-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VUrCKx6jDrGoxowna7oTbkqiMyjUBYeLzWlVkpt7OROtqDMO4QP0I27CJILBr9FK 7EQw8HkipR6jw2eo8u0XLA== 0000899243-02-002227.txt : 20020812 0000899243-02-002227.hdr.sgml : 20020812 20020812163053 ACCESSION NUMBER: 0000899243-02-002227 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENGLOBAL CORP CENTRAL INDEX KEY: 0000933738 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 880322261 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14217 FILM NUMBER: 02727132 BUSINESS ADDRESS: STREET 1: 600 CENTURY PLZ STREET 2: BLDG 140 CITY: HOUSTON STATE: TX ZIP: 77073-6033 BUSINESS PHONE: 2818213200 MAIL ADDRESS: STREET 1: 600 CENTURY PLAZA DR STREET 2: BLDG 140 CITY: HOUSTON STATE: TX ZIP: 77073-6033 FORMER COMPANY: FORMER CONFORMED NAME: INDUSTRIAL DATA SYSTEMS CORP DATE OF NAME CHANGE: 19970123 10-Q 1 d10q.txt FORM 10-Q 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 June 30, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 001-14217 ENGLOBAL CORPORATION (Exact name of registrant as specified in its charter) Nevada (State or, other Jurisdiction 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) (Zip Code) (281) 821-3200 (Registrant's telephone number, including area code) Industrial Data Systems Corporation (Former name, former address, and former fiscal year, if changed since last report) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the close of business of June 30, 2002. $0.001 Par Value Preferred Stock 2,588,000 shares $0.001 Par Value Common Stock 22,861,199 shares QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2002 TABLE OF CONTENTS
Page Number ------ Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets at June 30, 2002 and December 31, 2001 1 Condensed Consolidated Statements of Income for the Three Months ended June 30, 2002 and 2001 and for the Six Months ended June 30, 2002 and 2001 2 Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2002 and 2001 3 Notes to Condensed Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk 13 Part II. Other Information Item 1. Legal Proceedings 14 Item 2. Changes in Securities 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 Signature 16
i Part I. Financial Information Item 1. Financial Statements ENGlobal Corporation Condensed Consolidated Balance Sheets
June 30, 2002 December 31, 2001 ------------- ----------------- (unaudited) ASSETS CURRENT ASSETS: Cash $ 68,969 $ 1,244,907 Accounts receivable - trade, less allowance for doubtful accounts of approximately $287,000 for 2002 and $271,000 for 2001 14,307,117 14,908,069 Inventory 565,299 730,507 Cost and estimated earnings in excess of billings on uncompleted contracts 1,276,673 691,048 Prepaid and other 329,518 740,670 ----------- ----------- Total current assets 16,547,576 18,315,201 PROPERTY AND EQUIPMENT, net 5,135,955 5,123,115 OTHER ASSETS 329,099 333,567 GOODWILL 14,521,406 14,513,806 ----------- ----------- Total assets $36,534,036 $38,285,689 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $8,963,645 $9,076,520 Billings and estimated earnings in excess of cost on uncompleted contracts 713,807 777,712 Current portion long-term debt 904,156 1,357,228 Current portion capital lease payable 52,000 48,058 Notes payable 2,528 398,974 Preferred dividends payable 17,252 - Income taxes payable 467,030 - ----------- ----------- Total current liabilities 11,120,418 11,658,492 Long-term debt, net of current portion 10,190,091 12,131,582 Capital lease payable, net of current portion 129,854 149,665 ----------- ----------- Total liabilities 21,440,363 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 3,147,340 2,487,617 ----------- ----------- Total Stockholders' equity 15,093,673 14,345,950 ----------- ----------- Total liabilities and Stockholders' equity $ 36,534,036 $38,285,689 ============ ===========
See accompanying notes to interim condensed consolidated financial statements. 1 ENGlobal Corporation Condensed Consolidated Statements of Income (Unaudited)
For The Three Months Ended For The Six Months Ended June 30, June 30, 2002 2001 2002 2001 ------------ ---------- ----------- ----------- OPERATING REVENUES $22,814,394 $5,149,490 $43,517,120 $11,103,396 OPERATING EXPENSES Direct costs 18,862,197 3,715,135 36,340,803 8,342,236 Selling, general and administrative 2,704,322 866,269 5,148,549 1,621,166 Depreciation and amortization 187,919 66,603 408,309 99,196 ----------- ----------- ----------- ----------- Total operating expenses 21,754,438 4,648,007 41,897,661 10,062,598 ----------- ----------- ----------- ----------- Operating income 1,059,956 501,483 1,619,459 1,040,798 OTHER INCOME (EXPENSE) Other income 20,789 18,123 137,862 32,754 Interest income (expense) (201,264) (21,823) (434,605) (39,050) ----------- ----------- ----------- ----------- Total other income (expense) (180,475) (3,700) (296,743) (6,296) ----------- ----------- ----------- ----------- INCOME BEFORE PROVISION FOR INCOME TAXES 879,481 497,783 1,322,716 1,034,502 PROVISION FOR INCOME TAXES 380,228 205,000 557,522 403,500 ----------- ----------- ----------- ----------- NET INCOME 499,253 292,783 765,194 631,002 PREFERRED STOCK DIVIDENDS 50,000 - 105,472 - ----------- ----------- ----------- ----------- EARNINGS AVAILABLE TO COMMON STOCKHOLDERS $ 449,253 $ 292,783 $ 659,722 $ 631,002 =========== =========== =========== =========== BASIC AND DILUTED EARNINGS PER COMMON SHARE $ 0.02 $ 0.02 $ 0.03 $ 0.05 =========== =========== =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 22,861,199 12,964,918 22,861,199 12,964,918 =========== =========== =========== ===========
See accompanying notes to interim condensed consolidated financial statements. 2 ENGlobal Corporation Condensed Consoliated Statement of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2002 2001 -------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 765,194 $ 631,002 Adjustment for non-cash items 391,057 70,655 Changes in working capital, net 775,873 (385,805) ----------- --------- Net cash provided by operating activities 1,932,124 315,852 CASH FLOWS FROM INVESTING ACTIVITIES: Property and equipment acquired (193,858) (202,263) Proceeds from sale of property 42,523 - ----------- --------- Net cash used by investing activities (151,335) (202,263) ----------- --------- CASH FLOW FROM FINANCING ACTIVITIES: Line of credit borrowings (repayments) (1,599,651) - Short-term note (repayments) (396,445) (15,238) Lease borrowings (repayments) (26,355) - Long-term borrowings (repayments) (934,276) (18,038) ----------- --------- Net cash (used) by financing activities (2,956,727) (33,276) ----------- --------- NET CHANGE IN CASH (1,175,938) 80,313 CASH, at beginning of period 1,244,907 242,592 ----------- --------- CASH, at end of period $ 68,969 $ 322,905 =========== ========= SUPPLEMENTAL DISCLOSURES: Interest paid $ 264,627 $ 21,823 Income taxes paid 102,536 235,000 NON-CASH: Lease to finance equipment - 43,700 Accrual of preferred stock dividend 105,472 -
See accompanying notes to interim condensed consolidated financial statements. 3 ENGLOBAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 six-month periods ended June 30, 2002 and 2001. 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, 2001 and 2000, 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 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 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 Merger, ENGlobal entered into a financing arrangement with Fleet whereby all of Petrocon's outstanding debt (the "Credit Facility" comprised of a line of credit and a term loan), was refinanced. The new loan agreement positions the Fleet debt as senior to all other debt and includes a line of credit limited to $15,000,000, subject to borrowing base restrictions and a term loan in the amount of $500,000. The Credit Facility is collateralized by substantially all the assets of the Company. At June 30, 2002, $7,295,000 was outstanding on the line of credit and $165,000 was outstanding on the term loan. The interest rate on the line of credit is one-quarter of one percent plus prime (5.0 percent at June 30, 2002), and the commitment fee on the unused line of credit is 0.375 percent. The interest rate on the term loan is one-half of one percent plus prime (5.25 percent at June 30, 2002). Monthly principal payments on the term loan plus interest commenced January 1, 2002 and continue until maturity. The remaining borrowings available under the line of credit as of June 30, 2002, were $1,123,000 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 4 ENGLOBAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS replaced a revolving credit note that was collateralized with accounts receivable and inventory of the Company. An amendment to the Credit Facility was agreed upon between Fleet and the Company on July 31, 2002 whereby 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. Had the amendment been in place at June 30, 2002, the remaining borrowings available under the line of credit would have increased by $1,676,000. As part of the Merger consideration, Petrocon's pre-Merger debt with Equus was reorganized, restructured and reduced. Equus agreed to exchange notes worth $9,700,000 including accrued interest for $2,500,000 in preferred stock, a payment of $2,000,000, a 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 repaid quarterly beginning August 15, 2002. This note is subordinated to the Company's loan with Fleet.
(in thousands) June 30, December 31, 2002 2001 ------- ------------ Fleet Credit Facility- Line of credit, interest at prime plus 0.25% (5.00% at June 30, 2002), maturing in 2005 $ 7,295 8,894 Term loan, interest at prime plus 0.50% (5.25% at June 30, 2002), due in monthly installments of $60,000, maturing through 2005 165 523 Equus- Note payable, interest at 9.5%, principal due quarterly in installments of $110,000, maturing through 2005 3,000 3,000 Vendors- Notes payable, interest at 8%, due monthly in decreasing amounts starting at $115,000, maturing through 2004 634 1,072 ------- ------- 11,094 13,489 Less- current maturities (904) (1,357) ------- ------- Long-term debt, net of current portion $10,190 $12,132 ======= =======
Current notes payable include a note which finances commercial insurance on a short-term basis, with a balance of $3,000 and $399,000 as of June 30, 2002 and December 31, 2001, respectively. 5 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 shareholder, Equus II Incorporated. 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 for each share of outstanding Series A Preferred Stock. On May 31, 2002, the Company issued 88,000 shares of Series A Preferred Stock as a stock dividend plus $219 for fractional shares. 6. ALLOCATION OF 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 Merger 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 $14,521,000. 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. An intense marketing effort focused on those customers who are identified as most likely to buy the additional services offered through the combined company has commenced. 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 be completed by the end of the second quarter of 2002. The Company has completed such valuation and no impairment has been incurred. Goodwill for the Company for the six months ended June 30, 2001 was $4,000. Net income for the second quarter of 2001 and the six months ended June 30, 2001, adjusted to exclude goodwill amortization, would have changed to $295,000 and $635,000, respectively ($0.02 per share and $0.05 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 six months ended June 30, 2002 are estimated to be:
Three months ended June 30, Six months ended June 30, (In thousands, except per share data) 2002 2001 2002 2001 ----------------------------------------------- -------- -------- --------- -------- Net sales $22,814 $21,704 $43,517 $ 45,421 Net income from continuing operations 499 405 765 742 Net earnings per share from continuing operations - basic and diluted 0.02 0.02 0.03 0.03
6 ENGLOBAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The proforma results presented above do not include amortization of the 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 June 30, 2002 and December 31, 2001 (in thousands):
June 30, December 31, 2002 2001 -------- ----------- Costs incurred on uncompleted contracts $ 10,374 $ 7,293 Estimated earnings on uncompleted contracts 1,972 1,091 -------- -------- Earned revenues 12,346 8,384 Less billings to date (11,784) (8,431) -------- -------- Net cost and estimated earnings in excess (under) billings uncompleted contracts $ 562 $ (47) ======== ======== Costs and estimated earnings in excess of billings on uncompleted contracts $ 1,276 $ 731 Billings and estimated earnings in excess of costs on uncompleted contracts (714) (778) -------- -------- Net cost and estimated earnings in excess (under) billings uncompleted contracts $ 562 $ (47) ======== ========
7 ENGLOBAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 8. 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 June 30, 2002 and 2001, respectively, is as follows (in thousands)
Engineering Engineered Services Systems Manufacturing Corporate Total ----------- ---------- ------------- --------- ------- 2002 Net sales to external customers $18,625 $3,440 $ 749 $ - $22,814 Operating profit (loss) 1,772 323 23 (1,058) 1,060 2001 Net sales to external customers $ 3,332 $ 812 $1,005 $ - $ 5,149 Operating profit (loss) 555 64 138 (256) 501
Segment information for the six months ended June 30, 2002 and 2001, respectively, is as follows (in thousands):
Engineering Engineered Services Systems Manufacturing Corporate Total ----------- ---------- ------------- --------- ------- 2002 Net sales to external customers $36,499 $5,728 $1,290 $ - $43,517 Operating profit (loss) 3,233 497 (30) (2,081) 1,619 2001 Net sales to external customers $ 7,279 $1,858 $1,966 $ - $11,103 Operating profit (loss) 1,122 251 215 (547) 1,041
8 Item 2. Management's Discussion And Analysis And Results Of Operations Forward-Looking Statements Certain information contained in this Form 10-Q Quarterly Report, 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 On April 3, 2001, the Company entered into a non-binding letter of intent relating to a proposed Merger between a newly created subsidiary of the Company and Petrocon Engineering, Inc. The Merger was consummated on December 21, 2001 with an effective date for accounting purposes of December 31, 2001. The new Company provides a broader range of services over a larger geographic area. The Merger has resulted in some immediate expenses relating to consolidation of the operations 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 result of operations in 2002 includes the newly merged entity. On June 6, 2002 in a vote at the Annual Meeting, the stockholders overwhelmingly 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 our existing and potential customers. 9 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 percentages of sales generated by each of the operating segments.
