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 | ||
(Address of Principal Executive Offices) | 77073-6033 (Zip Code) |
(281) 821-3200
(Registrant’s telephone number, including area code)
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.
$0.001 Par Value Common Stock | 22,861,199 shares |
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2002MARCH 31, 2003
Page Number | ||||
Part I. | Financial Information | |||
Item 1. | Financial Statements | |||
1 | ||||
2 | ||||
3 | ||||
4 | ||||
Item 2. | 8 | |||
Item 3. | 11 | |||
Item 4. | 11 | |||
Part II. | Other Information | |||
Item 1. | 11 | |||
Item 2. | Changes in Securities and Use of Proceeds | 12 | ||
Item 3. | 12 | |||
Item 4. | 12 | |||
Item 5. | 12 | |||
Item 6. | 12 | |||
13 |
i
Part I. Financial Information
Item 1.Financial Statements
ENGLOBAL CORPORATIONENGlobal Corporation
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
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
(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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS1. 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. 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.
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
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.
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.
(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 | ||||
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).
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).
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 |
ENGlobal Corporation
ENGLOBAL CORPORATIONNotes To Condensed Consolidated Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS6. 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 | ) | |||
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.
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.
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
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 |
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 |
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.
Overview
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.
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.
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.
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.
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%.
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.
Liquidity and Capital Resources
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.
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.
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.
The Company completed reductions in force in Tulsa and Baton Rouge during the second and third quarters of 2002.
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.
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.
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.
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.
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.
Item |
Our financial instruments include cash and Qualitative Disclosures About Market Risk
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.
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.
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
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.
None.
None.
None.
a. Form 8-K
10.70 | Lease Agreement between PEI Investments and Petrocon Engineering, dated | |
10.71 | Copyright registration for PETRODOCS software. | |
99.9 | Certification Pursuant to | |
99.10 | Certification Pursuant to | |
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.
| ||||
Dated: May 13, 2003 |
By: |
/s/ Robert W. Raiford
W. Raiford, Chief Financial Officer and Treasurer |
13