UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002March 31, 2003

¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-14217

ENGLOBAL CORPORATIONENGlobal Corporation

(Exact name of registrant as specified in its charter)

Nevada

(State or, other jurisdictionJurisdiction of

corporation or organization)

88-0322261

(I.R.S. Employer Identification Number)

600 Century Plaza Drive, Suite 140, Houston, Texas

77073-6033

(Address of Principal Executive Offices)

 

77073-6033

(Zip Code)

(281) 821-3200

(Registrant’s telephone number, including area code)

Check

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesx            No¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes¨            Nox

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the close of business of September 30, 2002.

May 5, 2003.

$0.001 Par Value Common Stock

  22, 861,199

22,861,199 shares



QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER 30, 2002MARCH 31, 2003

TABLE OF CONTENTS

      

Page Number


Part I.

  

Financial Information

   

Item 1.

  

Financial Statements

   
   1

  2

1

   

2

Condensed Consolidated Statements of Cash Flows for the NineThree Months ended September 30,March 31, 2003 and March 31, 2002 and 2001

  

3

   

  

4

Item 2.

  

  9

8

Item 3.

  

  14

11

Item 4.

  

  14

11

Part II.

  

Other Information

   

Item 1.

  

  14

11

Item 2.

  

Changes in Securities and Use of Proceeds

  14

12

Item 3.

  

  14

12

Item 4.

  

  15

12

Item 5.

  

  15

12

Item 6.

  

  15

12

   

  15
16

13

i


Part I.    Financial Information

Item 1.Financial Statements

ENGLOBAL CORPORATIONENGlobal Corporation

CONDENSED CONSOLIDATED BALANCE SHEETSCondensed Consolidated Statements Of Income

   
September 30, 2002

  
December 31, 2001

   
(unaudited)
   
ASSETS

CURRENT ASSETS:
        
Cash  $89,967  $1,244,907
Accounts receivable—trade, less allowance for doubtful accounts of approximately $150,000 for 2002 and $271,000 for 2001   14,242,578   14,908,069
Inventory   615,982   730,507
Cost and estimated earnings in excess of billings on uncompleted contracts   1,224,972   691,048
Prepaid and other   189,508   740,670
Deferred tax asset   634,371   —  
   

  

Total current assets   16,997,378   18,315,201
PROPERTY AND EQUIPMENT, net
   5,369,035   5,123,115
OTHER ASSETS
   324,370   333,567
NON CURRENT DEFERRED TAX ASSET
   224,000   —  
GOODWILL
   13,121,406   14,513,806
   

  

Total assets  $36,036,189  $38,285,689
   

  

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
        
Accounts payable and accrued expenses  $8,638,176  $9,076,520
Billings and estimated earnings in excess of cost on uncompleted contracts   402,131   777,712
Current portion long-term debt   728,680   1,357,228
Current portion capital lease payable   55,553   48,058
Notes payable   —     398,974
Preferred dividends payable   69,013   —  
   

  

Total current liabilities   9,893,553   11,658,492
LONG-TERM LIABILITIES:
        
Long-term debt, net of current portion   10,524,868   12,131,582
Capital lease payable, net of current portion   114,132   149,665
   

  

Total liabilities   20,532,553   23,939,739
STOCKHOLDERS’ EQUITY:
        
Preferred stock, $0.001 par value, 5,000,000 shares authorized, 2,588,000 issued and outstanding and 2,500,000 issued and outstanding in 2002 and 2001, respectively   2,588   2,500
Common stock, $.001 par value; 75,000,000 shares authorized; 22,861,199 issued and outstanding   22,862   22,862
Additional paid-in capital   11,920,883   11,832,971
Retained earnings   3,557,303   2,487,617
   

  

Total stockholders’ equity   15,503,636   14,345,950
   

  

Total liabilities and stockholders’ equity  $36,036,189  $38,285,689
   

  

(Unaudited)

   

For The Three Months Ended March 31,

 
   

2003


   

2002


 

OPERATING REVENUES

  

$

23,603,480

 

  

$

20,702,727

 

OPERATING EXPENSES:

          

Direct costs

  

 

19,484,451

 

  

 

17,478,606

 

Selling, general and administrative

  

 

2,842,414

 

  

 

2,444,228

 

Depreciation and amortization

  

 

246,130

 

  

 

220,390

 

   


  


   

 

22,572,995

 

  

 

20,143,224

 

   


  


Operating income

  

 

1,030,485

 

  

 

559,503

 

OTHER INCOME (EXPENSE):

          

Other income (expense)

  

 

(29,681

)

  

 

117,073

 

Interest income (expense)

  

 

(201,658

)

  

 

(233,340

)

   


  


Total other income (expense)

  

 

(231,339

)

  

 

(116,267

)

   


  


INCOME BEFORE PROVISION FOR INCOME TAXES

  

 

799,146

 

  

 

443,236

 

PROVISION FOR INCOME TAXES

  

 

291,492

 

  

 

177,294

 

   


  


NET INCOME

  

 

507,654

 

  

 

265,942

 

PREFERRED DIVIDENDS

  

 

51,759

 

  

 

50,000

 

   


  


EARNINGS AVAILABLE TO COMMON SHAREHOLDERS

  

$

455,895

 

  

$

215,942

 

   


  


EARNINGS PER COMMON SHARE (BASIC)

  

$

0.02

 

  

$

0.01

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (BASIC)

  

 

22,861,199

 

  

 

22,861,199

 

EARNINGS PER COMMON SHARE (DILUTED)

  

$

0.02

 

  

$

0.01

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (DILUTED)

  

 

23,289,661

 

  

 

22,861,199

 

See accompanying notes to interim condensed consolidated financial statements.

ENGLOBAL CORPORATIONENGlobal Corporation

CONDENSED CONSOLIDATED STATEMENTS OF INCOMECondensed Consolidated Balance Sheets

(Unaudited)
   
For The Three Months Ended September 30,

   
For The Nine Months Ended September 30,

 
   
2002

   
2001

   
2002

   
2001

 
OPERATING REVENUES  $23,509,392   $5,755,832   $67,026,512   $16,859,228 
OPERATING EXPENSES                    
Direct costs   19,961,220    4,159,823    56,302,023    12,460,937 
Selling, general and administrative   2,430,050    1,039,688    7,578,599    2,700,749 
Depreciation and amortization   191,544    69,295    599,853    168,492 
   


  


  


  


Total operating expenses   22,582,814    5,268,806    64,480,475    10,062,598 
   


  


  


  


Operating income   926,578    487,026    2,546,037    1,529,050 
OTHER INCOME (EXPENSE)                    
Other income (expense)   (1,395)   15,009    136,467    47,762 
Interest income (expense)   (229,746)   (18,198)   (664,351)   (58,473)
   


  


  


  


Total other income (expense)   (231,141)   (3,189)   (527,884)   (10,711)
   


  


  


  


INCOME BEFORE PROVISION FOR INCOME TAXES   695,437    483,837    2,018,153    1,518,339 
PROVISION FOR INCOME TAXES   233,714    177,000    791,236    580,500 
   


  


  


  


NET INCOME   461,723    306,837    1,226,917    937,839 
PREFERRED STOCK DIVIDENDS   51,760    —      157,233    —   
   


  