Percentage of Revenue --------------------- For the three months ended June 30, For the six months ended June 30, Operating Segment 2002 2001 2002 2001 ----------------- ---- ---- ---- ---- Engineering services 81.6% 64.7% 83.9% 65.6% Engineered systems 15.1 15.8 13.1 16.7 Manufacturing 3.3 19.5 3.0 17.7 ----- ----- ----- ----- Total revenue 100.0% 100.0% 100.0% 100.0%
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 Total Revenue. Total revenue increased by $17,665,000 or 343% from $5,149,000 for the three months ended June 30, 2001, compared to $22,814,000 in 2002. Revenue from the engineering services segment, which comprised 81.6% of total revenue for the three months ended June 30, 2002, increased by $15,293,000 or 458%. The Petrocon companies generated revenues of $14,399,000 in the engineering services segment during the three months ended June 30, 2002. Revenue from the engineered systems segment was $3,441,000, which comprised 15.1% of total revenue for the three months ended June 30, 2002, an increase of $2,629,000 or 324% over the same period in 2001. Of this increase, $2,403,000 resulted from the Petrocon Merger. Revenue generated by the manufacturing segment for the three months ended June 30, 2002 decreased by $257,000 or 26% from the same period in 2001. Due to the acquisition of Petrocon, the manufacturing segment has become a smaller portion of total revenues, declining from 19.5% of total revenues for the three months ended June 30, 2001 to 3.3% for the three months ended June 30, 2002. The Company believes that the decline in revenues in the manufacturing segment is a result of the economic slowdown in the fourth quarter of 2001 continuing through the second quarter 2002. Gross Profit. Gross profit increased by $2,518,000 or 176% from $1,434,000 for the three months ended June 30, 2001 to $3,952,000 for the same period in 2002. The gross margin as a percentage of total revenues decreased from 27.9% for the period ended June 30, 2001 to 17.3% for the same period in 2002. The decrease in gross margin occurred in the engineering services and manufacturing segments, with the largest decrease in the engineering services segment, which had a gross margin of 16.6% for the three months ended June 30, 2002, down from a gross margin of 29.4% for the same period in 2001. This decrease in gross margins occurred due to the completion of lucrative lump-sum turnkey projects in the Houston division and the impact of lower utilization rates in the Baton Rouge and Tulsa offices. The Company felt that in the Baton Rouge area, short-term retention of core staff members was necessary to meet longer-term objectives. Lower utilization rates, particularly in the Baton Rouge and Tulsa divisions, impacted margins negatively. The Company instituted lay offs in Tulsa in the second quarter of 2002 in an attempt to ease the pressure of these lower utilization rates. The gross profit for the engineered systems segment increased from 18.3% for the period ended June 30, 2001 to 19.0% for the same period in 2002. This increase occurred due to the addition of a lucrative large lump sum project in the systems segment. 10 The manufacturing segment's gross margin generated in the period ended June 30, 2002 as compared to the same period in 2001 was $210,000 or 28.0% as compared to $306,000 or 30.5%. Other income and expenses. During the second quarter 2002, ENGlobal's interest expense increased by $197,000 from $4,000 due to the assumption of certain debt as a result of the Merger. Net income. Net income after taxes increased by $206,000 or 71% from $293,000 for the three months ended June 30, 2001 to $499,000 for the same period in 2002. Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 Total Revenue. Total revenue increased from $11,103,000 to $43,517,000 or 292% for the six months ended June 30, 2001 as compared to the same period in 2002. The largest segment, engineering services, contributed $36,500,000 or 83.9% of total revenues. The Merger with the Petrocon companies contributed $30,186,000 in revenues or 83% of the engineering services revenues during the six months ended June 30, 2002. The engineered systems segment increased revenues from $1,858,000 for the six months ended June 30, 2001 to $5,728,000 for the six months ended June 30, 2002 or a 208% increase. The impact of the Merger contributed $3,904,000 in revenues for the six months period ended June 30, 2002. The manufacturing division had revenues of $1,290,000 for the six months ended June 30, 2002 as compared to $1,967,000 for the same period last year. The decrease of $677,000 or 34% is the result of the economic downturn from the fourth quarter of 2001 continuing through the second quarter of 2002. Management feels that a slow recovery began during the second quarter and is improving. Gross Profit. Gross profit increased by $4,415,000 or 160% from $2,761,000 to $7,176,000 for the six months ended June 30, 2002 as compared to the same period last year. The gross margin as a percentage of revenues decreased from 24.9% to 16.5% for these two periods. The decrease in the gross margin in the engineering services segment from 24.8% for the six months ended June 30, 2001 to 15.6% for the six months ended June 30, 2002 is due to the completion 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 layoffs in Tulsa to ease the pressure of these lower utilization rates. The gross profit for the engineered systems segment decreased modestly from 21% to 20% for the six-month period ending June 30, 2001 and 2002. The manufacturing segment's gross profit declined from $562,000 to $346,000 with margins declining from 28.6% to 26.8% for the six months ended June 30, 2001 and 2002, respectively. Other income and expenses. During the six months ended June 30, 2002, the Company received a $110,000 settlement on its previous claim against a software provider whose product did not meet the expectations of the Company. There were no similar settlements in 2001. This increase in income was offset by the increase in interest expense from $39,000 to $435,000 from the first six months of 2001 as compared to the first six months of 2002. This increase occurred as a result of the Merger when certain debt was assumed by the Company. Net income. Net income after taxes increased from $631,000 for the six months ended June 30, 2001 to $765,000 for the six months ended June 30, 2002 or 21%. 11 Liquidity and Capital Resources Effective December 31, 2001 as part of the Merger, ENGlobal entered into a financing arrangement with Fleet whereby all of Petrocon's outstanding debt (the "Credit Facility" comprised of a line of credit and a term loan), was refinanced. The new loan agreement positions the Fleet debt as senior to all other debt and includes a line of credit limited to $15,000,000, subject to borrowing base restrictions and a term loan in the amount of $500,000. The Credit Facility is collateralized by substantially all the assets of the Company. At June 30, 2002, $7,295,000 was outstanding on the line of credit and $165,000 was outstanding on the term loan. 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. The interest rate on the term loan is one-half of one percent plus prime. Monthly principal payments on the term loan plus interest commenced January 1, 2002 and continue until maturity. The remaining borrowings available under the line of credit as of June 30, 2002 were $1,123,000 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. An amendment to the Credit Facility was agreed upon between Fleet and the Company on July 31, 2002 whereby 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. Had the amendment been in place at June 30, 2002, the remaining borrowings available under the line of credit would have increased by $1,676,000. The Company must meet all financial covenants through the maturity date of the Credit Facility. Management believes the Company will remain in compliance with all loan covenants, although no assurances can be given. As of June 30, 2002, the Company's cash position was sufficient to meet its working capital requirements. EBITDA, earnings before interest, taxes, depreciation and amortization, for the six months ended June 30, 2002 was $2,028,000. Any future decrease in demand for the Company's services or products would reduce the availability of funds through operations. The Company's working capital was $5,427,000 and $6,657,000 at June 30, 2002 and December 31, 2001, respectively. As noted above in the Result of Operations, some of the locations have experienced lower utilization rates that have impacted margins negatively. In an attempt to ease the pressure caused by lower utilization rates, the Company has instituted layoffs in Tulsa during the second quarter of 2002. As of June 30, 2002, ENGlobal had long-term debt outstanding of $11,094,000. This long-term debt includes the Credit Facility of $7,295,000 on the line of credit and $165,000 on the term loan, both of which mature on or before June 30, 2005. 12 Cash Flow Operating activities provided net cash totaling $1,932,000 and $316,000 for the six months ended June 30, 2002 and 2001, respectively. Trade receivables decreased $601,000 since December 31, 2001. Inventory decreased by $165,000 for the same period. Investing activities used cash totaling $151,000 for the six months ended June 30, 2002 and $202,000 for the same period in 2001. The Company's investing activities that used cash during the period ended June 30, 2002 were for the purchase of property and equipment. Financing activities used cash totaling $2,957,000 for the six months ended June 30, 2002, including the repayment of the line of credit and long-term debt. Financing activities used cash totaling $33,000 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. 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. 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 $14,307,000 and $14,908,000 at June 30, 2002 and December 31, 2001, respectively. The number of days' sales outstanding in trade accounts receivable was 60 days and 79 days, respectively. Item 3. Quantitative and Qualitative Disclosures About Market Risk As of June 30, 2002 and December 31, 2001, the Company did not participate in any derivative financial instruments or other financial and commodity instruments for which fair value disclosure would be required under SFAS No. 107 or SFAS No. 133. There are no investments at June 30, 2002 or December 31, 2001. Accordingly, the Company has no quantitative information concerning the market risk of participating in such investments. The Company has no market risk exposure in the areas of interest rate risk because there is no investment portfolio as of June 30, 2001. Currently the Company does not engage in foreign currency hedging activities nor is the Company exposed to currency exchange rate fluctuation. 13 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, individually or in the aggregate, would not have a material affect on the Company's results of operations. As reported in Form 10-Q for the quarterly period ended March 31, 2002 a claim filed in the 60th District Court of Jefferson County, Texas and a claim filed in the 14th District Court of Parish of Calcasieu, Louisiana, respectively, involved alleged failure of contractual performance purportedly caused by faulty design. If the Company is found to have any liability, it believes that such liability would be covered by errors and omissions insurance, except for the deductible which was accrued in a prior period. Both of these cases remain in the discovery phase. The Company believes that these lawsuits are without merit and plans to vigorously defend itself in both lawsuits. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of the Stockholders of the Company was held on June 6, 2002 at 10:00 a.m. at the corporate offices of the Company in Houston, Texas. A total of 21,438,878 shares of common stock, which is 93.78% of the shares outstanding on April 8, 2002 were represented at the meeting, either in person or by proxy. The stockholders approved three proposals, solicited by proxy. The vote tabulations follow: 1. The following directors were elected to serve until the next Annual Meeting of Stockholders and until their successors have been elected and qualified. DIRECTORS FOR AGAINST ABSTAIN --------- --- ------- ------- Michael L. Burrow, P.E. 21,331,299 0 107,579 William A. Coskey, P.E. 21,331,299 0 107,579 Hulda L. Coskey 21,331,299 0 107,579 David W. Gent, P.E. 21,329,299 0 109,579 Jimmie N. Carpenter, P.E. 20,822,248 0 616,630 David C. Roussel 21,329,099 0 109,779 Randall B. Hale 21,331,299 0 107,579 2. Ratification of the appointment of Hein + Associates LLP as the Company's independent auditors. FOR AGAINST ABSTAIN --- ------- ------- 21,431,234 4,060 3,584 14 3. Ratification of the Amendment to the Articles of Incorporation to change the name of Industrial Data Systems Corporation to ENGlobal Corporation. FOR AGAINST ABSTAIN --- ------- ------- 21,385,286 48,655 4,937 These were all the matters submitted to the Stockholders at the Annual Meeting. Item 5. Other Information During the second quarter 2002, the Company combined the business development efforts of its various subsidiaries into a corporate level Business Development department through an officer level position reporting directly to the Chief Executive Officer. The new Senior Vice President will be responsible for the coordination of the sales and marketing strategies among the Company's various operations. In an effort to standardize and streamline the business development and marketing efforts, a new marketing plan has already been developed and implemented which will directly and closely monitor the results of the business development team. Item 6. Exhibits and Reports on Form 8-K a. Form 8-K During the quarter ended June 30, 2002 the Company did not file a report on Form 8-K. b. Exhibits 3.15 Amendment to Articles of Incorporation of Industrial Data Systems Corporation dated June 6, 2002 changing the name of the corporation to ENGlobal Corporation 10.63 Second Amended and Restated Lease Agreement between Corporate Property Associates 4 and Petrocon Engineering, Inc. for Beaumont office space dated February 28, 2002 10.64 Guaranty and Suretyship Agreement between Industrial Data Systems Corporation and Corporate Property Associates 4 dated April 26, 2002 10.65 ENGlobal Corporation Incentive Bonus Plan dated June 12, 2002 99.4 Charter of the Compensation Committee adopted June 6, 2002 99.5 Audit Committee Charter adopted June 6, 2002 99.6 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated August 8, 2002 15 c. Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ENGlobal CORPORATION Dated: August 8, 2002 By: /s/ Robert W. Raiford ----------------------------------- Robert W. Raiford, Chief Financial Officer, Treasurer 16 EX-3.15 3 dex315.txt AMENDMENT TO ARTICLES OF INCORPORATION EXHIBIT 3.15 CERTIFICATE OF AMENDMENT TO ARTICLES OF INCORPORATION OF INDUSTRIAL DATA SYSTEMS CORPORATION A Nevada Corporation 1. The name of the corporation (the "Corporation") is Industrial Data Systems Corporation. 