiaries owns outright, and has full legal and beneficial title to all of its assets, free and clear of all liens, pledges, mortgages, security interests, conditional sales contracts and encumbrances, including good and marketable title to all of its real property interests, free and clear of any mortgages, security agreements, liens or encumbrances. 2.10 Defaults. Neither Parent nor any of its Subsidiaries nor any Designated Plan (as defined herein) of Parent is in default under or in violation of, and the execution and delivery of 12 the Agreement and Parent Related Documents, and the consummation of the transactions contemplated hereby, will not result in a default by Parent or any of its Subsidiaries or any Parent Designated Plan under or a violation of (i) any mortgage, indenture, charter or bylaw provision, provision of any Parent Designated Plan, contract, agreement, lease, commitment or other instrument of any kind to which Parent or any of its Subsidiaries or any Parent Designated Plan is a party or by which Parent or any of its Subsidiaries or any Parent Designated Plan or any of its properties or assets may be bound or affected or (ii) any law, rule or regulation applicable to Parent or any of its Subsidiaries or any Parent Designated Plan or any court injunction, order or decree, or any valid and enforceable order of any governmental agency in effect having jurisdiction over Parent or any Parent Designated Plan, which default or violation could adversely affect the ability of Parent or any of its Subsidiaries to consummate the transactions contemplated hereby or will have a Parent Material Adverse Effect. 2.11 Full Authority. Parent and each of its Subsidiaries has full power, authority and legal right, and has all licenses, permits, qualifications, and other documentation (including permits required under applicable Environmental Laws (as defined herein), necessary, to own and/or operate its businesses, properties and assets and to carry on its businesses as being conducted on the date hereof, and such businesses are now being conducted and such assets and properties are being owned and/or operated, and Parent Plans have been implemented and maintained, in compliance with all applicable laws (including Environmental Laws), ordinances, rules and regulations of any governmental agency of the United States, any state or political subdivision thereof, or any foreign jurisdiction, all applicable court or administrative agency decrees, awards and orders and all such licenses, permits, qualifications and other documentation, except where the failure to comply will not have a Parent Material Adverse Effect, and there is no existing condition or state of facts which would give rise to a violation thereof or a liability or default thereunder, except where a violation, liability or default will not have a Parent Material Adverse Effect. 2.12 Parent's SEC Documents. Parent has filed each material form, including, but not limited to, each report, schedule, registration statement and definitive proxy statement required to be filed by Parent with the SEC (the "PARENT SEC DOCUMENTS"). As of its filing date (and, with respect to any registration statement, the date on which it was declared effective), each Parent SEC Document was, and all information to be included by Parent in the Merger Proxy will be, in compliance, in all material respects, with all legal requirements and contained or will contain no untrue statement of a material fact and did not or will not omit any statement of a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made or will be made, not misleading. The financial statements of Parent included in the Parent SEC Documents complied, and the financial statements of Parent included in the Merger Proxy will comply at the time of filing with the SEC (and, with respect to any registration statement, at the time it was declared effective), in all material respects, with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved and fairly present, in all material respects (subject, in the case of the unaudited statements, to normal, recurring year-end audit adjustments), the consolidated financial position of Parent and its consolidated subsidiaries as at the dates thereof and the consolidated results of their operations 13 and changes in financial position for the periods then ended. Since December 31, 2000, there have been no changes in the Parent's method of accounting for tax purposes or any other purposes. The consolidated financial statements of Parent and its consolidated subsidiaries as of December 31, 2000, and as of June 30, 2001, included the Parent SEC Documents, and to be included in the Merger Proxy, disclose or will disclose, as applicable, all liabilities of Parent and its consolidated subsidiaries required to be disclosed therein and contain adequate reserves for taxes and all other material accrued liabilities. 2.13 Investment Company. Neither Parent nor any of its Subsidiaries is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or a "holding company," a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 2.14 Undisclosed Liabilities. Except as and to the extent disclosed in the Parent SEC Documents or on Schedule 2.14, neither Parent nor any of its Subsidiaries has any liabilities or obligations of any nature (whether absolute, contingent or otherwise) which would result in a Parent Material Adverse Effect. 2.15 Taxes. Parent and each of its Subsidiaries has filed all requisite federal and other Tax Returns, information returns, declarations and reports for all fiscal periods ended on or before December 31, 2000; and there are no claims (nor is there any matter pending which may result in a claim) against Parent or any of its Subsidiaries for federal, state or local income, sales, use, franchise or other taxes for any period or periods prior to and including December 31, 2000 and no notice of any claim, whether pending or threatened, for taxes has been received which would create a lien on the assets of Parent of any of its Subsidiaries, or result in a Parent Material Adverse Effect. The amounts shown as accruals for taxes in the financial statements included in the Current Parent SEC Documents are sufficient for the payment of all taxes of any kind or nature whatsoever for all fiscal periods ended on or before that date. Copies of the federal, state and local income tax returns and franchise tax returns (collectively, "TAX RETURNS") of Parent for its last three fiscal years have been provided to PEI. Except as set forth on Schedule 2.15, neither Parent nor any of its Subsidiaries has obtained an extension of time in which to file any Tax Returns which have not yet been filed. Neither Parent nor any of its Subsidiaries has waived any statute of limitations with respect to federal, state, or local income, sales, use, franchise or other taxes or agreed to any extensions of time with respect to a tax assessment or deficiency, except for such waivers or extensions which, by their terms, have lapsed as of the date hereof. 2.16 Legal Actions. Except as set forth on Schedule 2.16, no legal action, suit, audit, investigation, unfair labor practice charge, complaint, claim, grievance, or proceeding by or before any court, arbitration panel, governmental authority or third party is pending or, to the knowledge of Parent (after making inquiry with officers of Parent in a position to have such knowledge) threatened, which involves or may involve Parent, any of its Subsidiaries, or its now or previously owned or operated assets, operations, properties or businesses. 14 2.17 Parent Contracts; Parent Plans. Neither Parent nor, to Parent's knowledge, any other party thereto, is in default under or in violation of any Parent Contract or Designated Plan. 2.18 No Material Adverse Change. Except for the actions contemplated by this Agreement or as set forth on Schedule 2.18, since December 31, 2000, to Parent's knowledge there has not been: (a) any change in Parent's Articles of Incorporation or Bylaws, (b) any change in the financial condition, assets, liabilities (contingent or otherwise), income, business or prospects of Parent or any of its Subsidiaries resulting in a Parent Material Adverse Effect; (c) any damage, destruction or loss (whether or not covered by insurance) resulting in a Parent Material Adverse Effect on the properties or business of Parent or its Subsidiaries; (d) any change in the number of authorized or outstanding shares of stock, or membership interests, as applicable, of Parent or its Subsidiaries; (e) any declaration or payment of any dividend or distribution in respect of the capital stock or any direct or indirect redemption, purchase or other acquisition of any of the capital stock of Parent or its Subsidiaries; (f) any contract or commitment entered into by Parent or any of its Subsidiaries or any incurrence by Parent or its Subsidiaries of any liability or make any capital expenditures in excess of $100,000; (g) any increase in the compensation, bonus, sales commissions or fee arrangement payable or to become payable by Parent or any of its Subsidiaries to any of their respective officers, directors, stockholders, employees, consultants or agents; (h) any work interruptions, labor grievances or claims filed, proposed law or regulation (the existence of which is known, or under the normal course of business should be known, to Parent or its Subsidiaries) or any event or condition of any character which would have a Parent Material Adverse Effect on the business or future prospects of Parent or any of its Subsidiaries; (i) any creation, assumption or permitting to exist any mortgage, pledge or other lien or encumbrance upon any assets or properties whether now owned or hereafter acquired; (j) any sale or transfer, or any agreement to sell or transfer, any material assets, properties or rights of Parent or any of its Subsidiaries to any Person, including, without limitation, the stockholders and their respective Affiliates except as contemplated by this Agreement; (k) any cancellation, or agreement to cancel, any indebtedness or other obligation owing to Parent or any of its Subsidiaries, including, without limitation, any indebtedness or obligation of the stockholders or any of their Affiliates; (1) any plan, agreement or arrangement granting any preferential rights to purchase or acquire any interest in any of the assets, properties or rights of Parent or its Subsidiaries or requiring consent of any party to the transfer and assignment of any such assets, properties or rights; (m) any purchase or acquisition of, or agreement, plan or arrangement to purchase or acquire, any property, rights or assets of Parent or any of its Subsidiaries; (n) any negotiation for the acquisition of any business or start-up of any new business; (o) any merger or consolidation or agreement to merge or consolidate with or into any other entity (except the transactions contemplated by this Agreement); (p) any waiver of any material rights or claims of Parent or any of its Subsidiaries; (q) any breach, amendment or termination of any material contract, agreement, license, permit, permit application or other right to which Parent or any of its Subsidiaries is a party; (r) any discharge, satisfaction, compromise or settlement of any claim, lien, charge or encumbrance or payment of any obligation or liability, contingent or otherwise, other than current liabilities as of December 31, 2000, as set forth in the financial statements included in the Current Parent SEC Documents, current liabilities incurred since December 31, 2000 in the ordinary course of business and prepayments of obligations in accordance with normal and customary past practices; (s) any transaction by Parent or any of its Subsidiaries outside the ordinary course of their respective business or prohibited hereunder; or 15 (t) any material adverse change in the financial condition, results of operations or business of Parent or its Subsidiaries taken as a whole, and no event or condition has occurred or exists that insofar as may reasonably be foreseen, will result in a material adverse change in the financial condition, results of operations or business of Parent or any of its Subsidiaries taken as a whole. 2.19 Predecessors. The Parent SEC Documents contain all names under which Parent has done business as well as the names of all predecessors of Parent, including the names of any entities from which Parent previously acquired significant assets. 2.20 Affiliate Relationships. No Affiliate of the shareholders, and no director, officer or employee of or consultant to Parent or any of its Subsidiaries owns, directly or indirectly, in whole or in part, any property, asset or right, tangible or intangible, which is associated with any property, asset or right owned by Parent or its Subsidiaries or that they operate or use, or the use of which is necessary, for their respective business. The term "AFFILIATE" means, with respect to any Person, any other Person which directly or indirectly, by itself or through one or more intermediaries, Controls, or is Controlled by, or is under direct or indirect common Control with, such Person. The term "CONTROL" (and derivations thereof) means the possession, directly or indirectly, of the power to direct, or cause the direction of, the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. 2.21 Disclosure. No representation or warranty by Parent in this Agreement, and no statement contained in the Disclosure Schedules or any certificate delivered by Parent to PEI pursuant to this Agreement, contains or will contain any untrue statement of a material fact or omits or will omit any material fact necessary in order to make the statements herein or therein, in light of the circumstances under which they are or were made, not misleading. 2.22 Other Disclosures. The following disclosures pertaining to Parent and each of its Subsidiaries are set forth in the Disclosure Schedules: (a) Except as disclosed on Schedule 2.22(a), neither Parent nor any of its Subsidiaries has any products or uses any product registrations, and there are no material safety data sheets, toxicology studies or environmental studies with respect to the business of Parent or any of its Subsidiaries; (b) Except as disclosed on Schedule 2.22(b), neither Parent nor any of its Subsidiaries owns of record or beneficially, or leases, any real property; (c) Schedule 2.22(c) is a list of assets owned by Parent and each of its Subsidiaries as of the date hereof which have been capitalized and have an unamortized value of $10,000 or more, including vehicles and rolling stock, and a list of all leased equipment of Parent and each of its Subsidiaries, including leased vehicles; (d) There are no raw materials or other property located at any property owned or leased as lessee by Parent or any of its Subsidiaries that have been consigned to Parent or any of its Subsidiaries, or are otherwise owned by a third party, and have a market value exceeding $10,000; 16 (e) Listed on Schedule 2.22(e) is each policy of insurance maintained by Parent and each of its Subsidiaries, and Parent has provided PEI with information on coverages, insurers and expiration dates, an accurate list of all insurance loss runs and workers' compensation claims received for the past three policy years. Parent represents and warrants that (i) such insurance is currently in full force and effect, (ii) except as set forth on Schedule 2.22(e), Parent's insurance has never been cancelled, (iii) Parent has never been denied coverage or experienced a substantial increase in premiums or a substantial reduction in coverage from one policy period to the next policy period (other than increases resulting from the growth of Parent and its Subsidiaries and from the increased cost of insurance generally), (iv) to Parent's knowledge, such coverage is adequate in character and amount, (v) such coverage is placed with financially sound and reputable insurers unaffiliated with any of the stockholders of Parent, and (vi) similar coverage has been in place each year for the past four years. (f) Schedule 2.22(f) is a list of each bank, brokerage firm, trust or other financial institution in which Parent or any of its Subsidiaries has an account and the identity of each such account, and each bank in which Parent or any of its Subsidiaries has a safe deposit box, together with the names of all Persons authorized to draw on any such account or have access to any such safe deposit box; (g) Schedule 2.22(g) is a list and summary description of, or copies of, all governmental licenses and permits of Parent and each of its Subsidiaries; (h) Schedule 2.22(h) is a list of each debt, note, mortgage, security agreement, pledge agreement, guaranty, bond, letter of credit, lease or other instrument creating any debt or contingent obligation of Parent or any of its Subsidiaries, or creating a lien or claim on any assets of Parent or any of its Subsidiaries (other than unsecured trade accounts payable incurred in the ordinary course of business); (i) Schedule 2.22(i) is a list of all of Parent's Proprietary Rights and a description of all license fees and royalties (or the basis of calculation thereof) required to be paid now or in the future by Parent or any of its Subsidiaries for the use and practice of its Proprietary Rights; (j) Except as disclosed on Schedule 2.22(j), neither Parent nor any of its Subsidiaries has any Contracts. The term "CONTRACT" means each contract, lease, undertaking, commitment, mortgage, indenture, note, security agreement, license and other agreement in effect on the date hereof (i) with a party other than a customer or client of Parent or its Subsidiaries and involving the expenditure or receipt of more than $100,000 in any year; (ii) with a customer or client of Parent, its Subsidiaries or Sub and involving the expenditure or receipt of more than $1.0 million over the term thereof; (iii) containing provisions calling for the sale or purchase of raw materials, products or services at prices that vary from the market prices of such raw materials, products or services generally prevailing in customary third party markets; (iv) which include "most favored nations" or similar pricing or delivery arrangements; (v) requiring Parent, its Subsidiaries or Sub, as the case may be, to indemnify or hold harmless any other Person or entity; (vi) evidencing any warranty obligation of Parent, its Subsidiaries or Sub, as the case may be, with respect to goods, services or products sold or leased by it (other than 17 warranties given in the ordinary course of business); (vii) imposing on Parent, its Subsidiaries or Sub, as the case may be, any confidentiality, non-disclosure or non-compete obligation or containing any acceleration or termination provisions effective upon a change of control of Parent, Subsidiaries or Sub, respectively, or a merger of Parent or Sub into another entity; or (viii) involving collective bargaining agreements or other agreements with any labor union or employee group; (k) Neither Parent nor any of its Subsidiaries has powers of attorney presently in effect granted by Parent or any of its Subsidiaries, and all investments of Parent or its Subsidiaries in any equity securities, partnership interests, indebtedness or other interests in any other corporation, or any person, partnership, joint venture, limited liability company, trust, limited partnership or other legal entity; and (l) Schedule 2.22(l) includes a list of all current officers, directors and managers of Parent and each of its Subsidiaries. Parent has provided PEI with a complete listing of the compensation of such individuals. 2.23 Tax Reorganization Representations. (a) LC is a domestic eligible entity, as defined in Treasury Regulation Section 301.7701-3(b)(1)(ii), for federal income tax purposes that is wholly owned by Parent and that has not elected to be treated as an association taxable as a corporation under Treasury Regulation Section 301.7701-3(a). (b) Prior to the Merger, Parent, through its ownership of LC, will be in control of Sub within the meaning of Section 368(c) of the Code. (c) Neither Parent nor LC has any plan or intention to cause Surviving PEI to issue additional shares of its stock that would result in Parent, through its ownership of LC, losing control of Surviving PEI within the meaning of Section 368(c) of the Code. (d) Parent has no plan or intention to reacquire any of its stock issued in the Merger. (e) Neither Parent nor LC has any plan or intention to liquidate Surviving PEI; to merge Surviving PEI with or into another corporation; to sell or otherwise dispose of the stock of Surviving PEI except for transfers of stock to another corporation controlled by Parent to the extent permitted by Treasury Regulation Section 1.368-2(k)(2); or to cause Surviving PEI to sell or otherwise dispose of any of its assets, except for dispositions made in the ordinary course of business or transfers of assets to a corporation controlled by Parent to the extent permitted by Treasury Regulation Section 1.368-2(k)(2). (f) Following the Closing, Parent's and LC's intention is that Surviving PEI will continue the historic business of PEI or use a significant portion of the historic business assets of PEI in a business, all as required to satisfy the "continuity of business enterprise" requirement under Section 368 of the Code. 18 (g) Neither Parent nor LC owns, nor has either Parent or LC owned during the past five years, any shares of the stock of PEI. (h) Each of Parent, LC and Sub is undertaking the Merger for a bona fide business purpose and not merely for the avoidance of federal income tax. (i) None of Parent, LC or Sub is an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. (j) As of the Closing Date, Sub will have no liabilities which would be assumed by Surviving PEI, and Sub will not transfer to Surviving PEI any assets that are subject to liabilities in the Merger. (k) The consideration used by Sub to pay the $2 Million Notes, pursuant to Sections 5.3(i) and 5.5(a) of this Agreement, will be provided by Parent in accordance with Treasury Regulation Section 1.368- 2(j)(3)(iii). (l) The only assets of Sub prior to the Merger will be assets transferred by Parent to Sub, which assets will be used for the purposes set forth in Treasury Regulation Section 1.368-2(j)(3)(iii). 2.24 Brokers. Except for fees payable to J.C. Sorensen, no broker, investment banker or other Person is entitled to any broker's, finder's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Parent, its Subsidiaries or Sub. 2.25 Labor and Employment Matters. Neither Parent nor any of its Subsidiaries has employees who are represented by a labor union or organization, no labor union or organization has been certified or recognized as a representative of any such employees, and neither Parent nor any of its Subsidiaries is a party to or has any obligation under any collective bargaining agreement or other contract or agreement with any labor union or organization. There are no pending or, to Parent's knowledge, threatened, representation campaigns, elections or proceedings or questions concerning union representation involving any employees of either Parent or any of its Subsidiaries. Neither Parent nor any of its Subsidiaries has any knowledge of any activities or efforts of any labor union or organization (or representatives thereof) to organize any of its employees, any demands for recognition or collective bargaining, any strikes, slowdowns, work stoppages or lock-outs of any kind, or threats thereof, by or with respect to any employees of Parent or any of its Subsidiaries, and no such activities, efforts, demands, strikes, slowdowns, work stoppages or lock-outs occurred during a three-year period preceding the date hereof. Neither Parent nor any of its Subsidiaries has engaged in, admitted committing, or been held in any administrative or judicial proceeding to have committed any unfair labor practice under the National Labor Relations Act, as amended. Except as set forth on Schedule 2.25, neither Parent nor any of its Subsidiaries is involved in any industrial or trade dispute or any dispute or negotiation regarding a claim of material importance with any labor union or organization concerning its employees, and there are no controversies, claims, demands or 19 grievances of material importance pending or, so far as Parent is aware, threatened, between Parent or any of its Subsidiaries and any of their respective employees. 2.26 Employee Benefit Plans. (a) List of Plans. Schedule 2.26(a) includes a complete and accurate list of all employee benefits plans ("PLANS"), as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and material benefit arrangements that are not Plans ("BENEFIT ARRANGEMENTS"), including, but not limited to any (i) employment or consulting agreements, (ii) incentive bonus or deferred bonus arrangements, (iii) arrangements providing termination allowance, severance or similar benefits, (iv) equity compensation plans, (v) deferred compensation plans, (vi) cafeteria plans, (vii) employee assistance programs, (viii) bonus programs, (ix) scholarship programs, (x) vacation policies, and (xi) stock option plans that are currently in effect or were maintained within three years of the Effective Time, or have been approved before the Effective Time but are not yet effective, for the benefit of directors, officers, employers or former employees (or their beneficiaries) of Parent or a Controlled Company (Plans and Benefit Arrangements collectively referred to herein as "DESIGNATED PLANS"). "CONTROLLED COMPANY" shall mean any entity that, together with Parent as of the relevant determination date under ERISA, is or was required to be treated as a single employer under Section 414 of the Code and any reference to Parent in this Section 2.26 shall also include a reference to a Controlled Company. (b) No Title IV Plans or VEBAS. Neither Parent nor any entity (whether or not incorporated) that was at any time during the six years before the Effective Time treated as a single employer together with Parent under Section 414 of the Code has ever maintained, had any obligation to contribute to or incurred any liability with respect to a pension plan that is or was subject to the provisions of Title IV of ERISA or Section 412 of the Code. Neither Parent nor any entity (whether or not incorporated) that was at any time during the six years before the Effective Time treated as a single employer together with Parent under Section 414 of the Code has ever maintained, had an obligation to contribute to, or incurred any liability with respect to a multiemployer pension plan as defined in Section 3(37) of ERISA. During the six years before the Effective Time, Parent has not maintained, had an obligation to contribute to or incurred any liability with respect to a voluntary employees beneficiary association that is or was intended to satisfy the requirements of Section 501(c)(9) of the Code. (c) Designated Plans. With respect to each Designated Plan, Parent has delivered to PEI, as applicable, true and complete copies of (i) all written documents comprising such Plan or each Benefit Arrangement (including amendments and individual agreements relating thereto), (ii) the trust, group annuity contract or other document that provides for the funding of the Designated Plan or the payment of Designated Plan benefits, (iii) the three most recent annual Form 5500, 990 and 1041 reports (including all schedules thereto) filed with respect to the Designated Plan, (iv) the most recent actuarial report, valuation statement or other financial statement, (v) the most recent Internal Revenue Service ("IRS") determination letter and all rulings or determinations requested from the IRS after the date of that determination letter, (vi) the summary plan description currently in effect and all material modifications thereto, and (vii) all other correspondence from the IRS or Department of Labor received that 20 relate to one or more of the Designated Plans with respect to any matter, audit or inquiry that is still pending. All information provided by Parent and each of its Subsidiaries to the individuals who prepared any such financial statements was true, correct and complete in all material respects. Each financial or other report delivered to PEI pursuant hereto is accurate in all material respects, and there has been no material adverse change in the financial status of any Designated Plan since the date of the most recent report provided with respect thereto. (d) Compliance with Law. Except as set forth in Schedule 2.26(d), Parent has operated, and has caused its appointees and nominees to operate, each Designated Plan in a manner which is in compliance with the terms thereof and with all applicable law, regulations and administrative agency rulings and requirements applicable thereto, except the violation of which would not have a Parent Material Adverse Effect. Except as otherwise disclosed in Schedule 2.26(d), with respect to each Designated Plan that is a Plan, (i) the Plan is in compliance with ERISA in all material respects, including but not limited to all reporting and disclosure requirements of Part 1 of Subtitle B of Title I of ERISA, (ii) the appropriate Form 5500 has been timely filed for each year of its existence, (iii) there has been no transaction described in Sections 406 or 407 of ERISA or Section 4975 of the Code relating to the Plan unless exempt under Section 408 of ERISA or Section 4975 of the Code, as applicable, and (iv) the bonding requirements of Section 412 of ERISA have been satisfied. (e) Contributions. Full payment has been made of all amounts which Parent or a Controlled Company is required, under applicable law or under any Designated Plan or any agreement related to any Designated Plan to which Parent or a Controlled Company is a party, to have paid as contributions thereto as of the last day of the most recent fiscal year of each Designated Plan ended prior to the date hereof. Benefits under all Designated Plans are as represented in the governing instruments provided pursuant to Section 2.26(a) and have not been increased subsequent to the date as of which documents have been provided. (f) Tax Qualification. Each Designated Plan, as amended to date, that is intended to be qualified under Section 401(a) and 501(a) of the Code has been determined to be so qualified by the IRS, has been submitted to the IRS for a determination with respect to such qualified status or the remedial amendment period established under Section 402(b) of the Code with respect to the Designated Plan will not have expired prior to the Effective Time. Except as disclosed on Schedule 2.26(f), no facts have occurred which if known by the IRS could cause disqualification of any such Plan. (g) Tax or Civil Liability. Neither Parent nor a Controlled Company has participated in, or is aware of, any conduct that could result in the imposition upon Parent of any excise tax under Sections 4971 through 4980B of the Code or civil liability under Section 502(i) of ERISA with respect to any Designated Plan. (h) Claims Liability. There is no action, claim or demand of any kind (other than routine claims for benefits) that has been brought or, to Parent's knowledge, threatened against, or relating to, any Designated Plan, and Parent has no knowledge of any pending investigation or administrative review by any governmental entity relating to any Designated Plan. 21 (i) Retiree Welfare Coverage. Except as set forth in Schedule 2.26(i), no Designated Plan provides any health, life or other welfare coverage to employees of Parent or a Controlled Company beyond termination of their employment with Parent or a Controlled Company by reason of retirement or otherwise, other than coverage as may be required under Section 4980B of the Code or Part 6 of ERISA, or under the continuation of coverage provisions of the laws of any state or locality. (j) No Excess Parachute Payments. No amount that could be received (whether in cash or property or the vesting of property) as a result of any of transactions contemplated by this Agreement by any employee, officer or director of Parent or a Controlled Company who is a "disqualified individual" (as such term is defined in proposed Treasury Regulation Section 1.280G-1) under any employment, severance or termination agreement, other compensation arrangement or Designated Plan currently in effect would be characterized as an "excess parachute payment" (as such term is defined in Section 280G(b)(1) of the Code). 2.27 Environmental Matters. (a) No notice, notification, demand, request for information, citation, summons, complaint or order has been received, no complaint has been filed, no penalty has been assessed and no investigation is pending or has been threatened (each, an "ACTION") by any governmental entity or other party with respect to any (i) alleged violation by Parent or any of its Subsidiaries of any Environmental Law, (ii) alleged failure by Parent or any such Subsidiary to have any environmental permit, certificate, license, approval, registration or authorization required in connection with the conduct of its business or (iii) Regulated Activity, in each case where such Action has had, or would have, a Parent Material Adverse Effect. (b) Except as described in Schedule 2.27(b), neither Parent nor any of its Subsidiaries has any material Environmental Liabilities, and there has been no release of Hazardous Substances into the environment or violation of any Environmental Law by Parent or any such Subsidiary or with respect to any of their respective properties which has had, or would reasonably be expected to have, a Parent Material Adverse Effect. (c) For the purposes of this Agreement, the following terms have the following meanings: (i) "ENVIRONMENTAL LAWS" shall mean any and all federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, codes, injunctions and governmental restrictions relating to human health, the environment or to emissions, discharges or releases of Hazardous Substances into the environment or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Substances or the clean-up or other remediation thereof. (ii) "ENVIRONMENTAL LIABILITIES" shall mean all liabilities which (i) arise under or relate to Environmental Laws and (ii) relate to Regulated Activities occurring or conditions existing on or prior to the Effective Time. 22 (iii) "HAZARDOUS SUBSTANCES" shall mean any pollutants, contaminants, toxic, radioactive, caustic or otherwise hazardous substance or waste, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics that is regulated under or by any applicable Environmental Laws. (iv) "REGULATED ACTIVITY" shall mean any generation, treatment, storage, recycling, transportation, disposal or release of any Hazardous Substances. 2.28 Accounts Receivable. The accounts receivable reflected in the most recent balance sheet included in the Merger Proxy, or to be included in the Merger Proxy (the "LATEST PARENT BALANCE SHEET"), and all accounts receivable ensuing since the date of the Latest Parent Balance Sheet, represent bona fide claims against debtors for sales, services performed or other charges arising on or before the date hereof, and all the goods delivered and services performed which gave rise to said accounts were delivered or performed in accordance with the applicable orders, Contracts or customer requirements. Said accounts receivable are subject to no defenses, counterclaims or rights of offset and are fully collectible in the ordinary course of business without cost or collection efforts therefor except to the extent of the appropriate reserves set forth on the Latest Parent Balance Sheet, and, in the case of accounts receivable arising since the date of the Latest Parent Balance Sheet, to a reasonable allowance for bad debts which does not reflect a rate of bad debts more than that reflected by the reserve for bad debts on the Parent Balance Sheet. 2.29 Inventories. The values at which inventories are shown on the Latest Parent Balance Sheet have been determined in accordance with the normal valuation policy of Parent, consistently applied and in accordance with generally accepted accounting principles. The inventories (and items of inventory acquired or manufactured subsequent to the Latest Parent Balance Sheet) consist only of items of quality and quantity commercially usable and salable in the ordinary course of business, except for any items of obsolete material or material below standard quality, all of which have been written down to realizable market value, or for which adequate reserves have been provided. 2.30 Purchase Commitments and Outstanding Bids. As of the date of this Agreement, the aggregate backlog for accepted and unfulfilled orders for the sale of merchandise and orders for services of Parent, including its Subsidiaries, is at least $4,000,000. No outstanding purchase or outstanding lease commitment of Parent or any of its Subsidiaries is presently in excess of the normal, ordinary and usual requirements of its business, was made at any price in excess of the now current market price, or contains terms and conditions more onerous than those usual and customary in Parent's or such Subsidiary's business. Neither Parent nor any of its Subsidiaries is currently obligated to fulfill any fixed-fee Contract that requires expenditures materially in excess of the reasonably anticipated revenues on such Contract. There is no outstanding bid, proposal, Contract or unfilled order of Parent or any of its Subsidiaries which would, if or when accepted, have a Parent Material Adverse Effect. 2.31 Payments. Parent has not, directly or indirectly, paid or delivered any fee, commission or other sum of money or item or property, however characterized, to any finder, 23 agent, government official or other party, in the United States or any other country, which is in any manner related to the business or operations of Parent, which Parent knows or has reason to believe to have been illegal under any federal, state or local laws of the United States or any other country having jurisdiction; and Parent has not participated, directly or indirectly, in any boycotts or other similar practices affecting any of its actual or potential customers and has at all times done business in an open and ethical manner. 2.32 Customers and Suppliers. Schedule 2.32 contains a complete and accurate list of (i) the 10 largest customers of Parent and its Subsidiaries in terms of sales during Parent's last fiscal year and (ii) the 10 largest suppliers of Parent and its Subsidiaries in terms of purchases during Parent's last fiscal year. Parent has provided PEI with information showing the approximate total sales by Parent and its Subsidiaries to each such customer and the approximate total purchases by Parent and its Subsidiaries from each supplier during such fiscal year. Since the date of the Latest Parent Balance Sheet, there has been no adverse change in the business relationship of Parent or its Subsidiaries with any customer or supplier named in Schedule 2.32 which is material to the business or financial condition of Parent. 3. REPRESENTATIONS AND WARRANTIES OF PEI PEI hereby represents and warrants to Parent and the Parent stockholders that, except as otherwise disclosed in the Disclosure Schedules, the following statements are true and correct as to PEI and each of its Subsidiaries. 