  


  


EARNINGS AVAILABLE TO COMMON STOCKHOLDERS  $409,963   $306,837   $1,069,685   $937,839 
   


  


  


  


BASIC AND DILUTED EARNINGS PER COMMON SHARE  $0.02   $0.02   $0.05   $0.07 
   


  


  


  


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (BASIC AND DILUTED)   22,861,199    12,964,918    22,861,199    12,964,918 
   


  


  


  


ASSETS

  

March 31,

2003


  

December 31, 2002


   

(unaudited)

   

CURRENT ASSETS:

        

Cash

  

$

35,193

  

$

75,095

Accounts receivable—trade, less allowance for doubtful accounts of approximately $207,000 for 2003 and $209,000 for 2002

  

 

15,321,357

  

 

16,491,847

Inventory

  

 

495,652

  

 

531,575

Cost and estimated earnings in excess of billings on uncompleted contracts

  

 

2,168,619

  

 

2,043,603

Prepaid and other

  

 

672,881

  

 

759,330

Deferred tax asset

  

 

461,000

  

 

461,000

   

  

Total current assets

  

 

19,154,702

  

 

20,362,450

GOODWILL

  

 

13,211,628

  

 

13,211,628

PROPERTY AND EQUIPMENT,net

  

 

5,726,378

  

 

5,758,386

DEFERRED TAX ASSET

  

 

152,000

  

 

402,000

OTHER ASSETS

  

 

292,250

  

 

333,552

   

  

Total assets

  

$

38,536,958

  

$

40,068,016

   

  

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

        

Accounts payable

  

$

3,576,667

  

$

4,039,818

Accrued compensation and benefits

  

 

4,840,131

  

 

3,900,499

Billings and estimated earnings in excess of cost on uncompleted contracts

  

 

980,705

  

 

811,845

Other liabilities

  

 

892,383

  

 

932,934

Current portion—long term debt

  

 

728,680

  

 

743,039

Notes payable

  

 

278,566

  

 

485,850

Dividends payable

  

 

172,533

  

 

120,773

Current portion—capital lease payable

  

 

54,700

  

 

53,392

Income taxes payable

  

 

348,929

  

 

319,228

   

  

Total current liabilities

  

 

11,873,294

  

 

11,407,378

Long term debt, net of current portion

  

 

10,140,114

  

 

12,579,702

Capital lease payable, net of current portion

  

 

90,874

  

 

104,155

   

  

Total liabilities

  

 

22,104,282

  

 

24,091,235

PREFERRED STOCK:

        

Series A Redeemable convertible preferred stock; 5,000,000 shares authorized, 2,588,000 shares issued and outstanding at March 31, 2003 and December 31, 2002, respectively

  

 

2,588,000

  

 

2,588,000

STOCKHOLDERS’ EQUITY:

        

Common stock, $.001 par value; 75,000,000 shares authorized; 22,861,199 issued and outstanding at March 31, 2003 and December 31, 2002, respectively

  

 

22,862

  

 

22,862

Additional paid-in capital

  

 

9,335,471

  

 

9,335,471

Retained earnings

  

 

4,486,343

  

 

4,030,448

   

  

Total stockholders’ equity

  

 

13,844,676

  

 

13,388,781

   

  

Total liabilities and stockholders’ equity

  

$

38,536,958

  

$

40,068,016

   

  

See accompanying notes to interim condensed consolidated financial statements.

ENGLOBAL CORPORATIONENGlobal Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCondensed Consolidated Statements Of Cash Flows

(UNAUDITED)(Unaudited)

   
For the Nine Months Ended September 30,

 
   
2002

   
2001

 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income  $1,226,917   $937,839 
Adjustment for non-cash items   1,026,507    168,492 
Changes in working capital, net   212,152    (1,121,819)
   


  


Net cash provided (used) by operating activities   2,465,576    (15,488)
CASH FLOWS FROM INVESTING ACTIVITIES:          
Property and equipment acquired   (280,437)   (336,690)
Software development costs   (532,408)   —   
Proceeds from sale of property   42,523    —   
   


  


Net cash used by investing activities   (770,332)   (336,690)
   


  


CASH FLOW FROM FINANCING ACTIVITIES:          
Line of credit borrowings (repayments), net   (1,108,530)   —   
Short-term note (repayments)   (423,974)   282,563 
Lease borrowings (repayments)   (38,523)   —   
Long-term borrowings (repayments)   (1,279,167)   (36,129)
   


  


Net cash provided (used) by financing activities   (2,850,194)   246,434 
   


  


NET CHANGE IN CASH   (1,154,940)   (105,744)
CASH, at beginning of period   1,244,907    242,592 
   


  


CASH, at end of period  $89,967   $136,848 
   


  


SUPPLEMENTAL DISCLOSURES:          
Interest paid  $581,064   $58,854 
State and federal income taxes paid   206,076    105,000 
NON-CASH:          
Lease to finance equipment   —      67,791 
Accrual of preferred stock dividend   157,233    —   

   

For the Three Months Ended

March 31,

 
   

2003


   

2002


 

CASH FLOWS FROM OPERATING ACTIVITIES:

          

Net income

  

$

507,654

 

  

$

265,942

 

Adjustment for non-cash items

  

 

246,130

 

  

 

220,390

 

Changes in working capital, net

  

 

2,057,270

 

  

 

2,238,502

 

   


  


Net cash provided by operating activities

  

 

2,811,054

 

  

 

2,724,834

 

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Property and equipment acquired

  

 

(170,601

)

  

 

(112,883

)

Proceeds from sale of property

  

 

—  

 

  

 

42,523

 

   


  


Net cash used by investing activities

  

 

(170,601

)

  

 

(70,360

)

   


  


CASH FLOW FROM FINANCING ACTIVITIES:

          

Proceeds from borrowings under line of credit

  

 

23,537,173

 

  

 

24,179,355

 

Payments on line of credit

  

 

(25,814,281

)

  

 

(26,955,906

)

Short-term note repayments

  

 

(207,285

)

  

 

—  

 

Lease repayments

  

 

(11,972

)

  

 

(15,065

)

Long-term debt repayments

  

 

(183,990

)

  

 

(736,881

)

   


  


Net cash used by financing activities

  

 

(2,680,355

)

  

 

(3,528,497

)

   


  


NET CHANGE IN CASH

  

 

(39,902

)

  

 

(874,023

)

CASH, at beginning of period

  

 

75,095

 

  

 

1,244,907

 

   


  


CASH, at end of period

  

$

35,193

 

  

$

370,884

 

   


  


SUPPLEMENTAL DISCLOSURES:

          

Interest paid

  

$

191,540

 

  

$

153,044

 

NON-CASH:

          

Accrual of preferred dividends

  

 

51,759

 

  

 

—  

 

See accompanying notes to interim condensed consolidated financial statements.