2. The Articles of Incorporation of the Corporation are hereby amended by striking out Article First thereof and by substituting in lieu thereof the following new Article First: "FIRST. The name of the corporation is: ENGlobal Corporation" 3. The vote by which the stockholders holding shares in the corporation entitling them to exercise at least a majority of the voting power, or such greater proportion of the voting power as may be required in the case of a vote by classes or series, or as may be required by the provisions of the articles of incorporation have voted in favor of the amendment is: 21,385,286. EXECUTED this 6th day of June, 2002. /s/ Michael L. Burrow ------------------------------------------- Michael L. Burrow, Chief Executive Officer /s/ William A. Coskey ------------------------------------------- William A. Coskey, President /s/ Hulda L. Coskey ------------------------------------------- Hulda L. Coskey, Secretary 1 EX-10.63 4 dex1063.txt SECOND AMENDED AND RESTATED LEASE AGREEMENT EXHIBIT 10.63 SECOND AMENDED AND RESTATED LEASE AGREEMENT This Second Amended and Restated Lease Agreement (this "Lease") made and entered into as of this _28th day of February, 2002, effective as of January 1, 2002, by and between CORPORATE PROPERTY ASSOCIATES 4, a California limited partnership, with an address c/o W. P. Carey & Co. LLC, 50 Rockefeller Plaza, New York, New York 10020, herein called "Landlord", and PETROCON ENGINEERING, INC., a Texas corporation, with an address of 3105 Executive Boulevard, Beaumont, Texas 77705-1044 herein called "Tenant". In consideration of the rents and provisions herein stipulated to be paid and performed, Landlord and Tenant hereby covenant and agree as follows: PREMISES 1.1 Landlord does hereby demise and lease to Tenant, and Tenant does hereby lease from Landlord premises consisting of approximately 34,300 square feet as shown on Exhibit "A" attached hereto and made a part hereof (the "Premises") in a certain building located at 3105 Executive Blvd., Beaumont, Texas (the "Property"), as more specifically described in Exhibit "B". 1.2 Landlord is lawfully seized of the Premises and, subject to the terms and provisions hereof, Tenant will have peaceful and undisputed possession of the Premises during the term of this Lease and any renewal or extension thereof. The Premises are demised and let subject to (i) the existing state of title of the Property, (ii) any state of facts which an accurate survey or physical inspection of the Premises might show, (iii) all laws, statutes, codes, ordinances, rules and regulations of any and all applicable governmental and quasi-governmental authorities, agencies, boards or bureaus, including any existing violation of any thereof, and (iv) the condition of the Premises as of the Commencement Date, without representation or warranty by Landlord. 1.3 Landlord leases and will lease and Tenant takes and will take the Premises "as is". Tenant acknowledges that Landlord has not made and will not make, nor shall Landlord be deemed to have made, any warranty or representation, express or implied, with respect to any of the Premises. Tenant acknowledges that the Premises is of its selection and to its specifications and that the Premises has been inspected by Tenant and is satisfactory to it. In the event of any defect or deficiency in any of the Premises of any nature, whether latent or patent, Landlord shall not have any responsibility or liability with respect thereto or for any incidental or consequential damages (including strict liability in tort). Tenant agrees to accept the condition of the Premises in an "as is" condition as of the Commencement Date with no obligation of Landlord to make any repairs or improvements, subject to Landlord's obligation to provide the Tenant Allowance (as hereinafter defined). The provisions of this Section have been negotiated, and are intended to be a complete exclusion and negation of any warranties by Landlord, express or implied, with respect to any of the Premises, arising pursuant to the Uniform Commercial Code or any other law now or hereafter in effect or arising otherwise. TERM OF LEASE 2.1 The initial term of this Lease shall commence on January 1, 2002 (the "Commencement Date") and shall expire on December 31, 2011, unless extended pursuant to the provisions of Section 2.2 hereof or sooner terminated in accordance with the terms and provisions of this Lease (the "Expiration Date"). The period of time between the Commencement Date and the Expiration Date shall be hereinafter called the "Initial Lease Term". -1- 2.2 Tenant shall have and is given an option to renew this Lease, at Tenant's election, for a period of three (3) years (the "Extended Term"), subject to the terms and conditions of this Lease, provided Tenant is not in default in any of the terms of this Lease. If Tenant wishes to exercise its option to renew this Lease, Tenant shall notify Landlord in writing of its election to exercise such option not less than one hundred eighty (180) days before the expiration of the Initial Lease Term. If the Initial Lease Term is extended as aforesaid, all the same terms, provisions and conditions set forth in this Lease shall apply, except that annual rental during the Extended Term shall be as set forth in Section 3.2. If Tenant fails to exercise its option to renew this Lease beyond the Initial Term or an Event of Default occurs, then Landlord shall have the right during the term then in effect and, in any event, Landlord shall have the right during the last year of the term, to (i) advertise the availability of the Premises, or any portion thereof, for the sale or reletting and to post upon the Premises signs indicating such availability, and (ii) show the Premises, or any portion thereof, to prospective purchasers or tenants or their agents at such reasonable times as Landlord may select, upon prior notice to Tenant. 2.3 The parties acknowledge that Tenant is in possession of the Premises as of the Commencement Date pursuant to the terms and provisions of that certain Amended and Restated Lease Agreement dated as of October 29, 1992, as amended by a First Amendment to Amended and Restated Lease Agreement, dated as of February 16, 1994, and by a Second Amendment to Amended and Restated Lease Agreement, dated as of January 24, 1997, and by a Third Amendment to Amended and Restated Lease Agreement, dated as of April 24, 1997, and by a Fourth Amendment to Amended and Restated Lease Agreement, dated as of August 13, 1997, and by a Fifth Amendment to Amended and Restated Lease Agreement, dated as of October 14, 1997, and by a Sixth Amendment to Amended and Restated Lease Agreement, dated as of December 1, 1997, and by a Seventh Amendment to Amended and Restated Lease Agreement, dated as of January 1, 1999, and by an Eighth Amendment to Amended and Restated Lease Agreement, dated as of July 1, 1999 (as so amended, the "Original Lease"). The parties agree that this Lease shall amend, restate, replace and supersede the original Lease; provided, however, that Tenant shall not be released from any obligations or liabilities under the terms and provisions of the Original Lease. The parties agree that all rent due under the Original Lease has been paid as of the Commencement Date but real property taxes due under the original Lease for 2001 still remain outstanding as of the Commencement Date. RENTAL 3.1 As annual rental for the Initial Lease Term, Tenant shall pay to Landlord the sums for the periods indicated below Premises Period Annual Amount -------- ------ ------------- January 1, 2002 - December 31, 2003 $279,888 January 1, 2004 - December 31, 2005 $288,120 January 1, 2006 - December 31, 2007 $296,352 January 1, 2008 - December 31, 2009 $304,584 January 1, 2010 - December 31, 2011 $316,932 Such rent to be payable in equal monthly installments. All such monthly installments shall be due and payable in advance and without -2- notice, on or before the first day of each and every month during the Initial Lease Term. 3.2 During the Extended Term, Tenant shall pay to Landlord annual rent equal to the Fair Market Rental Value (as hereinafter defined). As used herein, "Fair Market Rental Value" shall mean the fair market rental value of the Premises as determined in accordance with the following procedure: (i) Landlord and Tenant shall endeavor to agree upon such Fair Market Rental Value on the date which is six (6) months prior to the expiration of the Initial Lease Term ("Applicable Date"). Upon reaching such agreement, the parties shall execute an agreement setting forth the amount of such Fair Market Rental Value. (ii) If the parties shall not have signed such agreement on or before the Applicable Date, Tenant shall within thirty (30) days after the Applicable Date select an appraiser and notify Landlord in writing of the name, address and qualifications of such appraiser. Within thirty (30) days following Landlord's receipt of Tenant's notice of the appraiser selected by Tenant, Landlord shall select an appraiser and notify Tenant of the name, address and qualifications of such appraiser. Such two appraisers shall endeavor to agree upon Fair Market Rental Value based on a written appraisal made by each of them (and given to Landlord by Tenant). If such two appraisers shall agree upon a Fair Market Rental Value, the amount of such Fair Market Rental value as so agreed shall be binding and conclusive upon Landlord and Tenant. (iii) If such two appraisers shall be unable to agree upon a Fair Market Rental Value within thirty (30) days after the selection of an appraiser by Landlord, then such appraisers shall advise Landlord and Tenant of their respective determination of Fair Market Rental Value and shall select a third appraiser to make the determination of Fair Market Rental Value. The selection of the third appraiser shall be binding and conclusive upon Landlord and Tenant. (iv) If such two appraisers shall be unable to agree upon the designation of a third appraiser within ten (10) days after the expiration of the thirty (30) day period referred to in clause (iii) above, or if such third appraiser does not make a determination of Fair Market Rental value within thirty (30) days after his selection, then such third appraiser or a substituted third appraiser, as applicable, shall, at the request of either party hereto (with respect to the other party), be appointed by the President or Chairman of the American Arbitration Association in New York, New York. The determination of Fair Market Rental Value made by the third appraiser appointed pursuant hereto shall be made within thirty (30) days after such appointment. (v) If a third appraiser is selected, Fair Market Rental Value shall be the average of the determination of Fair Market Rental Value made by all three appraisers. Such average shall be binding and conclusive upon Landlord and Tenant. (vi) In determining Fair Market Rental Value, the appraisers shall determine with respect to the Premises the amount that a willing tenant would pay, and a willing landlord of a comparable space located within a 10 mile radius of the Property would accept at arms' length, to rent such space of comparable size and quality as the Premises taking into account the condition of the Premises, the term of this Lease and such other factors that real estate appraisers would consider. (vii) All appraisers selected or appointed pursuant to this Section 3.2 shall (A) be independent qualified MAI appraisers -3- B) utilize the definition of Fair Market Rental Value hereinabove set forth above, and (C) be registered in the State of Texas if the State of Texas provides for or requires such registration. (viii) The cost of the procedure described in this Section 3.2 above shall be split equally between Landlord and Tenant. Such rent to be payable in equal monthly installments. All such monthly installments shall be due and payable in advance, and without notice on or before the first day of each and every month during the Extended Term. 3.3 In addition to the rental provided for in Sections 3.1 and 3.2 above, Tenant shall pay as additional rental Tenant's Proportionate Share (as hereinafter defined) of the amount necessary to compensate Landlord for any increases in real property taxes, municipal, county, and state improvement liens or betterment assessments levied or assessed against the Property over the "Base Year" (as hereinafter defined). As used herein, "Tenant's Proportionate Share" shall be a fraction, the numerator of which shall be the square footage of the Premises and the denominator of which shall be the leasable square footage of the Property. In determining any such increase for the purposes of this Section 3.3, the "Base Year" will be the calendar year 2000 ($35,618.41). As used in this calculation, "taxes" will include all real property taxes, rent taxes, ad valorem taxes or charges, water and sewer charges, municipal, county and state improvement liens or betterment assessments levied or assessed against the Property currently designated as Lot 9 and Lot 10, Block 4 of Executive Business Plaza, Addition to the City of Beaumont, Jefferson County, Texas and any improvements located thereon. Tenant shall pay to Landlord additional rent due under this Section 3.3 when the taxes become fixed and within thirty (30) days after demand therefor by Landlord. 3.4 In addition to the rental provided for hereinabove, Tenant shall pay to Landlord an amount equal to Tenant's Proportionate Share multiplied by the amount by which the Operating Expenses (as hereinafter defined) during any calendar year of the Initial Lease Term and Extended Term thereof exceeds the Operating Expenses during the Base Year(as hereinafter defined) (the "Excess Operating Expenses"). In determining any such increase for the purposes of this Section 3.4, the "Base Year" will be the calendar year 2000. As used herein, "Operating Expenses" are intended to be inclusive of all expenses, costs and charges of maintaining and operating the Property and the Premises and all improvements thereon including, without limitation, the parking lot, rights of ingress and egress, loading docks, platforms, and exterior ground surfaces, and all other costs, expenses or charges which Landlord shall pay or become obligated to pay because of or in connection with the ownership and operation of the Premises and the Property and shall include, without limitation, the following: 1. supervising, managing, policing, inspection and security protection; 2. lighting, cleaning, landscape maintenance and removing rubbish, dirt and debris; 3. wages, salaries, bonuses and other compensation, labor, payroll taxes, materials and supplies; electricity, gas, oil, and other utilities used in connection with the Property and not otherwise charged directly to tenants of the Property or separately metered to the Premises; 4. repairing, replacing and remarking paved and unpaved surfaces, curbs, directional and other signs, landscaping, lighting facilities, -4- drainage, heating, ventilating and air-conditioning, plumbing and mechanical systems and other similar items at the Property including the Common Areas; 5. all premiums on compensation, casualty, public liability, property damage and other insurance on the Premises, the Property (including the Common Areas), any improvements, parking or exterior facilities; 6. rental costs and/or purchase of all tools, machinery and equipment used in connection with the above; 7. capital expenses incurred to comply with any applicable laws, statutes, ordinances, codes, rules and regulations insurance requirements or to save or reduce operating expenses; 8. use and/or occupancy charges, surcharges, excise, transaction, gross receipts, rent, sales or privilege taxes (except income, transfer, estate and inheritance taxes) or any other costs levied, assessed or imposed by, or at the direction of, or resulting from statutes or regulations or interpretations thereof promulgated by any authority in connection with use or occupancy of the Premises; 9. costs of maintaining and repairing all security systems and all plumbing and mechanical systems; and 10. costs incurred for accountants, attorneys and other experts or other consultants to assist such professionals in making the computations required hereunder and rendering professional services. Operating Expenses shall exclude the major repairs completed by Landlord in 2001 such as window replacement, building joint sealing and waterproofing the east wall. In determining Operating Expenses for any calendar year or portion thereof during which less than 95% of the Property shall have been occupied by tenants for more than 30 days, operating Expenses shall be deemed for such year to be equal to the like expenses which would normally be expected to be incurred had such occupancy of the Property been 95% throughout such year, as reasonably determined by Landlord. Tenant shall pay to Landlord Tenant's Proportionate Share of the Excess Operating Expenses within ten (10) days following demand thereof by Landlord. Any change in Tenant's Proportionate Share resulting from changes in the amount of space leased by Tenant shall be effective as of the first day of the month following such change. 