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(Mark One)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File No. 001-14217
ENGlobal Corporation
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of
incorporation or organization)
88-0322261
(I.R.S. Employer Identification No.)
600 Century Plaza Drive, Suite 140, Houston, Texas
(Address of principal executive offices)
77073-6033
(Zip code)
Registrant’s telephone number, including area code: (281) 821-7100
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Common Stock, $0.001 par value
Name of each exchange on which registered
American Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Indicate by check mark whether the registrant: (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 shortened 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 (cid:57)
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes
No (cid:57)
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 30, 2003 was
$18,461,710 (based upon the closing price for shares of common stock as reported by the American Stock Exchange on that date).
The number of shares outstanding of the registrant’s common stock on March 16, 2004 is as follows:
$0.001 Par Value Common Stock........................................................................................ 24,034,288 shares
DOCUMENTS INCORPORATED BY REFERENCE
Responses to Items 10, 11, 12, and 13 of Part III of this report are incorporated herein by reference to certain information
contained in the Company’s definitive proxy statement for its 2004 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission on or before April 30, 2004.
PART I
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (“Report”), including “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” as well as oral statements made by the Company and its officers,
directors or employees, contains forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements are based on
Management’s beliefs, current expectations, estimates and projections about the industries that the Company and its
subsidiaries serve, the economy and the Company in general. The words “expect,” “anticipate,” “intend,” “plan,”
“believe,” “seek,” “estimate” and similar expressions are intended to identify such forward-looking statements;
however, this Report also contains other forward-looking statements in addition to historical information. Although
we believe that the expectations reflected in the forward-looking statements are reasonable, such forward-looking
statements are not guarantees of future performance and are subject to risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company to differ materially from historical
results or from any results expressed or implied by such forward-looking statements. The Company cautions readers
that the following important factors, among others, could cause the Company’s actual results to differ materially
from the forward-looking statements contained in this Report: (i) the effect of changes in laws and regulations with
which the Company must comply, and the associated costs of compliance with such laws and regulations, either
currently or in the future, as applicable; (ii) the effect of changes in accounting policies and practices as may be
adopted by regulatory agencies, as well as by the Financial Accounting Standards Board; (iii) the effect of changes
in the Company’s organization, compensation and benefit plans; (iv) the effect on the Company’s competitive
position within its market area of the increasing consolidation within its services industries, including the increased
competition from larger regional and out-of-state engineering services organizations; (v) the effect of increases and
decreases in oil prices; (vi) the inability to get parts from vendors; (vii) our inability to renew our line of credit;
(viii) our ability to identify attractive acquisition candidates, consummate acquisitions on terms that are favorable
to the Company and integrate the acquired businesses into the Company’s operations; and (ix) the effect of changes
in the business cycle and downturns in local, regional and national economies. The Company cautions that the
foregoing list of important factors is not exclusive. We are under no duty and have no plans to update any of the
forward-looking statements after the date of this Report to conform such statements to actual results.
The following summary is qualified in its entirety by, and should be read in connection with the more
detailed information contained herein and in the Company’s Consolidated Financial Statements, and the Notes
thereto, included elsewhere in this Report.
1
ITEM 1.
BUSINESS
General
ENGlobal Corporation (which may be referred to as “ENGlobal,” the “Company,” “we,” “us” or “our”) is
a leading provider of engineering services and systems principally to the petroleum refining, petrochemical,
pipeline, production and process industries throughout the United States and internationally. The services provided
by our multi-disciplined staff span the lifecycle of a project and include feasibility studies, design, procurement and
construction management. We also supply automation, control, and uninterruptible electrical power systems to our
clients worldwide.
The Company was incorporated as Industrial Data Systems Corporation in the State of Nevada in June
1994. In December 2001, we merged with Petrocon Engineering, Inc. and in June 2002, we changed the name of the
Company from Industrial Data Systems Corporation to ENGlobal Corporation. Effective June 16, 2002, the
Company’s trading symbol for its common stock, traded on the American Stock Exchange, changed from IDS to
ENG.
Since 1999, our net revenue has grown by a compound annual growth rate of 192% and our net income has
grown at a compound annual growth rate of 161%. We have accomplished this growth by expanding our service
offerings and geographic presence through a series of strategic acquisitions and through internal growth. We now
have offices strategically located in Houston, Beaumont and Freeport, Texas, Baton Rouge and Lake Charles,
Louisiana and Tulsa, Oklahoma.