ENGlobal Corporation

ENGLOBAL CORPORATIONNotes To Condensed Consolidated Financial Statements

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS1.    BASIS OF PRESENTATION

1.
BASIS OF PRESENTATION

The condensed consolidated financial statements of ENGlobal Corporation, formerly known as Industrial Data Systems Corporation (“ENGlobal” or the “Company”), included herein, are unaudited for the nine month periodsthree-month period ended September 30, 2002March 31, 2003 and 2001.2002. These financial statements reflect all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary to fairly depict the results for the periods presented. Certain information and note disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. It is suggested these condensed financial statements be read in conjunction with the Company’s audited financial statements for the years ended December 31, 20012002 and 2000,2001, which are included in the Company’s annual report on Form 10-K. The Company believes that the disclosures made herein are adequate to make the information presented not misleading.

2.
ACQUISITION
The acquisition of Petrocon Engineering, Inc. (the “Merger”) was consummated on December 21, 2001 with an effective date for accounting purposes of December 31, 2001. Through an indirect subsidiary, the Company acquired all the outstanding shares of stock of Petrocon Engineering, Inc. (“Petrocon”), an engineering services company with offices along the Texas and Louisiana gulf coast, in exchange for the issuance of 9,800,000 shares of common stock. None of Petrocon’s earnings were included as part of operations for 2001. Footnote 2 of the Form 10-K describes all subsidiaries.
3.
NAME CHANGE

2.    NAME CHANGE

On June 6, 2002, the stockholders voted on a proposal to amend the Articles of Incorporation to change the name of the Company from Industrial Data Systems Corporation to ENGlobal Corporation. The Company believes the new name reflects its broader capabilities and vision for future growth, providing a common identity, which will build name recognition and credibility among existing and potential customers.

4.
LINE OF CREDIT AND DEBT
Effective December 31, 2001, as part of

The ENGlobal name change has been adopted by the Merger, ENGlobal entered intoCompany’s operating subsidiaries effective January 25, 2003.

3.    LINEOF CREDITAND DEBT

The Company has a financing arrangementCredit Facility with Fleet Capital Corporation (“Fleet”) whereby all of Petrocon’s outstanding debt, the “Credit Facility”, (comprisedthat consists of a line of credit and a term loan) was refinanced.credit. The new loan agreement positions the Fleet debt as senior to all other debt and includes a $15,000,000debt. The line of credit is limited to $15,000,000, subject to borrowing base restrictions, and a $500,000 term loan.restrictions. The Credit Facility is collateralized by substantially all the assets of the Company. At September 30, 2002, $7,786,000March 31, 2003, $7,807,000 was outstanding on the line of credit. The line of credit and the term loan was paid off in full.matures on June 30, 2005. The interest rate on the line of credit is one-quarter of one percent plus prime (5.0(4.50 percent at September 30, 2002)March 31, 2003), and the commitment fee on the unused line of credit is 0.375 percent. Monthly principal payments on the term loan plus interest commenced January 1, 2002 and continued until maturity. The remaining borrowings available under the line of credit as of September 30, 2002,March 31, 2003, were $2,788,000$3,694,000 after consideration of the borrowing base limitations. The Company’s Credit Facility contains covenants which require the maintenance of certain ratios, including cumulative fixed charge coverage and debt coverages and specified levels of certain other items. This Credit Facility

ENGlobal Corporation

ENGLOBAL CORPORATIONNotes To Condensed Consolidated Financial Statements

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

replaced

     
   

March 31, 2003


   

December 31, 2002


 
   

(in thousands)

 

Fleet Credit Facility—

          

Line of credit, prime plus 0.25% (4.50% at March 31, 2003), maturing in 2005

  

$

7,807

 

  

$

10,084

 

Equus note payable, interest at 9.5%, principal payments in installments of $110,000 plus interest due quarterly maturing through 2005

  

 

2,670

 

  

 

2,780

 

Petrocon Arabia Limited uncollateralized note payable, interest at 8%, principal and interest due monthly in decreasing amounts starting at $25,000, maturing in August 2004

  

 

384

 

  

 

451

 

Miscellaneous

  

 

8

 

  

 

8

 

   


  


   

 

10,869

 

  

 

13,323

 

Less—current maturities

  

 

(729

)

  

 

(743

)

   


  


Long-term debt, net of current portion

  

$

10,140

 

  

$

12,580

 

   


  


Current notes payable include a revolving credit note that was collateralizedwhich finances commercial insurance on a short-term basis, with accounts receivablea balance of $279,000 and inventory$485,000 as of the Company.

An amendment to the Credit Facility was agreed upon between FleetMarch 31, 2003 and the Company on JulyDecember 31, 2002, wherebyrespectively.

4.    PREFERRED STOCK DIVIDENDS

One stockholder, Equus II Incorporated, holds the maturity date of the line of credit and the term loan was extended to June 30, 2005. The amendment also includes more favorable advance rates on eligible accounts, increased sub-limits on fixed price contracts and foreign receivables and an interest rate reduction if certain fixed charge ratios are maintained.

As part of the Merger consideration, Petrocon’s pre-Merger debt with Equus was reorganized, restructured and reduced. Equus agreed to exchange notes with a principal balance of $9,700,000, plus accrued interest, for $2,500,000 in preferred stock, a payment of $2,000,000, debt forgiveness of $2,200,000, and a new note for $3,000,000. The new note has interest at 9.5 percent per annum with interest paid quarterly beginning February 15, 2002 and principal payments being paid quarterly beginning August 15, 2002. This note is subordinated to the Company’s loan with Fleet.
   
(in thousands)
 
   
September 30,
2002

   
December 31,
2001

 
Fleet Credit Facility—          
Line of credit, interest at prime plus 0.25% (5.00% at September 30, 2002), maturing in 2005  $7,786   $8,894 
Term loan, interest at prime plus 0.50% (5.25% at September 30, 2002), matured September 2002.   —      523 
Equus—          
Note payable, interest at 9.5%, principal due quarterly in installments of $110,000, maturing through 2005   2,890    3,000 
Vendors—          
Notes payable, interest at 8%, due monthly in decreasing amounts starting at $115,000, maturing through 2004   578    1,072 
   


  


    11,254    13,489 
Less—current maturities   (729)   (1,357)
   


  


Long-term debt, net of current portion  $10,525   $12,132 
   


  


The Company carries commercial insurance financed by short-term notes from October 1 to September 30, 2002. At December 31, 2001 the balance in notes payable for the insurance was $399,000. At September 30, 2002, the note had matured and the balance was $0.

ENGLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5.
PREFERRED STOCK DIVIDENDS
The Company’s Series A Preferred Stock, $0.001 par value per share, is held by one stockholder, Equus II Incorporated.share. Dividends on outstanding shares of Series A Preferred Stock are payable annually on the last day of May beginning in 2002 at a rate of 8% of the liquidation amount which is $1.00 per share plus accrued and unpaid dividends. Dividends may be paid in cash, or at the option of the Company, in shares of Series A Preferred Stock. On May 31, 2002, the Company issued 88,000 shares of Series A Preferred Stock as a stock dividend and paid $219 for fractional shares.
6.
ALLOCATION OF GOODWILL

5.    ALLOCATIONOF GOODWILL

The Company’s plan to pursue potential acquisitions of complementary businesses was realized on December 21, 2001 through its Merger with Petrocon. The Company entered into a letter of intent on April 3, 2001 to acquire, through Mergermerger with a wholly owned subsidiary, Petrocon Engineering, Inc., an engineering support services company, with offices along the Texas and Louisiana gulf coast, in exchange for 9,800,000 shares of the Company, valued at $0.71 per share. The purchase price totaled $23,806,000. The transaction was financed by issuance of common stock valued at $6,637,000, net of registration costs, issuance of preferred stock with a liquidation value of $2,500,000 and assumption of debt totaling $13,737,000. The purchase resulted in the recognition of an intangible, goodwill, of $13,121,000$13,211,000, and deferred tax assets (see Note 8).