3.5 Notwithstanding anything herein to the contrary, Tenant shall pay prior to delinquency, or if billed directly to Landlord or any third party within ten (10) days following demand thereof by Landlord, all personal property taxes and assessments and any other governmental charges, including surcharges or regulatory fees levied or assessed against the Property, or any fees levied or assessed upon Landlord as a result of the nature of Tenant's business operations, all sales taxes, use taxes, occupancy taxes, business privilege taxes, rent or similar taxes, (now or hereafter in effect) imposed on any part of the rent or additional rent, and all taxes assessed against and levied upon furnishings, equipment and all other personal property of Tenant contained in the Leased Premises, and when possible Tenant shall cause said fixtures, furnishings, equipment and other personal property to be assessed and billed separately from the real property demised to Tenant. 3.6 In addition to rent, Tenant shall pay to Landlord an amount equal to three and one-half percent (3.5%) of the amount of any unpaid installment of rent or portion thereof due hereunder after the date same is due and not paid. If any portion of rent, additional rent or other sums due hereunder shall be due and unpaid for more than five (5) days, it shall bear interest at a rate equal to three percent (3%) -5- per annum greater than the highest prime rate of interest as published in the Wall Street Journal, eastern edition from time to time (the "Default Rate"), as the same may change from time to time, from the due date until the date of payment thereof by Tenant; provided, however, that nothing contained herein or elsewhere in this Lease shall be construed or implemented in such a manner as to allow Landlord to charge or receive interest in excess of the maximum legal rate then allowed by law. Landlord and Tenant agree that memos written on rental checks or any other payment forms delivered to Tenant, or any letter or statement accompanying such check or form, do not and shall not constitute satisfaction of any current or outstanding debt of Tenant pursuant to this Lease, and, provided further that any such memo shall not preclude Landlord from recovering any balance of any sum or sums due under this Lease. Any sums payable by Tenant hereunder shall be paid to Landlord within ten (10) days following demand thereof by Landlord. 3.7 Provided Tenant is not then in default under this Lease, Tenant shall have the right to terminate this Lease on December 31, 2008, December 31, 2009, or December 31, 2010 (as applicable, the "Early Termination Date") by giving written notice of its election to do so to Landlord at least six (6) months prior to the desired Early Termination Date; provided, however, that Tenant shall pay to Landlord, together with its notice to exercise the right to terminate this Lease as set forth in this Section 3.7, an amount (to be considered liquidated damages and not a penalty) equal to (i) sixty percent (60%) of the actual costs of the Tenant Improvements (as hereinafter defined) reimbursed by Landlord not to exceed the Tenant Allowance (as hereinafter defined) if this Lease is terminated on December 31, 2008, (ii) forty percent (40%) of the actual costs of the Tenant Improvements reimbursed by Landlord not to exceed the Tenant Allowance if this Lease is terminated on December 31, 2009, or (iii) twenty percent (20%) of the actual costs of the Tenant Improvements reimbursed by Landlord not to exceed the Tenant Allowance if this Lease is terminated on December 31, 2010. If Tenant exercises its option to terminate in accordance with the provisions herein, nothing contained herein or elsewhere in this Lease shall be terminated on the applicable Early Termination Date without further liability of either party, except for such liability of Tenant hereunder as has accrued on or prior to the Early Termination Date (or is to be charged to Tenant after termination as provided in this Lease) and such obligations or liabilities as would otherwise be applicable upon expiration of the then current term of this Lease. 3.8 All rent and other sums payable hereunder to Landlord shall be paid to Landlord at the address set forth above, or at such other place as the Landlord may from time to time designate in writing. CONDITION AND USE OF PREMISES 4.1 The Premises shall be used by Tenant for office and warehouse space, and for no other purpose or purposes without the express written consent of Landlord which consent will not be unreasonably withheld. Tenant shall not allow or permit the use or occupancy of the Premises or any portion thereof for any unlawful purpose or in any manner which would or might constitute a public or private nuisance or waste or interfere with the rights of other tenants of the Property; provided, however, that Tenant may handle and store at the Premises non-hazardous goods and materials in compliance with all applicable laws. Tenant shall comply with all laws, ordinances, rules, and regulations of any governmental and municipal agencies having jurisdiction over the Premises and/or business conducted thereon by Tenant and indemnify, defend and hold -6- Landlord harmless from all consequences from Tenant's failure to do so. 4.2 Provided Tenant has performed all of the terms, covenants, agreements, and conditions of this Lease, including the payment of rent, to be performed by Tenant, Tenant shall peaceably and quietly hold and enjoy the Premises for the term hereof, without hindrance from Landlord, subject to the terms and conditions of this Lease. ALTERATIONS OR IMPROVEMENTS 5.1 Except as otherwise provided in Exhibit "C" attached hereto and made a part hereof, Tenant shall not make any alterations, additions or improvements to the Premises, including the installation of signs, without first obtaining in each instance the written consent of Landlord, which consent shall not be unreasonably be withheld but may be subject to reasonable conditions imposed by Landlord. If Tenant makes any permitted alterations or improvements, then (i) all such alterations or improvements shall be performed by Tenant in a good and workmanlike manner, (ii) all such alterations or improvements shall be expeditiously completed in compliance with all applicable laws, statutes, codes, rules and regulations of all governmental and municipal authorities having jurisdiction over the Property, (iii) all such alterations or improvements shall be made in compliance with the requirements of insurance policies maintained by Landlord, (iv) Tenant shall obtain and deliver to Landlord prior to commencement of work fully executed lien waivers form all persons or entities supplying materials or providing labor, and shall promptly discharge or remove all liens filed against the Premises or the Property arising out of such alterations of improvements, and (v) Tenant shall procure and pay for all permits and licenses required in connection with such alterations or improvements. 5.2 Any permitted alterations or improvements made at Tenant's expense, or any shelves, lighting fixtures, removable partitions, machinery or equipment (excluding installation of trade fixtures and trade equipment which are readily removable without damage to the Premises or the Property) installed by Tenant shall be the property of Landlord. Tenant shall repair any damage occasioned by removal of trade fixtures and trade equipment as aforesaid and shall (or, at Landlord's option, shall reimburse Landlord for the costs and expenses to) restore or replace any structural parts or improvements which have been damaged by Tenant. 5.3 Tenant will not directly or indirectly create or permit to be created or remain, and will discharge, any mortgage, lien, encumbrance or charge on, pledge of, or conditional sale or other title retention agreement with respect to the Property, the Premises or any part thereof, Tenant's interest therein and the rent or other additional charge as rental payable under this Lease. Notice is hereby given that Landlord shall not be liable for any labor, services or materials furnished or to be furnished to Tenant or to anyone holding or occupying any of the Premises through or under Tenant, and that no mechanics' or other liens for any such labor, services or materials shall attach to or affect the interest of Landlord in and to any of the Premises. Landlord may at any time post any notices on the Premises regarding such non-liability of Landlord. REPAIRS AND MAINTENANCE 6.1. Tenant will, at its sole cost and expense, maintain in good order and repair the Premises, and all of its fixtures, systems, equipment (excluding the HVAC units) and improvements including, without limitation, all interior portions of the Premises, interior walls, floors, ceilings, signs, lights, doors and windows, in a -7- clean, safe, orderly and sanitary condition free of accumulation of dirt and rubbish, which obligation shall include, without limitation, providing janitorial service, unstopping drains, changing HVAC filters (if accessible inside the Premises) and installing bulbs, starters and ballasts for lighting fixtures. Tenant will not do or suffer any waste or injury with respect to the Premises, and shall take every action reasonably necessary or appropriate for the preservation and safety of the Premises. Upon prior reasonable notice (except in case of emergency when notice will not be required), Tenant will permit Landlord and its agents or representatives to enter the Premises during usual business hours for the purposes of (i) inspecting the same, (ii) verifying compliance or non-compliance by Tenant with its obligations hereunder and the existence or non-existence of any default hereunder, (iii) if Tenant fails to do so, performing any work which may be necessary to comply with any laws, ordinances, rules, regulations, or requirements of any public authority, or which may be necessary to prevent waste or deterioration in connection with the Premises, and (iv) exhibiting the Premises during the Initial Lease Term or any renewal thereof to any lender, purchaser, prospective tenant or other interested parties. Nothing in this Section imposes any duty upon the part of Landlord to do any such work or to make any repairs to the Premises of any kind whatsoever, except as specifically provided herein, and the performance thereof by Landlord will not constitute a waiver of Tenant's default in failing to perform the same. Tenant hereby waives all statutory or other right to make repairs at the expense of Landlord. Landlord will promptly, after Tenant has given Landlord notice of the necessity therefor, make all repairs required to be made by Landlord under Section 6.2, provided, however, that Landlord will not in any event be liable, nor will Tenant be entitled to any abatement or setoff or deduction from rent, nor will the obligations of Tenant under this Lease be affected in any manner whatsoever, for inconvenience, annoyance, disturbance, loss of business or other damage of Tenant or any other occupant of the Premises, or any part thereof, by reason of (i) making repairs, the performing of any work on the Premises or any noise, vibration or other disturbance, (ii) bringing materials, supplies and equipment into or through the Premises, or (iii) the Premises being rendered wholly or partially untenantable because of Landlord's failure to make any repairs required to be made hereunder by Landlord. Landlord will exercise due diligence not to interfere with Tenant's business operation, but will not be required to employ overtime labor to avoid such interference. 6.2 Landlord shall make all necessary repairs and replacements to the foundations and structural portions of the Premises and building systems of the Property, at Landlord's sole cost and expense, except (i) those repairs related to damage caused by Tenant or its agents, employees, or invitees which repairs shall be made by Landlord at the sole cost and expense of Tenant and (ii) routine maintenance by Landlord, the cost of which shall be included in Operating Expenses. 6.3 Consistent with the character of Tenant's business and its operations on the Premises, Tenant shall conduct and operate its business on the Premises in a lawful and reputable manner and shall keep and maintain the Premises in a clean, sanitary, healthful and safe condition in accordance with applicable laws and ordinances and in accordance with applicable directions, rules and regulations of governmental officers or governmental agencies having jurisdiction over the Premises. 6.4 Landlord shall make available from time to time at the Property such common areas, including any parking areas, driveways, -8- access and egress roads, walkways, sidewalks, open and enclosed courts, landscaped and planted areas (herein collectively and individually called "Common Area"), as and to the extent Landlord shall from time to time deem appropriate. The foregoing examples of Common Area are for definitional purposes only and are not to be construed as imposing any obligation on Landlord to furnish same. Subject to the other terms and provisions of this Lease, Landlord shall operate, manage, equip, police, light, repair and maintain the Common Area for its intended purposes in such manner and by such designees as Landlord shall in its sole discretion determine, and may from time to time change the size, location, elevation, nature and use of the Common Area and may make installations and construct and erect buildings, structures, and booths therein, thereon or thereunder and move and remove same, and all costs and expenses associated therewith shall be included in Operating Expenses. Tenant, and its licensees, and their respective officers, employees, agents, customers and invitees, shall have the nonexclusive right to use the Common Area as designated from time to time by Landlord subject to Landlord's rights as set forth elsewhere in this Lease, and further, subject to such reasonable rules and regulations as Landlord may from time to time impose. Tenant agrees that after notice thereof it will abide by such rules and regulations and use its best efforts to cause said licensees, officers, employees, agents, customers and invitees to conform thereto. Landlord may at any time close all or any part of the Common Area to make repairs or changes thereto, to prevent the acquisition of public rights in such area or to discourage noncustomer parking, and may do such other acts in and to the Common Area as in their sole judgment may be desirable. Tenant shall not at any time interfere with the rights of Landlord and other tenants, their licensees, officers, employees, agents, customers and invitees, to use any part of the Common Area. TAXES AND UTILITIES 7.1 Landlord shall pay all real property taxes, municipal, county, and state improvement liens or betterment assessments levied or assessed against the Premises, subject to Tenant's obligation to pay its pro rata share of any increases in such amounts over the Base Year pursuant to the provisions of Section 3.3 hereof. Tenant shall pay all taxes on its personal property. 