The Company streamlined its organizational structure and increased name recognition in 2003. As part of
the restructuring, the Company sold selected assets of its manufacturing segment and reorganized the subsidiaries in
its two remaining segments: the engineering segment and the systems segment. In addition, substantially all of the
Company’s wholly-owned subsidiaries adopted the ENGlobal name.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the Securities
and Exchange Commission (“SEC”). You can read and copy any materials filed with the SEC at its Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can obtain information about the
operations of the SEC Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a
website that contains information we file electronically with the SEC, that can be accessed over the Internet at
www.sec.gov. Our common stock is listed on the American Stock Exchange (AMEX: ENG), and you can obtain
information about ENGlobal at the offices of the American Stock Exchange, 86 Trinity Place, New York, New York
10006-1872 or at their website www.amex.com.
ENGlobal Website
You can find financial and other information about ENGlobal at the Company’s website at the URL
address www.englobal.com. Copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 are provided free of charge through the Company’s website and are available as
soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.
Information relating to corporate governance at ENGlobal, including our Code of Business Conduct and
Ethics for all of our Directors and employees, including our Chief Executive Officer and Chief Financial Officer;
and information concerning our Directors, and our Board Committees, including Committee charters, and
transactions in ENGlobal securities by Directors and officers, is available on our website at www.englobal.com
under the Investor Relations caption. We will provide any of the foregoing information without charge upon written
request to Investor Relations Officer, ENGlobal Corporation, 600 Century Plaza Drive, Building 140, Houston,
Texas 77073-6033.
2
Business Segments
During 2003, we operated three business segments: engineering (previously referred to as engineering
services), systems (previously referred to as engineered systems) and manufacturing. The manufacturing segment
was reclassified as a discontinued operation due to the December 2003 sale of certain assets of the Company’s
wholly-owned subsidiary, Thermaire, Inc. d/b/a Thermal Corporation, to Nailor Industries of Texas, Inc., a medium-
sized HVAC equipment manufacturer. The respective contributions to our total sales in 2003, 2002 and 2001 for the
engineering segment and the systems segment are summarized below.
Segment:(1)
Engineering ........................................................................
Systems...............................................................................
2003
87.6%
12.4%
100.0%
Percentage of Sales
2002
84.1%
15.9%
100.0%
2001
79.9%
20.1%
100.0%
(1) Does not include manufacturing segment which was sold in December 2003.
Engineering
Revenues to external customers.......................................... $108,380
Operating profit .................................................................. $ 4,575
Total assets ......................................................................... $ 35,531
2003
(amounts in thousands)
2002
$ 74,971
$ 937
$ 30,615
2001
$ 14,235
$ 1,571
$ 31,163
General
Our engineering segment offers engineering consulting services to clients in the petroleum refining,
petrochemical, pipeline, production and process industries for the development, management and turnkey execution
of engineering projects and provides inspection services throughout the United States. The engineering segment is
currently comprised of the following wholly-owned subsidiaries of ENGlobal Corporation: ENGlobal Engineering,
Inc. (“EEI”), RPM Engineering, Inc. d/b/a ENGlobal Engineering, Inc. (“RPM”) and ENGlobal Construction
Resources, Inc. (“ECR”). EEI and RPM focus primarily on providing services to the downstream petroleum refining
and petrochemical industry, including refineries and processing plants, upstream and midstream pipeline companies
and gas plants. ECR primarily provides inspection services to industrial plants throughout the United States.
The engineering segment has approximately 70 existing blanket service contracts pursuant to which it
provides clients either with services on a time and materials basis or with services on a fixed fee, turnkey basis. Our
engineering segment operates out of offices in Baton Rouge and Lake Charles, Louisiana; Beaumont, Houston and
Freeport, Texas; and Tulsa, Oklahoma. Our engineering segment also makes unique, custom-made metering skids
and other process related fabricated systems, designed to customer specifications.
During 2002 and 2003, the engineering segment continued to grow geographically throughout the United
States and into international markets and increased the range of services it provides. As part of our plan to extend
our geographical range to serve the downstream industries, such as the petroleum refining, petrochemical and
process industries in the Freeport Texas area, ENGlobal acquired selected assets of Petro-Chem Engineering, Inc.