The business strategy of the combined company focuses on cross-marketing its engineering capabilities and, following a reduction in its debt burden, completing mergers and acquisitions in its engineering business. Since there is little overlap in the engineering customer bases of the two companies, there is considerable potential to enhance the internal growth of the combined company through cross-marketing. The Company has commenced an intense marketing effort focused on those customers who are identified as most likely to buy the additional services offered through the combined company.
assets.

In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” goodwill is no longer amortized over its estimated useful life, but rather will be subject to at least an annual assessment for impairment. The initial test for impairment, as of January 1, 2002, must bewas completed by the end of the second quarter of 2002. The Company has completed such valuation2002 and no impairment has been incurred. Goodwill amortizationoccurred. The second annual test for the Company for the nine months ended September 30, 2001impairment was $6,000. Net income for the third quarter of 2001completed effective January 1, 2003 and the nine months ended September 30, 2001, adjusted to exclude goodwill amortization, would have changed to $309,000 and $944,000, respectively ($0.02 per share and $0.07 per share, respectively, would have remained the same).

The unaudited proforma combined historical results, as if Petrocon had been acquired at the beginning of fiscal 2001, as compared to the results of operations for the three months and nine months ended September 30, 2002, are estimated to be:
   
Three months ended

  
Nine months ended

   
2002

  
2001

  
2002

  
2001

   
(In thousands, except per share data)
Net sales  $23,509  $23,695  $67,027  $68,738
Operating income   927   614   2,546   2,255
Net earnings per share from continuing operations—basic and diluted   0.02   0.00   0.05   0.03
no impairment occurred.

ENGlobal Corporation

ENGLOBAL CORPORATIONNotes To Condensed Consolidated Financial Statements

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS6.    FIXED FEE CONTRACTS

The foregoing proforma results do not include amortization of goodwill, but do include the reduction of forgiven and restructured interest expense on debt. The proforma results do not purport to be indicative of what actually would have occurred if the acquisition had been completed as of the beginning of each fiscal period presented, nor are they necessarily indicative of future consolidated results.
7.
FIXED FEE CONTRACTS

Costs, estimated earnings and billings on uncompleted contracts consisted of the following at September 30, 2002March 31, 2003 and December 31, 20012002 (in thousands):

   
September 30,
2002

   
December 31,
2001

 
Costs incurred on uncompleted contracts  $11,918   $7,293 
Estimated earnings on uncompleted contracts   2,394    1,091 
   


  


Earned revenues   14,986    8,384 
Less billings to date   (14,163)   (8,431)
   


  


Net cost and estimated earnings in excess (under) billings uncompleted contracts  $823   $(47)
   


  


Costs and estimated earnings in excess of billings on uncompleted contracts  $1,225   $731 
Billings and estimated earnings in excess of costs on uncompleted contracts   (402)   (778)
   


  


Net cost and estimated earnings in excess (under) billings uncompleted contracts  $823   $(47)
   


  


8.
TAXES
At the time of the Merger, the

   

March 31,

2003


   

December 31,

2002


 

Costs incurred on uncompleted contracts

  

$

15,186

 

  

$

18,629

 

Estimated earnings on uncompleted contracts

  

 

3,025

 

  

 

3,096

 

   


  


Earned revenues

  

 

18,211

 

  

 

21,725

 

Less billings to date

  

 

17,023

 

  

 

20,493

 

   


  


Net cost and estimated earnings in excess of billings on uncompleted contracts

  

$

1,188

 

  

$

1,232

 

   


  


Costs and estimated earnings in excess of billings on uncompleted contracts

  

$

2,169

 

  

$

2,044

 

Billings and estimated earnings in excess of costs on uncompleted contracts

  

 

(981

)

  

 

(812

)

   


  


Net cost and estimated earnings in excess (under) billings on uncompleted contracts

  

$

1,188

 

  

$

1,232

 

   


  


7.    TAXES

The Company benefited from Petrocon’s net operating loss carryforwards at the time of approximately $1,000,000 in the calculation of current tax expense as of December 31, 2001. The Company had additional net operating loss carryforwards of approximately $3,530,000 subject to limitations on utilization due to prior ownership changes. The Company had established a valuation allowance on the entire net operating loss due to tax code ambiguity until further research was completed regarding the realization of this asset.

Merger. Based on the completion of the research and advice of tax counsel, the realization of thisan additional net operating loss carryforward asset is available to the Company. The Company has net operating loss carryforwards of approximately $2,768,000$1,592,000 as of December 31, 2001 that is not limited. The valuation allowance has been reversed2002 with an annual limitation of $1,176,000. Current and a current deferred asset has been established for $1,176,000 and a non-current deferred tax asset has been establishedassets representing the net operating loss carryforward and timing differences total $613,000 and $863,000 as of March 31, 2003 and December 31, 2002, respectively. The reduction in deferred tax assets during the first quarter of 2003 reflects the expected usage of net operating loss carryforwards in 2003 to offset taxable income.

8.    STOCK OPTION PLANS

The Company accounts for $224,000 by reallocatingits nonqualified incentive stock option plan under the goodwill balance that was created atrecognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees and related interpretations. Accordingly, no stock-based compensation cost is reflected in the timenet income, as all options granted under those plans were equal to the market value of the Merger. Previously recognized current year tax liability has been reclassified to offsetCompany’s stock on the current deferred asset account reducingdate of grant. The following table illustrates the balance to $634,000.

effect on net income and earnings per share for the three months ended March 31, 2003 and 2002, if the Company had applied the fair value recognition provisions of SFAS No. 123,Accounting for Stock-Based Compensation, as amended by FAS 148,Accounting for Stock-Based Compensation Transition and Disclosure, issued in December 2002.

   

Three Months Ended

March 31,


 
   

2003


   

2002


 
   

(in thousands)

 

Pro forma impact of fair value method (FAS 148):

          

Net income attributable to common stockholders, as reported

  

$

456

 

  

$

216

 

Less compensation expense determined under fair value method

  

 

(1

)

  

 

(37

)

   


  


Pro forma net income attributable to common stockholders

  

$

455

 

  

$

179

 

   


  


ENGlobal Corporation

ENGLOBAL CORPORATIONNotes To Condensed Consolidated Financial Statements

Earnings per share (basic and diluted):

          

As reported

  

$

0.02

 

  

$

0.01

 

Pro forma

  

$

0.02

 

  

$

0.01

 

Weighted average Black-Scholes fair value assumptions:

          

Risk free interest rate

  

 

5.0

%

  

 

5-5.75

%

Expected life

  

 

7–10 years

 

  

 

2-10 years

 

Expected volatility

  

 

93

%

  

 

93

%

Expected dividend yield

  

 

0.0

%

  

 

0.0

%

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  9.    SEGMENT INFORMATION

9.
SEGMENT INFORMATION

The Company operates in three business segments: (1) engineering consulting services primarily to major integrated oil and gas companies; (2) engineered systems, providing design and implementation of control systems for specific applications primarily in the energy and process industries, uninterruptible power systems and battery chargers; and (3) manufacturing of air handling equipment for commercial heating, ventilation and cooling systems. Sales and operating income set forth in the following table are the results of these segments. Segment operating profit (loss) is defined as profit (loss) before interest and income taxes. The amounts reported in the corporate segment include those activities that are allocated to the operating segments.