7.2 Tenant shall pay all charges for gas, electricity, waste disposal and telephone service used on or in connection with the Premises; such charges to be paid by Tenant directly to the utility company or municipality furnishing such service before such charge becomes delinquent. Tenant shall save, indemnify and hold harmless Landlord from any charge, expense or liability to Tenant or to anyone claiming under Tenant for failure of utility services in the event of a malfunction or cessation of supply of any of the utilities listed above caused by any acts or omissions of Tenant or its employees, contractors or agents. Landlord shall pay all charges for water and sewer disposal used on or in connection with the Premises and such charges shall be part of the Operating Expenses. LIABILITY, INDEMNITY, PROPERTY DAMAGE AND INSURANCE 8.1 Tenant shall pay, protect, indemnify, defend, save and hold Landlord and all other persons and entities described in Section 15.1 (each an "Indemnitee") harmless from and against any and all liabilities, losses, damages (including punitive damages), penalties, causes of action, suits, judgments, claims, demands, costs and expenses, including reasonable attorney's fees for the defense thereof, of any nature whatsoever, howsoever caused, without regard to the form of action and whether based on strict liability, gross negligence, negligence or any other theory of recovery, at law or in equity, arising from the conduct or management of Tenant's business or -9- its use of the Premises or from any breach on the part of Tenant of any conditions of this Lease, or from any act of negligence of Tenant, its agents, contractors, employees, subtenants, guests, or invitees in or about the Premises.In case of any action or proceeding brought against any Indemnitee by reason of any such claim, Tenant, upon notice from Landlord, shall defend such action or proceeding by counsel acceptable to Landlord. In the event of a conflict of interest or dispute or during the continuance of an Event of Default, Landlord shall have the right to select counsel, and the cost of such counsel shall be paid by Tenant. The obligations of Tenant under this Section 8.1 shall survive any rejection in bankruptcy of this Lease or any termination or expiration of this Lease. 8.2 Nothing contained in this Lease shall relieve Landlord from liability for loss or damage caused by or due to Landlord's negligence or that of Landlord's servants, employees, or agents, except as limited by Section 15.1. 8.3 In the event of any damage to or destruction of any of the buildings or improvements on the Premises by any insured casualty, Tenant shall give Landlord immediate notice thereof and Landlord may (i) terminate this Lease effective upon written notice to Tenant or (ii) elect to repair, restore and rebuild the same, without abatement of rent, provided that Landlord receives sufficient insurance proceeds for such purpose, so that upon completion of such repairs, restoration or rebuilding, the value and rental value of the building and improvements shall be substantially equal to the value and rental value thereof immediately prior to the occurrence of such fire or casualty. Notwithstanding anything to the contrary contained herein, Tenant may, upon thirty (30) days prior written notice to Landlord, terminate this Lease should the Premises become untenantable by fire or other casualty during this Lease and the Premises has not been repaired or restored within one hundred twenty (120) days following such fire or casualty. If Tenant is unable to occupy the Premises as a result of a casualty or condemnation, the monthly fixed rent (but not any additional rent) shall be abated in proportion to the amount of the Premises which cannot be occupied by Tenant in the commercially reasonable opinion of Landlord; provided, however, that Landlord may terminate this Lease: (1) if Landlord elects not to restore or, (2) if Landlord elects to restore and such rent abatement continues for more than sixty (60) days. 8.4 Tenant shall procure and maintain in full force and effect during the Initial Lease Term and any renewals thereof the following insurance on or in connection with the Premises: (a) Commercial General Liability Insurance and Business Automobile Liability Insurance (including Non-Owned and Hired Automobile Liability) against claims for personal and bodily injury, death or property damage occurring on, in or as a result of the use of the Leased Premises, in amounts not less than $1,000,000.00 per occurrence, and $2,000,000.00 annual aggregate and all other coverage extensions that are usual and customary for properties of this size and type. (b) Worker's compensation insurance covering all persons employed by Tenant in connection with any alterations, additions or improvements permitted to be made on or about any of the Premises for which claims for death, disease or bodily injury may be asserted against Landlord, Tenant or any of the Premises or, in lieu of such worker's compensation insurance, a program of self-insurance complying with the rules, regulations and requirements of the appropriate agency of the State of Texas. (c) All risk or fire insurance insuring Tenant's furniture, fixtures, equipment, inventory and leasehold improvements. -10- (d) During any period in which any permitted alterations, additions or improvements to the Premises are being undertaken, builder's risk insurance covering the total completed value including any "soft costs" with respect to the improvements or alterations being constructed, altered or repaired (on a completed value, non-reporting basis), replacement cost of such alterations, additions or improvements performed and equipment, supplies and materials furnished in connection with such construction or repair of improvements or alterations, together with such "soft cost" endorsements and such other endorsements as Landlord may reasonably require and general liability, worker's compensation and automobile liability insurance with respect to the improvements and alterations being constructed, altered or repaired. The insurance required by this Section shall be written by companies acceptable to Landlord which have a Best's rating of A:X or above and are admitted in, and approved to write insurance policies by, the State Insurance Department for the State of Texas. The insurance policies shall be in amounts sufficient to satisfy any coinsurance requirements thereof. The insurance referred to in (d) above shall name Landlord as owner and as sole loss payee. The insurance referred to in (a) above shall name Landlord as additional insured. Each policy required by any provision of this Section, except clause (b) thereof, shall provide that it may not be canceled or modified except after thirty (30) days' prior notice to Landlord. Tenant shall pay as they become due all premiums for the insurance required by this Section, shall renew or replace each policy and deliver to Landlord evidence of the payment of the full premium therefor or installment then due at least thirty (30) days prior to the expiration date of such policy, and shall promptly deliver to Landlord all original policies. All policies shall contain effective waivers by the carrier against all claims for insurance premiums against Landlord and shall contain full waivers of subrogation against Landlord. All proceeds attributable to Builder's Risk insurance (other than its general liability coverage provisions) under clause (d) of this Section shall be payable to Landlord. 8.5 Notwithstanding any provision contained herein to the contrary, Tenant shall not be responsible for any damage to the Premises normally covered by fire, windstorm and extended coverage insurance, unless such damage is caused by the negligence or willful conduct of Tenant or its agents, employees or invitees. 8.6 Landlord shall maintain in force and effect during the Initial Lease Term and any renewals thereof, fire, windstorm and extended coverage insurance on the Premises, business interruption and extra expense insurance and commercial general liability insurance on the Common Areas, the costs of such insurance shall be included in the Operating Expenses. Landlord shall not be required to maintain insurance on any property or equipment of Tenant. Tenant shall have no rights in and to such policy or the proceeds payable under such policy. 8.7 Tenant shall promptly comply with and conform to (i) all provisions of each insurance policy required under this Article 8 and (ii) all requirements of the insurers thereunder applicable to Landlord, Tenant, the Premises or Property or to the use, occupancy, possession, operation, maintenance, alteration or repair of the Premises or the Property. -11- EMINENT DOMAIN 9.1. In the event that all the Premises is taken for public purposes, this Lease shall terminate, without further liability on the part of either party hereto as of the day possession is taken by the condemning authority. 9.2 In the event that a portion of the Premises is taken for public purposes, this Lease shall cease as of the day possession of such portion is taken by the condemning authority only as to the portion so taken and shall continue as to the portion not so taken, and the monthly rental provided for in Section 3.1 above shall be equitably abated or reduced, taking into account the portion and amount of the Premises so taken and the effect of such taking upon the operation of Tenant's business on the Premises. However, if, as the result of such partial taking of the Premises, the operation of Tenant's business on the Premises is, in Landlord's commercially reasonable judgment, impractical, or Landlord elects to terminate this Lease, then this Lease shall terminate without further liability on the part of either party hereto as of the day possession is taken. 9.3 All damages awarded for any such taking under the power of eminent domain, whether for all or a portion of the Premises, shall belong to and be the property of Landlord whether such damages be awarded as compensation for diminution in value to the leasehold or to the fee of the Premises, and Tenant assigns to Landlord all rights and interests in such damages; provided, however, that Tenant shall be entitled to make a separate claim for moving expenses, dislocation damages or any other award which would not reduce the award payable to Landlord. DEFAULT AND REMEDIES 10.1 The occurrence of any one or more of the following shall constitute an Event of Default under this Lease: (i) a failure by Tenant to make (regardless of the pendency of any bankruptcy, reorganization, receivership, insolvency or other proceeding, in law, in equity, or before any administrative tribunal, which have or might have the effect of preventing Tenant from complying with the provision of this Lease) any payment of rent, additional rent or other sum herein required to be paid by Tenant on the date when such payment is due; (ii) a failure by Tenant to duly perform and observe, or a violation or breach of, any other provision of this Lease, which failure, violation or breach continues uncorrected for a period of thirty (30) days; (iii) Tenant shall (a) voluntarily be adjudicated a bankrupt or insolvent, (b) seek or consent to the appointment of a receiver or trustee for itself or for any of the Premises, (c) file a petition commencing a voluntary case under the bankruptcy or other similar laws of the United States, any state or any jurisdiction, (d) make a general assignment for the benefit of creditors, or (e) be unable to pay its debts as they mature; (iv) a court shall enter an order, judgment or decree appointing, with the consent of Tenant, a receiver or trustee for it or for any of the Premises or approving a petition filed against Tenant which seeks relief under the bankruptcy or other similar laws of the United States, any state or any jurisdiction, and such order, judgment or decree shall remain in force, undischarged or unstayed, ninety (90) days after it is entered; (v) the Premises shall have been abandoned; (vi) Tenant shall be liquidated or dissolved or shall begin proceedings towards its liquidation or dissolution; or (vii) the estate or interest of Tenant in any of the Premises shall be levied upon or attached in any proceeding or such process shall not be vacated or discharged within ninety (90) days after such levy or attachment. Upon the occurrence of any such event or events of default and in addition to any or all other rights or remedies of Landlord hereunder and by the law provided, Landlord shall have, at its option and -12- without further notice or demand of any kind to Tenant or any other person: (a) The right to declare the term hereof ended and to reenter and take possession of the Premises and remove all persons therefrom, and Tenant shall have no further claim thereon or hereunder; (b) The right to immediately declare the entire balance of rent and additional rent payable by Tenant for the remaining term of this Lease due, payable and in arrears as if by the terms and provisions of this Lease said balance of rent and additional rent were on that date payable in advance. Any such acceleration by Landlord shall not constitute a waiver of any right or remedy of Landlord; (c) The right to collect or bring action for rent and additional rent payable by Tenant for the remaining term of this Lease as rent in arrears, or file a proof of claim in any bankruptcy or insolvency proceeding for such rent and additional rent, or institute any other proceedings, whether similar or dissimilar to the foregoing, to enforce payment thereof; (d) The right without declaring this Lease ended to reenter the Premises and occupy or lease the whole or any part thereof for and on account of Tenant and upon such terms and conditions and for such rent as Landlord may deem proper and to collect said rent and any other rent that may thereafter become payable and apply the same toward the amount due or thereafter to become due from Tenant and on account of such expenses of such subletting and any other damages sustained by Landlord, and should such rental be less than that herein agreed to be paid by Tenant, Tenant agrees to pay such deficiency to Landlord in advance on the first day of each month and to pay to the Landlord forthwith upon any such reletting the costs and expenses Landlord may incur by reason thereof, and should such rental be more than that herein agreed to be paid by Tenant, Landlord shall hold said sums interest free to be applied to future damage; and (e) The right, even though it may have relet said Premises, to thereafter elect to terminate this Lease and all of the rights of Tenant in or to the Premises. In the event of