(“Petro-Chem”). Petro-Chem has a staff of 55 engineers, designers, inspectors and support personnel who are
engaged on contract projects with several Freeport area clients. This acquisition allowed us to expand into the
Freeport area with experienced staff who have an established reputation for expertise. The Freeport office currently
provides on-site engineering, design and support personnel to a leading chemical client that has facilities in Freeport
and Port Arthur, Texas and Geismar, Louisiana.
Our engineering segment offers its expertise to a broad range of industrial clients. We participate in
projects involving both the modification of existing facilities and construction of new facilities. Our predominant
type of contract is a blanket services contract that typically provides our clients with engineering, procurement and
project management services on a time and materials basis. We also enter into contracts to complete capital projects
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on a full service, turnkey basis. The engineering staff has the capability of developing a project from the initial
planning stages through the detailed design and construction management. Services that we provide include:
conceptual studies,
project definition,
cost estimating,
engineering design,
•
•
•
•
• material procurement, and
•
project and construction management.
We provide services for major energy-related firms at facilities such as chemical plants, crude oil refineries,
electric power generation facilities, cross-country pipelines, pipeline facilities and production processing facilities.
The engineering segment seeks to offer its clients a wide range of services from a single source provider. In
addition, the segment uses an internal virtual private network so that the employees in one location can work on
projects housed in other offices. This capability allows us to provide a greater depth and breadth of expertise to our
clients and helps stabilize the workload in our various offices.
Competition
Our engineering segment competes with a large number of firms of various sizes, ranging from the
industry’s largest firms, which operate on a worldwide basis, to much smaller regional and local firms. Typical
engineering segment competitors include (in alphabetical order): CDI Engineering Group, Jacobs Engineering
Group, Matrix Engineering, Mustang Engineering, S&B Engineering, SNC Lavilan GDS, Inc. and TAG. Many of
our competitors are larger than we are and have significantly greater financial and other resources available to them
than we do.
Competition is primarily centered on performance and the ability to provide the engineering, planning and
project execution skills required to complete projects in a timely and cost efficient manner. The technical expertise
of our management team and technical personnel and the timeliness and quality of our support services, are key
competitive factors. Larger projects, especially international work, typically include pricing alternatives designed to
shift risk to the service provider, or at least to cause the service provider to share a portion of the risks associated
with cost overruns in service delivery. These alternatives include fixed-price, guaranteed maximum price, incentive
fee, competitive bidding and other “value based” pricing arrangements.
Systems
Revenues to external customers.......................................... $ 15,339
Operating profit (loss) ........................................................ $ (803)
Total assets ......................................................................... $ 3,913
2003
(amounts in thousands)
2002
$ 14,151
$ (271)
$ 6,186
2001
$ 3,575
$ (65)
$ 2,587
General
Our systems segment designs, assembles, programs, installs, integrates and services control and
instrumentation systems for specific applications in the energy and processing related industries. The systems
segment currently consists of the following five wholly-owned subsidiaries of ENGlobal Corporation: ENGlobal
Systems, Inc. (“ESI”), ENGlobal Constant Power, Inc. (“ECP”), ENGlobal Technologies, Inc. (“ETI”), Senftleber &
Associates L.P. (“Senftleber”) and ENGlobal Design Group, Inc. (“EDG”).
ESI’s control and instrumentation systems are custom designed and include both conventional pneumatic
and hydraulic control systems, as well as electronic, microprocessor-based controls employing programmable logic.
Typical applications for control and instrumentation systems include oil and gas production safety systems; refinery,
petrochemical and chemical plant controls; analyzer packaging; fire and gas detection systems; pipeline facility
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controls; data acquisition systems; and control systems for various processing equipment. We perform all facets of
control and instrumentation system design, engineering, assembly and testing in-house. Field installation and
technical staff perform start-up and commissioning services, modifications to existing systems, on-site training and
routine maintenance procedures for client operating personnel.
ECP operates in the industrial electrical power backup and conditioned power systems marketplace and
fabricates industrial grade uninterruptible electrical power systems and battery chargers. Both standard and custom-
designed products and systems are fabricated and sold in a wide array of power ranges. These products include:
battery chargers,
battery monitoring systems,
•
•
• DC power supplies,
• DC/AC inverters,
•
•
uninterruptible power systems (“UPS”), and
power distribution systems and solar photo-voltaic systems.