Segment information for the three months ended September 30,March 31, 2003 and 2002, and 2001, respectively, iswas as follows (in thousands)

   
Engineering Services

  
Engineered Systems

     
Manufacturing

   
Corporate

   
Total

2002 Net sales to external customers  $19,743  $3,130     $636   $—     $23,509
Operating profit (loss)   1,979   (13)     (35)   (1,005)   926
2001 Net sales to external customers  $3,848  $743     $1,165   $—     $5,756
Operating profit (loss)   433   (166)     212    8    487
Segment information for the nine months ended September 30, 2002 and 2001, respectively, is as follows (in thousands):
   
Engineering Services

  
Engineered Systems

     
Manufacturing

   
Corporate

   
Total

2002 Net sales to external customers  $56,243  $8,858     $1,926   $—     $67,027
Operating profit (loss)   5,211   485      (65)   (3,085)   2,546
2001 Net sales to external customers  $11,127  $2,600     $3,132   $—     $16,859
Operating profit (loss)   1,427   (137)     307    (68)   1,529

Item
2.    Management’s Discussion And Analysis And Results Of Operations

2003


  

Engineering Services


  

Engineered Systems


    

Manufacturing


   

Corporate


   

Total


Net sales from external customers

  

$

18,316

  

$

4,690

    

$

597

 

  

$

—  

 

  

$

23,603

Operating profit (loss)

  

 

2,236

  

 

295

    

 

(15

)

  

 

(1,486

)

  

 

1,030

2002


  

Engineering Services


  

Engineered Systems


    

Manufacturing


   

Corporate


   

Total


Net sales from external customers

  

$

17,875

  

$

2,287

    

$

541

 

  

$

—  

 

  

$

20,703

Operating profit (loss)

  

 

1,461

  

 

174

    

 

(53

)

  

 

(1,023

)

  

 

559

Item 2.    Management’s Discussion And Analysis And Results Of Operations

Forward-Looking Statements

Certain information contained in this Form 10-Q Quarterly Report, on Form 10-Q, the Company’s Annual Report to Stockholders, 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 with the meaning of Section 21E of the Securities Exchange Act of 1934. This information includes, with 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. Actual results could differ materially from the results described in the forward-looking statements due to the risks and uncertainties set forth with this Quarterly Report on Form 10-Q.

The following discussion is qualified in its entirety by, and should be read in conjunction with, the Company’s Consolidated Financial Statements including the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

2002.

Overview

On April 3, 2001,Update on the Company entered into a non-binding letterSale of intent relating to a proposed Merger between a newly created subsidiaryThermal

The closing of the Company and Petrocon Engineering, Inc. The Merger was consummated on December 21, 2001 with an effective datetransaction for accounting purposesthe sale of December 31, 2001. As a resultThermal has been impeded due to the inability of the Merger,buyer to secure adequate financing. The Company has been considering various alternatives as well as restructuring the Company provides a broader range of services over a larger geographic area. The Merger resulted in some immediate expenses relating to consolidationterms of the operationsagreement to include owner financing. The Company has contracted with the Pivot Group LLC to provide dedicated management services to Thermal through the end of the two companies; however, the Company believes that the long-term impact of the Merger will be beneficial to the Company. The Company filed current reports of Unscheduled Material Events on Form 8-K on January 7, 2002 and Form 8-K/A on March 5, 2002 describing the Merger. The results of operations in 2002 include the operations of the merged entity.

On June 6, 2002, in a vote at the Annual Meeting, the stockholders approved a proposal to amend the Articles of Incorporation to change the name of the Company from Industrial Data Systems Corporation to ENGlobal Corporation. The Company believes the new name reflects its broader capabilities and vision for future growth, providing a common identity, which will build name recognition and credibility among its existing and potential customers. Effective June 16, 2002, the Company’s trading symbol for its common stock, traded on the American Stock Exchange, changed from IDS to ENG.
year.

Results of Operations

The Company operates in three segments, the engineering services segment, the engineered systems segment, and the manufacturing segment. The following table sets forth, for the periods indicated, the appropriate percentagespercentage of sales generated by each of the operating segments.

   
Percentage of Revenue

 
   
Three months ended September 30,

   
Nine months ended September 30,

 
Operating Segment

  
2002

   
2001

   
2002

   
2001

 
Engineering services  84.0%  66.9%  83.9%  66.0%
Engineered systems  13.3   12.9   13.2   15.4 
Manufacturing  2.7   20.2   2.9   18.6 
   

  

  

  

Total revenue  100.0%  100.0%  100.0%  100.0%

   

Percentage of Revenue


 
   

For the three months ended March 31,

 

Operating Segment


  

2003


   

2002


 

    Engineering services

  

77.6

%

  

86.3

%

Engineered systems

  

19.9

%

  

11.1

%

Manufacturing

  

2.5

%

  

2.6

%

   

  

Total revenue

  

100.0

%

  

100.0

%

Three Months Ended September 30, 2002March 31, 2003 Compared to Three Months Ended September 30, 2001March 31, 2002

Total Revenue. Total revenue increased by $17,754,000$2,900,000 or 308% from $5,755,00014% for the three months ended September 30, 2001,March 31, 2003 compared to $23,509,000the three months ended March 31, 2002. All segments reported an increase in 2002. Revenuesales

during the period. Engineering services segment increased from $17,875,000 in 2002 to $18,316,000 in 2003 or $441,000, a 2% increase. The revenue increase in engineering services resulted primarily from the engineering servicescontinuation of a large EPC project (engineering, procurement, and construction) in the Beaumont office. The engineered systems segment, which comprised 84.0%represents 20% of total revenuerevenues increased by $2,403,000 or 105% from $2,287,000 for the three months, ended September 30,March 31, 2002 increased by $15,895,000 or 413%. Of thisto $4,690,000 for the same period in 2003. This increase $16,850,000 or 106% was derived from Petrocon operations acquired in the Merger. Revenue of the pre-merger operations decreased from $3,517,000 to $2,943,000 or 16%occurred at ENGlobal Systems resulting from the completionlarge fixed price sales of a large lump-sum turnkey project in Houston and depressed economic conditions in Tulsa.

Revenue from the engineeredprocess systems to two clients. The manufacturing segment was $3,130,000, which comprised 13.3% of total revenueincreased sales for the three months ended September 30, 2002, an increase of $2,388,000March 31, 2003 by $56,000 or 322% over the same period in 2001. Of this increase, $2,703,000, or 86%, was derived10% from operations acquired in the Merger.
Revenue generated by the manufacturing segment$541,000 for the three months ended September 30,March 31, 2002 decreased by $529,000 or 45% fromto $597,000 for the same period in 2001.2003. The Company believes that the decline in revenues in 2002 were lower than normal due to the manufacturing segment is a resultlingering effects of the economic slowdownSeptember 11, 2001 terrorist attack that begansignificantly impacted the market in the fourth quarter of 2001 and is continuing throughout 2002. Due to the acquisition of Petrocon, the manufacturing segment has become a smaller portion of total revenues, declining from 20.2% of total revenueswhich Thermal operates.