3.1 Organization, Etc. PEI and each of its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation and is duly qualified or licensed as a foreign corporation authorized to do business in all other states in which any of its assets or properties may be situated or where the business of PEI or each of its Subsidiaries is conducted, except where the failure to obtain such qualification or license will not have a PEI Material Adverse Effect. For purposes of this Section 3, the term "PEI MATERIAL ADVERSE EFFECT" shall mean an adverse effect on the properties, assets, financial position, results of operations, long-term debt, other indebtedness, cash flows or contingent liabilities of PEI or each of its Subsidiaries in an amount of $100,000 or more. 3.2 Capitalization of PEI. The total authorized capital stock of PEI consists of (a) 20,000,000 shares of PEI Common Stock, of which 6,219,354 shares are issued and outstanding as of the date of this Agreement, and (b) 1,000,000 shares of preferred stock, $1.00 par value, none of which is issued and outstanding as of the date of this Agreement. No shares are held as treasury stock of PEI. Record ownership of the outstanding shares of PEI is set forth on Schedule 3.2. Each issued and outstanding share of capital stock of PEI is duly and validly authorized and issued, fully paid and non-assessable, and was not issued in violation of the preemptive rights of any past or present shareholder. Except as disclosed on Schedule 3.2, there are no outstanding convertible or exchangeable securities, shares of capital stock, subscriptions, calls, options, warrants, rights or other agreements or commitments of any character relating to the issuance or sale of any shares of capital stock of, or other equity ownership interest in, PEI. PEI has no liability, contingent or otherwise, to any Person or entity in connection with any Other Ownership Interests in PEI or other voting interests or securities of PEI. 24 3.3 Subsidiaries. All Subsidiaries of PEI are disclosed in Schedule 3.3, which contains each Subsidiary's name and jurisdiction of incorporation and, with respect to each Subsidiary of PEI that is not wholly owned, the number of issued and outstanding shares of capital stock and the number of shares of capital stock owned by PEI or a Subsidiary of PEI. All of the outstanding shares of capital stock of each Subsidiary of PEI are validly issued, fully paid and non-assessable, and those owned by PEI or by a Subsidiary of PEI are owned free and clear of any security interests, pledges, options, rights of first refusal, liens, claims, encumbrances or any other limitation or restriction (including a restriction on the right to vote or sell the same except as may be provided as a matter of law). Except as set forth in Schedule 3.3, there are no existing options, warrants, calls or other rights, agreements or commitments of any character relating to the issued or unissued capital stock or other securities of any of PEI or a Subsidiary of PEI. 3.4 Authority. PEI has the requisite right, power and authority to execute, deliver and perform this Agreement and all documents and instruments referred to in this Agreement or contemplated hereby (the "PEI RELATED DOCUMENTS") and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of PEI. This Agreement has been duly and validly executed and delivered by PEI, and assuming the due authorization, execution and delivery by Parent, LC and Sub, constitutes a valid and binding agreement of PEI, enforceable against PEI in accordance with its terms. All of the PEI Related Documents, when duly executed and delivered by PEI, will constitute legal, valid and binding obligations of PEI, enforceable against PEI in accordance with their respective terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (whether applied in a proceeding at law or in equity). 3.5 Consents. Except as set forth on Schedule 3.5, no approval, consent, order or action of or filing with any court, administrative agency, governmental authority or other third party is required for the execution, delivery or performance by PEI of this Agreement or the PEI Related Documents or the consummation by PEI of the transactions contemplated hereby, except for (i) the Merger Filing, (ii) such filings as may be required under federal and state securities laws, and (iii) approval by PEI's shareholders of the matters to be submitted to them for approval pursuant to the Merger Proxy. PEI and each of its Subsidiaries has obtained all the licenses and permits that are legally required for the continued operation of their respective business after the Effective Time, except such licenses and permits, the absence of which will not have a PEI Material Adverse Effect. 3.6 Proprietary Rights. PEI and each of its Subsidiaries has full and sufficient rights to use all Proprietary Rights necessary for the present operation of its businesses and the marketing, distribution, sale and use of the materials used and the products sold by PEI and each of its Subsidiaries. To PEI's knowledge, (i) none of the ownership, access to, use or practice of the Proprietary Rights by PEI or any of its Subsidiaries infringes on the rights of any other party and (ii) all Proprietary Rights of PEI or any of its Subsidiaries are valid and enforceable. 25 3.7 Title. Except as set forth on Schedule 3.7, PEI and each of its Subsidiaries owns outright, and has full legal and beneficial title to all of its assets free and clear of all liens, pledges, mortgages, security interests, conditional sales contracts and encumbrances, including good and marketable title to all of its real property interests, free and clear of any mortgages, security agreements, liens or encumbrances. 3.8 Defaults. Except as set forth on Schedule 3.8, neither PEI nor any of its Subsidiaries nor any Designated Plan (as defined in Section 2.26(a)) of PEI is in default under or in violation of, and the execution and delivery of this Agreement and the PEI Related Documents, and the consummation of the transactions contemplated hereby, will not result in a default by PEI, any of its Subsidiaries or any PEI Designated Plan under or a violation of (i) any mortgage, indenture, charter or bylaw provision, provision of any PEI Designated Plan, contract, agreement, lease, commitment or other instrument of any kind to which PEI, its Subsidiaries or any PEI Designated Plan is a party or by which PEI, its Subsidiaries or any PEI Designated Plan or any of its properties or assets may be bound or affected or (ii) any law, rule or regulation applicable to PEI or any PEI Designated Plan or any court injunction, order or decree, or any valid and enforceable order of any governmental agency in effect having jurisdiction over PEI, its Subsidiaries or any PEI Designated Plan, which default or violation could adversely affect the ability of PEI to consummate the transactions contemplated hereby or will have a PEI Material Adverse Effect. 3.9 Full Authority. PEI and each of its Subsidiaries has full power, authority and legal right, and has all licenses, permits, qualifications, and other documentation (including permits required under applicable Environmental Laws) necessary, to own and/or operate their respective businesses, properties and assets and to carry on its businesses as being conducted on the date hereof, and such businesses are now being conducted and such assets and properties are being owned and/or operated, and PEI Plans have been implemented and maintained, in compliance with all applicable laws (including Environmental Laws), ordinances, rules and regulations of any governmental agency of the United States, any state or political subdivision thereof, or any foreign jurisdiction, all applicable court or administrative agency decrees, awards and orders and all such licenses, permits, qualifications and other documentation, except where the failure to comply will not have a PEI Material Adverse Effect, and there is no existing condition or state of facts which would give rise to a violation thereof or a liability or default thereunder, except where a violation, liability or default will not have a PEI Material Adverse Effect. 3.10 PEI's SEC Documents. All information included by PEI in the Merger Proxy will be in compliance, in all material respects, with all legal requirements and will not contain any untrue statement of a material fact or omit any statement of a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading. The financial statements of PEI included in the Merger Proxy will comply, at the time of filing with the SEC (and, with respect to any registration statement, at the time it was declared effective), in all material respects, with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, and will be prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved and will fairly present, in all material respects (subject, in the 26 case of the unaudited statements, to normal, recurring year-end audit adjustments), the consolidated financial position of PEI and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operations and changes in financial position for the periods then ended. Since December 31, 2000, there have been no changes in PEI's method of accounting for tax purposes or any other purposes. The consolidated financial statements of PEI and its consolidated Subsidiaries as of December 31, 2000, and as of June 30, 2001 to be included in the Merger Proxy will disclose, as applicable, all liabilities of PEI and its consolidated subsidiaries required to be disclosed therein and contain adequate reserves for taxes and all other material accrued liabilities. 3.11 Investment Company. Neither PEI nor any of its Subsidiaries is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or a "holding company," a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 3.12 Undisclosed Liabilities. Except as and to the extent specifically disclosed on the audited financial statements of PEI dated as of and for the period ended December 31, 2000 and the unaudited balance sheets and statements of income, changes of shareholders' equity and cash flows for the period from January 1, 2000 to March 31, 2001 provided to Parent prior to the date of this Agreement or as described on Schedule 3.12, neither PEI nor any of its Subsidiaries has any liabilities or obligations of any nature (whether absolute, contingent or otherwise) which would result in a PEI Material Adverse Effect. 3.13 Taxes. PEI and each of its Subsidiaries has filed all requisite federal and other Tax Returns, information returns, declarations and reports for all fiscal periods ended on or before December 31, 2000; and there are no claims (nor is there any matter pending which may result in a claim) against PEI or any of its Subsidiaries for federal, state or local income, sales, use, franchise or other taxes for any period or periods prior to and including December 31, 2000, and no notice of any claim, whether pending or threatened, for taxes has been received which would create a lien on the assets of PEI or its Subsidiaries, or result in a PEI Material Adverse Effect. The amounts shown as accruals for taxes in the financial statements included in the Merger Proxy are sufficient for the payment of all taxes of any kind or nature whatsoever for all fiscal periods ended on or before that date. Copies of all PEI Tax Returns for its last three fiscal years have been provided to Parent. Except as set forth on Schedule 3.13, neither PEI nor any of its Subsidiaries has obtained any extensions of time in which to file any Tax Return which has not yet been filed. Neither PEI nor any of its Subsidiaries has waived any statutes of limitation with respect to federal, state, or local income, sales, use, franchise or other taxes or agreed to any extensions of time with respect to a tax assessment or deficiency, except for such waivers or extensions which, by their terms, have lapsed as of the date hereof. 3.14 Legal Actions. Except as set forth on Schedule 3.14, no legal action, suit, audit, investigation, unfair labor practice charge, complaint, claim, grievance, or proceeding by or before any court, arbitration panel, governmental authority or third party is pending or, to the knowledge of PEI or any of its Subsidiaries (after making inquiry with officers of PEI in a position to have such knowledge) threatened, which involves or may involve PEI, its 27 Subsidiaries or their now or previously owned or operated assets, operations, properties or businesses. 3.15 PEI Contracts; PEI Plans. Neither PEI nor any other party thereto is in default under or in violation of any PEI Contract or PEI Designated Plan. 3.16 No Material Adverse Change. Except for the actions contemplated by this Agreement or as set forth in Schedule 3.16, since December 31, 2000, to PEI's knowledge, there has not been: (a) any change in PEI's Articles of Incorporation or Bylaws, (b) any change in the financial condition, assets, liabilities (contingent or otherwise), income, business or prospects of PEI or any of its Subsidiaries resulting in a PEI Material Adverse Effect; (c) any damage, destruction or loss (whether or not covered by insurance) resulting in a PEI Material Adverse Effect on the properties or business of PEI or any of its Subsidiaries; (d) any change in the authorized or outstanding shares of stock or membership interests, as applicable, of PEI or its Subsidiaries; (e) any declaration or payment of any dividend or distribution in respect of the capital stock or any direct or indirect redemption, purchase or other acquisition of any of the capital stock of PEI or its Subsidiaries; (f) any contract or commitment entered into by PEI or any of its Subsidiaries, or any incurrence by PEI or any of its Subsidiaries, or any agreement by PEI or any of its Subsidiaries to incur any liability or make any capital expenditures in excess of $100,000; (g) any increase in the compensation, bonus, sales commissions or fee arrangement payable or to become payable by PEI or any of its Subsidiaries to any of their respective officers, directors, shareholders, employees, consultants or agents; (h) any work interruptions, labor grievances or claims filed, proposed law or regulation (the existence of which is known, or under the normal course of business should be known, to PEI or its Subsidiaries) or any event or condition of any character which would have a PEI Material Adverse Effect on the business or future prospects of PEI or any of its Subsidiaries; (i) any creation, assumption or permitting to exist any mortgage, pledge or other lien or encumbrance upon any assets or properties whether now owned or hereafter acquired; (j) any sale or transfer, or any agreement to sell or transfer, any material assets, properties or rights of PEI or any of its Subsidiaries to any Person, including, without limitation, the shareholders and their respective Affiliates except as contemplated by this Agreement; (k) any cancellation, or agreement to cancel, any indebtedness or other obligation owing to PEI or its Subsidiaries, including, without limitation, any indebtedness or obligation of the shareholders or any of their Affiliates; (l) any plan, agreement or arrangement granting any preferential rights to purchase or acquire any interest in any of the assets, properties or rights of PEI or its Subsidiaries or requiring consent of any party to the transfer and assignment of any such assets, properties or rights; (m) any purchase or acquisition of, or agreement, plan or arrangement to purchase or acquire, any property, rights or assets of PEI or any of its Subsidiaries; (n) any negotiation for the acquisition of any business or start-up of any new business; (o) any merger or consolidation or agreement to merge or consolidate with or into any other entity (except the transactions contemplated by this Agreement); (p) any waiver of any material rights or claims of Parent or any of its Subsidiaries; (q) any breach, amendment or termination of any material contract, agreement, license, permit, permit application or other right to which PEI or any of its Subsidiaries is a party; (r) any discharge, satisfaction, compromise or settlement of any claim, lien, charge or encumbrance or payment of any obligation or liability, contingent or otherwise, other than current liabilities as of December 31, 2000, as set forth in the financial statements to be included in the Merger Proxy, current liabilities incurred since 28 December 31, 2000 in the ordinary course of business and prepayments of obligations in accordance with normal and customary past practices; (s) any transaction by PEI or any of its Subsidiaries outside the ordinary course of their respective business or prohibited hereunder, or (t) any material adverse change in the financial condition, results of operations or business of PEI or its Subsidiaries, taken as a whole, and no event or condition has occurred or exists that insofar as may reasonably be foreseen, will result in a material adverse change in the financial condition, results of operations or business of PEI and any of its Subsidiaries, taken as a whole. 3.17 Predecessors. Schedule 3.17 contains all names under which PEI or its Subsidiaries have done business during the last five years as well as the names of all predecessors of PEI or its Subsidiaries, including the names of any entities from which PEI or its Subsidiaries previously acquired significant assets during the last five years. 3.18 Affiliate Relationships. Except as set forth on Schedule 3.18, no Affiliate (as defined in Section 2.20) of the shareholders, and no director, officer or employee of or consultant to PEI or its Subsidiaries owns, directly or indirectly, in whole or in part, any property, asset or right, tangible or intangible, which is associated with any property, asset or right owned by PEI or its Subsidiaries, or which PEI or its Subsidiaries are operating or using or the use of which is necessary for their respective businesses. 3.19 Disclosure. No representation or warranty by PEI in this Agreement, and no statement contained in the Disclosure Schedules or any certificate delivered by PEI to Parent pursuant to this Agreement, contains or will contain any untrue statement of a material fact or omits or will omit any material fact necessary in order to make the statements herein or therein, in light of the circumstances under which they are or were made, not misleading. 3.20 Other Disclosures. The following disclosures pertaining to PEI and each of its Subsidiaries are set forth in the Disclosure Schedules: (a) Except as disclosed on Schedule 3.20(a), neither PEI nor any of its Subsidiaries has any products or uses any product registrations, and there are no material safety data sheets, toxicology studies or environmental studies with respect to the business of PEI or any of its Subsidiaries; (b) Except as disclosed on Schedule 3.20(b), PEI or any of its Subsidiaries neither owns of record or beneficially, nor leases, any real property; (c) Schedule 3.20(c) is a list of assets owned by PEI and each of its Subsidiaries as of the date hereof which have been capitalized and have an unamortized value of $10,000 or more, including vehicles and rolling stock, and a list of all leased equipment of PEI or its Subsidiaries, including leased vehicles; (d) Except as set forth on Schedule 3.20(d), there are no raw materials or other property located at any property owned or leased as lessee by PEI or any of its Subsidiaries that have been consigned to PEI, or are otherwise owned by a third party, that in the aggregate, have a market value exceeding $10,000; 29 (e) Listed on Schedule 3.20(e) is each policy of insurance maintained by PEI and each of its Subsidiaries, and PEI has provided Parent with information on premiums, coverages, insurers, expiration dates and deductibles, an accurate list of all insurance loss runs and workers' compensation claims received for the past three policy years. PEI represents and warrants that (i) such insurance is currently in full force and effect; (ii) insurance held by PEI or any of its Subsidiaries has never been cancelled; (iii) neither PEI nor any of its Subsidiaries has been denied coverage or experienced a substantial increase in premiums or a substantial reduction in coverage from one policy period to the next policy period other than increases resulting from the growth of PEI and its Subsidiaries and from the increased cost of insurance generally; (iv) to PEI's knowledge, such coverage is adequate in character and amount; (v) such coverage is placed with financially sound and reputable insurers unaffiliated with any of the PEI Shareholders; and (vi) similar coverage has been in place each year for the past four years; (f) Schedule 3.20(f) is a list of each bank, brokerage firm, trust or other financial institution in which PEI or any of its Subsidiaries has an account and the identity of each such account, and each bank in which PEI or any of its Subsidiaries has a safe deposit box, together with the names of all Persons authorized to draw on any such account or have access to any such safe deposit box; (g) Schedule 3.20(g) is a list and summary description of, or copies of, all governmental licenses and permits of PEI and each of its Subsidiaries; (h) Schedule 3.20(h) is a list of each debt, note, mortgage, security agreement, pledge agreement, guaranty, bond, letter of credit, lease or other instrument creating any debt or contingent obligation of PEI or its Subsidiaries, or creating a lien or claim on any assets of Parent or any of its Subsidiaries (other than unsecured trade accounts payable incurred in the ordinary course of business), including a list of any indebtedness of PEI or its Subsidiaries to any PEI Shareholder; (i) Schedule 3.20(i) is a list of all of PEI's Proprietary Rights and a description of all license fees and royalties (or the basis of calculation thereof) required to be paid now or in the future by PEI or its Subsidiaries for the use and practice of its Proprietary Rights; (j) Except as disclosed on Schedule 3.20(j), neither PEI nor its Subsidiaries has any PEI Contracts. The term "PEI CONTRACT" means each contract, lease, undertaking, commitment, mortgage, indenture, note, security agreement, license and other agreement of PEI or its Subsidiaries in effect on the date hereof (i) with a party other than a customer or client of PEI or its Subsidiaries and involving the expenditure or receipt of more than $100,000 in any year; (ii) with a customer or client of PEI and involving the expenditure or receipt of more than $1.0 million over the term thereof; (iii) containing provisions calling for the sale or purchase of raw materials, products or services at prices that vary from the market prices of such raw materials, products or services generally prevailing in customary third party markets; (iv) which include "most favored nations" or similar pricing or delivery arrangements; (v) requiring PEI or its Subsidiaries to indemnify or hold harmless any other Person or entity; (vi) evidencing any warranty obligation of PEI or its Subsidiaries with respect to goods, services or products sold or 30 leased by it (other than warranties given in the ordinary course of business); (vii) imposing on PEI or its Subsidiaries any confidentiality, non-disclosure or non-compete obligation or containing any acceleration or termination provisions effective upon a change of control of PEI, or a merger of PEI into another entity; or (viii) involving collective bargaining agreements or other agreements with any labor union or employee group; (k) Neither PEI nor any of its Subsidiaries has powers of attorney presently in effect granted by PEI or any of its Subsidiaries and all investments of PEI or its Subsidiaries in any equity securities, partnership interests, indebtedness or other interests in any other corporation, or any person, partnership, joint venture, limited liability company, trust, limited partnership or other legal entity; and (l) Schedule 3.20(l) includes a list of all officers, directors and managers of PEI and each of its Subsidiaries. PEI has provided Parent with a complete listing of the compensation and such individuals. 3.21 Brokers. Except for fees payable to T.E. Mills & Associates, no broker, investment banker or other Person is entitled to any broker's, finder's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of PEI or any of its Subsidiaries. 3.22 Labor and Employment Matters. Neither PEI nor any of its Subsidiaries has employees who are represented by a labor union or organization, no labor union or organization has been certified or recognized as a representative of any such employees, and neither PEI nor any of its Subsidiaries is a party to or has any obligation under any collective bargaining agreement or other contract or agreement with any labor union or organization. There are no pending or, to PEI's knowledge, threatened, representation campaigns, elections or proceedings or questions concerning union representation involving any employees of either PEI or any of its Subsidiaries. Neither PEI nor any of its Subsidiaries has any knowledge of any activities or efforts of any labor union or organization (or representatives thereof) to organize any of its employees, any demands for recognition or collective bargaining, any strikes, slowdowns, work stoppages or lock-outs of any kind, or threats thereof, by or with respect to any employees of PEI or any of its Subsidiaries, and no such activities, efforts, demands, strikes, slowdowns, work stoppages or lock- outs occurred during a three-year period preceding the date hereof. Neither PEI nor any of its Subsidiaries has engaged in, admitted committing, or been held in any administrative or judicial proceeding to have committed any unfair labor practice under the National Labor Relations Act, as amended. Except as set forth on Schedule 3.22, neither PEI nor any of its Subsidiaries is involved in any industrial or trade dispute or any dispute or negotiation regarding a claim of material importance with any labor union or organization concerning its employees, and there are no controversies, claims, demands or grievances of material importance pending or, so far as PEI is aware, threatened, between PEI or any of its Subsidiaries and any of its employees. 31 3.23 Employee Benefit Plans. (a) List of Plans. Schedule 3.23(a) includes a complete and accurate list of all Plans and Benefit Arrangements of PEI or its Subsidiaries, including, but not limited to any (i) employment or consulting agreements, (ii) incentive bonus or deferred bonus arrangements, (iii) arrangements providing termination allowance, severance or similar benefits, (iv) equity compensation plans, (v) deferred compensation plans, (vi) cafeteria plans, (vii) employee assistance programs, (viii) bonus programs, (ix) scholarship programs, (x) vacation policies, and (xi) stock option plans that are currently in effect or were maintained within three years of the Effective Time, or have been approved before the Effective Time but are not yet effective, for the benefit of directors, officers, employers or former employees (or their beneficiaries) of PEI or a Controlled Company ("PEI DESIGNATED PLANS"). (b) No Title IV Plans or VEBAS. Neither PEI nor any entity (whether or not incorporated) that was at any time during the six years before the Effective Time treated as a single employer together with PEI under Section 414 of the Code has ever maintained, had any obligation to contribute to or incurred any liability with respect to a pension plan that is or was subject to the provisions of Title IV of ERISA or Section 412 of the Code. Neither PEI nor any entity (whether or not incorporated) that was at any time during the six years before the Effective Time treated as a single employer together with PEI under Section 414 of the Code has ever maintained, had an obligation to contribute to, or incurred any liability with respect to a multiemployer pension plan as defined in Section 3(37) of ERISA. During the six years before the Effective Time, PEI has not maintained, had an obligation to contribute to or incurred any liability with respect to a voluntary employees beneficiary association that is or was intended to satisfy the requirements of Section 501(c)(9) of the Code. (c) Designated Plans. With respect to each PEI Designated Plan, PEI has delivered to Parent, as applicable, true and complete copies of (i) all written documents comprising such Plan or each Benefit Arrangement (including amendments and individual agreements relating thereto), (ii) the trust, group annuity contract or other document that provides for the funding of the PEI Designated Plan or the payment of Designated Plan benefits, (iii) the three most recent annual Form 5500, 990 and 1041 reports (including all schedules thereto) filed with respect to the Designated Plan, (iv) the most recent actuarial report, valuation statement or other financial statement, (v) the most recent IRS determination letter and all rulings or determinations requested from the IRS after the date of that determination letter, (vi) the summary plan description currently in effect and all material modifications thereto, and (vii) all other correspondence from the IRS or Department of Labor received that relate to one or more of the Designated Plans with respect to any matter, audit or inquiry that is still pending. All information provided by PEI and each of its Subsidiaries to the individuals who prepared any such financial statements was true, correct and complete in all material respects. Each financial or other report delivered to PEI pursuant hereto is accurate in all material respects, and there has been no material adverse change in the financial status of any PEI Designated Plan since the date of the most recent report provided with respect thereto. (d) Compliance with Law. Except as set forth in Schedule 3.23(d), PEI has operated, and has caused its appointees and nominees to operate, each Designated Plan in a 32 manner which is in compliance with the terms thereof and with all applicable law, regulations and administrative agency rulings and requirements applicable thereto, except the violation of which would not have a PEI Material Adverse Effect. Except as otherwise disclosed in Schedule 3.23(d), with respect to each Designated Plan that is a Plan, (i) the Plan is in compliance with ERISA in all material respects, including but not limited to all reporting and disclosure requirements of Part 1 of Subtitle B of Title I of ERISA, (ii) the appropriate Form 5500 has been timely filed for each year of its existence, (iii) there has been no transaction described in Sections 406 or 407 of ERISA or Section 4975 of the Code relating to the Plan unless exempt under Section 408 of ERISA or Section 4975 of the Code, as applicable, and (iv) the bonding requirements of Section 412 of ERISA have been satisfied. (e) Contributions. Full payment has been made of all amounts which PEI or a Controlled Company is required, under applicable law or under any Designated Plan or any agreement related to any Designated Plan to which PEI or a Controlled Company is a party, to have paid as contributions thereto as of the last day of the most recent fiscal year of each Designated Plan ended prior to the date hereof. Benefits under all Designated Plans are as represented in the governing instruments provided pursuant to Section 3.23(a) and have not been increased subsequent to the date as of which documents have been provided. (f) Tax Qualification. Each Designated Plan, as amended to date, that is intended to be qualified under Section 401(a) and 501(a) of the Code has been determined to be so qualified by the IRS, has been submitted to the IRS for a determination with respect to such qualified status or the remedial amendment period established under Section 402(b) of the Code with respect to the Designated Plan will not have expired prior to the Effective Time. Except as disclosed on Schedule 3.23(f), no facts have occurred which if known by the IRS could cause disqualification of any such Plan. (g) Tax or Civil Liability. Neither PEI nor a Controlled Company has participated in, or is aware of, any conduct that could result in the imposition upon PEI of any excise tax under Sections 4971 through 4980B of the Code or civil liability under Section 502(i) of ERISA with respect to any Designated Plan. (h) Claims Liability. There is no action, claim or demand of any kind (other than routine claims for benefits) that has been brought or, to PEI's knowledge, threatened against, or relating to, any Designated Plan, and PEI has no knowledge of any pending investigation or administrative review by any governmental entity relating to any Designated Plan. (i) Retiree Welfare Coverage. Except as set forth in Schedule 3.23(i), no Designated Plan provides any health, life or other welfare coverage to employees of PEI or a Controlled Company beyond termination of their employment with PEI or a Controlled Company by reason of retirement or otherwise, other than coverage as may be required under Section 4980B of the Code or Part 6 of ERISA, or under the continuation of coverage provisions of the laws of any state or locality. 33 (j) No Excess Parachute Payments. No amount that could be received (whether in cash or property or the vesting of property) as a result of any of transactions contemplated by this Agreement by any employee, officer or director of PEI or a Controlled Company who is a "disqualified individual" under any employment, severance or termination agreement, other compensation arrangement or Designated Plan currently in effect would be characterized as an "excess parachute payment." 3.24 Environmental Matters. (a) No Action has been filed by any governmental entity or other party with respect to any (i) alleged violation by PEI or any of its Subsidiaries of any Environmental Law, (ii) alleged failure by PEI or any such Subsidiary to have any environmental permit, certificate, license, approval, registration or authorization required in connection with the conduct of its business or (iii) Regulated Activity, in each case where such Action has had, or would have, a PEI Material Adverse Effect. (b) Neither PEI nor any of its Subsidiaries has any material Environmental Liabilities, and there has been no release of Hazardous Substances into the environment or violation of any Environmental Law by PEI or any such Subsidiary or with respect to any of their respective properties which has had, or would reasonably be expected to have, a PEI Material Adverse Effect. 3.25 Accounts Receivable. The accounts receivable reflected in the most recent balance sheet of PEI included in the Merger Proxy (the "LATEST PEI BALANCE SHEET"), and all accounts receivable ensuing since the date of the Latest PEI Balance Sheet, represent bona fide claims against debtors for sales, services performed or other charges arising on or before the date hereof, and all the goods delivered and services performed which gave rise to said accounts were delivered or performed in accordance with the applicable orders, PEI Contracts or customer requirements. Said accounts receivable are subject to no defenses, counterclaims or rights of offset and are fully collectible in the ordinary course of business without cost or collection efforts therefor except to the extent of the appropriate reserves set forth on the Latest PEI Balance Sheet, and, in the case of accounts receivable arising since the date of the Latest PEI Balance Sheet, to a reasonable allowance for bad debts which does not reflect a rate of bad debts more than that reflected by the reserve for bad debts on the PEI Balance Sheet. 3.26 Inventories. The values at which inventories are shown on the Latest PEI Balance Sheet have been determined in accordance with the normal valuation policy of the PEI, consistently applied and in accordance with generally accepted accounting principles. The inventories (and items of inventory acquired or manufactured subsequent to the Latest PEI Balance Sheet) consist only of items of quality and quantity commercially usable and salable in the ordinary course of business, except for any items of obsolete material or material below standard quality, all of which have been written down to realizable market value, or for which adequate reserves have been provided. 3.27 Purchase Commitments and Outstanding Bids. As of the date of this Agreement, the aggregate backlog for accepted and unfulfilled orders for the sale of merchandise and orders 34 for services of PEI, including its Subsidiaries, shall be at least $12,000,000. No outstanding purchase or outstanding lease commitment of PEI or any of its Subsidiaries is presently in excess of the normal, ordinary and usual requirements of its business, was made at any price in excess of the now current market price, or contains terms and conditions more onerous than those usual and customary in PEI's or such Subsidiary's business. Neither PEI nor any of its Subsidiaries is currently obligated to fulfill any fixed-fee Contract that requires expenditures materially in excess of the reasonably anticipated revenues on such Contract. There is no outstanding bid, proposal, Contract or unfilled order of PEI or any of its Subsidiaries which would, if or when accepted, have a PEI Material Adverse Effect. 3.28 Payments. Neither PEI nor any of its Subsidiaries has, directly or indirectly, paid or delivered any fee, commission or other sum of money or item or property, however characterized, to any finder, agent, government official or other party, in the United States or any other country, which is in any manner related to the business or operations of PEI or its Subsidiaries, which PEI knows or has reason to believe to have been illegal under any federal, state or local laws of the United States or any other country having jurisdiction; and neither PEI nor its Subsidiaries has participated, directly or indirectly, in any boycotts or other similar practices affecting any of its actual or potential customers and has at all times done business in an open and ethical manner. 3.29 Customers and Suppliers. Schedule 3.29 contains a complete and accurate list of (i) the 10 largest customers of PEI and its Subsidiaries in terms of sales during PEI's last fiscal year, and (ii) the 10 largest suppliers of PEI and its Subsidiaries in terms of purchases during PEI's last fiscal year. PEI has provided Parent with information showing the approximate total sales by PEI and its Subsidiaries to each such customer and the approximate total purchases by PEI and its Subsidiaries from each supplier during such fiscal year. Since the date of the latest PEI Balance Sheet, there has been no adverse change in the business relationship of PEI or any of its Subsidiaries with any customer or supplier named in the Schedule 3.29 which is material to the business or financial condition of PEI. 4. CERTAIN COVENANTS, AGREEMENTS AND PRE-CLOSING MATTERS 4.1 Tax Matters. (a) Unless the other parties shall otherwise agree in writing, none of PEI, Parent, LC, Sub or Surviving PEI shall knowingly take or fail to take any action, which action or failure to act would jeopardize the qualification of the Merger as a tax-free reorganization within the meaning of Section 368(a) of the Code. (b) Parent and LC shall not make an election on IRS Form 8832, pursuant to Treasury Regulation Section 301.7701-3(c), to classify LC as an association (and thus taxable as a corporation) for federal income tax purposes. (c) In rendering the opinion required by Section 5.1(k) of this Agreement, Gardere Wynne Sewell LLP may request and rely upon representations contained in certificates 35 of officers of Parent and PEI, and Parent and PEI shall use their best efforts to make available such truthful certificates. 4.2 Access. Each of PEI and Parent shall cooperate fully in permitting the other and its representatives to make a full investigation of the properties, operations and financial condition of such party, and shall afford the other and its representatives reasonable access to the offices, buildings, real properties, machinery and equipment, inventory and supplies, records, files, books of account, tax returns, agreements and commitments and personnel of such party. Any such inspection shall occur during normal business hours and shall be scheduled by a party following request for access made to the other party. Each party will use its reasonable best efforts to conduct its review in such a manner as not to be disruptive to the other party's employees or business operations. Each party shall reimburse the other for any damage caused by such party or its representatives during the review process. 4.3 Approval of the Merger Proxy. Each of PEI and Parent shall cooperate fully in preparing and filing the Merger Proxy, and in obtaining at their respective shareholders' meeting the required consent, approval or ratification of the matters in the Merger Proxy by their respective shareholders in accordance with the Securities Act, the Exchange Act, this Agreement, and the Applicable Corporate Law. Upon securing the approval of the Merger Proxy, each of PEI and Parent shall cooperate fully in making any amendments thereto required, if any, between the date of effectiveness and the date of the shareholders' meetings. 4.4 Operations in the Ordinary Course. From the date of this Agreement until the Effective Time, each of PEI and Parent will conduct its business in a commercially prudent manner, as a going concern and in the ordinary course (except as necessary or appropriate as a result of the transactions contemplated herein). Consistent with such operation, it will comply in all material respects with applicable legal and contractual obligations, consistent with past practice. Each of PEI and Parent shall make all reasonable efforts to preserve intact its present business organization, keep available the services of its officers and employees, and preserve its relationships with its customers, suppliers and others having business dealings with it, to the end that its business shall not be materially impaired on or prior to the Effective Time. From the date of this Agreement until the Effective Time, each of PEI and the Parent shall maintain its respective records and books of account in a manner that fairly reflects, in all material respects, its income, expenses, assets and liabilities consistent with past practice. 