any entry or taking possession of the Premises as aforesaid, Landlord shall have the right, but not the obligation, to remove therefrom all or any part of the personal property located therein and may place the same in storage at a public warehouse at the expense and risk of the Tenant or owners thereof. In the event of Tenant's default and Landlord's retaking of possession of the Leased Premises, whether this Lease is terminated by Landlord or not, Tenant agrees to pay to Landlord as an additional item of damages the cost of repairs, leasing commissions and Landlord's other commercially reasonable and necessary expenses incurred in reletting the Premises to a new lessee. Landlord shall not be required to mitigate any of its damages hereunder unless required by applicable law. With respect to any remedy or proceeding of Landlord hereunder, Tenant waives the service of notice which may be required by any applicable law and any right to a trial by jury. Upon the occurrence of and during the continuance of any Event of Default, Landlord shall have the right (but no obligation) to perform any act required of Tenant hereunder and, if performance of such act requires that Landlord enter the Premises, Landlord may enter the Premises for such purpose. -13- Tenant hereby waives and surrenders, for itself and all those claiming under it, including creditors of all kinds, (i) any rights and privilege which it or any of them may have under any present or future law to redeem any of the Premises or any to have a continuation of this Lease after termination of this Lease or of Tenant's right of occupancy or possession pursuant to any court order or any provision hereof, and (ii) the benefits of any present or future law which exempts property from liability for debt or for distress for rent. All remedies are cumulative and concurrent and no remedy is exclusive of any other remedy. Each remedy may be exercised a any time an Event of Default has occurred and is continuing and may be exercised from time to time. No remedy shall be exhausted by any exercise thereof. Tenant shall pay all of Landlord's reasonable costs and expenses including reasonable attorneys' fees) in undertaking an matter relating to this Lease (other than the preparation and negotiation of this Lease). Tenant shall pay for all of Landlord's reasonable cots and expenses (including reasonable attorneys' fees and costs) in enforcing any of Landlord's remedies hereunder following occurrence of any Event of Default. In the event of any breach or threatened breach by Tenant of any of the terms, covenants or agreements contained in this Lease, Landlord shall have, in addition to any specific remedies provided in this Lease, the right to invoke any right or remedy allowed by law or in equity or by statute or otherwise, including the right to enjoin such breach or threatened breach. The waiver by Landlord of any breach or any term, covenant or condition herein contained or failure to insist upon the strict performance of any provisions herein or to exercise any options, power, right or remedy contained herein shall not be construed as a waiver, modification or relinquishment thereof or deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach of Tenant or any term, covenant or condition of this Lease, other than the failure of the Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of rent. No covenant, term or condition of this Lease shall be deemed to have been waived by Landlord unless such waiver be in writing by Landlord. TERMINATION AND HOLDING-OVER 11.1 Upon the expiration or earlier termination of the Initial Lease Term and any renewals thereof, Tenant shall surrender and yield up peacefully and quietly to Landlord possession of the Premises in as good condition as at the time of delivery of possession as herein provided, reasonable wear and tear and damage by fire or other casualty or elements excepted. Upon surrender, Tenant shall (a) remove from the Premises all property which is owned by Tenant or third parties other than Landlord and (b) repair any damage caused by such removal. Property not so removed shall become the property of the Landlord, and Landlord may thereafter cause such property to e removed from the Premises. The cost of removing and disposing of such property and repairing the damage to the Premises caused by such removal shall be paid by Tenant to Landlord upon demand. Landlord shall not in any manner or to any extent to be obligated to reimburse Tenant for any such property which becomes the property of Landlord pursuant to the provisions of this Lease. -14- 11.2 In the event of any holding over by Tenant or any assignee or subtenant beyond the expiration of the Initial Lease Term or any renewals thereof, Landlord shall be entitled to exercise any and all rights and remedies available at law or in equity relating to such holdover. During the period of holdover tenancy, Tenant shall be liable for a holdover rental charge equal to two (2) times the rent payable by Tenant during the year immediately preceding such holdover plus all additional rent. Tenant shall make such payment, with notice or demand, on the first day of each and every month. The receipt and acceptance by Landlord of all or any portion of such payments shall not be deemed a waiver or acceptance by Landlord of Tenant's breach of its covenants and agreements to timely vacate the Premises nor shall it constitute a waiver by Landlord of Landlord's right to institute any proceedings against Tenant to timely vacate the Premises, nor constitute a waiver by Landlord of any of other Landlord's rights or remedies against Tenant as provided in this Lease or under applicable law. In addition to the payments described above, Tenant shall indemnify and hold Landlord harmless of and from any and all loss and liability resulting from any delay by Tenant in so vacating the Premises, including any special damages or claims Landlord may suffer by reason of any claims made by any succeeding occupant founded on such delay, including any reasonable attorneys' fees, costs, disbursements and court costs incurred by Landlord in connection with the foregoing. ASSIGNMNENT, SUBLETTING AND SUBORDINATION OF LEASE 12.1 Tenant may not assign this Lease, voluntarily or involuntarily, or sublet the Premises, or any portion thereof, at any time to any person or entity without the prior written consent of Landlord, which consent may be withheld for any reason or no reason whatsoever. Notwithstanding the foregoing, Landlord agrees that it shall not unreasonably withhold its consent solely with respect to a proposed assignment or sublet to an entity controlling, controlled by or under common control with Tenant; provided, however, in determining whether or not to grant its consent, Landlord shall be entitled to take into account factors such as Landlord's desired tenant mix, the reputation and net worth of the proposed assignee or sublessee and the then current market conditions. Any permitted assignment or sublet shall be subject to the following terms and conditions: (a) Tenant shall provide Landlord with the name and address of the assignee or sublessee; (b) The assignee or sublessee shall assume, by written instrument, all obligations of this Lease as to the applicable space, and a form of such assumption agreement shall be furnished to Landlord for its approval at least thirty (30) days prior to the effective date of the assignment or sublease. Notwithstanding anything to the contrary herein, Tenant's primary liability for the obligation to pay rent due under this Lease shall not be reduced due to any assignment or sublet hereunder; (c) Tenant shall be and remain liable for the observance of all the covenants and provisions of this Lease, including, but not limited to, the payment of rent, additional rent and other charges due hereunder through the entire term of this Lease, as the same may be renewed, extended or otherwise modified; and (d) In any event, the acceptance by Landlord of any rent from any of the sublessees or the failure of Landlord to insist upon -15- a strict performance of any of the terms, conditions and covenants hereunder from any assignee or sublessee shall not release Tenant from any and all obligations hereunder during and for the entire term of this Lease. 12.2 Tenant shall not have the power to mortgage, pledge or otherwise encumber its interest under this Lease and any such mortgage, pledge or encumbrance made in violation of this Section 12.2 shall be null and void and of no further force or effect. 12.3 Landlord may sell or transfer the Premises at any time without Tenant's consent to any third party (each a "Third Party Purchaser"). In the event of any such transfer, Tenant shall attorn to any Third Party Purchaser as Landlord so long as such Third Party Purchaser and Landlord notify Tenant in writing of such transfer and such Third Party Purchaser assumes all of Landlord's obligations under this Lease arising due to acts or omissions occurring after the sale date. At the request of Landlord, Tenant will execute such documents confirming the agreement referred to above and such other agreements as Landlord may reasonably request, provided that such agreements do not increase the liabilities and obligations of Tenant hereunder. 12.4 This Lease, and the rights of Tenant hereunder, are hereby made subject and subordinate to all bona fide mortgages now or hereafter encumbering the Premises; provided, however, that such mortgage will not cover the equipment and furniture or furnishings on the Premises installed by Tenant. NOTICES 13.1 Any notice to be given to a party to this Lease shall be sent in writing by hand delivery, reputable overnight carrier or by certified mail, return receipt requested, addressed to the party to be notified at the address given below or at such other address as such party may have specified by like notice and shall be deemed to have been given and received for all purposes when delivered in person or by overnight delivery or three (3) business days after being deposited in the United States mail, as applicable: if to Landlord: Corporate Property Associates 4 c/o W. P. Carey & Co. LLC 50 Rockefeller Plaza New York, New York 10020 Attn.: Asset Management with a copy to: Gerald Dayley Property Management Consultants, Inc. 10 Flores Foothill Ranch, California 92610-1816 if to Tenant: Petrocon Engineering, Inc. -16- 3115 Executive Boulevard Beaumont, Texas 77705-1044 Attn.: David W. Smith with a copy to: Industrial Data Systems Corporation 600 Century Plaza Dr., Bldg. 140 Houston, TX 77073-6033 Attn: Wm. A. Coskey BOOKS AND RECORDS 14.1 Tenant shall permit Landlord and its agents, accountants and attorneys, upon reasonable notice to Tenant, to visit and inspect the Premises and to discuss the finances and business with the officers of Tenant, at such reasonable times as may be requested by Landlord. Upon the request of Landlord, Tenant shall provide the requesting party with copies of any information to which such party would be entitled in the course of a personal visit. 14.2 Tenant shall deliver to Landlord within 90 days of the close of each fiscal year, annual audited financial statements of Tenant prepared and certified by nationally recognized independent certified public accountants. Tenant shall also furnish to Landlord within 45 days after the end of each of the three remaining quarters unaudited financial statements and all other quarterly reports of Tenant, and all filings, if any, of Form 10-K, Form 10-Q and other required filings with the Securities and Exchange Commission pursuant to the provisions of the Securities Exchange Act of 1934, as amended, or any other Law. All financial statements of Tenant shall be prepared in accordance with generally accepted accounting principles consistently applied (subject to SEC accounting rules with respect to Forms 10-K and 10-Q). All annual financial statements shall be accompanied by the affidavit of the president or a vice president of Tenant, dated within five (5) days of the delivery of such statement, stating that (i) the affiant knows of no Event of Default, or event which, upon notice or the passage of time or both, would become an Event of Default which has occurred and is continuing hereunder or, if any such event has occurred and is continuing, specifying the nature and period of existence thereof and what action Tenant has taken or proposes to take with respect thereto and (ii) except as otherwise specified in such affidavit, that Tenant has fulfilled all of its obligations under this Lease which are required to be fulfilled on or prior to the date of such affidavit. MISCELLANEOUS 15.1 Anything contained herein to the contrary notwithstanding, any claim based on or in respect of any liability of Landlord under this Lease shall be enforced only against the Premises and not against any other assets, properties or funds of (a) Landlord or any director, officer, general partner, limited partner, member, employee or agent of Landlord (or any legal representative, heir, estate, successor or assign of any thereof), (b) any predecessor or successor partnership, limited liability company or corporation (or other entity) of Landlord, or (c) any other person or entity (including W. P. Carey & Co. LLC, Carey Diversified LLC, W. P. Carey Advisors, LP, Carey Corporate Property Inc., W. P. Carey & Co., Inc., Carey Corporate Property Management, Inc., Carey Asset Management, Inc., or any person affiliated with any of the foregoing, or any director, officer, employee or agent of any thereof). 15.2 This Lease constitutes the sole and entire agreement of the parties hereto and supersedes any prior understandings and written or oral agreements between the parties respecting the subject matter of this Lease, except as otherwise provided in Section 2.3 hereof. 15.3 Subject to approval by Landlord or its agent, Tenant may erect, maintain, permit and from time to time remove any sign or signs of Tenant in or about the Premises. -17- 15.4 No modification, alteration or amendment to this Lease shall be binding unless in writing and executed by the parties hereto, their heirs, successors or assigns. 15.5 The terms and conditions of this Lease shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, representatives, successors, or assigns. 15.6 The paragraph headings in this Lease are inserted only for convenience, and are in no way to be construed as a part of this Lease or as a limitation on the scope of the particular paragraphs to which they refer. 15.7 This Lease shall be governed exclusively by the provisions hereof and by the laws of the State of Texas as same may from time to time exist. 15.8 Time is of the essence in this Lease. 15.9 At any time upon not less than ten (10) days' prior written request by either Landlord or Tenant (the "Requesting Party") to the other party (the "Responding Party"), the Responding Party shall deliver to the Requesting Party a statement in writing, executed by an authorized officer of the Responding party, certifying (a) that, except as otherwise specified, this Lease is unmodified and in full force and effect, (b) the dates to which rent, additional rent and all other monetary obligations have been paid, (c) that, to the knowledge of the signer of such certificate and except as otherwise specified, no default by either Landlord or Tenant exists hereunder, and (d) such other matters as the Requesting Party may reasonably request. 