Gross Profit. The gross profit increased $895,000 or 28% for the three months ended September 30, 2001March 31, 2003 as compared to 2.7%the three months ended March 31, 2002. Engineering services gross profit as a percentage of revenue, improved from 15% to 17%. This resulted in a $527,000 increase over 2002 due primarily to better utilization of manpower.

The engineered systems segment gross profit increased $311,000 or 63% from $492,000 to $803,000 for the three months ended September 30, 2002.

Gross Profit.    GrossMarch 31, 2002 and 2003, respectively. However, gross profit as a percent of revenue declined from 22% in 2002 to 17% for the same period in 2003. This decline in gross profit as a percent of revenue from 2002 to 2003 was primarily due to competitive market pressures on contract pricing and budget over-runs on three fixed price projects.

The manufacturing segment increased gross profit by $1,952,000$56,000 or 122% from $1,596,00041% for the three months ended September 30, 2001March 31, 2003 compared to $3,548,000 for the same period infor 2002. The gross margin as a percentage of total revenues decreased from 27.7% for the period ended September 30, 2001This increase was due to 15.1% for the same period in 2002. The decrease in gross margin occurred in all segments. The engineering services segment had a gross margin of 15.6%Thermal reducing expenses by eliminating contract labor and decreasing accrued expenses.

Selling, General, and Administrative. Expenses related to selling, general and administrative, including depreciation and amortization increased $424,000 or 16% for the three months ended September 30, 2002, down from a gross margin of 31.6% for the same period in 2001. This decrease in gross margins was primarily caused by the large number of on-site contracts for services within the Petrocon companies. Contracts of this type are bid with lower margins because they require less overhead expenses. In addition, the decrease in gross margins was due to the completion in the prior period of lucrative lump-sum turnkey projects in the Houston division and the impact of lower utilization rates in the Baton Rouge and Tulsa offices. Lower utilization rates, particularly in the Baton Rouge and Tulsa locations, impacted margins negatively. The Company instituted a reduction in force in Tulsa and later in Baton Rouge in an attempt to decrease the negative impact of these lower utilization rates. Depressed economic conditions in Baton Rouge and Tulsa affected these locations more than the Company’s other location.

The gross profit for the engineered systems segment increased from a loss of 3.3% for the period ended September 30, 2001 to a project of 10.5% for the same period in 2002. This increase occurred due to the more profitable operations added as a result of the Merger.
The manufacturing segment’s gross margin generated in the period ended September 30, 2002March 31, 2003 as compared to the same period in 20012002. A majority of the increase resulted from the creation of a business development department in the corporate division, including the salaries and expenses of several marketing representatives. These salaries and expenses contributed approximately $300,000 to the first three months of 2003. In addition, the accounting system was $148,000 or 23.3% asupgraded and the cost of the consultants in 2003 added $90,000 and depreciation related to the software increased by $25,000.

Operating Income. Operating income increased by $471,000 to $1,030,000 for the three months ended March 31, 2003, compared to $404,000 or 34.7%.

Other$560,000 for the same period in 2002. As a percentage of revenues, operating income and expenses.    During the third quarter 2002, ENGlobal’s interest expense increased by $211,000 from $18,000 due3% to 4%. The increase is attributable primarily to the assumption of certain debt as a result ofEPC work in the Merger.engineering services segment, which contributed $2,235,000 to operating income before deducting corporate selling, general, and administrative expenses.

Net income. Net income after taxes increased by $154,000$242,000 or 50%91% from $307,000$266,000 to $508,000 for the three months ended September 30, 2001 to $462,000 for the same period in 2002.

Nine months ended September 30, 2002 Compared to Nine months ended September 30, 2001
Total Revenue.    Total revenue increased from $16,859,000 to $67,027,000 or 298% for the nine months ended September 30, 2001 as compared to the same period in 2002. The largest segment, engineering services, contributed $56,243,000 or 83.9% of total revenues. The Merger with the Petrocon companies contributed $46,986,000 in revenues or 84% of the engineering services revenues during the nine months ended September 30, 2002. The pre-merger operations had a decrease in revenues from $11,127,000 to $9,257,000 or 17% resulting from the completion of a large lump-sum turnkey project in Houston and the depressed economic conditions in Tulsa.
The engineered systems segment increased revenues from $2,600,000 for the nine months ended September 30, 2001 to $8,858,000 for the nine months ended September 30, 2002 or a 241% increase. The operations acquired in the Merger contributed $6,607,000 or 75% in revenues for the nine month period ended September 30, 2002.
The manufacturing division had revenues of $1,925,000 for the nine months ended September 30, 2002 as compared to $3,132,000 for the same period last year. Of this decrease, $606,000 is the result of the economic downturn beginning in the fourth quarter of 2001 and continuing throughout 2002. Contributing to the decrease from last year was an unusually large revenue level in 2001. The 2001 revenue level was approximately $600,000 greater than normal primarily attributable to orders from municipal customers for the replacement of equipment damaged by Tropical Storm Alison earlier in the year. No similar situation occurred duringMarch 31, 2002 and the anticipated third quarter 2002 recovery did not materialize.
Gross Profit.    Gross profit increased by $6,326,000 or 144% from $4,398,000 to $10,724,000 for the nine months ended September 30, 2002 as compared to the same period last year. The gross margin as2003, respectively. As a percentage of revenues decreased from 26.1% to 16.0% for these two periods. The gross margin intotal revenue, the engineering services segment decreased from 27.2% for the nine months ended September 30, 2001 to 15.6% for the nine months ended September 30, 2002. This decrease was primarily caused by the large number of on-site contracts for services within the Petrocon companies. Contracts of this type are bid with lower margins because they require less overhead expenses. In addition, the decrease in gross margins was due to the completion in the prior period of lucrative lump sum turnkey projects in the Houston division and lower utilization rates in the Baton Rouge, Houston, and Tulsa offices. The Company has instituted reduction in force in Tulsa and Baton Rouge to decrease the negative impact of these lower utilization rates.
The gross profit for the engineered systems segmentnet income percentage increased from 15%1% to 17% for the nine month period ending September 30, 2001 and 2002. The manufacturing segment’s gross profit declined from $966,000 to $494,000 with margins declining from 30.9% to 25.7% for the nine months ended September 30, 2001 and 2002, respectively.
Other income and expenses2%.    During the nine months ended September 30, 2002, the Company received a $110,000 settlement on its claim against a software provider whose product did not meet the Company’s expectations. There were no similar settlements in 2001. The increase in income was offset by the increase in interest expense from $58,000 to $600,000 from the first nine months of 2001 as compared to the first nine

months of 2002. This increase in interest expense occurred as a result of the assumption of debt in connection with the Merger.
Net income.    Net income after taxes increased from $938,000 for the nine months ended September 30, 2001 to $1,227,000 for the nine months ended September 30, 2002 or 31%.

