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