15.10 Landlord and Tenant hereby represent and warrant, each to the other, that they have not dealt with any broker, finder or any other person, firm, corporation or other entity so as to create any legal right or claim for a commission or similar fee or compensation with respect to the Premises or this Lease. Landlord and Tenant hereby indemnify each other against, and agree to hold each other harmless from, any liability or claim (and all expenses, including attorneys' fees, incurred in defending such claim or in enforcing this indemnity) for a real estate brokerage commission or similar fee or compensation arising out of or in any way connected with any claimed dealings with the indemnitor and relating to the Premises and this Lease. The provisions of this Section shall survive the expiration or sooner termination of this Lease. IN WITNESS WHEREOF, parties have executed this Lease as of the day and year first written above. CORPORATE PROPERTY 4, A California limited partnership W.P. CAREY & CO., LLC, its general partner By: /s/ DONNA M. NEILEY -------------------- Name: DONNA M. NEILEY Title: Senior Vice President -18- PETROCON ENGINEERING, INC /s/ ML Burrow -------------------------- Name: M.L. Burrow Title: CEO -19- EX-10.64 5 dex1064.txt GUARANTY AND SURETYSHIP AGREEMENT EXHIBIT 10.64 GUARANTY AND SURETYSHIP AGREEMENT FOR VALUE RECEIVED, the undersigned (herein called "Guarantor"), unconditionally guarantees and becomes surety for the full payment, performance and observation of (i) all of the covenants, conditions and agreements therein provided to be performed and observed by PETROCON ENGINEERING, INC. ("Tenant") pursuant to a Second Amended and Restated Lease Agreement (the "Lease") dated as of February__, 2002 by and between CORPORATE PROPERTY ASSOCIATES 4 ("Landlord") and Tenant, Tenant's successors and assigns, and Guarantor hereby makes itself fully liable for such full payment, performance and observation of all the covenants, conditions and agreements therein provided to be performed and observed by Tenant, Tenant's successors and assigns and (ii) all costs, attorneys' fees and expenses incurred or expended by Landlord in enforcing its rights against Tenant under the Lease or Guarantor hereunder. Guarantor's obligations hereunder shall be further subject to the terms and conditions herein set forth. l. Guarantor expressly agrees that the validity of this agreement and its obligations hereunder shall in no wise be terminated, affected or impaired by reason of the assertion by Landlord against Tenant of any obligation or obligations of Tenant to Landlord and further covenants and agrees that this Guaranty shall remain and continue in full force and effect as to any renewal, modification or extension of the Lease and any assignment or transfer by Landlord, whether or not it shall have received any notice of or consented to such renewal, modification, extension, assignment or transfer. 2. Failure of Landlord to insist upon strict performance or observation of any of the terms, provisions or covenants of the Lease or to exercise any right therein contained shall not be construed as a waiver or relinquishment for the future of any term, provision, covenant or right, but the same shall continue and remain in full force and effect. Receipt by Landlord of rent with knowledge of the breach of any provision of the Lease shall not be deemed a waiver of such breach. 3. Guarantor further agrees that its liability under this Guaranty shall be primary, and that in any right of action which shall accrue to Landlord under the Lease, Landlord may, at its option, proceed against Guarantor and Tenant, jointly and severally, or may proceed against Guarantor without having commenced any action against or having obtained any judgment against Tenant. 4. Guarantor absolutely and unconditionally covenants and agrees that (i) in the event that Tenant does not or is unable to pay or perform its obligations under the Lease for any reason, including, without limitation, liquidation, dissolution, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment or other similar proceedings affecting the status, composition, identity, existence, assets or obligations of Tenant, or the disaffirmance or termination of any of said obligations in or as a result of any proceeding, and/or (b) if all or any part of said obligations (or any instrument or agreement made or executed in connection therewith) is for any reason found to be invalid, illegal, unenforceable, uncollectible or legally impossible, for any reason whatsoever (including, without limiting the generality of the foregoing, upon the grounds that the payment and/or performance of said obligations is ultra vires or otherwise without authority, or is subject to valid defenses, claims or offsets of Tenant; then in any such case Guarantor shall pay and perform the obligations as herein provided, and no such occurrence shall in any way diminish or otherwise affect Guarantor's obligations hereunder. 5. In the event any payment of Tenant to Landlord is held to constitute a preference under the bankruptcy laws, or if for any other reason Landlord is required to refund such payment or pay the amount thereof to any other party, such payment by Tenant to Landlord shall not constitute a release of Guarantor from any liability hereunder, but Guarantor agrees to pay such amount to Landlord upon demand, and this Guaranty shall continue to be effective or shall be reinstated, as the case may be, to the extent of any such payment or payments. -1- 6. Guarantor agrees that Landlord may, from time to time, at its discretion, and with or without valuable consideration, allow substitution, withdrawal, release, surrender, exchange, subordination, deterioration, waste, loss or other impairment of all or any part of any security or collateral securing Tenant's obligations under the Lease, without notice to or consent by Guarantor, and without in anywise impairing, diminishing or releasing the liability of Guarantor hereunder. 7. The rights of Landlord are cumulative and shall not be exhausted by its exercise of any of its rights hereunder or otherwise against Guarantor or by any number of successive actions until and unless all rental under the Lease has been paid, all other obligations of Tenant have been performed and each of the obligations of Guarantor hereunder has been performed. 8. This Guaranty shall be deemed to have been made under and shall be governed by the laws of the State of Texas in all respects and shall not be waived, altered, modified or amended as to any of its terms or provisions except in writing duly signed by Landlord and Guarantor. 9. For so long as the financial statements of Tenant are consolidated with the financial statements of Guarantor, Guarantor shall provide to Landlord financial statements and information with respect to Guarantor in the form and at the times required under Paragraph 14.2 of the Lease, and in, such event the requirements of Paragraph 14.2 with respect to Tenant shall be deemed met. 10. Guarantor acknowledges and agrees that this Guaranty accurately represents and contains the entire agreement between Guarantor and Landlord with respect to the subject matter hereof, that Guarantor is not relying, in the execution, of this Guaranty, on any representations (whether written or oral) made by or on behalf of Landlord except as expressly set forth in this Guaranty, and that any and all prior statements and/or representations made by or on behalf of Landlord to Guarantor (whether written or oral) in connection with the subject matter hereof are merged herein. 11. The use of any gender herein shall include the other gender. A determination that any provision of this Guaranty is unenforceable or invalid shall not affect the enforceability or validity of any other provision. 12. All terms and provisions hereof shall inure to the benefit of the successors and assigns of Landlord and shall be binding upon the successors and assigns of Guarantor. EXECUTED this 26/th/ day of April, 2002. INDUSTRIAL DATA. SYSTEMS CORPORAT1ON, a Nevada Corporation By: /s/ William A. Coskey --------------------------------- Name: WILLIAM A. COSKEY ------------------------------- Title: PRESIDENT ------------------------------- -2- EX-10.65 6 dex1065.txt ENGLOBAL CORPORATION INCENTIVE BONUS PLAN EXHIBIT 10.65 ENGlobal CORPORATION INCENTIVE BONUS PLAN JUNE 12, 2002 CALCULATION OF THE INCENTIVE BONUS POOL Effective January 1, 2002, the incentive bonus pool shall be calculated quarterly after the review or audit of ENGlobal Corporation's ("ENGlobal") financial results by ENGlobal's corporate auditors is complete. The incentive bonus pool available for distribution shall be calculated in two parts: 1) 15% of ENGlobal's consolidated net profit before tax, less accrued dividends on preferred shares ("ENGlobal Profit") that exceeds 2% of Consolidated Total Revenue, added to, 2) 5% of ENGlobal Profit that exceeds 4% of Consolidated Total Revenue. Any cumulative losses in ENGlobal Profit in prior quarter(s) will be subtracted from ENGlobal Profit for the current quarter before performing the above calculation. PARTICIPATION IN AND SHARE OF THE INCENTIVE BONUS POOL Participation in the Incentive Bonus Plan ("the Plan") will be determined at the discretion of the CEO and COO of ENGlobal. The addition of, or removal of, participants to this Plan will require the joint consent of both the CEO and COO of ENGlobal. This Plan is primarily intended to reward key management or other major contributors to ENGlobal's profitability. This Plan is restricted to regular full time employees of ENGlobal or its subsidiaries. Participants in this Plan are listed on Attachment "A". Each participant's share of the incentive bonus pool will be determined by taking that participant's annual salary divided by the total annual salary of all participants in this Plan. Incentive bonuses under this Plan will be paid only to those employees who are employed on a regular full time basis on the last day of each calendar quarter ended: March 31, June 30, September 30, December 31. Participation in this Plan replaces any and all prior bonus, commission or incentive agreements, written or verbal, the participants may have been a part of. Termination from employment with ENGlobal or its subsidiaries for any reason, either voluntary or involuntary, will immediately disqualify an individual from receiving currently payable incentive bonus amounts or any future payments under this Plan. INCENTIVE BONUS POOL PAYMENTS Bonus pool payments will be made through payroll checks within sixty (60) days of any quarter end, except for the fourth calendar quarter, which shall be paid within ninety (90) days due to additional audit requirements. ADMINISTRATION OF THE PLAN The CEO and the COO of ENGlobal will have the full and final authority to make decisions regarding the amounts and timing of payments made under this Plan, and in addition, to resolve disputes which may arise related to this Plan. These decisions will be without recourse by affected employees. This Plan may be revised at any time without prior notice to or the consent of affected participants. APPROVED: /s/ Michael L. Burrow 6/24/02 /s/ William A. Coskey 6/24/02 - ------------------------- ---------- ------------------------- ---------- Michael L. Burrow, P.E. Date William A. Coskey, P.E. Date Chairman & CEO President & COO ENGlobal Corporation ENGlobal Corporation EX-99.4 7 dex994.txt CHARTER OF THE COMPENSATION COMMITTEE CHARTER OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF INDUSTRIAL DATA SYSTEMS CORPORATION AS ADOPTED BY RESOLUTION OF THE BOARD ON JUNE 6, 2002 - -------------------------------------------------------------------------------- AUTHORITY The Compensation Committee (the "Committee") of the Board of Directors (the "Board") of Industrial Data Systems Corporation, a Nevada corporation (the "Corporation"), is established pursuant to Article Tenth of the Corporation's Articles of Incorporation and Section 78.125 of the Nevada General Corporation Law. The Committee shall be comprised of three or more non-employee directors as determined from time to time by resolution of the Board. Consistent with the appointment of other Board committees, the members of the Committee shall be elected by the Board at the annual organizational meeting of the Board or at such other time as may be determined by the Board. The Chairman of the Committee shall be designated by the Board, provided that if the Board does not designate a Chairman, the members of the Committee, by majority vote, may designate a Chairman. The presence in person or by telephone of a majority of the Committee's members shall constitute a quorum for any meeting of the Committee. All actions of the Committee will require the vote of a majority of its members present at a meeting of the Committee at which a quorum is present. The Board may give the Committee the power to retain outside consultants or others to assist it in the evaluation of the Corporation's compensation and benefits programs. PURPOSE OF THE COMMITEE The Committee's primary function is to assist the Board in fulfilling its oversight responsibilities by reviewing, approving and recommending employee and management compensation and benefit policies for the Corporation. This oversight includes the responsibility to consider and evaluate management's recommendations and to further make recommendations to the Board as to the amount and form of compensation of directors and executive employees of the Corporation, and the administration of all annual bonus plans and the Corporation's stock option plans in addition to any successor or replacement stock option (the "Plans"). COMPOSITION OF THE COMMITTEE The members of the Committee shall be non-employee directors who are free from any relationship that might interfere with the exercise of his or her independent judgment as a member of the Committee. MEETINGS OF THE COMMITTEE The Committee shall meet with such frequency and at such intervals as it shall determine is necessary to carry out its duties and responsibilities, but in any case, at least twice a year. The Committee shall meet at least annually with management to discuss general compensation strategy. Each member of the Committee shall have one vote. A quorum of the Committee shall consist of a majority of the Committee's members. The Committee shall be authorized to take any permitted action only by the affirmative vote of a majority of the Committee members present at any meeting at which a quorum of its members is present, or by the unanimous written consent of all of the Committee members. 1 The Committee shall maintain and submit to the Board copies of minutes of each meeting of the Committee, and each written consent to action taken without a meeting, reflecting the actions so authorized or taken by the Committee since the preceding meeting of the Board. A copy of the minutes of each meeting and all consents shall be placed in the Corporation's minute book. DUTIES AND RESPONSIBILITIES OF THE COMMITTEE The Committee shall determine the compensation of the Corporation's executive officers (Parent company). The Committee shall evaluate and recommend to the full Board appropriate compensation for the Corporation's directors, including compensation and expense reimbursement policies for attendance at Board and committee meetings. The Committee shall review, approve and monitor any of the Corporation's employee and management compensation plans as disclosed in the Corporation's proxy statements provide oversight of any employee benefit plan review, approve, and recommend employee and management compensation and benefit policies, plans, and performance criteria concerning the salaries, bonuses, and other compensation of the Corporation's executive officers. The Committee shall review of any other benefit plan described from time to time in the Corporation's proxy statements, including key man insurance, 401(k) plans, stock incentive and stock purchase plans. The Committee shall have the power (a) to make grants of options under the Plans, (b) to establish the market price of the Corporation's common stock for purposes of such grants, and (c) to approve and modify any and all stock option award agreements. The Committee shall perform such other duties as shall from time to time be delegated to it by the Board of Directors. 