Liquidity and Capital Resources

Effective December 31, 2001 as part of the Merger, ENGlobal entered into

The Company has a financing arrangement with Fleet whereby all of Petrocon’s outstanding debt,Capital Corporation (“Fleet”) known as the “Credit Facility”, (comprisedCredit Facility, which is comprised of a line of credit and a term loan), was refinanced.credit. The new loan agreement positions the Fleet debt as senior to all other debt and includes a $15,000,000with the line of credit limited to $15,000,000, subject to borrowing base restrictions, and a $500,000 term loan.restrictions. The Credit Facility is collateralized by substantially all the assets of the Company. At September 30, 2002, $7,786,000March 31, 2003, $7,807,000 was outstanding on the line of credit and the term loan was paid off in full.credit. The Credit Facility matures on June 30, 2005. The interest rate on the line of credit is one-quarter of one percent plus prime, and the commitment fee on the unused line of credit is 0.375 percent. Monthly principal payments on the term loan plus interest commenced January 1, 2002 and continued until maturity. The remaining borrowings available under the line of credit as of September 30, 2002March 31, 2003 were $2,788,000$3,694,000 after consideration of the borrowing base restrictions.

limitations. The Company’s Credit Facility contains covenants, thatwhich require the maintenance of certain ratios, including cumulative fixed charge coverage and debt coverages and specified levels of certain other items.

Fleet and the Company agreed on an amendment to the Credit Facility on July 31, 2002 whereby the maturity date of the line of credit and the term loan was extended to June 30, 2005. The term loan was subsequently paid in full. The amendment also includes more favorable advance rates on eligible accounts, increased sub-limits on fixed price contracts and foreign receivables and an interest rate reduction if certain fixed charge ratios are maintained.
A subsequent amendment to the Credit Facility effective September 30, 2002, increased the limits on annual capital expenditures and the ratio of senior debt to earnings before interest, taxes, depreciation, and amortization.

The Company must meet all covenants through the maturity date of the Credit Facility. The Company is currently in compliance and Management believes the Companyit will remain in compliance with all loan covenants, although no assurances can be given.

given regarding such compliance.

As of September 30, 2002,March 31, 2003, Management believes the Company’s cash position was sufficient to meet its working capital requirements. EBITDA, earnings before interest, taxes, depreciation and amortization, for the ninethree months ended September 30, 2002March 31, 2003 was $3,146,000.$1,277,000. Any future decrease in demand for the Company’s services or products would reduce the availability of funds through operations.

The Company benefited from Peterson’s net operating loss carryforwards at the time of the merger. Based on the completion of research and advice of tax counsel, the realization of an additional loss carryforward asset is available to the Company. The Company has net operating loss carryforwards of $1,592,000 as of December 31, 2002 with an annual limitation of $1,176,000. Current and non-current deferred tax assets representing the net operating loss carryforward and timing differences total $613,000 and $863,000 as of March 31, 2003 and December 31, 2002, respectively. The reduction in deferred tax assets during the first quarter of 2003 reflects the expected usage of net operating loss carryforwards in 2003 to offset taxable income.

The Company’s working capital was $7,104,000$7,281,000 and $6,657,000$8,955,000 at September 30, 2002March 31, 2003 and December 31, 2001,2002, respectively. The increasedecrease in working capital resultresulted primarily from a decrease in trade payablesreceivables, attributable to the active collection process, and notes payable and a reductionan increase in current maturities of debt.

As noted abovefirst quarter accrued payroll taxes to be paid in the Results of Operations, some of the Company’s locations have experienced lower utilization rates negatively impacting the Company’s margins. In an attempt to ease the pressure caused by
April.

lower utilization rates, the

The Company completed reductions in force in Tulsa and Baton Rouge during the second and third quarters of 2002.

As of September 30, 2002, ENGlobal had long-term debt outstanding of $10,525,000.$10,869,000 and $13,323,000 as of March 31, 2003 and December 31, 2002, respectively. This long-term debt includes $7,786,000the Credit Facility of $7,807,000 on the line of credit granted under the Credit Facility, whichas of March 31, 2003 that matures on or before June 30, 2005.

Cash Flow

Operating activities provided net cash totaling $2,466,000$2,811,000 and $2,725,000 for the ninethree months ended September 30,March 31, 2003 and 2002, andrespectively. The increase in cash provided by operating activities used cash totaling $15,000primarily reflects the increase in net income for the ninethree months ended September 30, 2001. Trade receivables decreased $665,000 since DecemberMarch 31, 2001 due2003 as compared to improved timeliness of billings and shorter turn around in collection of receivables. Inventory decreased by $114,000 for the same period due to the utilization of work in process in the engineered systems segment.

2002.

Investing activities used cash totaling $770,000$171,000 for the ninethree months ended September 30, 2002March 31, 2003 and $337,000$70,000 for the same period in 2001.2002. The Company’s primary investing activities that used cash during 2002 arethe period ended March 31, 2003 was for the purchase and modification of a significant software system. The purchase of property and equipment occurred during both periods.

equipment.

Financing activities used cash totaling $2,850,000$2,680,000 for the ninethree months ended September 30, 2002, including the repayment of the line of credit and long-term debt. Financing activities provided cash totaling $246,000March 31, 2003, as compared to $3,528,000 for the same period in 2001.

2002. The decrease in cash used for financing activities reflects lower payments on debt in 2003 as compared to 2002.

The Company believes that it has available necessary cash for the next 12 months. Cash and the availability of cash, could be materially restricted if circumstances prevent the timely internal processing of invoices into receivable accounts, if such accounts are not collected within 90 days of the original invoice date, or if project mix shifts from cost reimbursable to fixed costs contracts during significant periods of growth.growth, or if ENGlobal is not able to meet the monthly covenants of the Fleet Credit Facility. If any such events occur the Company would be forced to consider alternative financing options.

If losses occur, ENGlobal may not be able to meet the monthly fixed charge ratio covenant of the Fleet Credit Facility. In that event, if ENGlobal is unable to obtain a waiver or amendment of the covenant, the Company may be unable to borrow under the Credit Facility and may have to repay all loans then outstanding under the Credit Facility. The Company believes it will be successful in obtaining a waiver or amendment of this covenant, but if unsuccessful, it will be forced to seek an alternative source of financing.

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 $14,243,000$15,321,000 and $14,908,000 $16,492,000

at September 30, 2002March 31, 2003 and December 31, 2001,2002, respectively. The number of days’ sales outstanding in trade accounts receivable was 5861 days and 7960 days, respectively.

ItemItem 3.Quantitative and Qualitative Disclosures About Market Risk

Our financial instruments include cash and Qualitative Disclosures About Market Risk

Ascash equivalents, accounts receivable, accounts payable, notes and capital leases payable, and debt obligations. The book value of September 30, 2002cash and December 31, 2001,cash equivalents, accounts receivable, accounts payable and short-term notes payable are considered to be representative of fair value because of the Company didshort maturity of these instruments.