4.5 Transactions Affecting Business and Properties. Except as specifically required by this Agreement or as set forth on Schedule 4.5, from the date of this Agreement until the Effective Time, without the prior written consent of the other party, neither PEI nor Parent will, without the prior written approval of the other: (a) make any single capital commitment in excess of $25,000, or $100,000 in the aggregate, (b) incur any indebtedness for money borrowed other than borrowings in the ordinary course of business consistent with past practice, (c) declare, set aside or pay any dividend or make any other distribution regarding its outstanding securities, (d) do any act other than in the ordinary course of business consistent with past practice, or (e) mortgage or otherwise encumber, voluntarily or involuntarily, presently or prospectively, any of its assets or properties. Neither PEI nor the Parent shall agree, without the prior written consent of the other, to (i) any adverse modification of the terms of any document 36 or contractual arrangement or to prepay or incur additional material obligations to any Person, whenever effective, (ii) dispose of any assets under its control, except in the ordinary course of business, (iii) materially increase the annual level of compensation of any employee, or increase at all the annual level of compensation of any Person whose compensation in the last preceding fiscal year exceeded $75,000, or grant any unusual or extraordinary bonuses, benefits or other forms of direct or indirect compensation to any employee, officer, director or consultant, except in amounts in keeping with past practices by formulas or otherwise, or (iv) increase, terminate, amend or otherwise modify any plan for the benefit of employees. 4.6 Negotiations. Each of PEI and Parent agrees not to, and each shall cause its officers, directors and Affiliates and their respective representatives not to, except to the extent appropriate to fulfill the fiduciary duties owed under applicable laws to its shareholders, as advised in writing by its legal counsel, take any action (including, without limitation, the solicitation of proxies from shareholders or the voting of stock), which could impede, or adversely effect the likelihood of, the consummation of the Merger. In addition, Parent and PEI each agree not to otherwise directly or indirectly make, solicit, initiate, participate in or otherwise encourage the submission of any proposal or offer from any Person (including without limitation, any of its directors, officers, shareholders or employees or those of its Subsidiaries) relating to any liquidation, dissolution, recapitalization, reorganization, merger, consolidation or the acquisition of all or a material portion of the assets of, or any equity interest in, PEI or Parent, as applicable, or their respective Subsidiaries, other than the Merger (an "ALTERNATIVE TRANSACTION"). Further, Parent and PEI each agree not to cause its officers, directors and Affiliates and their respective representatives to, except to the extent appropriate to fulfill the fiduciary duties owed under applicable laws to their respective shareholders, as advised in writing by their respective legal counsel, directly or indirectly, participate in any negotiations or discussions regarding, or furnish any information with respect to, or otherwise cooperate in any way in connection with, or assist or participate in, facilitate or encourage, any effort or attempt to effect or seek to effect, any Alternative Transaction with or involving any Person other than PEI or Parent, as applicable, or an Affiliate of PEI or Parent. 4.7 Renewal of Real Estate Leases. Each of PEI and Parent agree not to and not to permit their respective Subsidiaries to renew their existing real estate leases at a rate that is above fair market value, and each further agrees not to secure more real estate space than is reasonably necessary to conduct its business. 4.8 Articles of Incorporation and Bylaws. Except as specifically required by this Agreement, from the date of this Agreement until the Effective Time, neither PEI nor Parent, without the prior written consent of the other, which shall not be unreasonably withheld, will take any of the following actions or agree to take any of such actions: (a) amend or otherwise change its Articles of Incorporation or Bylaws or any instrument similar in purpose and intent to them; (b) issue any shares of its capital stock except: (1) in connection with the exercise of any outstanding option or warrant; or (2) in satisfaction of the PEI Shareholder Debt. 37 (c) issue or create any warrants, obligations, subscriptions, options, convertible securities, or other commitments under which any additional shares of its capital stock may be authorized, issued or transferred from treasury; (d) take any action that would make any of the representations and warranties in this Agreement untrue or incorrect except as necessary to consummate the transactions contemplated by this Agreement; or (e) agree to do any of the acts listed above. 4.9 Current Information. Each of PEI and Parent shall advise the other in writing as promptly as possible of: (a) the occurrence of any event that renders any of the their representations or warranties in this Agreement inaccurate as of any date prior to the Effective Time; (b) the awareness that any of their representations or warranties in this Agreement was not accurate in all respects when made; and (c) their failure to comply with or accomplish any of the covenants or agreements set forth in this Agreement in any respect. 4.10 Corporate Approvals. Each of PEI and Parent shall take all further action required, if any, to obtain the approval of their respective boards of directors (subject to applicable fiduciary duty standards) and shareholders (including the approval of a majority of the Parent stockholders other than Alliance and its Affiliates) to this Agreement and to the transactions contemplated hereby. 4.11 Consents. Each of PEI and Parent shall use its commercially reasonable best efforts to procure all consents, approvals or waivers that are required and for completion of the transactions described in this Agreement, including using all reasonable efforts to obtain all required consents of any governmental agency or body issuing any permits, licenses or other governmental authorizations affecting PEI or the Parent, or their respective businesses or properties, so that Surviving PEI may continue to operate the business and properties of PEI without interruption following the Effective Time. 4.12 Contracts. From the date of this Agreement until the Effective Time, neither PEI nor Parent, without the prior written consent of the other, shall amend or allow to be amended in any material respect or consent to the termination of any contract, agreement, instrument or other arrangement to which it is a party which would reasonably be expected to require the payment or expense of (i) $25,000 or more annually if not in the ordinary course of business or (ii) $1.0 million if in the ordinary course of business, in each case whether written or oral, or enter into or become a party to or submit any bid or proposal for any such contract, agreement or other instrument or arrangement to which it is a party. 38 4.13 Insurance. From the date of this Agreement until the Effective Time, each of PEI and Parent shall continue in force their existing insurance policies, or shall immediately replace such policies with comparable insurance companies on comparable terms and conditions. 4.14 Compliance with Laws. Each of PEI and Parent shall duly comply with all laws applicable to it and its properties, business, operations and employees. Without limiting the foregoing, Parent will timely file all annual, quarterly and current reports required to be filed with the SEC as may be required to permit the PEI Shareholders who become Affiliates of Parent to sell their shares under Rule 144. 5. CONDITIONS PRECEDENT; CLOSING DELIVERIES 5.1 Conditions Precedent to the Obligations of PEI. The obligations of PEI to effect the Merger under this Agreement are subject to the satisfaction of each of the following conditions, unless waived by PEI in writing to the extent permitted by applicable law: (a) Accuracy of Representations and Warranties. The representations and warranties of Parent contained in this Agreement, the Disclosure Schedules, or in any closing certificate or Parent Related Document delivered to PEI pursuant hereto shall be true and correct at and as of the Closing Date as though made at and as of that date other than representations and warranties as are specifically made as of another date and other than changes occurring in the ordinary course of business and not resulting in a Parent Material Adverse Effect, and changes to capitalization resulting from option exercises or stock repurchases consistent with Parent's Stock Repurchase Plan and Parent shall have delivered to PEI a certificate to that effect. (b) Performance of Covenants. Parent, LC and Sub shall have performed and complied with all covenants of this Agreement to be performed or complied with by each of them at or prior to the Closing Date, and Parent shall have delivered to PEI a certificate to that effect. (c) Legal Actions or Proceedings. No legal action or proceeding shall have been instituted after the date hereof against Parent, LC or Sub arising by reason of the Merger pursuant to this Agreement, which is reasonably likely (i) to restrain, prohibit or invalidate the consummation of the transactions contemplated by this Agreement, or (ii) to have a Parent Material Adverse Effect, and Parent shall have delivered to PEI a certificate to that effect. (d) Line of Credit. PEI, with the assistance of Parent and Parent's Subsidiaries, shall have obtained a line of credit acceptable to Parent in all respects that will be sufficient to allow Surviving PEI to repay the $2 Million Notes at the Closing and have a revolving line of credit of not less than $15 million, and the terms and documentation of such financing shall have been finalized to the satisfaction of Parent and PEI. (e) Effectiveness of Merger Proxy. The SEC shall have declared the Merger Proxy effective, thereby making the Merger Consideration freely tradable subject to the Lockup Agreement and applicable law. 39 (f) Approvals. Parent, LC and Sub shall have procured all of the consents, approvals and waivers of third parties or any regulatory body or authority, whether required contractually or by applicable law or otherwise necessary for the execution, delivery and performance of this Agreement (including the Parent Related Documents) by Parent, LC and Sub prior to the Closing Date, and Parent shall have delivered to PEI a certificate to that effect. Alliance shall have executed and delivered a proxy to vote its shares of Parent Common Stock in favor of all proposals described in the Merger Proxy. In addition, holders of a majority of the Common Stock of Parent present at the Parent stockholder meeting either in person or by proxy, other than Common Stock of Parent held by Alliance or its Affiliates, shall have approved the transactions contemplated by this Agreement. (g) Filing of Designation of Series A Stock. Parent shall, following receipt of the requisite approval by its directors and stockholders, have filed or cause to have been filed with the Secretary of State of Nevada Articles of Amendment to its Articles of Incorporation authorizing the issuance of not less than 5,000,000 shares of preferred stock, designating such preferred stock as Series A Preferred Stock with the preferences, limitations and relative rights set forth in the Certificate of Designation. (h) Closing Deliveries. All documents required to be executed or delivered at Closing by Parent, LC or Sub pursuant to Section 5.3 shall have been so executed and delivered. (i) No Material Adverse Change. There shall not have been any event that in the reasonable judgment of PEI materially adversely affects the properties, assets, financial condition, results of operations, cash flows, businesses or prospects of Parent. (j) Certain Corporate Actions. All necessary director and stockholder resolutions, waivers and consents required to consummate the transactions contemplated hereunder shall have been executed and delivered in form and substance satisfactory to PEI and its counsel. (k) Tax Opinion. PEI shall have received an opinion of Gardere Wynne Sewell LLP, counsel to PEI, dated at the Closing Date, to the effect that, on the basis of the facts, representations and assumptions set forth in such opinion (a) the Merger constitutes a "reorganization" within the meaning of Section 368(a) of the Code and (b) that, accordingly, (i) no gain or loss will be recognized by PEI as a result of the Merger and (ii) no gain or loss will be recognized by a shareholder of PEI who receives Parent Common Stock in exchange for shares of PEI Common Stock; except with respect to cash received in lieu of fractional share interests. (l) Parent Board of Directors. The Parent Board of Directors shall have been reconstituted in accordance with the description of the Board of Directors in the Merger Proxy. 5.2 Conditions Precedent to the Obligations of Parent. The obligations of Parent to effect the Merger under this Agreement are subject to the satisfaction of each of the following conditions, unless waived by Parent in writing: 40 (a) Repayment of PEI Accounts Receivable from PEI Shareholders. Prior to Closing, PEI shall have caused to be paid in full and in cash all accounts receivable and notes receivable owed by any PEI Shareholder to PEI, except for travel advances made in the ordinary course of business. (b) Issuance of PEI Common Stock in Satisfaction of PEI Shareholder Debt. Prior to the Closing, PEI shall have issued shares of PEI Common Stock to the holders of the PEI Shareholder Debt and paid in cash not more than $190,000 of the then outstanding principal balance in full and final satisfaction of the PEI Shareholder Debt, other than the Coury Debt. (c) Issuance of PEI Notes. Prior to the Closing, PEI shall have delivered to Equus in renewal, rearrangement and extension of the Equus Debt and the cancellation of the Equus Warrants: (i) promissory notes in the aggregate original principal amount of $2 million (the "$2 MILLION NOTES") in the form attached as Exhibit 5.2(c)-1; (ii) a promissory note in the original principal amount of $3 million (the "$3 MILLION NOTE") in the form attached as Exhibit 5.2(c)-2; and (iii) a promissory note in the original principal amount equal to (x) the outstanding principal balance of and all accrued and unpaid interest on the Equus Debt minus (y) $5.0 million (the "REMAINDER NOTE") in the form attached as Exhibit 5.2(c)-3. In addition, Equus shall have agreed to accept 2,500,000 shares of Parent Series A Stock as full and final settlement of the Remainder Note, and Equus shall have executed and delivered to PEI the Settlement Agreement and Plan of Reorganization (the "EQUUS SETTLEMENT AGREEMENT") in the form attached as Exhibit 5.2(c)-4. (d) Effectiveness of Merger Proxy. The SEC shall have declared the Merger Proxy effective, thereby making the Merger Consideration freely tradable subject to the Lockup Agreement and applicable law. (e) Accuracy of Representations and Warranties. The representations and warranties of PEI contained in this Agreement, the Disclosure Schedules, or in any closing certificate or PEI Related Document delivered to Parent pursuant hereto shall be true and correct at and as of the Closing Date as though made at and as of that date other than representations and warranties as are specifically made as of another date, changes occurring in the ordinary course of business and not resulting in a PEI Material Adverse Effect, and changes to capitalization resulting from actions permitted or required under this Agreement, including without limitation Section 4.8(b). (f) Performance of Covenants. PEI shall have performed and complied with all covenants of this Agreement to be performed or complied with by it at or prior to the Closing Date and PEI shall have delivered to Parent a certificate to such effect. (g) Legal Actions or Proceedings. No legal action or proceeding shall have been instituted after the date hereof against PEI or any of its Subsidiaries arising by reason of the Merger pursuant to this Agreement, which is reasonably likely (i) to restrain, prohibit or invalidate the consummation of the transactions contemplated by this Agreement, or (ii) to have a PEI Material Adverse Effect, and PEI shall have delivered to Parent a certificate to that effect. 41 (h) Termination of Shareholders' Agreement. The Shareholders' Agreement dated as of March 9, 1999, among PEI and the shareholders of PEI shall have been terminated at the special meeting of the shareholders of PEI held in connection with the Merger, and PEI shall have delivered to IDS a certificate to that effect. (i) Cancellation of PEI Options and Warrants. All options and warrants in PEI that are not being converted into options and warrants in Parent shall have been exercised or cancelled or shall have expired by their own terms. (j) Lockup Agreement. Each of the Significant PEI Shareholders shall have executed and delivered a lockup agreement in substantially the form attached hereto as Exhibit 5.2(j) (the "LOCKUP AGREEMENT"). (k) Line of Credit. PEI, with the assistance of Parent and Parent's Subsidiaries, shall have obtained a line of credit acceptable to Parent in all respects that will be sufficient to allow Surviving PEI to repay the $2 Million Notes at the Closing and have a revolving line of credit of not less than $15 million, and the terms and documentation of such financing have been finalized to the satisfaction of IDS and PEI. (l) Approvals. PEI shall have used its commercially reasonable best efforts to procure all of the consents, approvals and waivers of third parties or any regulatory body or authority, whether required contractually or by applicable law or otherwise necessary for the execution, delivery and performance of this Agreement (including the PEI Related Documents) by PEI prior to the Closing Date, and PEI shall have delivered to Parent a certificate to that effect, listing any approvals required but not received. A majority of the PEI Shareholders shall have approved the merger proposal described in the Merger Proxy. In addition, 66 2/3% of the PEI Shareholders shall have approved the proposal to terminate the Shareholders' Agreement described in the Merger Proxy. (m) Third Party Consents. PEI, with the assistance of Parent and Parent's Subsidiaries, shall have used its commercially reasonable best efforts to obtain all required consents from third parties. (n) Dissenter's Rights. Dissenter's rights shall not have been exercised in accordance with the relevant provisions of the Applicable Corporate Law by PEI Shareholders holding more than 350,000 shares of PEI Common Stock. (o) Closing Deliveries. All documents required to be executed or delivered at Closing by PEI pursuant to Section 5.4 shall have been so executed and delivered. (p) No Material Adverse Change. There shall not have been any event that in the reasonable judgment of Parent materially adversely affects the properties, assets, financial condition, results of operations, cash flows, businesses or prospects of PEI. (q) Certain Corporate Actions. All necessary director and shareholder resolutions, waivers and consents required to consummate the transactions 42 contemplated hereunder shall have been executed and delivered in form and substance satisfactory to Parent and its counsel. 5.3 Deliveries by Parent at the Closing. At the Closing, simultaneously with the deliveries by PEI specified in Section 5.4, and in addition to any deliveries required to be made by Parent pursuant to any Parent Related Document at the Closing, Parent shall deliver or cause to be delivered to PEI the following: (a) Closing Certificates. Parent shall deliver the certificates required pursuant to Section 5.1. (b) Secretary's Certificate for Parent. Parent shall deliver a certificate executed by the Secretary of Parent dated the Closing Date, (i) verifying that the Articles of Incorporation, including the Certificate of Designation, and the Bylaws (as attached thereto) are true, correct and complete as of the Closing Date, (ii) attesting to all corporate and shareholder action taken by Parent including the resolutions of the Board of Directors and shareholders authorizing the transactions contemplated by this Agreement and all other agreements or matters contemplated hereby or executed in connection herewith, (iii) certifying the names and true signatures of the officers of Parent authorized to sign this Agreement and the Parent Related Agreements to which it is a party, and (iv) attaching certificates dated within ten days of Closing as to the corporate existence and good standing of Parent in the States of Nevada and Texas. (c) Secretary's Certificate for LC. LC shall deliver a certificate executed by the Secretary of LC dated the Closing Date, (i) verifying that the Articles of Organization and Regulations (as attached thereto) are true, correct and complete as of the Closing Date, (ii) attesting to all manager and member action taken by LC including the resolutions of the managers authorizing the transactions contemplated by this Agreement and all other agreements or matters contemplated hereby or executed in connection herewith, (iii) certifying the names and true signatures of the officers or managers of LC authorized to sign this Agreement and the Parent Related Agreements to which it is a party, and (iv) attaching certificates dated within ten days of Closing as to the corporate existence and good standing of LC in the State of Texas. (d) Alliance Option Pool Agreement. Parent shall deliver the Option Pool Agreement, executed by Alliance, which Agreement shall be in the form attached hereto as Exhibit 5.3(d), and Alliance shall issue option agreements in the form of the option agreements attached thereto to the Persons designated by the mutual agreement of William A. Coskey and Michael L. Burrow. (e) Legal Opinion. Parent shall have delivered a legal opinion by counsel to Parent reasonably satisfactory to PEI. (f) Voting Agreement. Parent and the Significant PEI Shareholders shall have executed and delivered a voting agreement in substantially the form attached hereto as Exhibit 5.3(f). 43 (g) Escrow Agreements. Parent shall execute and deliver the Indemnification Escrow Agreement and the Option Escrow Agreement. (h) Employment Agreements. William A. Coskey shall have executed an employment agreement including a covenant not to compete with the business operations of Parent or any of its Subsidiaries for a period of five years following the Closing unless he is terminated without cause. (i) Equus Notes. Parent shall (i) cause Surviving PEI to pay in full the $2 Million Notes in cash, and (ii) issue 2,500,000 shares of Series A Stock in full payment and satisfaction of the Remainder Note, in exchange for the return of such notes marked "Cancelled and Paid in Full." Parent and each of its Subsidiaries shall also execute and deliver a guaranty and grant a security interest to secure the $3 Million Note, which Guaranty and Security Agreement shall be in the form attached to the Equus Settlement Agreement. (j) Instruction Letter. Parent shall deliver to the Exchange Agent an instruction letter, acceptable to PEI, providing for the Exchange Agent to give information to the PEI Shareholders with respect to the exchange of their shares, and providing for the delivery of shares into the Indemnification Escrow and the Option Escrow. (k) Option Agreements. Parent shall deliver the Surviving Options to the Persons entitled thereto. (l) Alliance Debt Cancellation. Parent shall cancel and forgive the outstanding principal balance of and all accrued and unpaid interest on the debt owed by Alliance to Parent in the original principal amount of $150,000. (m) Equus Call Option. Parent shall deliver the Equus Call Option, executed by Alliance, in the form attached hereto as Exhibit 5.3(m). (n) Documents. Parent shall execute and deliver any and all other documents, certificates, opinions, instruments and agreements required to be executed and delivered by Parent or its officers or directors at the Closing as contemplated hereby or as may be reasonably requested by PEI. The consummation of the Closing shall not be deemed to be a waiver by PEI or Surviving PEI of any of their rights or remedies against Parent hereunder for any breach of any warranty, covenant or agreement herein by Parent irrespective of any knowledge of or investigation with respect thereto made by or on behalf of PEI. 5.4 Deliveries by PEI at the Closing. At the Closing, simultaneously with the deliveries by Parent specified in Section 5.3, and in addition to any other deliveries to be made by PEI pursuant to any PEI Related Document at the Closing, PEI shall deliver or cause to be delivered to Parent the following: (a) Closing Certificates. PEI shall deliver the certificates required pursuant to Section 5.2. 44 (b) Secretary's Certificate. PEI shall deliver a certificate executed by the Secretary of PEI dated the Closing Date, (i) verifying that the Articles of Incorporation and the Bylaws (as attached thereto) are true, correct and complete as of the Closing Date, (ii) attesting to all corporate and shareholder action taken by PEI including the resolutions of the Board of Directors and shareholders authorizing the transactions contemplated by this Agreement and all other agreements or matters contemplated hereby or executed in connection herewith, (iii) certifying the names and true signatures of the officers of PEI authorized to sign this Agreement and the PEI Related Agreements to which it is a party, and (iv) attaching certificates dated within ten days of Closing as to the corporate existence and good standing of PEI in the State of Texas. (c) Legal Opinion. PEI shall have delivered a legal opinion by counsel to PEI reasonably satisfactory to Parent. (d) Employment Agreements. Each person listed on Schedule 5.4(d) shall have executed an employment agreement on terms mutually acceptable to Parent and such employee including a covenant not to compete with the business operations of Parent or any of its Subsidiaries for a period of three years following the Closing unless such person is terminated without cause. (e) Voting Agreement. PEI and the other Persons named therein shall have executed and delivered a voting agreement in substantially the form attached hereto as Exhibit 5.3(f). (f) Release by PEI Shareholders to be Effective Upon Closing. PEI shall deliver releases in the form of the Release attached as Exhibit 5.4(f), executed by each of the Significant PEI Shareholders, which release shall, among other matters, (i) release, acquit and forever discharge PEI, Parent and Equus from any and all liabilities, obligations, claims, demands, actions or causes of action arising from or relating to any event, occurrence, act, omission or condition occurring or existing on or prior to the Effective Time; (ii) waive all breaches, defaults or violations of any agreement applicable to PEI Common Stock or PEI Shareholder Debt, and agree that any and all such agreements are terminated as of the Effective Time; and (iii) waive any and all preemptive or other rights to acquire any shares of capital stock of PEI and release any and all claims arising in connection with any prior default, violation or failure to comply with or satisfy any such preemptive or other rights. (g) Escrow Agreement. PEI shall have delivered the Indemnification Escrow Agreement and the Option Escrow Agreement, which shall have been executed by both PEI and the Significant PEI Shareholders. (h) Significant PEI Shareholders Voting Agreement. The Significant PEI Shareholders shall have executed and delivered the Voting Agreement attached as Exhibit 5.4(h). (i) Documents. PEI shall execute and deliver all other documents, certificates, opinions, instruments and agreements required to be executed and delivered by PEI 45 or its officers or directors at the Closing as contemplated hereby or as may be reasonably requested by Parent. The consummation of the Closing shall not be deemed to be a waiver by Parent of any of its rights or remedies against PEI hereunder for breach of any warranty, covenant or agreement herein by PEI irrespective of any knowledge of or investigation with respect thereto made by or on behalf of Parent. 5.5 Deliveries by Sub and Surviving PEI at the Closing. (a) Payment of $2 Million Notes. Surviving PEI shall pay the $2 Million Notes, by wire transfer to Equus, to the following account: Equus II Incorporated, Account # 5772222982, Routing #111000025, Bank of America, Houston, Texas. (b) Secretary's Certificate. Sub shall deliver a certificate executed by the Secretary of Sub dated the Closing Date, (i) verifying that the Articles of Incorporation and the Bylaws (as attached thereto) are true, correct and complete as of the Closing Date, (ii) attesting to all corporate and shareholder action taken by Sub including the resolutions of the Board of Directors and sole shareholder authorizing the transactions contemplated by this Agreement and all other agreements or matters contemplated hereby or executed in connection herewith, (iii) certifying the names and true signatures of the officers of Sub authorized to sign this Agreement and any other transaction document to which it is a party, and (iv) attaching certificates dated within ten days of Closing as to the corporate existence and good standing of Sub in the State of Texas. (c) Employment Agreements. Surviving PEI shall execute or cause to be executed and delivered employment agreements with those former officers, directors and key employees of PEI designated by Parent and PEI. 6. SURVIVAL, INDEMNIFICATION, ARBITRATION 6.1 Survival. The representations and warranties set forth in this Agreement and the other documents, instruments and agreements contemplated hereby shall survive for a period of two years from the Effective Time; provided, however, that the representations and warranties with respect to Sections 2.15, 2.27, 3.13 and 3.24 shall survive for the applicable statute of limitations periods. The periods of survival of the representations and warranties as stated above in this Section 6.1 are referred to herein as the "SURVIVAL PERIODS." The liabilities of the parties under their respective representations and warranties shall expire as of the expiration of the applicable Survival Period and no claim for indemnification may be made with respect to any breach of any representation or warranty, the applicable Survival Period of which shall have expired, except to the extent that written notice of such breach shall have been given to the party against which such claim is asserted on or before the date of such expiration. The covenants and agreements of the parties herein and in other documents and instruments executed and delivered in connection with the closing of the transactions contemplated hereby shall survive for a period of two years from the Effective Time. 46 6.2 Indemnification by Significant PEI Shareholders. Subject to the provisions of Section 6.4, the Significant PEI Shareholders shall, in accordance with their respective Pro Rata Shares, indemnify, save and hold harmless Parent and Surviving PEI and any of their assignees (including lenders) and all of their respective officers, directors, employees, representatives, agents, advisors and consultants and all of their respective heirs, legal representatives, successors and assigns (collectively the "PARENT INDEMNIFIED PARTIES") from and against any and all losses (net of taxes) arising from, out of or in any manner connected with or based on: (a) the breach of any covenant of PEI or the failure by PEI to perform any obligation of PEI contained herein or in any PEI Related Document; (b) PEI's failure to comply with any law, rule or regulation relating to a PEI Designated Plan, whether or not disclosed prior to the Closing; (c) Litigation disclosed in Schedule 3.14 to the extent the aggregate amount of all losses after the Effective Time, including the cost of such litigation, exceeds the sum of (i) the aggregate amount of reserves for litigation shown on the financial records of PEI as of the last day of the calendar month immediately preceding the Closing Date; plus (ii) one-half of one percent of the gross revenues of PEI and its Subsidiaries for the period from the Effective Time to the second anniversary of the Closing Date; (d) any inaccuracy in or breach of any representation or warranty of PEI contained herein or in any PEI Related Document as of the date hereof or as of the Effective Time; (e) indemnification payments made by Parent or Surviving PEI to PEI's present or former officers, directors, employees, agents, consultants, advisors or representatives in respect of actions taken or omitted to be taken prior to the Closing; (f) any act, omission, occurrence, event, condition or circumstance occurring or existing at any time on or before the Effective Time and involving or related to the assets, properties, business or operations now or previously owned or operated by PEI or any of its Subsidiaries and not (i) disclosed in this Agreement, including the Disclosure Schedules or (ii) disclosed in the Merger Proxy; and (g) any claim made under the indemnification agreement made by Parent or any of its Subsidiaries pursuant to Section 4.2 of those certain Guaranty agreements executed by Parent and each of its Subsidiaries in favor of and for the benefit of Equus with respect to the $3 Million Note. Notwithstanding anything herein to the contrary, (i) except for liability for the matters set forth in Schedule 3.14, the Significant PEI Shareholders shall not have any liability for indemnification hereunder until the aggregate liability (net of any insurance proceeds received by Parent or Surviving PEI with respect to such liability) equals or exceeds $100,000, following which the Significant PEI Shareholders shall have liability only for the aggregate liability in excess of $100,000; and (ii) the Significant PEI Shareholders' liability for indemnification arising 47 hereunder shall be limited to, and shall be paid solely out of, the 1,000,000 shares of the Parent Common Stock held in the Indemnification Escrow pursuant to Section 1.6. 6.3 Indemnification by Parent. Subject to the provisions of Section 6.4, the Parent shall indemnify, save and hold harmless the Significant PEI Shareholders and any of their assignees (including lenders) and all of their respective officers, directors, employees, representatives, agents, advisors and consultants and all of their respective heirs, legal representatives, successors and assigns (collectively the "PEI INDEMNIFIED PARTIES") from and against any and all losses (net of taxes) arising from, out of or in any manner connected with or based on: (a) the breach of any covenant of Parent or the failure by Parent to perform any obligation of Parent contained herein or in any Parent Related Document; (b) any inaccuracy in or breach of any representation or warranty of Parent contained herein or in any Parent Related Document as of the date hereof or as of the Effective Time; (c) Parent's failure to comply with any law, rule or regulation relating to a Parent Designated Plan, whether or not disclosed prior to the Closing; and (d) any act, omission, occurrence, event, condition or circumstance occurring or existing at any time on or before the Effective Time and involving or related to the assets, properties, business or operations now or previously owned or operated by Parent or any of its Subsidiaries and not (i) disclosed in this Agreement, including the Disclosure Schedules or (ii) disclosed in the Merger Proxy. Notwithstanding anything herein to the contrary, Parent shall not have any liability for indemnification hereunder until the aggregate liability (net of any insurance proceeds received with respect to such liability) equals or exceeds $100,000, following which Parent shall have liability only for the aggregate liability in excess of $100,000; and (ii) Parent's liability for indemnification arising hereunder shall be limited solely to offset any of the rights to indemnity from the Significant PEI Shareholders. Accordingly, if neither the Parent nor Surviving PEI has rights to indemnity pursuant to this Agreement, the Significant PEI Shareholders shall not have any right to indemnity under this Agreement. 6.4 Procedures for Indemnification. (a) Notice. The Parent Indemnified Parties or the PEI Indemnified Parties, as the case may be, that are seeking indemnity pursuant to this Agreement (the "INDEMNIFIED PARTY") shall give prompt notice to Parent or the Shareholder Representative (as hereinafter defined), as the case may be (the "INDEMNIFYING PARTY"), of the assertion of any claim, or the commencement of any suit, action or proceeding in respect of which indemnity may be sought hereunder. For purposes of this Agreement, the "SHAREHOLDER REPRESENTATIVE" shall initially be Michael L. Burrow, acting as the shareholder representative for the Significant PEI Shareholders pursuant to the terms of the Indemnity Escrow Agreement. Any failure on the part of any 48 Indemnified Party to give the notice described in this Section 6.4(a) shall relieve the Indemnifying Party of its obligations under this Section 6 only to the extent that such Indemnifying Party has been prejudiced by the lack of timely and adequate notice (except that the Indemnifying Party shall not be liable for any expenses incurred by the Indemnified Party during the period in which the Indemnified Party failed to give such notice). Thereafter, the Indemnified Party shall deliver to the Indemnifying Party, promptly (and in any event within 10 days thereof) after the Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Indemnified Party relating to such claim, action, suit or proceeding. (b) Legal Defense. The Indemnifying Party shall have the obligation to assume the defense or settlement of any third-party claim, suit, action or proceeding in respect of which indemnity may be sought hereunder, provided that (i) Parent shall at all times have the right, at its option and cost, to participate fully therein, and (ii) if the Indemnified Party does not proceed diligently to defend the third-party claim, suit, action or proceeding within 10 days after receipt of notice of such third-party claim, suit, action or proceeding, the Indemnified Party shall have the right, but not the obligation, to undertake the defense of any such third-party claim, suit, action or proceeding. (c) Settlement. The Indemnifying Party shall not be required to indemnify the Indemnified Party with respect to any amounts paid in settlement of any third-party suit, action, proceeding or investigation entered into without the written consent of the Indemnifying Party; provided, that if the Indemnifying Party gives 10 days' prior written notice to the Indemnified Party of a settlement offer which the Indemnifying Party desires to accept and to pay all losses with respect thereto and the Indemnified Party fails or refuses to consent to such settlement within 10 days after delivery of such settlement offer notice to the Indemnified Party, and such settlement otherwise complies with the provisions of this Section 6.4, the Indemnifying Party shall not be liable for losses arising from such third-party suit, action, proceeding or investigation in excess of the amount proposed in such settlement offer. Notwithstanding the foregoing, no Indemnifying Party will consent to the entry of any judgment or enter into any settlement without the consent of the Indemnified Party, if such judgment or settlement imposes any obligation or liability upon the Indemnified Party other than the execution, delivery or approval thereof and customary releases of claims with respect to the subject matter thereof. (d) Cooperation. The parties shall cooperate in defending any such third-party suit, action, proceeding or investigation, and the defending party shall have reasonable access to the books and records, and personnel in the possession or control of the Indemnified Party that are pertinent to the defense. The Indemnified Party may join the Indemnifying Party in any suit, action, claim or proceeding brought by a third party as to which any right of indemnity created by this Agreement would or might apply, for the purpose of enforcing any right of the indemnity granted to such Indemnified Party pursuant to this Agreement. 