2 EX-99.5 8 dex995.txt AUDIT COMMITTEE CHARTER ENGLOBAL CORPORATION AUDIT COMMITTEE OF THE BOARD OF DIRECTORS CHARTER General The Committee's purpose is to provide assistance to the Board in fulfilling its legal and fiduciary obligations with respect to matters involving the accounting, auditing, financial reporting, and internal control functions of the Corporation and its subsidiaries. The Committee shall oversee the audit efforts of the Corporation's independent accountants and any internal auditors employed by the Corporation and, in that regard, shall take such actions as it may deem necessary to satisfy itself that the Corporation's auditors are independent of management. It is the objective of the Committee to maintain free and open means of communications among the Board, the independent accountants, any internal auditors employed by the Corporation and the financial and senior management of the Corporation. Composition The Audit Committee shall consist of three or more directors as determined by the Board, each of whom shall be independent directors, and free from any relationship that, in the opinion of the Board, would interfere with the exercise of his or her independent judgment as a member of the Committee. In determining whether any director is independent, the Board shall take into consideration the requirements of the principal exchange or system on which the Corporation's common stock is traded. Directors, who are affiliates of the Company, or officers or employees of the Company or its subsidiaries, will not be considered independent. Notwithstanding the first sentence of this paragraph, until June 14, 2001, the Committee may consist of two or more directors meeting the qualifications of this section. All members of the Committee shall be financially literate at the time of their election to the Committee or shall become financially literate within a reasonable period of time after their appointment to the Committee. "Financial literacy" shall be determined by the Board in the exercise of its business judgment, and shall include a working familiarity with basic finance and accounting practices. At a minimum, all members of the Committee must be able to read and understand fundamental financial statements, including the corporation's balance sheet, income statement, and cash flow statement or become able to do so within a reasonable period of time after his or her appointment to the Committee. At least one member of the Committee shall have accounting or related financial management expertise, as such qualification may be determined in the business judgment of the Board. Such expertise may be the result of past employment or background experience including service as a chief executive officer, a chief financial officer or other senior officer with financial oversight responsibilities. Committee members, if they or the Board deem it appropriate, may enhance their understanding of finance and accounting by participating in educational programs conducted by the Corporation or an outside consultant or firm. The members of the Committee are to be elected by the Board and shall serve until their successors are duly elected and qualified. Unless a Chair is elected by the full Board, the members of the Committee may designate a Chair by majority vote of the full Committee membership. 1 Meetings The Committee shall hold regular meetings, as may be necessary, and special meetings as may be called by the Chairman of the Committee. As part of its job to foster open communication, the Committee should meet at least annually with management and the independent accountants in separate executive sessions to discuss any matters that the Committee or either of these groups believe should be discussed privately. In addition, the Committee or its Chair should meet with the independent accountants and management quarterly to review the Corporation's financial statements. The presence in person or by telephone of a majority of the Committee's members shall constitute a quorum for any meeting of the Committee. All actions of the Committee will require the vote of a majority of its members present at a meeting of the Committee at which a quorum is present. The Committee Chairman should consult with management in the process of establishing agendas for Committee meetings. The Committee shall maintain and submit to the Board copies of minutes of each meeting of the Committee, and each written consent to action taken without a meeting, reflecting the actions so authorized or taken by the Committee since the preceding meeting of the Board. A copy of the minutes of each meeting shall be placed in the Corporation's minute book. Relationship with Independent Accountants The Corporation's independent accountants are to be ultimately accountable to the Board and the Committee, and the Committee and the Board shall have the ultimate authority and responsibility to select, evaluate and, where appropriate, replace the independent accountants (or nominate the outside auditor to be proposed for stockholder approval in any proxy statement). Responsibilities and Duties To fulfill its responsibilities and duties, the Audit Committee shall: Documents/Reports Review 1. Review and assess the adequacy of this Charter at least annually, and otherwise as conditions dictate. 2. Review the results of the year-end audit of the Corporation, including (as applicable): . the audit report, the published financial statements, the management representation letter, the "Memorandum Regarding Accounting Procedures and Internal Control" or similar memorandum prepared by the Corporation's independent auditors, any other pertinent reports and management's responses concerning such memorandum; . the qualitative judgments of the independent auditors about the appropriateness, not just the acceptability, of accounting principle and financial disclosure practices used or proposed to be adopted by the Corporation and, particularly, about the degree of aggressiveness or conservatism of its accounting principles and underlying estimates; . the methods used to account for significant unusual transactions; . the effect of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus; . management's process for formulating sensitive accounting estimates and the reasonableness of these estimates; 2 . significant recorded and unrecorded audit adjustments; . any material accounting issues among management, members of the Corporation's internal auditing department and the independent auditors; and . other matters required to be communicated to the Committee under generally accepted auditing standards, as amended, by the independent auditors. 3. Review with financial management and the independent accountants the Corporation's filings with the Securities and Exchange Commission on Form 10-Q and Form 10-K prior to their filing or prior to the release of earnings. The Chair of the Committee may represent the entire Committee for purposes of this review. 4. Review with management and the Corporation's independent auditors such accounting policies (and changes therein) of the Corporation, including any financial reporting issues which could have a material impact on the Corporation's financial statements, as are deemed appropriate for review by the Committee prior to any interim or year-end filings with the SEC or other regulatory body. Independent Accountants 5. Recommend to the Board the selection of the independent accountants, considering independence and effectiveness, and approve the fees and other compensation to be paid to the independent accountants. 6. On an annual basis, obtain from the independent accountants, and review and discuss with the independent accountants, a formal written statement delineating all relationships that the independent accountants have with the Corporation, consistent with Independence Standards Board Standard 1, and actively engage in a dialogue with the independent accountants with respect to any disclosed relationships or services that may impact the objectivity and independence of the independent accountants. 7. Recommend to the Board any appropriate action to oversee the independence of the independent accountants. 8. Review the performance of the independent accountants and approve any proposed discharge of the independent accountants when circumstances warrant. 9. Periodically consult with the independent accountants outside of the presence of management about internal controls and the fullness and accuracy of the Corporation's financial statements. 10. Confirm through private discussions with the Corporation's independent auditors and the Corporation's management that no management restrictions are being placed on the scope of the independent auditors' work. Financial Reporting Processes 11. In consultation with the independent accountants, review the integrity of the organization's financial reporting processes, both internal and external. 12. Consider the independent accountant's judgments about the quality and appropriateness of the Corporation's accounting principles as applied in its financial reporting. 13. Consider and approve, if appropriate, major changes to the Corporation's auditing and accounting principles and practices as suggested by the independent accountants or management. 14. Establish regular and separate reporting to the Committee by each of management and the independent accountants regarding any significant judgments made in 3 management's preparation of the financial statements and the view of each as to appropriateness of such judgments. 15. Following completion of the annual audit, review separately with each of management and the independent accountants any significant difficulties encountered during the course of the audit, including any restrictions on the scope of work or access to required information. 16. Review any significant disagreement among management and the independent accountants in connection with the preparation of the financial statements. 17. Review with the independent accountants and management the extent to which changes or improvements in financial or accounting practices, as approved by the Committee, have been implemented. 18. Review with management and the independent auditors any reportable conditions and material weaknesses, as defined by the American Institute of Certified Public Accountants, affecting internal control. 19. Receive periodic reports from the Corporation's independent auditors and management of the Corporation to assess the impact on the Corporation of significant accounting or financial reporting developments proposed by the Financial Accounting Standards Board or the SEC or other regulatory body, or any other significant accounting or financial reporting related matters that may have a bearing on the Corporation. 20. Prepare a report annually which states, among other things, whether: . the Committee has reviewed and discussed with management the audited financial statements to be included in the Corporation's Annual Report on Form 10-K; . the Committee has discussed with the Corporation's independent auditors the matters that the auditors are required to discuss with the Committee by Statements on Auditing Standard No. 61, (as it may be modified or supplemented); . the Committee has received the written disclosures and the letter from the Corporation's independent auditors required by Independence Standards Board Standard No. 1, as may be modified or supplemented, and has discussed with the independent auditors their independence; and . based on the review and discussions described in subsections (i), (ii) and (iii) above, the Committee has recommended to the Board that the audited financial statements be included in the Corporation's Annual Report on Form 10-K for the last fiscal year for filing with the SEC. Ethical and Legal Compliance 21. Establish, review and update periodically a Code of Conduct and ensure that management has established a system to enforce this Code. 22. Review with the Corporation's counsel, any legal matter that could have a significant impact on the Corporation's financial statements. 23. Perform any other activities consistent with this Charter, the Corporation's bylaws and governing law, as the Committee or the Board deems necessary or appropriate. 24. Meet annually with the general counsel, and outside counsel when appropriate, to review legal and regulatory matters, including any matters that may have a material impact on the financial statements of the Corporation. 25. Review the Corporation's policies relating to the avoidance of conflicts of interest and review past or proposed transactions between the Corporation and members of management as well as policies and procedures with respect to officers' expense accounts and perquisites, including the use of corporate assets. The Committee shall 4 consider the results of any review of these policies and procedures by the Corporation's independent auditors. 26. Obtain from the independent auditors any information pursuant to Section 10A of the Securities Exchange Act of 1934. With respect to the duties and responsibilities listed above, the Committee should: . Report regularly to the Board on its activities, as appropriate; . Exercise reasonable diligence in gathering and considering all material information; . Understand and weigh alternative courses of conduct that may be available; . Focus on weighing the benefit versus harm to the Corporation and its stockholders when considering alternative recommendations or courses of action; If the Committee deems it appropriate, secure independent expert advice and understand the expert's findings and the basis for such findings, including retaining independent counsel, accountants or others to assist the Committee in fulfilling its duties and responsibilities; and . Provide management, the Corporation's independent auditors, and any internal auditors employed by the Corporation with appropriate opportunities to meet privately with the Committee. * * * While the Committee has the duties and responsibilities set forth in this charter, the Committee is not responsible for planning or conducting the audit or for determining whether the Corporation's financial statements are complete and accurate and are in accordance with generally accepted accounting principles. Similarly, it is not the responsibility of the Committee to resolve disagreements, if any, between management and the independent auditors or to ensure that the Corporation complies with all laws and regulations. Adopted by Resolution of the Board of Directors August 8, 2002 5 EX-99.6 9 dex996.txt CERTIFICATION PURSUANT TO SECTION 906 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 June 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 -----END PRIVACY-ENHANCED MESSAGE-----