We do not participate inutilize financial instruments for trading purposes and we do not hold any derivative financial instruments or other financial and commodity instrumentsthat could expose us to significant market risk. Our exposure to market risk for which fair value disclosurechanges in interest rates relates primarily to our obligations under the Fleet Credit Facility. As of March 31, 2003, $7,807,000 had been borrowed under the line of credit, accruing interest at 4.5% per year, excluding amortization of prepaid financing costs. A ten percent increase in the short-term borrowing rates on the Credit Facility outstanding as of March 31, 2003 would be required under SFAS No. 107 or SFAS No. 133. There are no investments at September 30, 2002 or December 31, 2001. Accordingly,45 basis points. Such an increase in interest rates would increase our annual interest expense by approximately $35,000 assuming the Company has no quantitative information concerning the market riskamount of participating in such investments.

debt outstanding remains constant.

The Company has no market risk exposure in the areas ofabove sensitivity analysis for interest rate risk excludes accounts receivable, accounts payable and accrued liabilities because there is no investment portfolio as of September 30, 2001. Currently the Companyshort-term maturity of such instruments. The analysis does not engageconsider the effects this movement may have on other variables including changes in foreign currency hedging activities nor isrevenue volumes that could be indirectly attributed to changes in interest rates. The actions that Management would take in response to such a change are also not considered. If it were possible to quantify this impact, the Company exposed to currency exchange rate fluctuation.

results could well be different than the sensitivity effects shown above.

Item 4.Controls and Procedures

With the participation of management,Management, the Company’s chief executive officer and chief financial officer reviewed and evaluated the Company’s disclosure controls and procedures as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended as of a date within 90 days prior to the filing of this report. Based on this evaluation, the chief executive officer and chief financial officer concluded that the disclosure controls and procedures are effective in bringing to their attention on a timely basis information relating to the Company and its consolidated subsidiaries in connection with the Company’s filing of its quarterly report ofon Form 10-Q for the quarterly period ended September 30, 2002.March 31, 2003. There have been no significant changes in the Company’s internal controls for financial reporting or in other factors that could significantly affect these controls, including any significant deficiencies or material weaknesses of internal controls that would require corrective action. In connection with the new rules, the Company is currently in the process of further reviewing and documenting the disclosure controls and procedures, including its internal accounting controls, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business.

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 currently party to legal proceedings that have been reserved for, are covered by insurance, or that, if determined adversely to the Company,us individually or in the aggregate, would not have a material affect on the Company’s results of operations.

As reportedEngineered Carbons, Inc. filed a claim in the Company’s Form 10-Q for the quarterly periods ended March 31, 2002 and June 30, 2002 claims were filed2000 against the Company in the 60th60th District Court of Jefferson County, Texas, in May, 1999 and in the 14th District Court of Parish of Calcasieu, Louisiana in December, 1998. Both claims involve allegedalleging failure of contractual performance purportedly caused by faulty design. If the CompanyThe claim is found to have any liability, it believes that such liability would be covered by itsthe Company’s errors and omissions insurance, except forinsurance. The Company has further reserved $100,000, the amount of its deductible which was accrued in a prior period. Both of these cases remainunder such insurance. This litigation remains pending and is in the discovery phase. Engineered Carbons has yet to specify the relief that it is seeking in the litigation.

The Company believesrecently resolved a prior claim filed in 2000 by Arch Chemicals, Inc. in the 14th District Court of the Parish of Calcasieu, Louisiana, alleging failure of contractual performance purportedly by faulty design. On April 26, 2003 a jury found that these lawsuits are without meritboth Arch and plansthe Company were concurrently negligent and required that the Company pay $17,740 to vigorously defend itself inArch, including interest. The jury verdict is subject to appeal by both lawsuits.the Company and Arch.

Item 2.Changes in Securities and Use of Proceeds

None.

Item 3.Defaults Upon Senior Securities

None.

None.

Item 4.Submission of Matters to a Vote of Security Holders

None.

Item 5.Other Information

None.

Item 6.Exhibits and Reports on Form 8-K

a. Form 8-K

During the quarter ended September 30, 2002 the Company did not file a report on Form 8-K.
b.    Exhibits

3.16

10.70

  Restated Articles of Incorporation of ENGlobal Corporation

Lease Agreement between PEI Investments and Petrocon Engineering, dated August 8, 2002July 1, 2002.

10.66

10.71

  Lease Agreement between Petrocon Engineering, Inc. and Mickey Phelan B Land L. P. dated July 25, 2002

Copyright registration for PETRODOCS software.

10.67

99.9

  Second Amendment

Certification Pursuant to Second Amended and Restated Loan and Security Agreement between IDS Engineering and Subsidiaries and Fleet Capital Corporation dated July 31,Section 906 of the Sarbanes-Oxley Act for 2002 for the First Quarter 2003.

10.68

99.10

  Amendment

Certification Pursuant to Intercreditor Agreement between Fleet Capital Corporation, Equus II Corporation and ENGlobal Corporation dated July 31,Section 302 of the Sarbanes-Oxley Act for 2002

10.69Fifth Amendment of Lease Agreement between IDS and C.C. Business Park Ltd. dated May 23, 2002. for the First Quarter 2003.

b. Form 8-K

None.

c.    SignatureSIGNATURE

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.

ENGLOBAL CORPORATION
Dated: November 14, 2002
By:    /s/     ROBERT W. RAIFORD

Robert W. Raiford, Chief Financial Officer, Treasurer

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I,Michael L. Burrow, certify that:
1.I have reviewed this quarterly report on Form 10-Q of ENGlobal Corporation;
2.Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of ENGlobal as of, and for, the periods presented in this report;
4.EnGlobal’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures and internal controls and procedures for financial reporting (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

·ENGlobal Corporation

Dated: May 13, 2003

  Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including in consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
·

By:

 Evaluated the effectiveness of the registrant’s disclosure controls and procedures and internal controls and procedures for financial reporting as of a date within 90 days prior to the filing date of this quarterly report September 30, 2002 (the “Evaluation Date”); and
·
Presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.
5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of ENGlobal Corporation’s board of directors:
·
All significant deficiencies in the design or operation of internal controls which could adversely affect ENGlobal’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weakness in internal controls; and
·
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.ENGlobal’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/S/     MICHAEL L. BURROW

/s/ Robert W. Raiford


Michael L. Burrow, Chief Executive Officer

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I,Robert W. Raiford, certify that:
1.I have reviewed this quarterly report on Form 10-Q of ENGlobal Corporation;
2.Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of ENGlobal as of, and for, the periods presented in this report;
4.EnGlobal’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures and internal controls and procedures for financial reporting (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
·
Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including in consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
·
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and internal controls and procedures for financial reporting as of a date within 90 days prior to the filing date of this quarterly report September 30, 2002 (the “Evaluation Date”); and
·
Presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.
5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of ENGlobal Corporation’s board of directors:
·
All significant deficiencies in the design or operation of internal controls which could adversely affect ENGlobal’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weakness in internal controls; and
·
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.ENGlobal’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/S/    ROBERT W. RAIFORD

RobertW. Raiford, Chief Financial Officer and Treasurer

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the filing of the Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2002 by ENGlobal Corporation, each of the undersigned hereby certifies that:
1.The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Registrant.
/S/    MICHAEL L. BURROW

Michael L. Burrow
Chairman and Chief Executive Officer
/S/    ROBERT W. RAIFORD

Robert W. Raiford
Treasurer and Chief Financial Officer

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