6.5 Subrogation. Each Indemnifying Party hereby waives for itself and its Affiliates any rights to subrogation against any Indemnified Party or its insurers for losses arising from any third-party claims for which it is liable or against which it indemnifies any Indemnified Party 49 and, if necessary, each Indemnifying Party shall obtain waivers of such subrogation from its, his or her insurers. 6.6 Arbitration. (a) If a dispute between Parent and PEI relating to this Agreement, or under any other agreement executed and delivered in connection herewith, is not resolved within 10 business days from the date that either party has notified the other that such dispute exists, then such dispute shall be submitted jointly for conciliation to the president or his designee of each party. If such senior executive officers are unable to resolve the dispute within 15 business days from the date that it is first presented to them, then such dispute shall be referred to binding arbitration. (b) Any dispute under this Agreement shall be submitted to arbitration pursuant to this Section. Within 30 calendar days of notice of the dispute, the parties shall select a single arbitrator (the "ARBITRATOR"). If the parties are unable to select the Arbitrator within such time, the dispute shall be determined by the decision of a board of arbitration consisting of three members ("BOARD OF ARBITRATION") selected as hereinafter provided. For purpose of the Board of Arbitration, Parent shall select an arbitrator and PEI shall select an arbitrator, each of whom shall be a member of the Board of Arbitration, and each of whom shall be independent of the parties and shall be experienced in arbitrating complex commercial transactions. A third Board of Arbitration member, independent of the parties, shall be selected by mutual agreement of the other two Board of Arbitration members. If the other two Board of Arbitration members fail to reach agreement on such third member within 20 days after their selection, such third member shall thereafter be selected by the American Arbitration Association upon application made to it for such purpose by any party to the arbitration. The Arbitrator or the Board of Arbitration (as applicable) shall meet in Harris County, Texas, and shall reach and render a decision in writing with respect to items in dispute. The decision shall state the facts and law on which it is based, be approved by the Arbitrator or at least a majority of the members of the Board of Arbitration (as applicable), and shall be based on the law governing this Agreement. In connection with rendering its decisions, the Arbitrator or Board of Arbitration (as applicable) shall adopt and follow the Commercial Rules of Arbitration of the American Arbitration Association in effect as of the date of the arbitration, except as provided in Exhibit 6.6. To the extent practical, decisions of the arbitrator or the Board of Arbitration (as applicable) shall be rendered and delivered to Parent, PEI, and the Shareholder Representative no more than 30 calendar days following commencement of proceedings with respect thereto. Any decision made by the Arbitrator or the Board of Arbitration (as applicable) (either prior to or after the expiration of such 30-day period) shall be final, binding and conclusive on Parent and PEI (except as may be provided in Exhibit 6.6) and each party to the arbitration shall be entitled to enforce such decision to the fullest extent permitted by law and entered in any court of competent jurisdiction. The fees and expenses of the Arbitrator or the Board of Arbitration (as applicable) and the reasonable fees and expenses of legal counsel and consultants of the parties shall be allocated among the parties in the same proportion that the aggregate amount of the disputed items so submitted to the Arbitrator or the Board of Arbitration (as applicable) that is unsuccessfully submitted by each of them (as finally determined by the Arbitration or the Board of Arbitration) bears to the total amount of items so submitted. 50 (c) Sections 6.6(a) and 6.6(b) shall not apply to any claim for injunctive relief or specific performance. Such claims shall be submitted to a court of competent jurisdiction, and neither party shall be required to post any bond or other security. If a party chooses to pursue such relief, such conduct shall not constitute a waiver of, or be deemed inconsistent with, the arbitration provisions set forth in Section 6.6. Once the claims for injunctive relief or specific performance are finally decided, any and all remaining claims shall be submitted to arbitration pursuant to Sections 6.6(a) and 6.6(b) and the Board of Arbitration shall be bound by the findings and rulings of the court on the claims for injunctive relief or specific performance. (d) This Section 6.6 shall survive the termination of this Agreement and the Closing of the transactions contemplated herein. 7. TERMINATION 7.1 Events of Termination. This Agreement may be terminated and the Merger shall be abandoned upon the occurrence of an event described in Section 7.1(a) through Section 7.1(d). On termination, other than Section 6.6, this Agreement shall be of no further force or effect except as to liabilities for misrepresentation, breach or default in connection with any warranty, representation, covenant, duty or obligation given, occurring or arising prior to the date of termination and abandonment. (a) Misrepresentation, Breach or Failure by PEI. By Parent, at Parent's election, if any of the conditions precedent to its obligation to close stated in Section 5.2 have not been fulfilled or waived by the scheduled Closing Date; if an event has occurred that results in PEI Material Adverse Effect; or if there has been any misrepresentation or breach of or failure to satisfy timely on the part of PEI any condition or any material warranty, representation or agreement contained herein, if such breach or failure is not cured within 15 business days after receipt of written notice from Parent describing such breach or failure in detail. (b) Misrepresentation, Breach or Failure by Parent. By PEI, at PEI's election, if any of the conditions precedent to its obligation to close stated in Section 5.1 have not been fulfilled or waived by the scheduled Closing Date, if an event has occurred that results in a Parent Material Adverse Effect; or if there has been any misrepresentation or breach of or failure to satisfy timely on the part of Parent any condition or any material warranty, representation or agreement contained herein, if such breach or failure is not cured within 15 business days after receipt of written notice from PEI describing such breach or failure in detail. (c) Expiration of Time. By either Parent or PEI if, for any reason the Closing shall not have taken place by October 31, 2001; provided, however, that neither Parent nor PEI shall be entitled to terminate this Agreement pursuant to this Section 7.1(c) if such party is in material breach of this Agreement at such time. (d) Damages for Termination; Breakup Fee. If Parent declines to consummate the Merger solely because either (i) up to but no more than three Significant PEI Shareholders (none of whom is an officer or director of PEI at the time of the execution and delivery of this Agreement) fail to sign the documents required to be signed by the Significant 51 PEI Shareholders as a condition to Closing, or (ii) holders of more than 350,000 shares of PEI Common Stock exercised dissenters' rights and none of such holders was an officer or director of PEI at the time of the execution and delivery of this Agreement, then Parent shall not be entitled to damages from PEI for PEI's failure to meet its conditions precedent to Closing. Notwithstanding any provision of this Agreement to the contrary, if this transaction in not closed for any reason and PEI consummates an Alternative Transaction at any time within six months after the date of this Agreement, then, in addition to all other damages to which Parent may be entitled at law or in equity, PEI shall, promptly following the consummation of such Alternative Transaction, pay to Parent by wire transfer a fee of $250,000. 7.2 Effect of Termination. Termination of this Agreement pursuant to Section 7.1 shall be without prejudice to any and all remedies the parties may have against each other for breach of this Agreement. 8. MISCELLANEOUS 8.1 Notice. Any notice, delivery or communication required or permitted to be given under this Agreement shall be in writing, and shall be mailed, postage prepaid, or delivered, to the addresses given below, or sent by fax to the fax numbers set forth below, as follows: To Parent and/or LC: Industrial Data Systems Corporation 600 Century Plaza Drive, Building 140 Houston, Texas 77073-6013 Attn: William A. Coskey IDS Engineering Management, LC 600 Century Plaza Drive, Building 140 Houston, Texas 77073-6013 Attn: William A. Coskey With a copy to (delivery of which shall not constitute notice hereunder): Jenkens & Gilchrist, a Professional Corporation 600 Congress Avenue, Suite 2200 Austin, Texas 78701 Fax: 512-404-3520 Attn: Kathryn K. Lindauer To PEI or the Significant PEI Shareholders: Petrocon Engineering, Inc. 3155 Executive Boulevard Beaumont, Texas 77705 Attn: Michael L. Burrow 52 With a copy to (delivery of which shall not constitute notice hereunder): Gardere Wynne Sewell LLP 1601 Elm Street, Suite 3000 Dallas, Texas 75201 Fax: 214-999-4667 Attn: Gary B. Clark or such other address as shall be furnished in writing by any such party to the other party, and such notice shall be effective and be deemed to have been given as of the date actually received. To the extent any notice provision in any other agreement, instrument or document required to be executed or executed by the parties in connection with the transactions contemplated herein contains a notice provision which is different from the notice provision contained in this Section 8.1 with respect to matters arising under such other agreement, instrument or document, the notice provision in such other agreement, instrument or document shall control. 8.2 Further Documents. The parties shall, at any time and from time to time after the date hereof, upon request by the other party and without further consideration, execute and deliver such instruments or other documents and take such further action as may be reasonably required in order to perfect any other undertaking made by such party hereunder. 8.3 Assignability. Neither party shall assign this Agreement in whole or in part without the prior written consent of the other party. 8.4 Exhibits and Schedules. The Exhibits and Schedules (and any appendices thereto) referred to in this Agreement are and shall be incorporated herein and made a part hereof. 8.5 References to Sections, Exhibits and Schedules. Unless the context otherwise requires, all Sections and Exhibits referred to herein are, respectively, sections of, and exhibits to, this Agreement and all Schedules referred to herein are schedules constituting a part of the Disclosure Schedules. 8.6 Entire Agreement. This Agreement, together with the Confidentiality Agreements executed by Parent and PEI on or about October 13, 1999, and October 31, 2000, constitutes the full understanding of the parties, a complete allocation of risks between them and a complete and exclusive statement of the terms and conditions of their agreement relating to the subject matter hereof and supersedes any and all prior agreements, whether written or oral, that may exist between the parties with respect thereto. Except as otherwise specifically provided in this Agreement, no conditions, usage of trade, course of dealing or performance, understanding or agreement purporting to modify, vary, explain or supplement the terms or conditions of this Agreement shall be binding unless hereafter made in writing and signed by the party to be bound, and no modification shall be effected by the acknowledgment or acceptance of documents containing terms or conditions at variance with or in addition to those set forth in this Agreement. No waiver by any party with respect to any breach or default or of any right or 53 remedy and no course of dealing shall be deemed to constitute a continuing waiver of any other breach or default or of any other right or remedy, unless such waiver be expressed in writing signed by the party to be bound. Failure of a party to exercise any right shall not be deemed a waiver of such right or rights in the future. 8.7 Headings. Headings as to the contents of particular Sections are for convenience only and are in no way to be construed as part of this Agreement or as a limitation of the scope of the particular Sections to which they refer. 8.8 Controlling Law. The validity, interpretation and performance of this Agreement and any dispute connected herewith shall be governed and construed in accordance with the laws of the state of Texas except with respect to conflict of law provisions which would result in the applicability of another state's substantive law. Venue for any disputes not subject to arbitration shall be in Harris County, Texas, and the parties agree to submit to the jurisdiction of the state and federal courts in Harris County, Texas. 8.9 Public Announcements. The parties shall cooperate in making all press releases, public announcements or other public confirmations of this Agreement and the transactions contemplated herein; except as required by law, no party shall publish any of the foregoing without the prior written consent of the other parties, which consent each party agrees not to unreasonably withhold. 8.10 No Third Party Beneficiaries. Except as set forth in Section 6, no Person or entity not a party to this Agreement shall have rights under this Agreement as a third party beneficiary or otherwise. 8.11 Amendments and Waivers. This Agreement may be amended by PEI, LC, Sub and Parent, by action taken by their Boards of Directors to the extent permitted by applicable law; provided, however, that no such amendment shall (i) alter or change any provision of this Agreement, the alteration or change of which must be adopted by the holders of capital stock of Parent or PEI under the Articles of Incorporation of Parent or PEI or the Applicable Corporate Law, or (ii) alter or change this Section 8.11, unless each such alteration or change is adopted by the holders of shares of capital stock of Parent and PEI as may be required by the Articles of Incorporation of Parent or PEI or the Applicable Corporate Law. Prior to the Effective Time, all amendments to this Agreement must be by an instrument in writing signed on behalf of PEI and Parent. After the Effective Time, all amendments to this Agreement must be by an instrument in writing signed on behalf of Parent and Surviving PEI. Any term or provision of this Agreement (other than the requirements for shareholder approvals) may be waived in writing at any time by the party which is, or whose shareholders are, entitled to the benefits thereof. 8.12 No Employee Rights. Nothing herein expressed or implied shall confer upon any employee of PEI or Parent any rights or remedies, including any right to employment or continued employment for any specified period, of any nature or kind whatsoever under or by reason of this Agreement, or shall cause the employment status of any employee to be other than terminable at will. 54 8.13 When Effective. This Agreement shall become effective only upon the execution and delivery of one or more counterparts of this Agreement by PEI, LC, Parent and Sub. 8.14 Takeover Statutes. If any "fair price," "moratorium," "control share acquisition" or other form of anti-takeover statute or regulation shall become applicable to the transactions contemplated hereby, PEI and Parent and their respective members of their Boards of Directors shall grant such approvals and take such actions as are necessary so that the transactions contemplated by this Agreement may be consummated as promptly as practicable on the terms contemplated herein and otherwise act to eliminate or minimize the effects of such statute or regulation on the transactions contemplated herein. 8.15 Number and Gender of Words. Whenever herein the singular number is used, the same shall include the plural where appropriate and words of any gender shall include each other gender where appropriate. 8.16 Invalid Provisions. If any provision of this Agreement is held by final judgment of a court of competent jurisdiction to be invalid, illegal or unenforceable, such invalid, illegal or unenforceable provision shall be severed from the remainder of this Agreement, and the remainder of this Agreement shall be enforced. In addition, the invalid, illegal or unenforceable provision shall be deemed to be automatically modified, and, as so modified, to be included in this Agreement, such modification being made to the minimum extent necessary to render the provision valid, legal and enforceable. Notwithstanding the foregoing, however, if the severed or modified provision concerns all or a portion of the essential consideration to be delivered under this Agreement by one party to the other, the remaining provisions of this Agreement shall also be modified to the extent necessary to equitably adjust the parties' respective rights and obligations hereunder. 8.17 Multiple Counterparts. This Agreement may be executed in a number of identical counterparts. If so executed, each of such counterparts is to be deemed an original for all purposes and all such counterparts shall, collectively, constitute one agreement, but, in making proof of this Agreement, it shall not be necessary to produce or account for more than one such counterpart. 8.18 No Rule of Construction. All of the parties hereto have been represented by counsel in the negotiations and preparation of this Agreement; therefore, this Agreement will be deemed to be drafted by each of the parties hereto, and no rule of construction will be invoked respecting the authorship of this Agreement. 8.19 Expenses. Except as otherwise expressly provided herein, each of the parties shall bear all of its own expenses in connection with the negotiation and closing of this Agreement and the transactions contemplated hereby, and, after the Effective Time, Surviving PEI shall be responsible for the expenses of PEI incurred in connection with the transactions contemplated by this Agreement. 55 8.20 Time of the Essence. Time is of the essence in the performance of the obligations of each of the parties to this Agreement and any agreement or instrument contemplated hereunder. 8.21 Attorneys' Fees. If any arbitration or action at law or in equity, including an action for declaratory relief, is brought to enforce or interpret the provisions of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and costs from the other party; provided, however, that no party shall be a prevailing party unless such party has recovered more or paid less as a result of arbitration or a final order resulting from judicial proceedings than the amount offered in writing by an opposing party to settle the dispute. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 56 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered on the date first above written. PARENT: INDUSTRIAL DATA SYSTEMS CORPORATION By: ---------------------------------------------- William A. Coskey, President LC: IDS ENGINEERING MANAGEMENT, LC By: ---------------------------------------------- William A. Coskey, President SUB: PEI ACQUISITION, INC. By: ---------------------------------------------- William A. Coskey, President PEI: PETROCON ENGINEERING, INC. By: ---------------------------------------------- Michael L. Burrow, President 57 SCHEDULES AND EXHIBITS TO AGREEMENT AND PLAN OF MERGER Intentionally omitted. 58 EX-3.10 4 dex310.txt ARTICLES OF INCORP OF IDS ENGINEERING EXHIBIT 3.10 ARTICLES OF ORGANIZATION OF IDS ENGINEERING MANAGEMENT, LC The undersigned, acting as the sole organizer of a limited liability company under the Texas Limited Liability Company Act (the "ACT"), does hereby adopt the following Articles of Organization for IDS Engineering Management, LC (the "COMPANY"): ARTICLE ONE The name of the Company is IDS Engineering Management, LC. ARTICLE TWO The period of duration of the Company is perpetual. ARTICLE THREE The purpose for which the Company is organized is the transaction of any or all lawful business for which limited liability companies may be organized under the Act. ARTICLE FOUR The address of the initial registered office of the Company is 600 Century Plaza Drive, Bldg. 140, Houston, Texas 77037-6013 and the name of the initial registered agent of the Company at that address is William A. Coskey. ARTICLE FIVE The Company is to be managed by its members and shall have no managers. The Regulations of the Company will be adopted by the members and the power to alter, amend and/or repeal the Regulations and/or adopt new Regulations is vested in the members. The name and address of the initial member shall be as follows: Industrial Data Systems Corporation Attn: William A. Coskey 600 Century Plaza Drive, Bldg. 140 Houston, Texas 77037-6013 ARTICLE SIX Any action required by the Act or the Texas Business Corporation Act ("TBCA") to be taken at any annual or special meeting of members, or any action that may be taken at any annual or special meeting of members, may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holder or holders of membership interests having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all membership interests entitled to vote on the action were present and voted. Prompt notice of 1 the taking of any action by the members without a meeting by less than unanimous written consent shall be given to those members who did not consent in writing to the action. ARTICLE SEVEN No member shall have a preemptive right to acquire any membership interests or securities of any class that may at any time be issued, sold, or offered for sale by the Company. ARTICLE EIGHT A member of the Company shall not be liable to the Company or its other members for monetary damages for an act or omission in the member's capacity as a member, except that this Article Eight does not eliminate or limit the liability of a member to the extent the member is found liable for (i) a breach of the member's duty of loyalty to the Company or its members; (ii) an act or omission not in good faith that constitutes a breach of duty of the member to the Company or an act or omission that involves intentional misconduct or a knowing violation of the law; (iii) a transaction from which the member received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the member's office; or (iv) an act or omission for which the liability of a member is expressly provided in an applicable statute. Any repeal or amendment of this Article Eight by the members of the Company shall be prospective only and shall not adversely affect any limitation on the liability of a member of the Company existing at the time of such repeal or amendment. In addition to the circumstances in which the member of the Company is not liable as set forth in the preceding sentences, the member shall not be liable to the fullest extent permitted by any provision of the statutes of Texas hereafter enacted that further limits the liability of a member or of a director of a corporation. ARTICLE NINE The Company shall indemnify any person who was, is, or is threatened to be made a named defendant or respondent in a proceeding (as hereinafter defined) because the person (i) is or was a member or officer of the Company or (ii) while a member or officer of the Company, is or was serving at the request of the Company as a director, manager, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise, to the fullest extent that a limited liability company may grant indemnification to a member under the Act and the TBCA, as the same exists or may hereafter be amended. Such right shall be a contract right and as such shall run to the benefit of any member or officer who is elected and accepts the position of member or officer of the Company or elects to continue to serve as a member or officer of the Company while this Article Nine is in effect. Any repeal or amendment of this Article Nine shall be prospective only and shall not limit the rights of any such member or officer or the obligations of the Company with respect to any claim arising from or related to the services of such member or officer in any of the foregoing capacities prior to any such repeal or amendment of this Article Nine. Such right shall include the right to be paid or reimbursed by the Company for expenses incurred in defending any such proceeding in advance of its final disposition to the maximum extent permitted under the Act and the TBCA, as the same exists or may hereafter be amended. If a claim for indemnification or advancement of 2 expenses hereunder is not paid in full by the Company within 90 days after a written claim has been received by the Company, the claimant may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim, and if successful in whole or in part, the claimant shall be entitled to be paid also the expenses of prosecuting such claim. It shall be a defense to any such action that such indemnification or advancement of costs of defense are not permitted under the Act and the TBCA, but the burden of proving such defense shall be on the Company. Neither the failure of the Company (including its members or any committee thereof, special legal counsel, or members) to have made its determination prior to the commencement of such action that indemnification of, or advancement of costs of defense to, the claimant is permissible in the circumstances nor an actual determination by the Company (including its members or any committee thereof, special legal counsel, or members) that such indemnification or advancement is not permissible, shall be a defense to the action or create a presumption that such indemnification or advancement is not permissible. In the event of the death of any person having a right of indemnification under the foregoing provisions, such right shall inure to the benefit of his heirs, executors, administrators, and personal representatives. The rights conferred above shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, regulation, resolution of members, agreement, or otherwise. The Company may additionally indemnify any person covered by the grant of mandatory indemnification contained above to such further extent as is permitted by law and may indemnify any other person to the fullest extent permitted by law. To the extent permitted by then applicable law, the grant of mandatory indemnification to any person pursuant to this Article Nine shall extend to proceedings involving the negligence of such person. As used herein, the term "proceeding" means any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, arbitrative, or investigative, any appeal in such an action, suit, or proceeding, and any inquiry or investigation that could lead to such an action, suit, or proceeding. ARTICLE TEN With respect to any matter for which the affirmative vote of the holders of a specified portion of the membership interests entitled to vote is required by the Act, and notwithstanding that the Act may require a portion of the membership interest entitled to vote that exceeds that specified in this Article, the act of the members on that matter shall be the affirmative vote of the holders of a majority of the membership interests entitled to vote on that matter, rather than the affirmative vote otherwise required by the Act. ARTICLE ELEVEN The name and address of the sole organizer of the Company are as follows: 3 Susan E. Casey 2200 One American Center 600 Congress Avenue Austin, Texas 78701 IN WITNESS WHEREOF, these Articles of Organization have been executed on the _______ day of July, 2001 by the undersigned. SOLE ORGANIZER ---------------------------------- Susan E. Casey 4 EX-3.11 5 dex311.txt REGULATIONS OF IDS ENGINEERING MGT EXHIBIT 3.11 REGULATIONS OF IDS ENGINEERING MANAGEMENT, LC A Texas Limited Liability Company These Regulations of IDS Engineering Management, LC, a Texas limited liability company, executed to be effective as of July 30, 2001, are adopted, executed and agreed to by the sole Member (as defined below). 1. FORMATION. IDS Engineering Management, LC (the "COMPANY") has been organized as a Texas limited liability company under and pursuant to the Texas Limited Liability Company Act (the "ACT"). 2. SOLE MEMBER. Industrial Data Systems Corporation, a Nevada corporation, shall be the sole member of the Company (the "MEMBER"). 3. CONTRIBUTIONS. The Member has made an initial contribution to the capital of the Company in the amount of $1,000. Without creating any rights in favor of any third party, the Member may, from time to time, make additional contributions of cash or property to the capital of the Company, but shall have no obligation to do so. 4. DISTRIBUTIONS. The Member shall be entitled to (a) receive all distributions (including, without limitation, liquidating distributions) made by the Company, and (b) enjoy all other rights, benefits and interests in the Company. 5. SINGLE-MEMBER LIMITED LIABILITY COMPANY FOR TAX PURPOSES. The Member hereby states that it is its intention that the Company shall be treated as a disregarded entity for purposes of United States federal income tax laws, and further states that it will not take any position or make any election, in a tax return or otherwise, inconsistent herewith. In furtherance of the foregoing, the Company will file its results of operations as part of the Member's income tax return for each year for United States federal income tax purposes. 6. INDEMNIFICATION. (a) RIGHT TO INDEMNIFICATION. Subject to the limitations and conditions as provided in this Section 6, each person who was or is made a party or is threatened to be made a party to or is involved in any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative (a "PROCEEDING"), or any appeal in such a Proceeding or any inquiry or investigation that could lead to such a Proceeding, by reason of the fact that such person is or was a member of the Company or while such member of the Company is or was serving at the request of the Company as a member, manager, director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic limited liability company, corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise shall be indemnified by the 1 Company to the fullest extent permitted by the Act, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than said law permitted the Company to provide prior to such amendment) against judgments, penalties (including excise and similar taxes and punitive damages), fines, settlements and reasonable expenses (including attorneys' fees) actually incurred by such person in connection with such Proceeding, and indemnification under this Section 6 shall continue as to a person who has ceased to serve in the capacity which initially entitled such person to indemnity hereunder. The rights granted pursuant to this Section 6 shall be deemed contract rights, and no amendment, modification or repeal of this Section 6 shall have the effect of limiting or denying any such rights with respect to actions taken or Proceedings arising prior to any such amendment, modification, or repeal. It is expressly acknowledged that the indemnification provided in this Section 6 could involve indemnification for negligence or under theories of strict liability. (b) ADVANCE PAYMENT. The right to indemnification conferred in this Section 6 shall include the right to be paid or reimbursed by the Company the reasonable expenses incurred by a person of the type entitled to be indemnified under Section 6 who was, is or is threatened to be made a named defendant or respondent in a Proceeding in advance of the final disposition of the Proceeding and without any determination as to the person's ultimate entitlement to indemnification; provided, however, that the payment of such expenses incurred by any such person in advance of the final disposition of a Proceeding, shall be made only upon delivery to the Company of a written affirmation by such person of its good faith belief that it has met the standard of conduct necessary for indemnification under this Section 6 and a written undertaking, by or on behalf of such person, to repay all amounts so advanced if it shall ultimately be determined that such indemnified person is not entitled to be indemnified under this Section 6 or otherwise. (c) INDEMNIFICATION OF OFFICERS, EMPLOYEES AND AGENTS. The Company shall indemnify and advance expenses to an officer of the Company to the extent required to do so by the Act or other applicable law. The Company, by adoption of a resolution of the Member, may indemnify and advance expenses to an officer, employee or agent of the Company to the same extent and subject to the same conditions under which it may indemnify and advance expenses to the Member under this Section 6; and the Company may indemnify and advance expenses to persons who are not or were not members, officers, employees, or agents of the Company but who are or were serving at the request of the Company as a member, manager, director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic limited liability company, corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise against any liability asserted against such person and incurred by such person in such a capacity or arising out of its status as such a person to the same extent that the Company may indemnify and advance expenses to the Member under this Section 6. (d) APPEARANCE AS A WITNESS. Notwithstanding any other provision of this Section 6, the Company may pay or reimburse expenses incurred by the Member in connection with its appearance as a witness or other participation in a Proceeding at a time when it is not a named defendant or respondent in the Proceeding. 2 (e) NONEXCLUSIVITY OF RIGHTS. The right to indemnification and the advancement and payment of expenses conferred in this Section 6 shall not be exclusive of any other right which the Member may have or hereafter acquire under any law, provision of these Regulations or otherwise. (f) INSURANCE. The Company may purchase and maintain insurance, at its expense, to protect itself and any person who is or was serving as a member, officer, employee, or agent of the Company or is or was serving at the request of the Company as a member, manager, director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic limited liability company, corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise against any expense, liability or loss, whether or not the Company would have the power to indemnify such person against such expense, liability or loss under this Section 6. (g) MEMBER NOTIFICATION. To the extent required by law, any indemnification of or advance of expenses to the Member in accordance with this Section 6 shall be duly recorded in the official documentation of the Company within the 12-month period immediately following the date of the indemnification or advance. (h) SAVINGS CLAUSE. If this Section 6 or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify and hold harmless the Member or any other person indemnified pursuant to this Section 6 as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit, or proceeding, whether civil, criminal, administrative, or investigative to the full extent permitted by any applicable portion of this Section 6 that shall not have been invalidated and to the fullest extent permitted by law. 7. AMENDMENT OF REGULATIONS. Any amendment or supplement to these Regulations shall only be effective if in writing and if the same shall be consented to and approved by the Member. 8. MANAGEMENT. (a) The management of the Company is fully reserved to the Member, and the Company shall not have "managers" as that term is used in the Act. The powers of the Company shall be exercised by or under the authority of, and the business and affairs of the Company shall be managed under the direction of, the Member, who shall make all decisions and take all actions for the Company. 9. OFFICERS. (a) The Member may, from time to time, designate one or more persons to be the officers of the Company. Any officers so designated shall have such authority and perform such duties as the Member may, from time to time, delegate to them. The Member may assign titles to particular officers. Unless the Member decides otherwise, if the title is one commonly used for officers of a business corporation formed under the Texas Business Corporation Act, the assignment of such title shall constitute the delegation to such officer of the authority and duties 3 that are normally associated with that office. Each officer shall hold office until such officer's successor shall be duly designated and shall qualify or until such officer's death or until such officer shall resign or shall have been removed in the manner hereinafter provided. Any number of offices may be held by the same person. The salaries or other compensation, if any, of the officers and agents of the Company shall be fixed from time to time by the Member. (b) Any officer may resign as such at any time. Such resignation shall be made in writing and shall take effect at the time specified therein, or if no time is specified, at the time of its receipt by the Member. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation. Any officer may be removed as such, either with or without cause, by the Member whenever in its judgment the best interests of the Company will be served thereby; provided, however, that such removal shall be without prejudice to the contract rights, if any, of the officer so removed. Designation of an officer shall not of itself create contract rights. Any vacancy occurring in any office of the Company may be filled by the Member. 10. DISSOLUTION. The Company shall dissolve and its affairs shall be wound up at such time, if any, as the Member may elect. No other event (including, without limitation, an event described in Article 6.01(A)(5) of the Act) will cause the Company to dissolve. 11. GOVERNING LAW. THESE REGULATIONS ARE GOVERNED BY AND SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (EXCLUDING ITS CONFLICT-OF- LAWS RULES). EXECUTED as of the day and year first written above. SOLE MEMBER: INDUSTRIAL DATA SYSTEMS CORPORATION By: ---------------------------------------- William A. Coskey, President 4 EX-3.12 6 dex312.txt ARTICLES OF INCORP OF PEI ACQUISITION EXHIBIT 3.12 ARTICLES OF INCORPORATION OF PEI ACQUISITION, INC. I, the undersigned, a natural person of the age of eighteen years or more acting as the incorporator of a corporation (the "CORPORATION") under the Texas Business Corporation Act, do hereby adopt the following Articles of Incorporation for the Corporation: ARTICLE ONE The name of the Corporation is PEI Acquisition, Inc. ARTICLE TWO The period of duration of the Corporation is perpetual. ARTICLE THREE The purpose for which the Corporation is organized is to engage in the transaction of any and all lawful businesses for which corporations may be incorporated under the Texas Business Corporation Act. ARTICLE FOUR The aggregate number of shares of capital stock which the Corporation shall have authority to issue is 100,000, par value $0.01 per share, designated Common Stock. Each share of such Common Stock shall have identical rights and privileges in every respect. ARTICLE FIVE No holder of any shares of capital stock of the Corporation, whether now or hereafter authorized, shall, as such holder, have any preemptive or preferential right to receive, purchase, or subscribe to (a) any unissued or treasury shares of any class of stock (whether now or hereafter authorized) of the Corporation, (b) any obligations, evidences of indebtedness, or other securities of the Corporation convertible into or exchangeable for, or carrying or accompanied by any rights to receive, purchase, or subscribe to, any such unissued or treasury shares, (c) any right of subscription to or to receive, or any warrant or option for the purchase of, any of the foregoing securities, or (d) any other securities that may be issued or sold by the Corporation. ARTICLE SIX The Corporation will not commence business until it has received for the issuance of its shares consideration of the value of at least $1,000.00. ARTICLE SEVEN Cumulative voting for the election of directors is expressly denied and prohibited. 