In addition, ECP provides field service support for installation and maintenance of the foregoing products.
Most of the products are made pursuant to specifications required for a particular order. Refineries, petrochemical
plants, pipeline facilities, utilities, offshore platforms and other commercial, industrial and governmental facilities
across the United States utilize the products sold by ECP. ECP’s USGS Intellicharger™ product line of
microprocessor controlled battery chargers has been used as an integral component in major power systems and is
now included in a majority of ECP system units that contain battery chargers.
ETI, a wholly-owned subsidiary that was not operational prior to 2003, provides products and services
supporting the advanced automation and environmental technology fields. Advanced automation services provided
by ETI include automation technology audits, consulting, advanced process controls and process computer services,
multivariable control, optimization (on-line and off-line), neural net applications, operator training simulators,
expert systems and on-site support. ETI supports the environmental technology field by providing predictive
emissions monitoring (“PEMS”), continuous emissions monitoring system (“CEMS”), Flare-Mon® (flare
monitoring system) and air emissions consulting. In October 2003, ETI acquired a small software services company,
Senftleber & Associates, LP, of Houston, Texas, which provides support services for the pipeline industry, primarily
through provision of technical personnel with expertise in SCADA (Supervisory Control and Data Acquisition)
systems.
In January 2004, ENGlobal Design Group, Inc. acquired certain assets of Engineering Design Group, Inc.
(“EDG”) in Tulsa, Oklahoma. EDG provides design, installation and maintenance of various government and public
sector facilities, the most active sector being Automated Fuel Handling Systems serving the U.S. military.
Competition
The systems segment has been impacted by an increased emphasis on pricing by our clients and
competitors and the fact that prices are subject to variations attributable to cyclical conditions in the oil and gas,
petroleum and processing industries. ESI’s control systems and modular facilities compete with similar systems built
by other companies, most of which compete primarily on the basis of pricing. Typical systems competitors include
(in alphabetical order): Aspen Technologies, ICS/Triplex, Puffer Sweiven, PasTech, Scallon Controls, Honeywell
and Siemens.
ECP’s market is characterized by a small number of larger companies that dominate the market and a large
number of similarly sized companies that compete for a limited share of the market. Companies that compete in the
power systems arena are Custom Power, Gutor, LaMarche Mfg., Powerware, SCI and Toshiba.
ETI competes directly with large companies such as Honeywell Hyspec for advanced control consulting.
Smaller independent contractors provide low prices but generally do not provide long-term support and backup.
Aspen Technologies and James/Magnum Associates are also competitors of ETI. We believe that pricing, technical
competence and ability to provide superior service are the primary bases of competition.
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Manufacturing
In December 2003, we sold selected assets of our only manufacturing operation, Thermaire, Inc., which
was engaged in designing, manufacturing and selling air handling equipment under the Thermal brand name. The
38,000 square foot office and manufacturing facility owned by Thermaire was not included in the sale. The
operations formerly conducted by this subsidiary are reflected in this Report as discontinued operations.
Acquisitions and Sales
We have grown our business over the past several years through both internal initiatives and strategic
mergers and acquisitions. These mergers and acquisitions have allowed us to (i) expand our client base and the range
of services that we provide to our clients; and (ii) gain access to new geographic areas. We expect to continue
evaluating and assessing acquisition opportunities to further complement our existing business base. We believe that
strategic acquisitions will enable us to more efficiently serve the technical needs of national and international clients
and strengthen our financial performance. We will also continue to evaluate and assess current operations and from
time to time, sell assets when strategic conditions warrant.
Two acquisitions of operating companies were completed during fiscal 2003. Petro-Chem Engineering, Inc.
(“Petro-Chem”), acquired by EEI and Senftleber & Associates, L.P. (“Senftleber”), acquired by ETI, were acquired
during the third and fourth quarters, respectively. Petro-Chem operates primarily in the Freeport, Texas and
surrounding area. This acquisition primarily provides on-site engineering, design and support personnel to an
existing client that has facilities in Freeport and Port Arthur, Texas and Geismar, Louisiana. Senftleber is a Houston-
based provider of technical personnel with expertise in software systems such as the SCADA system, a service we
believe a number of our clients will be interested in. In January 2004, ENGlobal Design Group, Inc. acquired certain
assets of Engineering Design Group, Inc. (“EDG”) in Tulsa, Oklahoma. EDG provides design, installation and
maintenance of various government and public sector facilities, the most active sector being Automated Fuel
Handling Systems serving the U.S. military. EDG produced revenues of $14.4 million (unaudited) in 2003. The
acquisition of these assets expands our capabilities into government-related engineering and significantly increases
our operations in the Tulsa market.