1 ARTICLE EIGHT No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers or have a financial interest, shall be void or voidable solely for this reason, solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (a) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (b) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or (c) The contract or transaction is fair as to the Corporation as of the time it is authorized, approved, or ratified by the Board of Directors, a committee thereof, or the shareholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. This provision shall not be construed to invalidate a contract or transaction which would be valid in the absence of this provision or to subject any director or officer to any liability that he would not be subject to in the absence of this provision. ARTICLE NINE The Corporation shall indemnify any person who was, is, or is threatened to be made a named defendant or respondent in a proceeding (as hereinafter defined) because the person (a) is or was a director or officer of the Corporation or (b) while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise, to the fullest extent that a corporation may grant indemnification to a director under the Texas Business Corporation Act, as the same exists or may hereafter be amended. Such right shall be a contract right and as such shall run to the benefit of any director or officer who is elected and accepts the position of director or officer of the Corporation or elects to continue to serve as a director or officer of the Corporation while this Article Nine is in effect. Any repeal or amendment of this Article Nine shall be prospective only and shall not limit the rights of any such director or officer or the obligations of the Corporation with respect to any claim arising from or related to the services of such director or officer in any of the foregoing capacities prior to any such repeal or amendment of this Article Nine. 2 Such right shall include the right to be paid or reimbursed by the Corporation for expenses incurred in defending any such proceeding in advance of its final disposition to the maximum extent permitted under the Texas Business Corporation Act, as the same exists or may hereafter be amended. If a claim for indemnification or advancement of expenses hereunder is not paid in full by the Corporation within ninety days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim, and if successful in whole or in part, the claimant shall be entitled to be paid also the expenses of prosecuting such claim. It shall be a defense to any such action that such indemnification or advancement of costs of defense are not permitted under the Texas Business Corporation Act, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors or any committee thereof, special legal counsel, or shareholders) to have made its determination prior to the commencement of such action that indemnification of, or advancement of costs of defense to, the claimant is permissible in the circumstances nor an actual determination by the Corporation (including its Board of Directors or any committee thereof, special legal counsel, or shareholders) that such indemnification or advancement is not permissible, shall be a defense to the action or create a presumption that such indemnification or advancement is not permissible. In the event of the death of any person having a right of indemnification under the foregoing provisions, such right shall inure to the benefit of his heirs, executors, administrators, and personal representatives. The rights conferred above shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, bylaw, resolution of shareholders or directors, agreement, or otherwise. The Corporation may additionally indemnify any person covered by the grant of mandatory indemnification contained above to such further extent as is permitted by law and may indemnify any other person to the fullest extent permitted by law. To the extent permitted by then applicable law, the grant of mandatory indemnification to any person pursuant to this Article Nine shall extend to proceedings involving the negligence of such person. As used herein, the term "proceeding" means any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, arbitrative, or investigative, any appeal in such an action, suit, or proceeding, and any inquiry or investigation that could lead to such an action, suit, or proceeding. ARTICLE TEN Any action of the Corporation which, under the provisions of the Texas Business Corporation Act or any other applicable law, is required to be authorized or approved by the holders of any specified fraction which is in excess of one-half or any specified percentage which is in excess of 50% of the outstanding shares (or of any class or series thereof) of the Corporation shall, notwithstanding any law, be deemed effectively and properly authorized or approved if authorized or approved by the vote of the holders of more than 50% of the outstanding shares entitled to vote thereon (or, if the holders of any class or series of the Corporation's shares shall be entitled by the Texas Business Corporation Act or any other applicable law to vote thereon separately as a class, by the vote of the holders of more than 50% of the outstanding shares of each such class or series). 3 Without limiting the generality of the foregoing, the foregoing provisions of this Article Ten shall be applicable to any required shareholder authorization or approval of: (a) any amendment to these Articles of Incorporation; (b) any plan of merger, share exchange, or reorganization involving the Corporation; (c) any sale, lease, exchange, or other disposition of all, or substantially all, the property and assets of the Corporation; and (d) any voluntary dissolution of the Corporation. Directors of the Corporation shall be elected by a plurality of the votes cast by the holders of shares entitled to vote in the election of directors of the Corporation at a meeting of shareholders at which a quorum is present. Except as otherwise provided in this Article Ten or as otherwise required by the Texas Business Corporation Act or other applicable law, with respect to any matter, the affirmative vote of the holders of a majority of the Corporation's shares entitled to vote on that matter and represented in person or by proxy at a meeting of shareholders at which a quorum is present shall be the act of the shareholders. Nothing contained in this Article Ten is intended to require shareholder authorization or approval of any action of the Corporation whatsoever unless such approval is specifically required by the other provisions of these Articles of Incorporation, the bylaws of the Corporation, or by the Texas Business Corporation Act or other applicable law. ARTICLE ELEVEN The street address of the initial registered office of the Corporation is 600 Century Plaza Drive, Bldg. 140, Houston, Texas 77037-6013, and the name of its initial registered agent at such address is William A. Coskey. ARTICLE TWELVE The number of directors constituting the initial Board of Directors is two and the name and address of each person who is to serve as director until the first annual meeting of shareholders and until such director's successor is elected and qualified or, if earlier, until such director's death, resignation, or removal as director, are as follows: Name Address ---- ------- William A. Coskey 600 Century Plaza Drive, Bldg. 140 Houston, Texas 77037-6013 Hulda L. Coskey 600 Century Plaza Drive, Bldg. 140 Houston, Texas 77037-6013 ARTICLE THIRTEEN To the fullest extent permitted by applicable law, a director of the Corporation shall not be liable to the Corporation or its shareholders for monetary damages for an act or omission in the 4 director's capacity as a director, except that this Article Thirteen does not eliminate or limit the liability of a director of the Corporation to the extent the director is found liable for: (a) a breach of the director's duty of loyalty to the Corporation or its shareholders; (b) an act or omission not in good faith that constitutes a breach of duty of the director to the Corporation or an act or omission that involves intentional misconduct or a knowing violation of the law; (c) a transaction from which the director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office; or (d) an act or omission for which the liability of a director is expressly provided by an applicable statute. Any repeal or amendment of this Article Thirteen by the shareholders of the Corporation shall be prospective only and shall not adversely affect any limitation on the personal liability of a director of the Corporation arising from an act or omission occurring prior to the time of such repeal or amendment. In addition to the circumstances in which a director of the Corporation is not personally liable as set forth in the foregoing provisions of this Article Thirteen, a director shall not be liable to the Corporation or its shareholders to such further extent as permitted by any law hereafter enacted, including without limitation any subsequent amendment to the Texas Miscellaneous Corporation Laws Act or the Texas Business Corporation Act. ARTICLE FOURTEEN Any action which may be taken, or which is required by law or the Articles of Incorporation or bylaws of the Corporation to be taken, at any annual or special meeting of shareholders may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so taken, shall have been signed by the holder or holders of shares having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were present and voted. ARTICLE FIFTEEN The name and address of the incorporator are as follows: Name Address ---- ------- Susan E. Casey 2200 One American Center 600 Congress Avenue Austin, Texas 78701 EXECUTED this ______ day of July, 2001. 5 ------------------------------------ Susan E. Casey I, the undersigned incorporator of PEI Acquisition, Inc., a corporation to be filed with the Texas Secretary of State, do hereby disclaim any and all interests in said corporation. ------------------------------------ Susan E. Casey 6 EX-3.13 7 dex313.txt BYLAWS OF PEI ACQUISITIONS INC EXHIBIT 3.13 BYLAWS OF PEI ACQUISITION, INC. A TEXAS CORPORATION PREAMBLE These bylaws are subject to, and governed by, the Texas Business Corporation Act and the articles of incorporation of PEI Acquisition, Inc. (the "CORPORATION"). In the event of a direct conflict between the provisions of these bylaws and the mandatory provisions of the Texas Business Corporation Act or the provisions of the articles of incorporation of the Corporation, such provisions of the Texas Business Corporation Act or the articles of incorporation of the Corporation, as the case may be, will be controlling. ARTICLE ONE: OFFICES 1.01 Registered Office and Agent. The registered office and registered agent of the Corporation shall be as designated from time to time by the appropriate filing by the Corporation in the office of the Secretary of State of Texas. 1.02 Other Offices. The Corporation may also have offices at such other places, both within and without the State of Texas, as the board of directors may from time to time determine or the business of the Corporation may require. ARTICLE TWO: SHAREHOLDERS 2.01 Annual Meetings. An annual meeting of shareholders of the Corporation shall be held during each calendar year on such date and at such time as shall be designated from time to time by the board of directors and stated in the notice of the meeting, if not a legal holiday in the place where the meeting is to be held, and, if a legal holiday in such place, then on the next business day following, at the time specified in the notice of the meeting. At such meeting, the shareholders shall elect directors and transact such other business as may properly be brought before the meeting. 2.02 Special Meetings. A special meeting of the shareholders may be called at any time by the president, the board of directors, or the holders of not less than ten percent of all shares entitled to vote at such meeting. Only business within the purpose or purposes described in the notice of special meeting may be conducted at such special meeting. 2.03 Place of Meetings. The annual meeting of shareholders may be held at any place within or without the State of Texas designated by the board of directors. Special meetings of shareholders may be held at any place within or without the State of Texas designated by the person or persons calling such special meeting as provided in Section 2.02 above. Meetings of shareholders shall be held at the principal office of the 1 Corporation unless another place is designated for meetings in the manner provided herein. 2.04 Notice. Except as otherwise provided by law, written or printed notice stating the place, day, and hour of each meeting of the shareholders and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten nor more than sixty days before the date of the meeting by or at the direction of the president, the secretary, or the person calling the meeting, to each shareholder of record entitled to vote at such meeting. 2.05 Voting List. At least ten days before each meeting of shareholders, the secretary shall prepare a complete list of shareholders entitled to vote at such meeting, arranged in alphabetical order, including the address of each shareholder and the number of voting shares held by each shareholder. For a period of ten days prior to such meeting, such list shall be kept on file at the registered office of the Corporation and shall be subject to inspection by any shareholder during usual business hours. Such list shall be produced at such meeting, and at all times during such meeting shall be subject to inspection by any shareholder. The original stock transfer books shall be prima facie evidence as to who are the shareholders entitled to examine such list. 2.06 Voting of Shares. Treasury shares, shares of the Corporation's own stock owned by another corporation the majority of the voting stock of which is owned or controlled by the Corporation, and shares of the Corporation's own stock held by the Corporation in a fiduciary capacity shall not be shares entitled to vote or to be counted in determining the total number of outstanding shares. Shares standing in the name of another domestic or foreign corporation of any type or kind may be voted by such officer, agent, or proxy as the bylaws of such corporation may authorize or, in the absence of such authorization, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian, or conservator may be voted by him, either in person or by proxy, without transfer of such shares into his name so long as such shares form a part of the estate served by him and are in the possession of such estate. Shares held by a trustee may be voted by him, either in person or by proxy, only after the shares have been transferred into his name as trustee. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without transfer of such shares into his name if authority to do so is contained in the court order by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until they have been transferred into the name of the pledgee, and thereafter, the pledgee shall be entitled to vote such shares. 2.07 Quorum. The holders of a majority of the outstanding shares entitled to vote, present in person or represented by proxy, shall constitute a quorum at any meeting of shareholders, except as otherwise provided by law, the articles of incorporation, or these bylaws. If a quorum shall not be present or represented at any meeting of shareholders, a majority of the shareholders entitled to vote at the meeting, who are present in person or represented by proxy, may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or 2 represented. At any reconvening of an adjourned meeting at which a quorum shall be present or represented by proxy, any business may be transacted which could have been transacted at the original meeting, if a quorum had been present or represented. 2.08 Majority Vote; Withdrawal of Quorum. If a quorum is present in person or represented by proxy at any meeting, the vote of the holders of a majority of the outstanding shares entitled to vote, present in person or represented by proxy, shall decide any question brought before such meeting, unless the question is one on which, by express provision of law, the articles of incorporation, or these bylaws, a different vote is required, in which event such express provision shall govern and control the decision of such question. The shareholders present at a duly convened meeting may continue to transact business until adjournment, notwithstanding any withdrawal of shareholders which may leave less than a quorum remaining. 2.09 Method of Voting; Proxies. Every shareholder of record shall be entitled at every meeting of shareholders to one vote on each matter submitted to a vote, for every share standing in his name on the original stock transfer books of the Corporation except to the extent that the voting rights of the shares of any class or classes are limited or denied by the articles of incorporation. Such stock transfer books shall be prima facie evidence as to the identity of shareholders entitled to vote. At any meeting of shareholders, every shareholder having the right to vote may vote either in person or by a proxy executed in writing by the shareholder or by his duly authorized attorney-in- fact. Each such proxy shall be filed with the secretary of the Corporation before, or at the time of, the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. If no date is stated on a proxy, such proxy shall be presumed to have been executed on the date of the meeting at which it is to be voted. Each proxy shall be revocable unless the proxy form conspicuously states that the proxy is irrevocable and the proxy is coupled with an interest. 2.10 Closing of Transfer Books; Record Date. For the purpose of determining shareholders entitled to notice of, or to vote at, any meeting of shareholders or any reconvening thereof, or entitled to receive a distribution (other than a distribution involving a purchase or redemption by the Corporation of any of its own shares) or a share dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors may provide that the stock transfer books of the Corporation shall be closed for a stated period but not to exceed in any event sixty days. If the stock transfer books are closed for the purpose of determining shareholders entitled to notice of, or to vote at, a meeting of shareholders, such books shall be closed for at least ten days immediately preceding such meeting. In lieu of closing the stock transfer books, the board of directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than sixty days and, in case of a meeting of shareholders, not less than ten days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If the stock transfer books are not closed and if no record date is fixed for the determination of shareholders entitled to notice of, or to vote at, a meeting of shareholders or entitled to receive a distribution (other than a distribution involving a purchase or redemption by the Corporation of any of its own shares) or a share dividend, the date on which the notice of 3 the meeting is mailed or the date on which the resolution of the board of directors declaring such distribution or share dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. 2.11 Officers' Duties at Meetings. The president shall preside at, and the secretary shall prepare minutes of, each meeting of shareholders, and in the absence of either such officer, his duties shall be performed by some person or persons elected by the vote of the holders of a majority of the outstanding shares entitled to vote, present in person or represented by proxy. ARTICLE THREE: DIRECTORS 3.01 Management. The business and property of the Corporation shall be managed by the board of directors, and subject to the restrictions imposed by law, the articles of incorporation, or these bylaws, the board of directors may exercise all the powers of the Corporation. 3.02 Number; Election; Term; Qualification. The number of directors which shall constitute the board of directors shall be not less than one. The first board of directors shall consist of the number of directors named in the articles of incorporation. Thereafter, the number of directors which shall constitute the entire board of directors shall be determined by resolution of the board of directors at any meeting thereof or by the shareholders at any meeting thereof, but shall never be less than one. At each annual meeting of shareholders, directors shall be elected to hold office until the next annual meeting of shareholders and until their successors are elected and qualified. No director need be a shareholder, a resident of the State of Texas, or a citizen of the United States. In addition, the board of directors may appoint such advisory directors as it determines from time to time to be appropriate. Advisory directors shall not have the right to vote on any matter brought before the board of directors for a vote, but shall have the right to attend board meetings and to receive such documents and other materials as are provided to all other board members, unless either the president or a majority of the board of directors determines that such attendance or the provision of such materials could have an adverse effect on the business or operations of the Corporation or is otherwise not in the best interests of the Corporation. Advisory directors may receive such compensation, including the issuance of stock options, as the board of directors determines is appropriate. Any advisory directors may be removed by the board of directors, with or without cause and with or without notice at any time. 3.03 Changes in Number. No decrease in the number of directors constituting the entire board of directors shall have the effect of shortening the term of any incumbent director. Any directorship to be filled by reason of an increase in the number of directors may be filled by (i) the shareholders at any annual or special meeting of shareholders called for that purpose or (ii) the board of directors for a term of office continuing only until the next election of one or more directors by the shareholders; provided that the board of directors may not fill more than two such directorships during the period between any two successive annual meetings of shareholders. Notwithstanding the foregoing, whenever the holders of any class or series of shares are entitled to elect one 4 or more directors by the provisions of the articles of incorporation, any newly created directorship(s) of such class or series to be filled by reason of an increase in the number of such directors may be filled by the affirmative vote of a majority of the directors elected by such class or series then in office or by a sole remaining director so elected or by the vote of the holders of the outstanding shares of such class or series, and such directorship(s) shall not in any case be filled by the vote of the remaining directors or by the holders of the outstanding shares of the Corporation as a whole unless otherwise provided in the articles of incorporation. 3.04 Removal. At any meeting of shareholders called expressly for that purpose, any director or the entire board of directors may be removed, with or without cause, by a vote of the holders of a majority of the shares then entitled to vote on the election of directors. 3.05 Vacancies. Any vacancy occurring in the board of directors may be filled by (i) the shareholders at any annual or special meeting of shareholders called for that purpose or (ii) the affirmative vote of a majority of the remaining directors though less than a quorum of the board of directors. A director elected to fill a vacancy shall be elected to serve for the unexpired term of his predecessor in office. Notwithstanding the foregoing, whenever the holders of any class or series of shares are entitled to elect one or more directors by the provisions of the articles of incorporation, any vacancies in such directorship(s) may be filled by the affirmative vote of a majority of the directors elected by such class or series then in office or by a sole remaining director so elected or by the vote of the holders of the outstanding shares of such class or series, and such directorship(s) shall not in any case be filled by the vote of the remaining directors or the holders of the outstanding shares of the Corporation as a whole unless otherwise provided in the articles of incorporation. 3.06 Place of Meetings. The board of directors may hold its meetings and may have an office and keep the books of the Corporation, except as otherwise provided by law, in such place or places within or without the State of Texas as the board of directors may from time to time determine. 3.07 First Meeting. Each newly elected board of directors may hold its first meeting for the purpose of organization and the transaction of business, if a quorum is present, immediately after and at the same place as the annual meeting of shareholders, and notice of such meeting shall not be necessary. 3.08 Regular Meetings. Regular meetings of the board of directors may be held without notice at such times and places as may be designated from time to time by resolution of the board of directors and communicated to all directors. 3.09 Special Meetings; Notice. Special meetings of the board of directors shall be held whenever called by the president or by any director. The person calling any special meeting shall cause notice of such special meeting, including therein the time and place of such special meeting, to be given to each director at least two days before such special 5 meeting. Neither the business to be transacted at, nor the purpose of, any special meeting of the board of directors need be specified in the notice or waiver of notice of any special meeting. 3.10 Quorum; Majority Vote. At all meetings of the board of directors, a majority of the directors, fixed in the manner provided in these bylaws, shall constitute a quorum for the transaction of business. If a quorum is not present at a meeting, a majority of the directors present may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum is present. The act of a majority of the directors present at a meeting at which a quorum is in attendance shall be the act of the board of directors, unless the act of a greater number is required by law, the articles of incorporation, or these bylaws. 3.11 Procedure; Minutes. At meetings of the board of directors, business shall be transacted in such order as the board of directors may determine from time to time. The board of directors shall appoint at each meeting a person to preside at the meeting and a person to act as secretary of the meeting. The secretary of the meeting shall prepare minutes of the meeting which shall be delivered to the secretary of the Corporation for placement in the minute books of the Corporation. 3.12 Presumption of Assent. A director of the Corporation who is present at any meeting of the board of directors at which action on any matter is taken shall be presumed to have assented to the action unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as secretary of the meeting before the adjournment thereof or shall forward any dissent by certified or registered mail to the secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. 3.13 Compensation. Directors, in their capacity as directors, may receive, by resolution of the board of directors, a fixed sum and expenses of attendance, if any, for attending meetings of the board of directors or a stated salary. No director shall be precluded from serving the Corporation in any other capacity or receiving compensation therefor. ARTICLE FOUR: COMMITTEES 4.01 Designation. The board of directors may, by resolution adopted by a majority of the entire board of directors, designate executive and other committees. 4.02 Number; Qualification; Term. Each committee shall consist of one or more directors appointed by resolution adopted by a majority of the entire board of directors. The number of committee members may be increased or decreased from time to time by resolution adopted by a majority of the entire board of directors. Each committee member shall serve as such until the earliest of (i) the expiration of his term as director, (ii) his resignation as a committee member or as a director, or (iii) his removal, as a committee member or as a director. 6 4.03 Authority. Each committee, to the extent expressly provided in the resolution establishing such committee, shall have and may exercise all of the authority of the board of directors in the management of the business and property of the Corporation, including, without limitation, the power and authority to declare a dividend and to authorize the issuance of shares of the Corporation. Notwithstanding the foregoing, however, no committee shall have the authority of the board of directors in reference to: (a) amending the articles of incorporation; (b) approving a plan of merger or consolidation; (c) recommending to the shareholders the sale, lease, or exchange of all or substantially all of the property and assets of the Corporation otherwise than in the usual and regular course of its business; (d) recommending to the shareholders a voluntary dissolution of the Corporation or a revocation thereof; (e) amending, altering, or repealing these bylaws or adopting new bylaws; (f) filling vacancies in the board of directors or of any committee; (g) filling any directorship to be filled by reason of an increase in the number of directors; (h) electing or removing officers or committee members; (i) fixing the compensation of any committee member; or (j) altering or repealing any resolution of the board of directors which by its terms provides that it shall not be amendable or repealable. 4.04 Committee Changes; Removal. The board of directors shall have the power at any time to fill vacancies in, to change the membership of, and to discharge any committee. However, a committee member may be removed by the board of directors, only if, in the judgment of the board of directors, the best interests of the Corporation will be served thereby. 4.05 Regular Meetings. Regular meetings of any committee may be held without notice at such time and place as may be designated from time to time by the committee and communicated to all members thereof. 4.06 Special Meetings. Special meetings of any committee may be held whenever called by any committee member. The committee member calling any special meeting shall cause notice of such special meeting, including therein the time and place of such special meeting, to be given to each committee member at least two days before 7 such special meeting. Neither the business to be transacted at, nor the purpose of, any special meeting of any committee need be specified in the notice or waiver of notice of any special meeting. 4.07 Quorum; Majority Vote. At meetings of any committee, a majority of the number of members designated by the board of directors shall constitute a quorum for the transaction of business. If a quorum is not present at a meeting of any committee, a majority of the members present may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum is present. The act of a majority of the members present at any meeting at which a quorum is in attendance shall be the act of a committee, unless the act of a greater number is required by law, the articles of incorporation, or these bylaws. 4.08 Minutes. Each committee shall cause minutes of its proceedings to be prepared and shall report the same to the board of directors upon the request of the board of directors. The minutes of the proceedings of each committee shall be delivered to the secretary of the Corporation for placement in the minute books of the Corporation. 4.09 Compensation. Committee members may, by resolution of the board of directors, be allowed a fixed sum and expenses of attendance, if any, for attending any committee meetings or a stated salary. 4.10 Responsibility. The designation of any committee and the delegation of authority to it shall not operate to relieve the board of directors or any director of any responsibility imposed upon it or such director by law. ARTICLE FIVE: GENERAL PROVISIONS RELATING TO MEETINGS 5.01 Notice. Whenever by law, the articles of incorporation, or these bylaws, notice is required to be given to any committee member, director, or shareholder and no provision is made as to how such notice shall be given, it shall be construed to mean that any such notice may be given (a) in person, (b) in writing, by mail, postage prepaid, addressed to such committee member, director, or shareholder at his address as it appears on the books of the Corporation or, in the case of a shareholder, the stock transfer records of the Corporation, or (c) by any other method permitted by law. Any notice required or permitted to be given by mail shall be deemed to be delivered and given at the time when the same is deposited in the United States mail, postage prepaid, and addressed as aforesaid. Any notice required or permitted to be given by telegram, telex, cable, telecopier, or similar means shall be deemed to be delivered and given at the time transmitted with all charges prepaid and addressed as aforesaid. 5.02 Waiver of Notice. Whenever by law, the articles of incorporation, or these bylaws, any notice is required to be given to any committee member, shareholder, or director of the Corporation, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time notice should have been given, shall be equivalent to the giving of such notice. Attendance of a committee member, shareholder, or director at a meeting shall constitute a waiver of notice of such meeting, 8 except where such person attends for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. 5.03 Telephone and Similar Meetings. Shareholders, directors, or committee members may participate in and hold a meeting by means of a conference telephone or similar communications equipment by means of which persons participating in the meeting can hear each other. Participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. 5.04 Action Without Meeting. Any action which may be taken, or is required by law, the articles of incorporation, or these bylaws to be taken, at a meeting of shareholders, the directors, or any committee members may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the shareholders, directors, or committee members, as the case may be, entitled to vote with respect to the subject matter thereof, and such consent shall have the same force and effect, as of the date stated therein, as a unanimous vote of such shareholders, directors, or committee members, as the case may be, and may be stated as such in any document filed with the Secretary of State of Texas or in any certificate or other document delivered to any person. The consent may be in one or more counterparts so long as each shareholder, director, or committee member signs one of the counterparts. The signed consent shall be placed in the minute books of the Corporation. ARTICLE SIX: OFFICERS AND OTHER AGENTS 6.01 Number; Titles; Election; Term; Qualification. The officers of the Corporation shall be a president and secretary, and if the board of directors determines appropriate, one or more vice presidents (and, in the case of each vice president, with such descriptive title, if any, as the board of directors shall determine), and a treasurer. The Corporation may also have a chairman of the board, one or more assistant treasurers, one or more assistant secretaries, and such other officers and such agents as the board of directors may from time to time elect or appoint. The board of directors shall elect a president and secretary and such other officers as it deems appropriate at its first meeting at which a quorum shall be present after the annual meeting of shareholders or whenever a vacancy exists. The board of directors then, or from time to time, may also elect or appoint one or more other officers or agents as it shall deem advisable. Each officer and agent shall hold office for the term for which he is elected or appointed and until his successor has been elected or appointed and qualified. Any person may hold any number of offices. No officer or agent need be a shareholder, a director, a resident of the State of Texas, or a citizen of the United States. 6.02 Removal. Any officer or agent elected or appointed by the board of directors may be removed by the board of directors whenever in its judgment the best interest of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. 9 6.03 Vacancies. Any vacancy occurring in any office of the Corporation may be filled by the board of directors. 6.04 Authority. Officers shall have such authority and perform such duties in the management of the Corporation as are provided in these bylaws or as may be determined by resolution of the board of directors not inconsistent with these bylaws. 6.05 Compensation. The compensation, if any, of officers and agents shall be fixed from time to time by the board of directors; provided, that the board of directors may by resolution delegate to any one or more officers of the Corporation the authority to fix such compensation. 6.06 Chairman of the Board. The chairman of the board shall have such powers and duties as may be prescribed by the board of directors. 6.07 President. Unless and to the extent that such powers and duties are expressly delegated to a chairman of the board by the board of directors, the president shall be the chief executive officer of the Corporation and, subject to the supervision of the board of directors, shall have general management and control of the business and property of the Corporation in the ordinary course of its business with all such powers with respect to such general management and control as may be reasonably incident to such responsibilities, including, but not limited to, the power to employ, discharge, or suspend employees and agents of the Corporation, to fix the compensation of employees and agents, and to suspend, with or without cause, any officer of the Corporation pending final action by the board of directors with respect to continued suspension, removal, or reinstatement of such officer. The president may, without limitation, agree upon and execute all division and transfer orders, bonds, contracts, and other obligations in the name of the Corporation. 6.08 Vice Presidents. Each vice president shall have such powers and duties as may be prescribed by the board of directors or as may be delegated from time to time by the president and (in the order as designated by the board of directors, or in the absence of such designation, as determined by the length of time each has held the office of vice president continuously) shall exercise the powers of the president during that officer's absence or inability to act. As between the Corporation and third parties, any action taken by a vice president in the performance of the duties of the president shall be conclusive evidence of the absence or inability to act of the president at the time such action was taken. 6.09 Treasurer. The treasurer shall have custody of the Corporation's funds and securities, shall keep full and accurate accounts of receipts and disbursements, and shall deposit all moneys and valuable effects in the name and to the credit of the Corporation in such depository or depositories as may be designated by the board of directors. The treasurer shall audit all payrolls and vouchers of the Corporation, receive, audit, and consolidate all operating and financial statements of the Corporation and its various departments, shall supervise the accounting and auditing practices of the Corporation, and shall have charge of matters relating to taxation. Additionally, the 10 treasurer shall have the power to endorse for deposit, collection, or otherwise all checks, drafts, notes, bills of exchange, and other commercial paper payable to the Corporation and to give proper receipts and discharges for all payments to the Corporation. The treasurer shall perform such other duties as may be prescribed by the board of directors or as may be delegated from time to time by the president. 6.10 Assistant Treasurers. Each assistant treasurer shall have such powers and duties as may be prescribed by the board of directors or as may be delegated from time to time by the president. The assistant treasurers (in the order as designated by the board of directors or, in the absence of such designation, as determined by the length of time each has held the office of assistant treasurer continuously) shall exercise the powers of the treasurer during that officer's absence or inability to act. As between the Corporation and third parties, any action taken by an assistant treasurer in the performance of the duties of the treasurer shall be conclusive evidence of the absence or inability to act of the treasurer at the time such action was taken. 6.11 Secretary. The secretary shall maintain minutes of all meetings of the board of directors, of any committee, and of the shareholders or consents in lieu of such minutes in the Corporation's minute books, and shall cause notice of such meetings to be given when requested by any person authorized to call such meetings. The secretary may sign with the president, in the name of the Corporation, all contracts of the Corporation and affix the seal of the Corporation thereto. The secretary shall have charge of the certificate books, stock transfer books, stock ledgers, and such other stock books and papers as the board of directors may direct, all of which shall at all reasonable times be open to inspection by any director at the office of the Corporation during business hours. The secretary shall perform such other duties as may be prescribed by the board of directors or as may be delegated from time to time by the president. 6.12 Assistant Secretaries. Each assistant secretary shall have such powers and duties as may be prescribed by the board of directors or as may be delegated from time to time by the president. The assistant secretaries (in the order designated by the board of directors or, in the absence of such designation, as determined by the length of time each has held the office of assistant secretary continuously) shall exercise the powers of the secretary during that officer's absence or inability to act. As between the Corporation and third parties, any action taken by an assistant secretary in the performance of the duties of the secretary shall be conclusive evidence of the absence or inability to act of the secretary at the time such action was taken. ARTICLE SEVEN: CERTIFICATES AND SHAREHOLDERS 7.01 Certificated and Uncertificated Shares. The shares of the Corporation may be either certificated shares or uncertificated shares. As used herein, the term "certificated shares" means shares represented by instruments in bearer or registered form, and the term "uncertificated shares" means shares not represented by instruments and the transfers of which are registered upon books maintained for that purpose by or on behalf of the Corporation. 11 7.02 Certificates for Certificated Shares. The certificates representing certificated shares of stock of the Corporation shall be in such form as shall be approved by the board of directors in conformity with law. The certificates shall be consecutively numbered, shall be entered as they are issued in the books of the Corporation or in the records of the Corporation's designated transfer agent, if any, and shall state upon the face thereof: (a) that the Corporation is organized under the laws of the State of Texas; (b) the name of the person to whom issued; (c) the number and class of shares and the designation of the series, if any, which such certificate represents; (d) the par value of each share represented by such certificate, or a statement that the shares are without par value; and (e) such other matters as may be required by law. The certificates shall be signed by the president or any vice president and also by the secretary, an assistant secretary, or any other officer; however, the signatures of any of such officers may be facsimiles. The certificates may be sealed with the seal of the Corporation or a facsimile thereof. 7.03 Issuance. Shares with or without par value may be issued for such consideration and to such persons as the board of directors may from time to time determine, except in the case of shares with par value the consideration must be at least equal to the par value of such shares. Shares may not be issued until the full amount of the consideration has been paid. After the issuance of uncertificated shares, the Corporation or the transfer agent of the Corporation shall send to the registered owner of such uncertificated shares a written notice containing the information required to be stated on certificates representing shares of stock as set forth in Section 7.02 above and such additional information as may be required by Article 2.19 of the Texas Business Corporation Act as currently in effect and as the same may be amended from time to time hereafter. 7.04 Consideration for Shares. The consideration for the issuance of shares shall consist of money paid, promissory notes, labor done (including services actually performed or future services to be performed for the Corporation), or property (tangible or intangible) actually received. In the absence of fraud in the transaction, the judgment of the board of directors as to the value of consideration received shall be conclusive. When consideration, fixed as provided by law, has been paid, the shares shall be deemed to have been issued and shall be considered fully paid and nonassessable. The consideration received for shares shall be allocated by the board of directors, in accordance with law, between stated capital and capital surplus accounts. 7.05 Lost, Stolen, or Destroyed Certificates. The Corporation shall issue a new certificate or certificates in place of any certificate representing shares previously issued if the registered owner of the certificate: (a) Claim. Makes proof by affidavit, in form and substance satisfactory to the board of directors, that a previously issued certificate representing shares has been lost, destroyed, or stolen; 12 (b) Timely Request. Requests the issuance of a new certificate before the Corporation has notice that the certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim; (c) Bond. Delivers to the Corporation a bond in such form, with such surety or sureties, and with such fixed or open penalty, as the board of directors may direct, in its discretion, to indemnify the Corporation (and its transfer agent and registrar, if any) against any claim that may be made on account of the alleged loss, destruction, or theft of the certificate; and (d) Other Requirements. Satisfies any other reasonable requirements imposed by the board of directors. 7.06 Transfer of Shares. Shares of stock of the Corporation shall be transferable only on the books of the Corporation by the shareholders thereof in person or by their duly authorized attorneys or legal representatives. With respect to certificated shares, upon surrender to the Corporation or the transfer agent of the Corporation for transfer of a certificate representing shares duly endorsed and accompanied by any reasonable assurances that such endorsements are genuine and effective as the Corporation may require and after compliance with any applicable law relating to the collection of taxes, the Corporation or its transfer agent shall, if it has no notice of an adverse claim or if it has discharged any duty with respect to any adverse claim, issue one or more new certificates to the person entitled thereto, cancel the old certificate, and record the transaction upon its books. With respect to uncertificated shares, upon delivery to the Corporation or the transfer agent of the Corporation of an instruction originated by an appropriate person (as prescribed by section 8.107 of the Texas Uniform Commercial Code as currently in effect and as the same may be amended from time to time hereafter) and accompanied by any reasonable assurances that such instruction is genuine and effective as the Corporation may require and after compliance with any applicable law relating to the collection of taxes, the Corporation or its transfer agent shall, if it has no notice of an adverse claim or has discharged any duty with respect to any adverse claim, record the transaction upon its books, and shall send to the new registered owner of such uncertificated shares, and, if the shares have been transferred subject to a registered pledge, to the registered pledgee, a written notice containing the information required to be stated on certificates representing shares of stock set forth in Section 7.02 above and such additional information as may be required by Article 2.19 of the Texas Business Corporation Act as currently in effect and as the same may be amended from time to time hereafter. 7.07 Registered Shareholders. The Corporation shall be entitled to treat the shareholder of record as the shareholder in fact of any shares and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have actual or other notice thereof, except as otherwise provided by law. 7.08 Legends. The board of directors shall cause an appropriate legend to be placed on certificates representing shares of stock as may be deemed necessary or 13 desirable by the board of directors in order for the Corporation to comply with applicable federal or state securities or other laws. 7.09 Regulations. The board of directors shall have the power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer, registration, or replacement of certificates representing shares of stock of the Corporation. ARTICLE EIGHT: MISCELLANEOUS PROVISIONS 8.01 Dividends. Subject to provisions of applicable statutes and the articles of incorporation, dividends may be declared by and at the discretion of the board of directors at any meeting and may be paid in cash, in property, or in shares of stock of the Corporation. 8.02 Reserves. The board of directors may create out of funds of the Corporation legally available therefor such reserve or reserves out of the Corporation's surplus as the board of directors from time to time, in its discretion, considers proper to provide for contingencies, to equalize dividends, to repair or maintain any property of the Corporation, or for such other purpose as the board of directors shall consider beneficial to the Corporation. The board of directors may modify or abolish any such reserve. 8.03 Books and Records. The Corporation shall keep correct and complete books and records of account, shall keep minutes of the proceedings of its shareholders, board of directors, and any committee, and shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of the shares held by each shareholder. 8.04 Fiscal Year. The fiscal year of the Corporation shall be fixed by the board of directors; provided, that if such fiscal year is not fixed by the board of directors and the board of directors does not defer its determination of the fiscal year, the fiscal year shall be the calendar year. 8.05 Seal. The seal, if any, of the Corporation shall be in such form as may be approved from time to time by the board of directors. If the board of directors approves a seal, the affixation of such seal shall not be required to create a valid and binding obligation against the Corporation. 8.06 Attestation by the Secretary. With respect to any deed, deed of trust, mortgage, or other instrument executed by the Corporation through its duly authorized officer or officers, the attestation to such execution by the secretary of the Corporation shall not be necessary to constitute such deed, deed of trust, mortgage, or other instrument a valid and binding obligation against the Corporation unless the resolutions, if any, of the board of directors authorizing such execution expressly state that such attestation is necessary. 14 8.07 Resignation. Any director, committee member, officer, or agent may resign by so stating at any meeting of the board of directors or by giving written notice to the board of directors, the president, or the secretary. Such resignation shall take effect at the time specified in the statement at the board of directors' meeting or in the written notice, but in no event may the effective time of such resignation be prior to the time such statement is made or such notice is given. If no effective time is specified in the resignation, the resignation shall be effective immediately. Unless a resignation specifies otherwise, it shall be effective without being accepted. 8.08 Securities of Other Corporations. The president or any vice president of the Corporation shall have the power and authority to transfer, endorse for transfer, vote, consent, or take any other action with respect to any securities of another issuer which may be held or owned by the Corporation and to make, execute, and deliver any waiver, proxy, or consent with respect to any such securities. 8.09 Amendment of Bylaws. The power to amend or repeal these bylaws or to adopt new bylaws is vested in the board of directors, but is subject to the right of the shareholders to amend or repeal these bylaws or to adopt new bylaws. 8.10 Invalid Provisions. If any part of these bylaws is held invalid or inoperative for any reason, the remaining parts, so far as is possible and reasonable, shall remain valid and operative. 8.11 Headings; Table of Contents. The headings and table of contents used in these bylaws are for convenience only and do not constitute matter to be construed in the interpretation of these bylaws. The undersigned, the secretary of the Corporation, hereby certifies that the foregoing bylaws were adopted by the board of directors of the Corporation as of July 30, 2001. /s/ Hulda L. Coskey ------------------------------------ Hulda L. Coskey, Secretary 15 EX-10.42 8 dex1042.txt STANDARD INDUSTRIAL LEASE AGREEMENT Exhibit 10.42 STANDARD INDUSTRIAL LEASE AGREEMENT 11,427 Square Feet Facility Address: 757 Kenrick, Suite 100 ---------------------- Houston, Texas 77060 -------------------- LEASE AGREEMENT THIS LEASE AGREEMENT, ("Lease") made and entered into by and between HOUSTON INDUSTRIAL ASSETS, L.P. hereinafter referred to as "Lessor", and Constant Power Manufacturing, Inc., a Texas Corporation (Tax IDS #76-0281773, Charter #01116391-00), hereinafter referred to as "Lessee"; WITNESSETH: 1. PREMISES AND TERM. In consideration of the mutual obligations of Lessor and Lessee set forth herein, Lessor leases to Lessee, and Lessee hereby takes from Lessor the Premises situated within the County of Harris, State of Texas, more particularly described in Paragraph 26A below and on EXHIBITS "A and B" attached hereto and incorporated herein by reference (the "Premises"), together with all rights, privileges, easements, appurtenances, and amenities belonging to or in any way pertaining to the Premises, to have and to hold, subject to the terms, covenants and conditions in this Lease. The term of this Lease shall commence on the commencement date hereinafter set forth and shall end on the last day of the month that is Sixty (60) months after the commencement date. If this Lease is executed before the Premises become vacant or otherwise available and ready for occupancy, or if any present lessee or occupant of the Premises holds over, and Lessor cannot acquire possession of the Premises prior to the date recited as the commencement date of this Lease, Lessor shall not be deemed to be in default hereunder, and Lessee agrees to accept possession of the Premises at such time as Lessor is able to tender the same, which date shall thenceforth be deemed the "commencement date", and Lessor hereby waives payment of rent covering any period prior to the tendering of possession to Lessee hereunder. A. EXISTING BUILDING. Lessee acknowledges that (i) it has inspected and accepts the Premises "AS IS," "WHERE IS," and "WITH ALL FAULTS" (except any latent defects), (ii) the buildings and improvements comprising the same are suitable for the purpose for which the Premises are leased, (iii) the Premises are in good and satisfactory condition, and (iv) the Premises shall be leased on an "AS IS," "WHERE IS," and "WITH ALL FAULTS" (except any latent defects) basis, and no representations as to the repair of the Premises, nor promises to alter, remodel or improve the Premises have been made by Lessor except those expressly set forth in Paragraph 26 and Exhibit "B" of this Lease. Unless mutually altered in writing by Lessee and Lessor or pursuant to the provisions of Paragraph 1 hereinabove, or Paragraphs 1.B or 1.C, hereinbelow, the commencement date shall be July 1, 2001. Upon request by Lessor, Lessee shall execute and deliver to Lessor a Letter of Acceptance of delivery of the Premises. Notwithstanding, Lessee's acceptance of the Premises shall be subject to the leasehold improvements listed in Paragraph 26C and Exhibit "B" attached hereto and incorporated herein by reference being substantially completed (as defined below in Paragraph 1B), B. BUILDING TO BE CONSTRUCTED OR SHELL SPACE. If the Premises or a major portion thereof is to be constructed, the commencement date shall be deemed to be the date upon which the Premises and other improvements to be erected in accordance with the plans and/or 1 specifications described in Paragraph 26C and on Exhibit "B" attached hereto and incorporated herein by reference (the "Plans") have been substantially completed. As used herein, the term "substantially completed" shall mean, that in the reasonable opinion of Lessor, such improvements have been completed in accordance with the Plans and, the Premises are in good and satisfactory condition, subject only to completion of minor punch list items. As soon as such improvements have been substantially completed, Lessor shall notify Lessee in writing that the commencement date has occurred. Within twenty (20) days thereafter, Lessee shall submit to Lessor in writing a punch list of items needing completion or correction. Lessor shall use reasonable efforts to complete such items within thirty (30) days after the receipt of such notice. In the event Lessee, its employees, agents or contractors cause construction of such improvements to be delayed, the commencement date shall be deemed to be the date that, in the opinion of the architect or space planner that prepared the Plans, substantial completion would have occurred if such delays had not taken place. The taking of possession by Lessee shall be deemed to conclusively establish that the buildings and other improvements had been completed in accordance with tile Plans, that the Premises are n good and satisfactory condition as of when possession was taken, and that Lessee has accepted such buildings and other improvements "AS IS," "WHERE IS," and "WITH ALL FAULTS" (except any latent defects) without representation or warranty from Lessor. Upon Lessor's request, Lessee shall execute and deliver to Lessor a Letter of Acceptance of delivery of the Premises. Notwithstanding anything in the Lease to the contrary, if the Plans are not attached to this Lease as Exhibit "B", Lessor will deliver the Plans to Lessee which in Lessor's opinion are reasonably necessary for the construction and space planning of the buildings or improvements contemplated to be constructed on the Premises. C. GENERAL CONDITIONS. Lessor and Lessee further agree that Lessee's obligations, privileges, covenants and agreements contained in this Lease shall be operative and effective regardless of whether the Premises are ever occupied by Lessee and whether or not this Lease is fully exhibited. If Lessee fails to occupy the Premises for any reason after substantial completion of any building or improvements constructed in accordance with the Plans, or if Lessee, whether constructively or actively prevents or hinders Lessor from constructing the improvements contemplated herein in accordance with the Plans, this Lease shall be deemed to have commenced automatically and the "commencement date" shall be deemed to be the date on which the improvements would have been completed in Lessor's sole, but reasonable judgment, but for such hindrance or prevention by Lessee. 2. BASE RENT, SECURITY DEPOSIT AND OPERATING EXPENSES. A. Lessee agrees to pay to Lessor base rent ("Base Rent") for the Premises, in advance, without demand, deduction or set off, at the rate of (see Paragraph 26B) Dollars ($--) per month during the term hereof. One such monthly installment, plus the other monthly charges set forth in Paragraph 2C below shall be due and payable on the date hereof and a like monthly installment shall be due and payable on or before the first day of each calendar month succeeding the commencement date, except that all payments due hereunder for any fractional calendar month shall be prorated. B. In addition, Lessee agrees to deposit with Lessor on the date hereof, the sum of Six Thousand Two Hundred Eighty Five and No/100 Dollars ($6,285.00) which shall be held by Lessor, without obligation for interest, as security for the performance of Lessee's obligations under this Lease, it being expressly understood and agreed that this deposit is not an advance rental deposit or a measure of Lessor's damages in case of Lessee's default. Upon each occurrence of an event of default, Lessor may use all or part of the deposit to pay past due rent or other payments due Lessor under this Lease, and the cost of any other damage, injury, expense or liability caused by such event 2 of default without prejudice to any other remedy provided herein or provided by law. On demand, Lessee shall pay Lessor the amount that will restore the security deposit to its original amount. The security deposit shall be deemed the property of Lessor, but any remaining balance of such deposit shall be returned by Lessor to Lessee thirty (30) days after Lessee's obligations under this Lease have been fulfilled; provided, however, Lessor shall have the right to retain and expend such remaining balance (a) to reimburse Lessor for any and all rent or other sums due hereunder that have not been paid in full by Lessee and/or (b) for cleaning and repairing the Premises if Lessee shall fail to deliver same at the termination of this Lease in a neat and clean condition and in as good a condition as existed at the date of possession of same by Lessee, ordinary wear and tear only excepted. No interest shall be paid to Lessee on the security deposit and Lessor shall not be required to hold the security deposit in a separate or segregated account but rather may commingle the security deposit with other monies held by or belonging to Lessor. C. Lessee agrees to pay as additional rental its proportionate share (as defined in Paragraph 24B below) of operating expenses which include (i) taxes (hereinafter defined) payable by Lessor pursuant to Paragraph 3A below, (ii) the cost of maintaining insurance covering the buildings and/or project of which the Premises are a part, (iii) the cost of utilities payable pursuant to Paragraph 8 below, and the cost of any common area charges payable by Lessor in accordance with Paragraph 4 below and (iv) any other charges which Lessor is entitled to collect under the terms of this Lease. During each month of the term of this Lease, on the same day that rent is due hereunder, Lessee shall escrow with Lessor an amount equal to 1/12 of the estimated annual cost of its proportionate share of such operating expenses. Lessee authorizes Lessor to use the funds deposited with Lessor under this Paragraph 2C to pay such costs. The initial monthly escrow payments are based upon the estimated amounts and shall be increased or decreased annually to reflect the then current projected cost of all such operating expenses. Lessor shall total all operating expenses annually, and reconcile Lessee's actual proportionate share of such expenses against Lessee's total escrow payments. If Lessee's total escrow payments are less than Lessee's actual proportionate share of all such operating expenses, Lessee shall pay the difference to Lessor within thirty (30) days after demand. If the total escrow payments of Lessee are more than Lessee's actual proportionate share of all such operating expenses, Lessor shall retain such excess and credit it against Lessee's future Base Rent and/or liabilities for operating expenses. Lessor shall use reasonable efforts to provide such services and to pay such expenses in a cost effective manner, which when practical, shall include competitive bidding for maintenance, insurance and other costs and the protesting of taxes. The amount of the initial monthly Base Rent and the initial monthly operating expenses escrow payments are as follows: (1) Initial Base Rent as set forth in Paragraph 2A $4,247.00 (2) Tax Escrow $ 800.00 (3) Insurance Escrow $ 152.00 (4) Common Area Escrow $ 857.00 --------- Total Initial Monthly Rental Payment $6,056.00 3. TAXES. A. Lessor agrees to pay all taxes, assessments and governmental charges of any kind and nature (collectively referred to herein as "Taxes") that accrue against the Premises, and/or the land and/or improvements of which the Premises are a part and Lessee shall be liable for its proportionate share of the same. If at any time during the term of this Lease, there shall be levied, assessed or imposed on Lessor a capital levy or other tax directly on the rents received there from and/or a 3 franchise tax, assessment, levy or charge measured by or based, in whole or in part, upon such rents from the Premises and/or the land and improvements of which the Premises are a part, then all such taxes, assessments, levies or charges, or the part thereof so measured or based, shall be deemed to be included within the term "Taxes" for the purposes hereof. The Lessor shall have the right to employ a tax consulting firm to attempt to assure a fair tax burden on the building and/or project and grounds within the applicable taxing jurisdiction. Lessee agrees to pay its proportionate share of the reasonable cost of such consultant. In no event shall Lessee challenge, directly or indirectly, by suit, intervention or otherwise, the amount of any such tax, assessment, levy or charge. B. Lessee shall be liable for all taxes levied or assessed against any personal property or fixtures placed in the Premises. If any such taxes are levied or assessed against Lessor or Lessor's property and (i) Lessor pays the same or (ii) the assessed value of Lessor's property is increased by inclusion of such personal property and fixtures and Lessor pays the increased taxes, then, upon demand, Lessee shall pay to Lessor such taxes. 4. LESSOR'S REPAIRS AND MAINTENANCE. A. Lessor shall maintain the roof, foundation and the structural soundness of the exterior walls of the building and/or project of which the Premises are a part in good repair, reasonable wear and tear excepted, and Lessee shall be liable for its proportionate share of the cost of such maintenance or repair, provided, however, Lessee shall promptly, upon demand, reimburse Lessor for any damage to the same caused by Lessee's act, neglect, fault or omission. The term "walls" as used herein shall not include windows, glass or plate glass, doors, special storefronts or office entries. Lessee shall immediately give Lessor written notice of defect or need for repairs, after which Lessor shall have reasonable opportunity to repair the same or cure such defect as soon as reasonably possible. Lessor's obligation to maintain the aforementioned items shall be limited solely to the cost of such repairs or maintenance or the curing of any defect in the same. B. Lessor shall perform the paving maintenance, common area and landscape replacement and maintenance, exterior painting, common water and sewage line plumbing, and any other common maintenance items and Lessee shall be liable for its proportionate share of the cost and expense of such repair, replacement, and maintenance. In the event Lessee does not perform any obligation as outlined in Paragraph 5 in a timely manner, Lessor reserves the right to perform such obligations in which event Lessee shall promptly reimburse Lessor for the entirety of the costs of such performance. Notwithstanding anything to the contrary, if it is determined that the negligent acts of other Lessees in the building and/or project of which the Premises are a part caused the need for Lessor to repair the common water and/or sewage line plumbing, Lessee shall not be liable for any portion of the costs for said repairs or remedies. C. Lessor reserves the right to alter or modify the building and/or project of which the Premises are a part and/or common areas associated therewith, when such alterations or modifications are required by changes or amendments to existing governmental laws, codes, ordinances, regulations, or any other applicable authorities which become effective on or after the commencement date of tills Lease, including, without limitation, the Americans with Disabilities Act of 1990 (the "ADA") (collectively "Applicable Laws"), in which event Lessee shall be liable for its proportionate share of such cost, provided, however, Lessee shall not be required to pay any portion of the cost of such alterations or modifications required by such Applicable Laws in effect prior to the commencement date of this Lease. If such modification is a capital modification for the general benefit of the project, and is required regardless of Lessee's particular use of the Premises, then the cost shall be an operating expense allocated over the useful life of such modification. 4 Notwithstanding the foregoing, if such modification is predicated by Lessee's particular use of the Premises or is principally for the benefit of Lessee (and not other lessees of the building and/or project) the cost shall be borne entirely by Lessee, and Lessee shall reimburse Lessor for same promptly upon demand. D. Lessee agrees to pay its proportionate share of the cost of (i) maintenance and/or landscaping of any property that is a part of the building and/or project of which the Premises are a part, (ii) maintenance and/or landscaping of any property that is maintained or landscaped by any property owner or community owner association to which the Premises are subject, (iii) a reasonable property management fee, staff salary and benefits allocated to the building and/or project of which the Premises are a part, and (iv) operating and maintaining any property, facilities or services, including, but not limited to, the cost of the monitoring, repair and maintenance of water systems or sewer plants, and security systems and service, if any, provided for the common use or benefit of Lessee and other lessees of the project or building of which the Premises are a part. All such expenses of Lessor for maintaining and operating the building and/or project of which the Premises are a part, including, but not limited to, the items set forth in Paragraphs 4A, 4B, 4C, and 4D, shall be included as additional rental under the provisions of Paragraph 2C. Lessor agrees that such costs do not include the following: (1) Repairs or other work occasioned by (i) fire, windstorm. or other casualty of the type which Lessor has insured or is required to insure pursuant to the terms of this Lease to the extent of net insurance proceeds received by Lessor with respect thereto, or (ii) tile exercise of the right of eminent domain; (2) Leasing commissions, attorney's fees, costs and disbursements and other expenses incurred in connection with negotiations or disputes with other lessees, other occupants or prospective lessees; (3) Expenses incurred in the building out, renovating, improving or decorating, painting, or redecorating of any facility within tile project of which the Premises are a part for other lessees or other occupants; (4) Costs incurred by Lessor for alterations which are considered capital improvements and replacements under generally accepted accounting principles consistently applied; (5) Depreciation and amortization; (6) Non-arm's length payments which exceed competitive costs for such services rendered by persons or entities of similar skill, competence, and experience; (7) Payments of principal and/or interest on debt or amortization payments on any mortgage or mortgages executed by Lessor covering the project of which the Premises are a part (or any portion thereof); (8) All general administrative overhead expenses of Lessor for services not specifically performed for the project of which the Premises are a part; (9) All items and services for which Lessee pays directly to third parties or for which Lessee reimburses Lessor; 5 (10) Advertising and promotional expenditures; (11) Any fines or penalties incurred by Lessor due to violations by Lessor of any governmental rule or authority; (12) Wages, salaries or other compensation of any kind or nature paid to any executive employees above the title of Building Manager, and; (13) Income and/or franchise taxes of Lessor. E. Lessee or Lessee's agent may audit in the office of Lessor's or Lessor's agent Lessor's books relevant to the operating expenses upon reasonable notice to Lessor; provided however, if no error is found in such audit, Lessee agrees to pay all costs associated with or resulting from such audit, including reimbursement to Lessor or Lessor's agents for time or costs incurred. 5. LESSEE'S REPAIRS AND MAINTENANCE. A. Lessee, at its own cost and expense, shall (i) maintain all parts of the Premises (except for those items for which Lessor is responsible under Paragraph 4) in good condition, ordinary wear and tear excepted; (ii) promptly make all necessary repairs and replacements, including, but not limited to, windows, glass and plate glass, exterior doors, any special office entry, interior walls and finish work, interior doors and floor covering, utility connections, downspouts, gutters, heating and air conditioning systems, light bulbs and ballasts, dock boards, truck doors, dock bumpers, paving, plumbing work and fixtures, termite and pest extermination, regular removal of trash and debris, dedicated sewer lines, and any damage due to vandalism or malicious mischief; (iii) keep the parking areas, driveways, truck aprons, and grounds surrounding the Premises in a clean and sanitary condition; and (iv) repair all wind damage to glass except with respect to tornado or hurricane damage. B. In the event the Premises constitute a portion of a multiple occupancy building, Lessee and its employees, agents, customers, invitees, and/or licensees shall have the right to use the parking areas, if any, as may be designated by Lessor in writing, subject to such reasonable rules and regulations as Lessor may from time to time prescribe and subject to rights of ingress and egress of other lessees; provided, however, that Lessor covenants that it shall not provide to other lessees or occupants of the building and/or project of which the Premises area part any exclusive parking rights with respect to the one row of parking spaces directly in front of the Premises. Lessor shall not be responsible for enforcing Lessee's parking rights against any third parties. Lessee shall, at its own cost and expense, keep its employees, agents, customers, invitees, and/or licensees from parking on any streets running through or contiguous to the building or project of which the Premises are a part or any other areas as designated by Lessor. Lessee hereby consents to the removal of any vehicle in violation of the foregoing designated areas of parking as established by Lessor. In the event Lessee is unable to park a minimum of ten (10) standard vehicles directly in front of the Premises or within a reasonable distance from the Premises, Lessee shall advise Lessor of same in writing. Upon receipt of such notice from Lessee, Lessor shall use reasonable efforts to remedy the problem. If Lessor is unable to remedy the problem within thirty (30) days of such written notice, then Lessor shall provide ten (10) designated parking spaces for Lessee directly in front of the Premises. C. Lessee, at its own cost and expense, shall enter into a regularly scheduled preventive maintenance/service contract acceptable to Lessor with a maintenance contractor approved by 6 Lessor for servicing all hot water, heating and air conditioning systems and equipment within the Premises. The service contract must include all services suggested by the equipment manufacturer in its operations/maintenance manual and must become effective and a copy thereof delivered to Lessor within thirty (30) days of the date Lessee takes possession of the Premises. D. Lessee agrees that no washing of any type (other than reasonable restroom or kitchen washing) will take place in the Premises, including the truck apron and parking areas. E. Any and all security of any kind for Lessee, Lessee's agents, employees or invitees, the Premises, or any personal property thereon (including, without limitation, any personal property of any Sublessee) shall be the sole responsibility and obligation of Lessee, and shall be provided by Lessee at Lessee's sole cost and expense. Lessee acknowledges and agrees that Lessor shall have no obligation or liability whatsoever with respect to the same. Lessee shall indemnify and hold Lessor harmless from and against any and all loss, cost, damage or other liability arising directly or indirectly from security measures or the absence thereof with respect to the Premises and the building or the project of which the Premises are a part. Lessee may, at Lessee's sole cost and expense, install alarm systems in the Premises provided such installation complies with the provisions of Paragraph 6 hereof. Removal of such alarm systems shall be Lessee's sole responsibility and, at Lessee's sole cost and expense, shall be completed prior to lease termination, and all affected areas of the Premises shall be repaired and/or restored in a good and workmanlike manner to the condition that existed prior to such installation. Notwithstanding the foregoing, Lessor may elect in Lessor's sole discretion to contract for common security services, to whatever extent Lessor may deem appropriate, for the building or the project of which the Premises are a part; provided, however Lessee acknowledges and agrees that Lessor shall in no event be obligated to provide any such services and the provision of such services shall not alter or modify Lessee's indemnification of Lessor or the obligation of Lessee to provide its own security as set forth herein. The cost of any security services contracted for by Lessor shall be treated as an operating expense pursuant to Paragraph 2C hereof. 6. ALTERATIONS. Lessee shall not make any alterations, additions, partitions or other improvements to the Premises without the prior written consent of Lessor which consent shall not be unreasonably withheld or delayed. Lessee, at its own cost and expense, may erect shelves, bins, machinery and trade fixtures as it desires as well as alterations, additions, partitions, or other improvements which have been specifically consented to in writing by Lessor, provided that (a) such items do not alter the basic character of the Premises or the building and/or improvements of which the Premises are a part, (b) such items do not overload or damage tile same, (c) such items may be removed without injury to the Premises, and (d) the construction, erection or installation thereof complies with all applicable governmental laws, codes, ordinances, regulations, or any other applicable authorities, including, without limitation, the ADA; and with Lessor's details, specifications and other requirements. Any architectural, engineering, construction management, permits, inspections, or other cost or fee required to assure compliance with the conditions set forth in this Paragraph 6 shall be paid by Lessee promptly upon demand. All alterations, additions, partitions, or other improvements erected by Lessee shall be and remain the property of Lessee during the term of this Lease; provided, however, at the termination of this Lease, Lessor shall have the option, exercisable in Lessor's sole discretion, to require Lessee either (i) upon request to remove, at Lessee's sole cost and expense, all or part of any alterations, additions, partitions, or other improvements, at which time Lessee shall promptly restore the Premises to its original condition ordinary wear and tear excepted (this option is available to Lessor only if Lessor notified Lessee of same in writing at the time Lessor consented to such alterations), or (ii) to keep in place the same, at which time such alterations, additions, improvements, and partitions shall become the 7 property of Lessor. All shelves, bins, machinery and trade fixtures installed by Lessee shall be removed on or before the earlier to occur of the date of termination of this Lease or vacating the Premises, at which time Lessee shall restore the Premises to their original condition ordinary wear and tear excepted. All alterations, installations, removals and restoration shall be performed in a good and workmanlike manner so as not to damage or alter the primary structure or structural qualities of the buildings and other improvements situated on the Premises or of which the Premises are a part. 7. SIGNS. Any signage Lessee desires for the Premises shall be subject to Lessor's specifications and/or written approval which approval shall not be unreasonably withheld. Lessee shall repair, paint, and/or replace the building facial surface to which its signs are attached upon vacation of the Premises, or the removal or alteration or its signage. Lessee shall not (i) make any changes to the exterior of the Premises, (ii) install any exterior lights, decorations, balloons, flags, pennants, banners or painting, or (iii) erect or install any signs, windows or door lettering, placards, decorations or advertising media of any type which can be viewed from the exterior of tile Premises, without Lessor's prior written consent, which consent shall not be unreasonably withheld. All signs, decorations, advertising media, blinds, draperies and other window treatment or bars or other security installations visible from outside the Premises shall conform, at Lessee's expense, in all respects to the criteria established by Lessor and any applicable governmental laws, ordinances, regulations, or other requirements. 8. UTILITIES. Lessor agrees to provide normal water, electricity, and telephone service connections to the Premises upon the commencement date hereof, which connections, regardless of location, shall hereafter be maintained by Lessee. Lessee shall pay for all water, gas, heat, light, power, telephone, sewer, sprinkler charges and other utilities and services used on or at the Premises, and any maintenance or inspection charges for utilities. Lessor shall have the right to cause any of said services to be separately metered to Lessee, at Lessee's expense. Lessee shall pay its pro rata share, as reasonably determined by Lessor, of all charges for jointly metered utilities which service the building and/or project of which the Premises are a part. Lessor shall not be liable for any interruption or failure of utility service on the Premises. Provided however, in the event of an interruption of utility service, Lessor shall use reasonable efforts to facilitate restoration of said service. In the event water is not separately metered to Lessee, Lessee agrees that it will not use water for uses other than normal domestic restroom and kitchen usage; and, Lessee does further agree to reimburse Lessor for the entire amount of common water costs as additional rental if, in fact, Lessee uses water for uses other than normal domestic restroom and kitchen uses without first obtaining Lessor's written permission. Furthermore, Lessee agrees in such event to install at its own expense, a submeter to determine Lessee's usage. If Lessor determines in its reasonable opinion that other lessees in the building and/or project of which the Premises are a part are using the water provided by Lessor for uses other than normal domestic restrooms or kitchen usage, Lessor shall cause such lessee's use to be separately metered at such lessee's expense. Lessee agrees it will not use sewer capacity for any use other than normal domestic restroom and kitchen use. Lessee further agrees to notify Lessor of any other sewer use ("excess sewer use") and also agrees to reimburse Lessor for the costs and expenses related to Lessee's excess sewer use, which shall include, but is expressly herein not limited to the cost of acquiring additional sewer capacity to service Lessee's Lease. 9. INSURANCE. 8 A. Lessor shall maintain insurance covering the buildings and/or project situated on the Premises or of which the Premises are a part, except for those items the repair and maintenance of which are Lessee's responsibility under Paragraph 5, in an amount not less than eighty percent (80%) of the "replacement cost" thereof insuring against the perils of Fire, Lightning, Extended Coverage, Vandalism, and Malicious Mischief. The cost of such insurance shall be treated as an operating expense pursuant to Paragraph 2C hereof. B. Lessee, at its own expense, shall maintain, during the term of this Lease, a policy or policies of worker's compensation and commercial general liability insurance, including personal injury and property damage, with contractual liability endorsement, in the amount of Five Hundred Thousand Dollars ($500,000.00) for property damage and One Million Dollars ($1,000,000.00) per occurrence for personal injuries or deaths of persons occurring in or about the Premises. Lessee, at its own expense, also shall maintain during the term of this Lease, fire and extended coverage or all risk insurance covering (i) the replacement cost of all alterations, additions, partitions and improvements installed or placed on the Premises by Lessee or by Lessor on behalf of Lessee, (ii) the replacement cost of all of Lessee's personal property contained within the Premises, and (iii) business interruption of Lessee. Said policies shall (i) name Lessor as an additional insured and insure Lessor's contingent liability under this Lease (except for the worker's compensation policy, which instead shall include waiver of subrogation endorsement in favor of Lessor), (ii) be issued by an insurance company which is reasonably acceptable to Lessor, (iii) provide that said insurance shall not be canceled unless thirty (30) days prior written notice shall have been given to Lessor, and (iv) provide primary coverage to Lessor when any policy issued to Lessor provides duplicate or similar coverage, and in such circumstance Lessor's coverage under Lessor's policy shall be deemed excess over and above the coverage provided by Lessee's policy. Said policy or policies or certificates thereof shall be delivered to Lessor by Lessee upon commencement of the term of the Lease and upon each renewal of said insurance. C. Lessee will not permit the Premises to be used for any purpose or in any manner that would (i) void the insurance thereon, (ii) increase the insurance risk or premium, or (iii) cause the disallowance of any sprinkler credits, including without limitation, use of the Premises for the receipt, storage or handling of any product, material or merchandise that is explosive or highly flammable. If any increase in the cost of any insurance on the Premises or the building and/or project of which the Premises are a part is caused by Lessee's use of the Premises, or because Lessee vacates the Premises, then Lessee shall promptly pay the amount of such increase to Lessor upon demand. D. Anything in this Lease to the contrary notwithstanding, Lessor and Lessee hereby waive and release each other of and from any and all rights of recovery, claim, action or cause of action, against each other, their agents, officers and employees, for any loss or damage that may occur to the Premises, improvements to the building of which the Premises are a part, or personal property (building contents) within the building and/or Premises covered or required to be covered by the insurance to be provided under this Lease, for any reason regardless of cause or origin. Said mutual waivers shall be in addition to, and not in limitation or derogation of, any other waiver or release contained in this Lease with respect to any loss or damage to property of the parties hereto. Each party to this Lease agrees immediately after execution of this Lease to give each insurance company, which has issued to it policies of fire and extended coverage insurance, written notice of the terms of the mutual waivers contained in this subparagraph, and if necessary, to have the insurance policies properly endorsed. 9 10. FIRE AND CASUALTY DAMAGE. A. If the Premises or the building of which the Premises are a part should be damaged or destroyed by fire or other peril, Lessee immediately shall give written notice to Lessor. If the building situated upon the Premises or of which the Premises are a part should be damaged or destroyed by any peril covered by the insurance to be provided by Lessor under Paragraph 9A above, and, in Lessor's estimation, rebuilding or repairs cannot be completed within one hundred eighty (180) days after the date of such damage, this Lease shall terminate and the Base Rent and additional rental shall be abated during the unexpired portion of this Lease, effective upon the date of the occurrence of such damage. B. If the buildings situated upon the Premises or of which the Premises are a part, should be damaged by any peril covered by the insurance to be provided by Lessor under Paragraph 9A above, and in Lessor's estimation, rebuilding or repairs can be substantially completed within one hundred eighty (180) days after the date of such damage, this Lease shall not terminate, and Lessor shall restore the Premises to substantially its previous condition, except that Lessor shall not be required to rebuild, repair or replace any part of the partitions, fixtures, additions and other improvements that may have been constructed, erected or installed in, or about the Premises for the benefit of, by or for Lessee. If such repairs and rebuilding have not been substantially completed within one hundred eighty (180) days after the date of such damage, Lessee, as Lessee's exclusive remedy, may terminate this Lease by delivering written notice of termination to Lessor in which event the rights and obligations hereunder shall cease and terminate. For purposes of this Paragraph 10B, if Lessor reasonably determines that the Premises are untenable or such damage materially interferes with the use of the Premises for the purpose for which it was leased to Lessee, in whole or in part, following such damage, the Base Rent and additional rental payable hereunder during the period in which Lessor reasonably determines that the Premises are untenable or Lessee's use is so interfered with as mentioned above shall be reduced (i) according to the square footage of such untenable/interfered area contained in the Premises, as reasonably determined by Lessor, or (ii) to such extent as may be fair and reasonable under the circumstances, as reasonably determined by Lessor and Lessee. C. Notwithstanding anything herein to the contrary, in the event the holder of any indebtedness secured by a mortgage or deed of trust covering the Premises requires that the insurance proceeds be applied to such indebtedness, then Lessor shall have the right to terminate this Lease by delivering written notice of termination to Lessee within fifteen (15) days after such requirement is made known by any such holder, whereupon all rights and obligations of Lessor hereunder shall cease and terminate. 11. LIABILITY AND INDEMNIFICATION. Except for any claims, rights of recovery and causes of action that Lessee has released, Lessor shall hold Lessee harmless and defend Lessee against any and all claims or liability for any injury or damage (i) to any person in, on or about the Premises or any part thereof and/or the building and/or project of which the Premises are a part, when such injury or damage shall be caused by the act, neglect, fault of, or omission of any duty with respect to the same by Lessor, its agents, servants or employees, and (ii) all costs, counsel fees, expenses and liabilities incurred in connection with any such claim or action or proceeding brought thereon. Except for any claims, rights of recovery and causes of action that Lessor has released, Lessee shall hold Lessor harmless from and defend Lessor against any and all claims or liability for any injury or damage (i) to any person or property whatsoever occurring in, on or about the Premises or any part thereof and/or of the building and/or project of which the Premises are a part, including without limitation elevators, stairways, passageways or hallways, the use of 10 which Lessee may have in accordance with this Lease, when such injury or damage shall be caused by the act, neglect, fault of, or omission of any duty with respect to the same by Lessee, its agents, servants, employees, or invitees, (ii) arising from the conduct of management of any work done by the Lessee in or about the Premises, and (iii) all costs, counsel fees, expenses and liabilities incurred in connection with any such claim or action or proceeding brought thereon. The provisions of this Paragraph 11 shall survive the expiration or termination of this Lease with respect to any claims or liability occurring prior to such expiration or termination. Notwithstanding the foregoing or anything to the contrary in this Lease, each party hereby agrees that in no event shall the other party hereto be liable for any incidental or consequential damages whatsoever, including without limitation, any damages as a result of any interruption of such other party's business or any loss of income therefrom. 12. USE. The Premises shall be used only for the purpose of general office use, receiving, storing, servicing, shipping and selling (other than retail) products, materials and merchandise made and/or distributed by Lessee and for such other lawful purposes as may be incidental thereto. Outside storage, including without limitation, storage of trucks and other vehicles and the washing thereof at any time is prohibited without Lessor's prior written consent. Lessee shall, at its own cost and expense, obtain any and all licenses and permits necessary for such use, shall at all times maintain the Premises in a clean, healthful and safe condition and comply with all governmental laws, codes, ordinances, regulations or any other applicable authorities with regard to the use, condition or occupancy of the Premises including, without limitation, the ADA. Lessee shall be responsible, at Lessee's sole cost and expense, for the correction, prevention, and abatement of nuisances in or upon, or connected with, the Premises. Lessee shall not permit any objectionable or unpleasant odors, smoke, dust, gas, noise, vibrations, or pest infestations to emanate from the Premises, nor take any other action that would constitute a nuisance or would disturb, unreasonably interfere with, or endanger Lessor or any other lessees of the building or project of which the Premises are a part. Lessee's use of the Premises shall at all times comply with the insurance provisions in Paragraph 9C hereof. 13. INSPECTION. Lessor and Lessor's agents and representatives shall have the right to enter the Premises at any reasonable time during business hours upon reasonable notice to Lessee, except in the case of emergency, to inspect the Premises and to make such repairs as may be required or permitted pursuant to this Lease. During the period that is six (6) months prior to the end of the term hereof and at any time Lessee is in default, Lessor and Lessor's representatives may enter the Premises during business hours upon reasonable notice to Lessee, for the purpose of showing the Premises. Lessee shall neither prevent, prohibit, nor in any way impair such showing of the Premises. In addition, Lessor shall have the right to erect a suitable sign on or near the Premises stating the Premises are available. Lessee shall notify Lessor in writing at least thirty (30) days prior to vacating the Premises and shall arrange to meet with Lessor for a joint inspection of the Premises prior to vacating. If Lessee fails to give such notice or to arrange for such inspection, then Lessor's inspection of the Premises shall be deemed correct for the purpose of determining Lessee's responsibility for repairs and restoration of the Premises. 14. ASSIGNMENT AND SUBLETTING. A. Lessee shall not have the right to assign, sublet, transfer or encumber this Lease, or any interest therein, directly or indirectly, by any manner, including, without limitation, by merger, reorganization or other transfer of the ownership interests in Lessee, without the prior written consent of Lessor, which consent shall not be unreasonably withheld or delayed. Any attempted assignment, subletting, transfer or encumbrance by Lessee in violation of the terms and covenants of 11 this Paragraph shall be void. Any assignee, sublessee or transferee of Lessee's interest in this Lease (all such assignees, sublessees and transferees being hereinafter referred to as "Transferees"), by assuming Lessee's obligations hereunder, shall assume liability to Lessor for all amounts paid to persons other than Lessor by such transferees in contravention of this Paragraph. No assignment, subletting, or other transfer, whether consented to by Lessor or not, or permitted hereunder, shall relieve Lessee of its liability hereunder. If an event of default occurs while the Premises or any part thereof are assigned or sublet, then Lessor, in addition to any other remedies herein provided, or provided by law, may collect directly from such Transferee all rents payable to the Lessee and apply such rent against any sums due Lessor hereunder. No such collection shall be construed to constitute a ilovation or a release of Lessee from the further performance of Lessee's obligations hereunder. B. If this Lease is assigned to any person or entity pursuant to the provision of the Bankruptcy Code, 11 U.S.C. (S)101 et. seq., (the "Bankruptcy Code"), any and all monies or other consideration payable or otherwise to be delivered in connection with such assignment shall be paid or delivered to Lessor, shall be and remain the exclusive property of Lessor and shall not constitute property of Lessee or of the estate of Lessee within the meaning of the Bankruptcy Code. Any and all monies or other considerations constituting Lessor's property under the preceding sentence not paid or delivered to Lessor shall be held in trust for the benefit of Lessor and be promptly paid or delivered to Lessor. C. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed, without further act or deed, to have assumed all of the obligations arising under this Lease on and after the date of such assignment. Any such assignee shall upon demand execute and deliver to Lessor an instrument confirming such assumption. 15. CONDEMNATION. If the whole or any substantial part as determined by Lessor of the Premises should be taken for any public or quasi-public use under governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof and the taking prevents or materially interferes with the use of the Premises for the purpose for which they were leased to Lessee, this Lease shall terminate and the Base Rental and additional rental shall be abated during the unexpired portion of this Lease, effective on the date of such taking. If less than a substantial part, as determined by Lessor, of the Premises is taken for any public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof, this Lease shall not terminate, but the Base Rent and additional rental payable hereunder during the unexpired portion of this Lease shall be reduced to such extent as may be fair and reasonable under all of the circumstances. All compensation awarded in connection with or as a result of any of the foregoing proceedings shall be the property of Lessor, and Lessee hereby assigns any interest in any such award to Lessor; provided, however, Lessor shall have no interest in any award made to Lessee for loss of business or goodwill or for the taking of Lessee's fixtures and improvements, if a separate award for such items is made to Lessee. 16. HOLDING OVER. At the termination of this Lease by its expiration or otherwise, Lessee immediately shall deliver possession to Lessor with all repairs and maintenance required herein to be performed by Lessee completed. If, for any reason, Lessee retains possession of the Premises after the expiration or termination of this Lease, unless the parties hereto otherwise agree in writing, such possession shall be subject to termination by either Lessor or Lessee at any time upon not less than ten (10) days advance written notice, and all of the other terms and provisions of this Lease shall be applicable during such period, except that Lessee shall pay Lessor from time to time, upon demand, as rental for the period of such possession, an amount equal to one hundred fifty percent (150%) the Base Rent in effect on the termination date, computed on a daily basis for each 12 day of such period. No holding over by Lessee, whether with or without consent of Lessor shall operate to extend this Lease except as otherwise expressly provided. The preceding provisions of this Paragraph 16 shall not be construed as consent for Lessee to retain possession of the Premises in the absence of written consent thereto by Lessor. 17. QUIET ENJOYMENT. Lessor covenants that on or before the commencement date, it will have good title to the Premises, free and clear of all liens and encumbrances, excepting only the lien for current taxes not yet due, such mortgage or mortgages as are permitted by the terms of this Lease, zoning ordinances and other building and fire ordinances and governmental regulations relating to the use of such property, and easements, restrictions and other conditions of record. Lessor represents that it has the authority to enter into this Lease and that so long as Lessee pays all amounts due hereunder and performs all other covenants and agreements herein set forth, Lessee shall peaceably and quietly have, hold and enjoy the Premises for the term hereof without hindrance or molestation from Lessor, subject to the terms and provisions of this Lease. 18. EVENTS OF DEFAULT. The following events (herein individually referred to as "event of default") each shall be deemed to be events of nonperformance by Lessee under this Lease: A. Lessee shall fail to pay any installment of Base Rent or any additional rental herein reserved when due, or any other payment or reimbursement to Lessor required herein when due, and such failure shall continue for a period of five (5) days after the date of written notice from Lessor to Lessee of such failure; provided, however, that Lessor shall not be obligated to provide more than two (2) such written notices during any twelve (12) consecutive month period of the Lease term, and Lessee's failure to pay any third (3/rd/) or subsequent installment of Base Rent or other payment required herein that is payable within such twelve (12) consecutive month period within five (5) days after the due date thereof shall constitute an Event of Default by Lessee. B. Lessee or any guarantor of the Lessee's obligations hereunder shall (i) become insolvent; (ii) admit in writing its inability to pay its debts; (iii) make a general assignment for the benefit of creditors; (iv) commence any case, proceeding or other action seeking to have an order for relief entered on its behalf as a debtor or to adjudicate it as bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or of any substantial part of its property; or (v) take any action to authorize or in contemplation of any of the actions set forth above in this Paragraph. C. Any case, proceeding or other action against the Lessee or any guarantor of the Lessee's obligations hereunder shall be commenced seeking (i) to have an order for relief entered against it as a debtor or to adjudicate it as bankrupt or insolvent; (ii) reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors; or (iii) appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, and such case, proceeding or other action (a) results in the entry of an order for relief against it which it is not fully stayed within seven (7) business days after the entry thereof or (b) shall remain undismissed for a period of forty-five (45) days. D. Lessee shall (i) vacate all or a substantial portion of the Premises or (ii) fail to continuously operate its business at the Premises for the permitted use set forth herein, whether or 13 not Lessee is in default of the rental payments due under this Lease, provided however, that no vacating or abandonment or failure to open or continuously operate its business at the Premises for the permitted use set forth herein shall be considered a default so long as Lessee continues to pay rent and other sums due under this Lease Agreement. After the expiration of one hundred twenty (120) days from said vacating or abandonment or ceasing of operations, Lessor may at any time thereafter elect to terminate this Lease and recapture the Lease Premises. E. Lessee shall fail to discharge any lien placed upon the Premises in violation of Paragraph 21 hereof within twenty (20) days after any such lien or encumbrance is filed against the Premises. F. Lessee shall fail to comply with any term, provision or covenant of this Lease (other than those listed in this Paragraph 18), and shall not cure such failure within twenty (20) days after written notice thereof to Lessee. 19. REMEDIES. A. Upon each occurrence of an event of default, Lessor shall have the option to pursue any one or more of the following remedies without any notice or demand: 1. terminate this Lease; and/or 2. enter upon and take possession of the Premises with or without terminating this Lease; and/or 3. alter all locks and other security devices at the Premises with or without terminating this Lease, and pursue, at Lessor's option, one or more remedies pursuant to this Lease, Lessee hereby specifically waiving any state or federal law to the contrary; and in any such event Lessee immediately shall surrender the Premises to Lessor, and if Lessee fails so to do, Lessor, without waiving any other remedy it may have, may enter upon and take possession of the Premises and expel or remove Lessee and any other person who may be occupying such Premises or any part thereof, without being liable for prosecution or any claim of damages therefore. B. If Lessor terminates this Lease, at Lessor's option, Lessee shall be liable for and shall pay to Lessor, the sum of all rental and other payments owed to Lessor hereunder accrued to the date of such termination, plus, as liquidated damages, an amount equal to the present value (using the current "prime" interest rate of a national banking institution of Lessor's choosing, or should such financial institution no longer exist, a comparable financial institution) of (1) the total rental and other payments owed hereunder for the remaining portion of the Lease term calculated as if such term expired on the date set forth in Paragraph 1, less (2) the then fair market rental of the Premises for such period, which because of the difficulty of ascertaining such value, Lessor and Lessee stipulate and agree, shall in no event be deemed to exceed seventy-five percent (75%) of the total rental amount (including Base Rental and any and all amounts due as additional rental) set forth in Paragraph 2 above. C. If Lessor repossesses the Premises without terminating the Lease, Lessee, at Lessor's option, shall be liable for and shall pay Lessor on demand all rental and other payments owed to Lessor hereunder, accrued to the date of such repossession, plus all amounts required to be paid by Lessee to Lessor until the date of expiration of the term as stated in Paragraph 1, diminished by all amounts received by Lessor through reletting of the Premises during such remaining term (but only to the extent of the rent provided for herein). Actions to collect amounts due by Lessee to Lessor under this subparagraph may be brought from time to time, on one or more occasions, without the necessity of Lessor's waiting until expiration of tile Lease term. 14 D. Upon an event of default, in addition to any sum provided to be paid herein, Lessee also shall be liable for and shall pay to Lessor (i) brokers' fees incurred by Lessor in connection with reletting the whole or any part of the Premises; (ii) the costs of removing and storing Lessee's or other occupant's property; (iii) the costs of repairing, altering, remodeling or otherwise putting the Premises into rentable condition; and (iv) all reasonable expenses incurred by Lessor in enforcing or defending Lessor's rights and/or remedies. If either party hereto institutes any action or proceeding to enforce any provision hereof by reason of any alleged breach of any provision of this Lease, the prevailing party shall be entitled to receive from the losing party all reasonable attorneys' fees and all court costs in connection with such proceeding. E. In the event Lessee fails to make any payment due hereunder when payment is due, to help defray the additional cost to Lessor for collecting and/or processing such late payments, Lessee shall pay to Lessor on demand a late charge in an amount equal to five percent (5%) of such installment; and the failure to pay such late charge within ten (10) days after demand therefore shall be an additional event of default hereunder. The provision for such late charge shall be in addition to all of Lessor's other rights and remedies hereunder or at law and shall not be construed as liquidated damages or as limiting Lessor's remedies in any manner. F. Exercise by Lessor of any one or more remedies hereunder granted or otherwise available shall not be deemed to be an acceptance of surrender of the Premises by Lessor, whether by agreement or by operation of law, it being understood that such surrender can be effected only by the written of Lessor and Lessee. Lessee and Lessor further agree that forbearance by Lessor to enforce its rights pursuant to the Lease at law or in equity, shall not be a waiver of Lessor's right to enforce one or more of its rights in connection with any subsequent default. G. If Lessor fails to perform any of its obligations hereunder within thirty (30) days after written notice from Lessee specifying such failure, Lessee's exclusive remedy shall be an action for damages. Unless and until Lessor fails to cure any default after such notice, Lessee shall not have any remedy or cause of action by reason thereof. All obligations of Lessor hereunder will be construed as covenants, not conditions; and all such obligations will be binding upon Lessor only during the period of its possession of the Premises and not thereafter. The term "Lessor" shall mean only the owner, for the time being, of tile Premises, and in the event of the transfer by such owner of its interest in the Premises, such owner shall thereupon be released and discharged from all covenants and obligations of the Lessor thereafter accruing, but such covenants and obligations shall be binding during the Lease term upon each new owner for the duration of such owner's ownership. Notwithstanding any other provision hereof, Lessor shall not have any personal liability hereunder. In the event of any breach or default by Lessor in any term or provision of this Lease, Lessee agrees to look solely to tile equity or interest then owned by Lessor in the Premises or the building and/or project of which the Premises are a part; however, in no event, shall any deficiency judgment or any money judgment of any kind be sought or obtained against any Lessor. H. If Lessor repossesses the Premises pursuant to the authority herein granted, then Lessor shall have the right to (i) keep in place and use or (ii) remove and store all of the furniture, fixtures and equipment at the Premises, including that which is owned by or leased to Lessee at all times prior to any foreclosure thereon by Lessor or repossession thereof by any lessor thereof or third party having a lien thereon. Lessor also shall have the right to relinquish possession of all or any portion of such furniture, fixtures, equipment and other property to any person ("Claimant") will presents to Lessor a copy of any instrument represented by Claimant to have been executed by Lessee (or any predecessor of Lessee) granting Claimant the right under various circumstances to 15 take possession of such furniture, fixtures, equipment or other property, without the necessity on the part of Lessor to inquire into the authenticity or legality of said instrument. The rights of Lessor herein stated shall be in addition to any and all other rights that Lessor has or may hereafter have at law or in equity; and Lessee stipulates and agrees that the rights herein granted Lessor are commercially reasonable. I. Notwithstanding anything in this Lease to the contrary, all amounts payable by Lessee to or on behalf of Lessor under this Lease, whether or not expressly denominated as rent, shall constitute rent. J. This is a contract under which applicable law excuses Lessor from accepting performance from (or rendering performance to) any person or entity other than Lessee. 20. MORTGAGES. Lessee accepts this Lease subject and subordinate to any mortgages and/or deeds of trust now or at any time hereafter constituting a lien or charge upon the Premises or the improvements situated thereon or the building and/or project of which the Premises are a part; provided, however, that if the mortgagee, trustee, or holder of any such mortgage or deed of trust elects to have Lessee's interest in this Lease superior to any such instrument, then by notice to Lessee from such mortgagee, trustee or holder, this Lease shall be deemed superior to such lien, whether this Lease was executed before or after said mortgage or deed of trust. Lessee, at any time hereafter on demand, shall execute any instruments, releases or other documents that may be required by any mortgagee for the purpose of subjecting and subordinating this Lease to the lien of any such mortgage. 21. MECHANIC'S LIENS. Lessee has no authority, express or implied, to create or place any lien or encumbrance of any kind or nature whatsoever upon, or in any manner to bind the interest of Lessor or Lessee in the Premises or to charge the rentals payable hereunder for any claim in favor of any person dealing with Lessee, including those who may furnish materials or perform labor for any construction or repairs. Lessee covenants and agrees that it will pay or cause to be paid all sums legally due and payable by it on account of any labor performed or materials furnished in connection with any work performed on the Premises and that it will save and hold Lessor harmless from any and all loss, cost or expense based on or arising out of asserted claims or liens against the leasehold estate or against the right, title and interest of the Lessor in the Premises or under the terms of this Lease. Lessee agrees to give Lessor immediate written notice of the placing of any lien or encumbrance against the Premises. 22. Intentionally Omitted. Lessor agrees to delete Paragraph 22, Lessor's Lien, but reserves any statutory lien for rent in Lessor's favor as well as all remedies provided by law and all rights and remedies under the Uniform Commercial Code as in effect in the State of Texas; and Lessor will not unreasonably withhold approval of individual requests for subordination and shall respond within thirty (30) days to such requests. 23. HAZARDOUS MATERIALS. The term "Substances," as used in this Lease, shall mean petroleum or petroleum products, radioactive materials (including, but not limited to, naturally occurring radioactive materials ("NORM") and NORM contaminated equipment or materials), polychlorinated biphenyls ("PCBs") (including, but not limited to, equipment or materials containing PCBs), pollutants, contaminants, toxic or hazardous substances or wastes, hazardous materials, or any other substances, the use, storage, handling, disposal, transportation or removal of which is 16 regulated, restricted, prohibited or penalized by any "Environmental Law," which term shall mean any federal, state or local law, ordinance, order, code, rule, regulation, or statute of a governmental or quasi-governmental authority relating to pollution or protection of health or the environment and shall specifically include, but not be limited to, any "hazardous substance" as that term is defined under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 and any amendments or successors in function thereto. Lessee hereby agrees that (i) no activity will be conducted on the Premises that will generate, produce or use any Substance, except for such activities that are part of the ordinary course for Lessee's business activities provided said activities (a) are conducted in accordance with all Environmental Laws and (b) have been expressly approved by Lessor in advance in a separate writing which approval Lessor may grant or withhold in its sole discretion ("Permitted Activities"); (ii) the Premises will not be used in any manner for the storage of any Substances except for the temporary storage of such materials that are generated, produced or used in the course of the Permitted Activities, provided such Substances are properly stored in a manner and location and for a duration meeting all Environmental Laws; (iii) no portion of the Premises will be used as a disposal facility of any kind, including, but not limited to, any landfill, dump, pit, pond or lagoon; (iv) Lessee will not install any underground or aboveground tank of any type; (v) Lessee will not allow any surface or subsurface conditions to exist or come into existence arising out of Lessee's or its consultants', contractors', employees', agents', or invitees' operations or activities that constitute, or with the passage of time, may constitute a violation of Environmental Laws or a public or private nuisance or trespass; (vi) Lessee will not permit any Substances to be brought onto, or released, emitted, or discharged onto, the Premises, except in accordance with the terms and conditions hereof, and if so brought or found located thereon, Lessee shall immediately remove and properly dispose of same, and shall diligently undertake all cleanup procedures required under Environmental Laws or otherwise necessary to restore the Premises to its original condition; and (vii) Lessee shall in all regards comply with Environmental Laws including, without limitation, obtaining any required permits, submitting any required registrations, filings or notices or reports, meeting any necessary financial responsibility requirements, paying all required fees, maintaining any required records, and performing any required monitoring, testing, or remediation. Without limiting the generality of the foregoing, (a) Lessee, as generator, shall execute, and maintain records of, any waste manifests required in connection with the transportation or disposal of hazardous or other regulated wastes arising from the activities of Lessee or its contractors or consultants on the Premises; and (b) Lessee shall make available for inspection and copying by Lessor, during Lessee's normal business hours, copies of waste manifests and any material safety data sheets required to be maintained with respect to Substances used or stored on the Premises. Lessor or Lessor's representative shall have the right, but not the obligation, to enter the Premises for, among other purposes, the purposes of inspecting the storage, use and disposal of any Substances and to review compliance with all Environmental Laws. Should it be determined, in Lessor's sole opinion, that any Substances are being improperly stored, used, or disposed of, then Lessee shall immediately take such corrective action as required by applicable Environmental Laws. Lessee will provide Lessor written notification of the release or disposal of any Substance either within the Premises or outside of Lessee's Premises, or the release or disposal of any Substance by Lessee on any properties adjacent thereto. Lessee will also provide Lessor written notice of any pending or threatened investigations, regulatory proceedings, enforcement actions, litigation or other proceedings concerning the breach or purported breach of any Environmental Laws. If at any time during or after the term of the Lease, the Premises is found to be contaminated by Substances or subject to said conditions, arising from or as a result of Lessee's negligence (whether in whole or in part) or the use of the Premises or any Substances by Lessee or any of Lessee's agents, employees, assigns or sublessees, Lessee shall diligently institute proper and thorough cleanup procedures in accordance with Environmental Laws at Lessee's sole cost, and Lessee agrees to indemnify and hold Lessor harmless from all claims, demands, actions, liabilities, costs, expenses, damages, fines, 17 reimbursement, restitution, response costs, cleanup costs, and obligations (including investigative responses and attorney's fees) of any nature. The foregoing indemnification and the responsibilities of Lessee shall apply to Lessee regardless of whether they arise from the Permitted Activities or from any Substances, the use of which Lessor approved, and shall survive the termination or expiration of this Lease. Lessor shall be under no obligation to expend any sums or to seek reimbursement to enforce the indemnification obligations of Lessee hereunder. Lessee acknowledges and agrees that to the extent Lessor has agreed not to unreasonably withhold its consent to any proposed assignment, subletting or transfer of Lessee's interest in this Lease, it shall not be unreasonable for Lessor to withhold such consent if (i) the anticipated use of the Premises by the proposed Transferee involves tile generation, storage, use, treatment, or disposal of Substances different in identity or materially different in quantity from Lessee's existing activities; (ii) the proposed Transferee has been required by any prior lessor, lender, or governmental authority to make remedial action in connection with Substances contaminating a property, if the contamination resulted from such Transferee's actions or use of the property in question; or (iii) the proposed Transferee is subject to an enforcement order issued by any governmental authority in connection with the use, disposal, or storage of a Substance. 24. MISCELLANEOUS. A. Words of any gender used in this Lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the context otherwise requires. The captions inserted in this Lease are for convenience only and in no way define, limit or otherwise describe the scope or intent of this Lease, or any provision hereof, or in any way affect the interpretation of this Lease. B. Except where otherwise expressly defined, Lessee's "proportionate share", as used in this Lease, shall mean a fraction, the numerator of which is the area contained in the Premises as shown on Page 1 of this Lease and the denominator of which is the area contained in the building of which the Premises are a part (each such area being measured in square feet). Such areas shall be calculated according to the roof dimensions of the particular area. C. The terms, provisions, covenants and conditions contained in this Lease shall apply to, inure to the benefit of, and be binding upon, the parties hereto and upon their respective heirs, executors, personal representatives, legal representatives, successors and assigns, except as otherwise herein expressly provided. Lessor shall have the right to transfer and assign, in whole or in part, its rights and obligations in the building and property that are the subject of this Lease. Each party agrees to furnish to tile other, promptly upon demand, a corporate resolution, proof of due authorization by partners, or other appropriate documentation evidencing the due authorization of such party to enter into this Lease. D. Lessor shall not be held responsible for delays in the performance of its obligations hereunder when caused by Lessee, material shortages, acts of God, labor disputes or other matters outside of Lessor's control. E. Lessee agrees, from time to time, within five (5) days after request of Lessor, to deliver to Lessor, or Lessor's designee, (i) a Certificate of Occupancy and (ii) an estoppel certificate stating that this Lease is in full force and effect, the date to which rent has been paid, the unexpired term of this Lease and such other factual matters pertaining to this Lease as may be requested by Lessor. It is understood and agreed that Lessee's obligation to furnish such Certificate of Occupancy 18 and estoppel certificate in a timely fashion is a material inducement for Lessor's execution of this Lease. F. This Lease constitutes the entire understanding and agreement of the Lessor and Lessee with respect to the subject matter of this Lease, and contains all of the covenants and agreements of Lessor and Lessee with respect thereto. Lessor and Lessee each acknowledge that no representations, inducements, promises or agreements, oral or written, have been made by Lessor or Lessee, or anyone acting on behalf of Lessor or Lessee, which are not contained herein, and any prior agreements, promises, negotiations, or representations not expressly set forth in this Lease are of no force or effect. This Lease may not be altered, changed or amended except by an instrument in writing signed by both parties hereto. G. All obligations of Lessee hereunder not fully performed as of the expiration or earlier termination of the term of this Lease shall survive the expiration or earlier termination of the term hereof, including without limitation, all payment obligations with respect to Base Rent and operating expenses and all obligations concerning the condition and repair of tile Premises. Upon the expiration or earlier termination of the term hereof, and prior to Lessee vacating tile Premises, Lessee shall restore the Premises to good condition and repair, reasonable wear and tear excluded. Prior to Lessee vacating the Premises, Lessee shall make all repairs as specified in Paragraph 5 hereof, including but not limited to any repairs necessary so that the heating and air conditioning systems are in good working order reasonable wear and tear excluded. Upon expiration or earlier termination hereof the Premises shall be delivered to Lessor in broom clean condition. If any and all repairs or restoration required of Lessee hereunder are not completed by the expiration or earlier termination hereof, Lessor may cause the same to be completed and the costs shall be paid by Lessee (including a ten percent (10%) service charge for arranging for and coordinating such work). Lessee shall also, prior to vacating the Premises, pay to Lessor the amount, as estimated by Lessor, of Lessee's obligation hereunder for all operating expenses including, without limitation, taxes, insurance premiums and common area charges for the year in which tile Lease expires or terminates. All such amounts shall be used and held by Lessor for payment of such obligations of Lessee hereunder, with Lessee being liable for any additional costs therefore upon demand by Lessor, or with any excess to be returned to Lessee after all such obligations have been determined and satisfied as the case may be. In lieu of waiting until the close of the calendar year in order to determine any excess additional rentals for operating expenses as set forth in Paragraph 2C, Lessor has the option to charge Lessee for Lessee's proportionate share of the additional rentals based upon tile previous year's operating expenses plus ten percent (10%). Any security deposit held by Lessor may, at Lessor's option, be credited against the amount payable by Lessee under this Paragraph 24G or otherwise handled in accordance with Paragraph 2B hereof. H. If any clause or provision of this Lease is illegal, invalid or unenforceable under present or future laws effective during the term of this Lease, then and in that event, it is the intention of the parties hereto that the remainder of this Lease shall not be affected thereby, and it is also the intention of the parties to this Lease that in lieu of each clause or provision of this Lease that is illegal, invalid or unenforceable, there be added, as a part of this Lease, a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. I. All references in this Lease to "the date hereof" or similar references shall be deemed to refer to the last date, in point of time, on which all parties hereto have executed this Lease. 19 J. Lessee represents and warrants that it has dealt with no broker, agent or other person in connection with this transaction or that no broker agent or other person brought about this transaction, other than Mr. John C. Stavinoha of InSite Realty Partners, L.P. and William D. Swanson and Drew Lewis with NAI Partners Commercial, L.L.C. and Lessee agrees to indemnify and hold Lessor harmless from and against any claims by any other broker agent or other person claiming a commission or other form of compensation by virtue of having dealt with Lessee with regard to this leasing transaction. K. If and when included within the term "Lessor", as used in this instrument, there is more than one person, firm or corporation, all shall jointly arrange among themselves for their joint execution of a notice specifying some individual at some specific address for the receipt of notices and payments to Lessor. If and when included within the term "Lessee", as used in this instrument, there is more than one person, firm or corporation, all shall jointly arrange among themselves for their joint execution of a notice specifying some individual at some specific address within tile continental United States for the receipt of notices and payments to Lessee. All parties included within the terms "Lessor" and "Lessee" respectively, shall be bound by notices given in accordance with the provisions of Paragraph 25 hereof to the same effect as if each had received such notice. L. LESSOR AND LESSEE EXPRESSLY AGREE THAT THERE ARE AND SHALL BE NO IMPLIED WARRANTIES OF MERCHANTABILITY, HABITABILITY, FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER KIND ARISING OUT OF THIS LEASE AGREEMENT AND THAT ALL EXPRESS OR IMPLIED WARRANTIES IN CONNECTION THEREWITH ARE EXPRESSLY DISCLAIMED. M. This Lease Agreement shall be construed under the laws of the State of Texas. N. Time is of the essence; and all due dates, time schedules, and conditions precedent to exercising a right shall be strictly adhered to without delay except where otherwise expressly provided. O. Because the Premises are on the open market and are presently being shown, this Lease shall be treated as an offer subject to non-acceptance by Lessor, and shall not be valid or binding unless and until accepted by Lessor in writing and a fully executed copy delivered to both parties hereto. Notwithstanding the foregoing, Lessee agrees to tender to Lessor an initial sum with executed originals of this Lease Agreement. Lessor shall for a period of ten (10) days after receipt of such executed Lease and tendered sum have the ability but not the obligation to review and return an executed original of the Lease Agreement to Lessee. If Lessor shall notify Lessee of its acceptance or return an executed original Lease Agreement to the Lessee during, such time period, then this Lease Agreement shall be binding upon both parties. Upon such occasion, Lessor may retain such sums so deposited by Lessee and apply such sums to amounts due and owing under the terms of the Lease Agreement. Lessee agrees that its offer to lease the Premises will be irrevocably left open for a period of ten (10) days after Lessor's receipt of this Lease executed by Lessee. 25. NOTICES. Each provision of this instrument or of any applicable governmental laws, ordinances, regulations and other requirements with reference to the sending, mailing or delivering of notice or the making of any payment by Lessor to Lessee or with reference to the sending, mailing or delivering of any notice or the making of any payment by Lessee to Lessor shall be deemed to be complied with when and if the following steps are taken: (a) All rent and other payments required to be made by Lessee to Lessor hereunder shall 20 be payable to Lessor at the address for Lessor set forth below or at such other address as Lessor may specify from time to time by written notice delivered in accordance herewith. Lessee's obligation to pay rent and any other amounts to Lessor under the terms of this Lease shall not be deemed satisfied until such rent and other amounts have been actually received by Lessor. In addition to Base Rental due hereunder, all sums of money and all payments due Lessor hereunder shall be deemed to be additional rental owed to Lessor. (b) All payments required to be made by Lessor to Lessee hereunder shall be payable to Lessee at the address set forth below, or at such other address within the continental United States as Lessee may specify from time to time by written notice delivered in accordance herewith. (c) Any written notice or document required or permitted to be delivered hereunder shall be deemed to be delivered whether actually received or not, five (5) business days after deposited in the United States Mail, postage prepaid, Certified or Registered Mail, addressed to the parties hereto at the respective addresses set out below, or at such other address as they have therefore specified by written notice delivered in accordance herewith. 26. ADDITIONAL PROVISIONS. The provisions contained in the Addendum attached hereto shall become a part hereof as if fully set forth herein, shall supplement, modify and be in addition to the terms and conditions contained in the body of this Lease, and shall control in the event of a conflict with such terms and provisions. 21 EXECUTED BY LESSOR, THIS 30/TH/ DAY OF May, 2001. ------ --- HOUSTON INDUSTRIAL ASSETS, L.P. ------------------------------- Attest/Witness By: /s/ Kris A. Van Norman ---------------------- Title: Agent ----- Address: c/o InSite Realty Partners, L.P. 1502 Augusta, Suite 100 Houston, TX 77057 "Lessor and Secured Party" EXECUTED BY LESSEE, this 30/th/ day of May, 2001. ------ --- CONSTANT POWER MANUFACTURING, ---------------------------- INC. ---- By: /s/ William A. Coskey ---------------------- Attest/Witness Title: President ---------- /s/ Frank Ivester - ----------------- Title: General Manager Address: --------------- 757 Kenrick, Suite 100 Houston, TX 77060 "Lessee and Debtor" 22 LEASE ADDENDUM 26A. Premises. For purposes of this Lease, the rentable square footage of the Premises is approximately 11,427 square feet of office and warehouse space located in a building deemed to be approximately 45,357 square feet situated on a tract of land containing 2.2039 acres of land in the William Sevey Survey, Abstract 699, and being the same land called Exhibit "C" recorded under Clerks File No. G-078586 of the said County Real Property Records and being out of Unrestricted Reserve "B", Greenbriar North, Subdivision, Section 2, recorded in Volume 225, Page 62, of the said County Maps Records. The Premises is known by the following street address: 757 Kenrick, Suite 100 Houston, TX 77060. Such Premises is outlined on Exhibit "A" attached hereto and incorporated herein. 26B. Monthly Base Rental Payments. Months 0 1-12 @ $4,247.00 Months 13-24 @ $4,304.00 Months 25-36 @ $4,362.00 Months 37-48 @ $4,419.00 Months 49-60 @ $4,476.00 26C. Lessee Improvements. Lessee agrees to lease tile Premises on an "as is" basis with the exception that the Lessor will provide the following improvements: . Deliver the electrical, lighting, mechanical, plumbing, and HVAC systems in good working order. . Warranty - Lessor agrees that it shall be responsible for all maintenance and repairs to the electrical, lighting, mechanical, plumbing, and HVAC systems for a period of ninety (90) days from the commencement date of this Lease. . Install a concrete loading ramp (Lessor will commence the construction of this ramp upon full execution of this Lease). . Lessor will transfer ownership of the racks, work desks, furniture, and misc. items presently located in the facility to Lessee at no cost to Lessee. This transfer will be on an "as-is" basis without any warranty of any kind (items may or may not be in working order). All other improvements to the Premises will be at the sole cost and expense of the Lessee. 26D. HVAC Maintenance/Service Contract Requirements. The HVAC maintenance/service contract must become effective within thirty (30) days of the date of the commencement of this lease and must be performed on at least a quarterly basis. The following items must be included in your maintenance contract: 1. Adjust belt tension; 2. Lubricate all moving parts, as necessary; 3. Inspect and adjust all temperature and safety controls; 4. Check refrigeration system for leaks and operation; 5. Check refrigeration system for moisture; 6. Inspect compressor oil level and crank heaters; 7. Check head pressure, suction pressure and oil pressure; 8. Inspect air filters and replace when necessary; (minimum of once per month) 9. Check space conditions; 23 10. Check condensate drains and drain pans and clean, if necessary; 11. Inspect and adjust all valves; 12. Check and adjust dampers; 13. Run machine through complete cycle; 14. Clean evaporative and condensing coils; 15. Check and repair all sheet metal duct, duct board, and flexible duct; 16. Inspect and replace if necessary all belts; 17. Inspect and repair if necessary unit housing; 18. Check thermostat operation; 19. Inspect and repair as necessary the heating elements; and 20. Any and all other items as recommended by the manufacturer of the unit(s). 26E. Compliance with Laws, Rules and Regulations. Lessee, at Lessee's sole cost and expense, shall comply with all laws, ordinances, orders, rules and regulations now in effect or enacted subsequent to the date hereof of state, federal, municipal or other agencies or bodies having jurisdiction over Lessee or the use, condition and occupancy of the Leased Premises. Lessee shall also comply with the rules and regulations of the Building and/or project adopted by Lessor which are set forth on Exhibit "C" attached hereto and incorporated by reference. Lessor is entitled, at all times, to change and amend the rules and regulations in any reasonable manner as Lessor deems advisable for the safety, care, cleanliness, preservation of good order and operation or use of the Building and/or project or the Leased Premises. All such changes and amendments to the rules and regulations of the Building and/or project must be in writing and sent to Lessee at the Leased Premises and must thereafter be carried out and observed by Lessee. 26F. 100-YEAR FLOOD PLAIN NOTICE. Lessee agrees to execute the special flood hazard area notice set forth in "Exhibit D" attached hereto and incorporated by reference. 26G. Renewal Option. Lessor hereby grants to Lessee the right and option to renew and extend the term of this Lease for thirty-six (36) months (the "Renewal Period"). In the event Lessee elects to exercise the option described herein, all terms and conditions of this Lease shall continue in full force and effect, except that (i) terms, covenants and condition that are expressly or by their nature inapplicable to the Renewal Period, including, without limitation, this Renewal Option shall not apply, and (ii) the monthly rent shall be adjusted in the following manner: The monthly rent to be paid during the Renewal Period shall be at the then current prevailing market rate. This market rental shall be based upon the then prevailing rental rates for properties of equivalent quality, size, utility, and location, with the length of the lease term, lease structure (gross, net, etc.), amount of leasehold improvements to be provided and credit standing of the lessee to be taken into account. Notice of Lessee's intention to exercise the option must be given to Lessor in writing not less than four (4) months nor more than six (6) months prior to the expiration of the primary or immediately preceding term of this Lease, and Lessee must not be in default under, nor shall there be any event or condition which with the passage of time could constitute a default under this Lease at either the time that this option must be exercised or the commencement of the Renewal Period; otherwise, this Renewal Option shall be null and void and of no further force or effect. Lessee's failure to give notice of exercise of the Renewal Option shall be deemed a waiver of such option and such option will then be of no further force or effects. Lessee shall promptly execute and deliver an amendment of the Lease in form and substance 24 satisfactory to Lessor to evidence the exercise of this Renewal Option and the effect thereof. In the event the Premises are sublet or assigned, this renewal option will be null and void and of no further effect. 26H. Common Area Charge Maximum Contribution. Lessee's contribution for common area charges, as referenced in Paragraphs 2(C)(iii) and 4 above, shall be limited to the following maximum amounts, based on a 8% per year escalating cap: 2001: $ 857.00 x 1.08 = $926.00/month 2002: $ 926.00 x 1.08 = $1,000.00/month 2003: $1,000.00 x 1.08 = $1,080.00/month 2004: $1,080.00 x 1.08 = $1,166.00/month 2005: $1,166.00 x 1.08 = $1,259.00/month 2006: $1,259.00 x 1.08 = $1,360.00/month No maximums shall apply to Lessee's contribution for (i) the cost of utilities; (ii) the cost of insurance; or (iii) any taxes, assessments or governmental charges; however, Lessee shall only be responsible for its proportionate share of each year's actual costs. 26I. CANCELLATION OPTION. Provided no default shall then exist under the Lease and no condition shall then exist which with the passage of time or giving of notice, or both, would constitute a default under the Lease, Lessee shall have the right at any time on or before the end of the thirtieth (30th) month of the Lease term to send Lessor written notice (the "Termination Notice") that Lessee has elected to terminate this Lease effective on the end of the thirty-sixth (36th) month of the Lease term. If Lessee elects to terminate this Lease pursuant to the immediately preceding sentence, the effectiveness of such termination shall be conditioned upon Lessee paying to Lessor Seventeen Thousand Thirty Six and No/100 Dollars ($17,036.00) [the amount of all unamortized costs incurred by Lessor in connection with this lease reduced by amortizing the same amount monthly at a rate of ten percent (10%) contemporaneously with Lessee's delivery of the Termination Notice to Lessor. Lessor and Lessee shall be relieved of all obligations accruing under this lease after the effective date of such termination but not any obligations accruing under the Lease prior to the effective date of such termination. Lessee's exercise of this cancellation option shall be irrevocable upon delivery of the notice thereof to Lessor, and Lessee shall be obligated to surrender possession of the Premises to Lessor on or before the Cancellation Date in accordance with the terms of the Lease. Further, provided no default shall then exist under the Lease and no condition shall then exist which with the passage of time or giving of notice, or both, would constitute a default under the Lease, Lessee shall have the right at any time on or before the end of the forty-second (42nd ) month of the Lease term to send Lessor written notice (the "Termination Notice") that Lessee has elected to terminate this Lease effective on the end of the forty-eighth (48th) month of the Lease term. If Lessee elects to terminate this Lease pursuant to the immediately preceding sentence, the effectiveness of such termination shall be conditioned upon Lessee paying to Lessor Nine Thousand Eight and No/100 Dollars ($9,008.00) [the amount of all unamortized costs incurred by lessor in connection with this Lease reduced by amortizing the same amount monthly at a rate of ten percent (10%)] contemporaneously with Lessee's delivery of the Termination Notice to Lessor. Lessor and Lessee shall be relieved of all obligations accruing under this Lease after the effective date of such termination but not any obligations accruing under the Lease prior to the effective date of such termination. Lessee's exercise of this cancellation option shall be irrevocable upon delivery of the 25 notice thereof to Lessor, and Lessee shall be obligated to surrender possession of the Premises to Lessor on or before the Cancellation Date in accordance with the terms of the Lease. 26J. Lease Contingency. The consummation of this lease is contingent upon Lessor's early termination of the lease with the lessee (Seagate Technology) presently occupying Suite 100 which must occur no later than the date prior to the commencement of this lease. Notwithstanding anything to the contrary, if said Seagate Technology termination does not occur within ten (10) days after Lessor's receipt of this Lease executed by Lessee, Lessee shall have the option, at Lessee's sole discretion to terminate this Lease and receive a full refund from the Lessor of any rentals or deposits paid, and both Lessee and Lessor shall have no obligations or liabilities under the terms of this Lease. 26K. City of Houston Certificate of Occupancy. (i) Lessor shall be responsible for costs of up to Two Thousand Five Hundred and No/100 Dollars ($2,500.00) to complete any work to the Premises required by the City of Houston to satisfy compliance issues connected with the City of Houston Inspection Report or to obtain the Certificate of Occupancy that relates to the existing condition of the Premises as of the date of Lessee's acceptance of the Premises. Lessee shall be responsible for costs t complete such work that exceed Two Thousand Five Hundred and No/100 Dollars ($2,500.00) up to a maximum of Twenty Thousand and No/100 Dollars ($20,000.00). If the cost to complete such work exceeds Twenty Thousand and No/100 Dollars ($20,000.00) and provided no default shall then exist under the Lease and no condition shall then exist which with the passage of time or giving of notice, or both, would constitute a default under the Lease, Lessee shall have the right, upon ninety (90) days written notice to Lessor, to terminate this Lease. If the costs to complete such work exceeds Twenty Thousand and No/100 Dollars ($20,000.00), Lessor shall likewise have the right, upon ninety (90) days written notice to Lessee, to terminate this Lease. Within forty-five (45) days after either the Lessor's or Lessee's receipt of such termination notice, the other party shall have the right to agree in writing to pay for such costs that exceed Twenty Thousand and No/100 Dollars ($20,000.00). This receipt of this agreement shall serve to cancel the effect of the termination notice and both parties shall continue to be responsible for its obligations under this Lease through the expiration date. The right to send notice to the other party to terminate this Lease in accordance with this Paragraph 26K(i) shall expire at the end of twelve (12) months from Lessee's acceptance of the Premises. (ii) Lessee shall be responsible for the 1) the cost of the City of Houston Certificate of Occupancy application fee, and 2) the costs for any work to the Premises required by the City of Houston to satisfy compliance issues connected with the City of Houston Inspection Report or to obtain the Certificate of Occupancy that is specific to Lessee's occupancy or use of the Premises as permitted by the Lease, or modifications or alterations of the Premises performe3d by or contracted for b y Lessee. The right to terminate this Lease in accordance with this Paragraph 26K(i) does not apply to the work required City of Houston to satisfy compliance issues connected with the City of Houston Inspection Report or to obtain the Certificate of Occupancy that is specific to Lessee's occupancy or use of the Premises as permitted by the Lease, or modifications or alterations of the Premises performed by or contracted for by Lessee. 26L. In exchange for Lessor not requiring a guaranty for this Lease from it parent company, Industrial Data Systems Corporation, Lessee agrees that it will not in any way circumvent the responsibilities of Lessee under this lease (i.e. transfer assets of Lessee to Industrial Data Corporation or any affiliated companies of Lessee). 26 EXHIBIT "A" HEDGECROFT SQUARE 08 757 KENRICK 27 [FLOOR PLAN] 28 EXHIBIT "B" HEDGECROFT SQUARE 08 757 Kenrick, Suite 100 11,427 sf. Total / 2,828 Office 29 [FLOOR PLAN] 30 EXHIBIT "C" PROJECT RULES AND REGULATIONS 1. Lessor agrees to rekey the lock(s) to Lessee's space and furnish Lessee with eight (8) entry keys without charge. Lessor shall not be responsible for Lessee's keys nor shall Lessor keep a key at Lessor's office for Lessee's space. 2. No Lessee shall at any time occupy any part of the Premises, Building of which the Premises are a part and/or the Project as sleeping or lodging quarters. 3. Lessor will not be responsible for lost or stolen personal property, equipment, money or jewelry from Lessee's area or public rooms regardless of whether or not such loss occurred when the area is locked against entry. 4. No birds, fowl, or animals shall be brought into or kept in or about the Premises, Building of which the Premises are a part and/or the Project. 5. The water closets and other water fixtures shall not be used for any purpose other than those for which they were constructed, and any damage resulting to them from misuse, or the defacing or injury of any part of the Premises, Building of which the Premises are a part and/or the Project shall be borne by the person who shall occasion it. No person shall waste water by interfering with the faucets or otherwise. 6. No person shall disturb the occupants of the Building and/or the Project by the use of any musical instruments, the making of unseemly noises, causing objectionable odors, or any unreasonable use. 7. For purposes of good housekeeping, safety and cleanliness of the area outside the Premises and of the common areas, Lessee must keep all refuse and debris in containers. If Lessee fails in this respect, Lessor may give written notification to Lessee to clean up such refuse and debris. If Lessee does not remedy the situation within forty-eight (48) hours from receipt of such notification, Lessor retains the right to clean up the area and bill the Lessee for such work. 8. No item, including, but not limited to, vehicles, trailers, temporary structures, supplies or equipment, shall be stored outside the Premises within the Project without the express permission of the Lessor, except as otherwise provided for in this Lease. 9. Lessee shall not block or obstruct the driveway or place rubbish, trash, litter or material of any similar nature in such area. Lessee shall place approved trash receptacles only in designated areas. 10. Lessee may not operate any recreational vehicles around the Project. 11. Lessee may not repair any vehicle outside the Premises. 12. Lessee may not leave any vehicle outside the Premises over seventy-two (72) hours that has a flat tire or is inoperative for any reason. 31 13. Pest Control / Extermination in the Premises is a Lessee expense. 14. No washing of any type (other than a reasonable rest-room or kitchen washing) will take place in the Premises including the truck apron and parking areas. 15. Lessee will furnish and maintain an adequate number of fire extinguishers in good operating condition as may be reasonably required by Lessor and will also comply with such safety recommendations and loss prevention and loss reduction recommendations as Lessor or Lessor's insurance carriers (or both) may, from time to time request. 16. Lessee shall not authorize anyone to walk upon, inspect, install anything upon, or repair the roof of the project. 17. Lessee and its employees, agents and invitees shall park their vehicles only in those parking areas designated by Lessor. If Lessee or its employees, agents or invitees park their vehicles in areas other than the designated parking areas or leave any vehicle in a state of disrepair, Lessor, after giving written notice to Lessee of such violation, shall have the right to remove such vehicles at Lessee's expense. 18. Lessor reserves the right to make such other and further reasonable rules and regulations as in its judgment may from time to time be needed, for the safety, care and cleanliness of the project, and for the reservation of good order therein. 32 EXHIBIT "D" Notice to Seller/Lessor-Buyer/Lessee RE: NATIONAL FLOOD INSURANCE PROGRAM U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT Date: May 18,2001 To: Constant Power Manufacturing. Inc. --------------------------------- Re: 757 Kenrick. Suite 100, Houston, Texas 77060 -------------------------------------------- The above property has been identified as being located in a Special Flood Hazard Area (100-year flood plain). Federal law requires that, as a condition of obtaining federally related financing on most properties located in "flood zones", banks, savings and loan associations, and some insurance lenders require flood insurance to be carried where the property, real or personal, is security for the loan. This requirement is mandated by the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973. The purpose of the program is to provide flood insurance to property owners at a reasonable cost. Cities or counties participating in the National Flood Insurance Program may have adopted building or zoning restrictions, or other measures, as part of their participation in the program. You should contact the city or county in which the property is located to determine any such restrictions. The extent of coverage available to your area and the cost of this coverage may vary, and for further information, you should consult your lender or your insurance carrier. NO REPRESENTATION OR RECOMMENDATION IS MADE BY Houston Industrial Assets, L.P., OR ITS AGENTS OR EMPLOYEES, AS TO THE LEGAL EFFECT, INTERPRETATION, OR ECONOMIC CONSEQUENCES OF THE NATIONAL FLOOD INSURANCE PROGRAM AND RELATED LEGISLATION. THESE ARE QUESTIONS THAT YOU SHOULD ADDRESS TO YOUR LENDER OR YOUR INSURANCE CARRIER. Receipt of a copy of this notice is hereby acknowledged. Constant Power Manufacturing, Inc. - --------------------------------- By: //William A. Coskey// ---------------------- Title: President Date: May 30, 2001 33 EX-99.2 9 dex992.txt PRESS RELEASE DATED 8/1/2001 EXHIBIT 99.2 NEWS RELEASE [LOGO OF INDUSTRIAL DATA SYSTEMS CORPORATION] FOR IMMEDIATE RELEASE CONTACT: INVESTOR RELATIONS (281) 821-3200 (X 215) OR (281) 209-2409 fax IDS SIGNS MERGER AGREEMENT WITH PETROCON ENGINEERING, INC. (Houston, August 1, 2001) -- Industrial Data Systems Corporation (AMEX: IDS) today announced that it has signed a definitive merger agreement with Petrocon Engineering, Inc. ("PEI"), a privately-held, full service, international engineering and control systems firm with 2000 revenues of approximately $68 million. The two companies previously announced, on April 3, 2001, the signing of a Letter of Intent relating to their proposed merger. It is expected that this transaction will close during the fourth quarter of 2001, subject to regulatory approvals, shareholder approvals and satisfaction of other closing requirements as stipulated in the merger agreement. William A. Coskey, Chairman and CEO of IDS, commented, "The mission will now be to realize the many strategic benefits made possible by combining our two companies. I look forward to working with associates from both IDS and PEI to create a unified company in which we can all take pride. On a pro forma basis with Petrocon, our 2002 revenues may approach the $100 million level. As a public company, we should now have a focused, growth story to share with customers, stockholders and the investment community." Also commenting on the merger, Mike Burrow, Chairman, President and CEO of Petrocon stated, "PEI and IDS have already started working together on prospective projects with clients who need our combined capabilities. I am enthused about the prospects for growing together with IDS to attract more customers who see the strategic advantages of dealing with a firm which covers a larger segment of the energy business." The transaction will be effected as a stock for stock exchange, with PEI surviving as an indirect wholly owned subsidiary of IDS. Under the terms of the merger agreement, IDS will issue 9.8 million shares of its common stock in return for 100% of PEI shares. In addition, a significant PEI creditor has agreed to convert approximately $9 million of PEI debt into 2.5 million shares of newly issued IDS Series A Convertible Preferred Stock (convertible into approximately 1,050,000 shares of IDS Common Stock), in addition to receiving cash and a promissory note. The Boards of Directors of both companies have unanimously approved the transaction, which is expected to be presented for IDS and PEI shareholder approval early in the fourth quarter of this year. Industrial Data Systems Corporation plans to file with the SEC a Registration Statement on Form S-4 in connection with the transaction, and IDS and Petrocon plan to mail their stockholders a Proxy Statement/Prospectus in connection with the transaction. The Registration Statement and Proxy Statement/Prospectus will contain important information about Industrial Data Systems Corporation and Petrocon Engineering, Inc., the transaction and related matters. Investors and security holders are urged to read the Registration Statement and Proxy Statement/Prospectus carefully when they are available. Investors and security holders will be able to obtain free copies of the Registration Statement and the Proxy Statement/Prospectus and other documents filed with the SEC by Industrial Data Systems Corporation through the web site maintained by the SEC at http://www.sec.gov. Furthermore, investors and security holders will be able to obtain free copies of the Registration Statement and the Proxy Statement/Prospectus from IDS by contacting IDS Investor Relations at (281) 821-3200, extension 215. Industrial Data Systems Corporation and Petrocon Engineering, Inc., and their respective directors, officers and certain members of their management and employees may be soliciting proxies from Industrial Data Systems Corporation or Petrocon Engineering, Inc.'s stockholders in connection with the transaction. A description of any interests that Industrial Data Systems Corporation and Petrocon Engineering, Inc.'s directors and executive officers have in the transaction and their security holdings will be available in the Registration Statement and the Proxy Statement/Prospectus. About Petrocon Engineering, Inc. Petrocon provides a broad range of services to the refining, chemical, petrochemical, exploration, production, co-generation, manufacturing, process control and advanced automation sectors. Petrocon subsidiaries include: Petrocon Construction Resources, Inc., which focuses on field inspection services, process plant operations and construction management; Petrocon Systems, Inc., which is a full service control systems integration and advanced automation technology company; Triangle Engineers and Constructors, Inc., which provides engineering, design and construction services to refining, chemical and petrochemical industries; and RPM Engineering, Inc./Barnard and Burk Industries, a full service multi-discipline engineering company located in Baton Rouge, Louisiana with more than a 50 year history of providing quality engineering services. Petrocon, with approximately 800 employees and 2000 revenues of $68 million, has offices in Houston and Beaumont, Texas and Baton Rouge and Lake Charles, Louisiana. Petrocon's CEO, Mike Burrow, has completed 18 acquisitions of engineering services companies during his career. Further information about the company is available at http://www.petrocon.com. About Industrial Data Systems Corporation Industrial Data Systems Corporation is a service provider and specialty manufacturer, which through its largest subsidiary, provides engineering and control system services for pipeline and production facilities. Based in Houston, Texas, IDS has approximately 175 employees and 2000 revenues of $17 million. IDS provides consulting services to the pipeline and process industries for development, management and turnkey execution of engineering projects. Manufactured products include conditioned power systems and HVAC equipment. Further information about the company is available at http://www.idscorporation.com. Safe Harbor for Forward-Looking Statements Except for the historical information contained herein, this news release contains forward-looking statements, including, without limitation, statements containing the words, "believes," "anticipates," "expects" and words of similar import, other statements about Industrial Data Systems Corporation and Petrocon Engineering, Inc.'s managements' future expectations, beliefs, goals, plans and prospects, and statements regarding the likelihood and timing of the closing of the merger, the expected benefits and synergies of the merger, the ability of the combined company to successfully provide products and services after the merger, and the future growth of the markets served by the companies. Such forward-looking statements have known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of Industrial Data Systems Corporation, Petrocon Engineering, Inc, the combined company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others: risks associated with difficulties in successfully integrating Industrial Data Systems Corporation and Petrocon Engineering, Inc.'s businesses and technologies; costs related to the merger; failure to obtain required director, stockholder or regulatory approvals of the merger; failure of the combined company to retain and hire key executives, technical personnel and other employees; difficulty of successfully managing a large organization; potential inability to maintain business relationships with clients and suppliers, rapid technological changes; competition in the consulting engineering industry; consolidation and cost pressures in the industry, and other risk factors. Reference is hereby made to cautionary statements set forth in the Company's Form 10-KSB for the year ended December 31, 2000, Form 10-QSB for the quarters ended March 31, 2001, June 30, 2000 and September 30, 2000, current Forms 8-K, and other SEC filings. The forward-looking statements contained in this news release are made as of the date hereof and Industrial Data Systems Corporation and Petrocon Engineering, Inc. do not assume any obligation to update the reasons why actual results could differ materially from those projected in the forward-looking statements. -----END PRIVACY-ENHANCED MESSAGE-----