In December 2003, we completed the sale of certain assets of our subsidiary, Thermaire, Inc., d/b/a
Thermal Corporation, which comprised our manufacturing segment, to Nailor Industries of Texas, Inc., a medium
sized HVAC equipment manufacturer. The disposition had been actively pursued since November 2001 in order to
permit us to strategically focus on our core operations. The sale resulted in a $26,000 gain, net of tax. The 38,000
square foot office and manufacturing facility owned by Thermaire was not included in the transaction. The
Company plans to sell this facility. Information relating to all prior periods throughout this Report treats the
manufacturing segment as discontinued and excludes it from continuing operations.
Business Strategy
Our objective is to strengthen the Company’s position as a leading engineering and consulting services
provider while enhancing the services we offer and expanding our geographic presence. To achieve this objective,
we have developed a strategy comprised of the following key elements:
•
Increase Name Recognition. To present a more cohesive image and increase name recognition, in January
2003 virtually all of ENGlobal’s operating subsidiaries adopted “ENGlobal” as part of their name.
• Enhance and Strengthen Our Ability to Perform Engineering, Procurement and Construction Projects. We
rely heavily on repeat business and referrals from existing customers, industry members and manufacturing
representatives. The engineering segment’s strategy is to increase revenues by developing and marketing its
ability to perform full service turnkey projects, also called EPC (Engineering, Procurement and
Construction) projects. The engineering segment has traditionally been responsible only for the engineering
portion of its projects, which usually represents between five to fifteen percent of a project’s total installed
cost.
• Expand and Enhance Technical Capabilities. We believe that it is important to develop our capabilities in
three-dimensional computer-aided design and drafting (“3D CADD”). To achieve this objective, we
6
•
purchased computer hardware and software during 2003 to implement Integraph’s SmartPlant 3D software,
which is the next generation to plant design system. This initiative should enhance our marketing position
strategically with many customers along the Texas Gulf Coast. We are also developing and using 3D
CADD software tools from other suppliers.
Improve Utilization of Resources. We have developed a work-sharing program through the use of an
internal virtual private network that gives our clients access to technical resources located in any of our
offices and allows for higher utilization of our resources. We believe that the work-sharing program should
reduce employee turnover and provide for a more stable work environment. We are also moving toward
standardization of engineering processes and procedures among our offices, which we believe will enhance
our work-sharing ability and provide our clients with more consistent and higher quality services.
• Pursue Foreign Technical Resources. Our Beaumont engineering office has been testing the use of offshore
technical resources to enable it to access professional engineering and design work in lower cost countries
such as Mexico, India and the Far East. If these tests are ultimately successful, it will allow us to lower our
contract bid prices and enhance our competitive position.
• Acquire Complementary Businesses. We intend to grow in market segments where we currently have a
strong competitive position by acquiring complementary businesses that will permit us to expand or
enhance our existing services. The Company hopes to acquire businesses with higher profit margins, such
as the Senftleber acquisition, or allows us to provide additional services to our existing client base, or when
synergies are likely to result in cost savings. We will also pursue acquisitions that provide entry into
industries that we don’t currently serve. For example, in 2003 we acquired Senftleber and selected assets of
Petro-Chem, both of which enabled us to expand the services we offer our existing clients. Similarly, the
acquisition in January 2004 of the assets of Engineering Design Services, Inc. provides a platform to
perform governmental and military projects, a new industry for ENGlobal.
• Maintain High Quality Service. To maintain high quality service, we focus on being responsive to our
customers, working diligently and responsibly and maintaining schedules and budgets. The Company has a
quality control and assurance program to maintain standards and procedures for performance and
documentation and to audit and monitor compliance with procedures and quality standards.
• Continue to Recruit and Retain Qualified Personnel. We believe recruiting and retaining qualified, skilled
professionals is crucial to our success and growth. As a result, we have dedicated staff focused on
recruiting personnel with experience in the petrochemical industry. We have used inter-company recruiting
to retain key personnel.
Improve the Strategic Focus by Selling Thermaire. In December 2003, we sold most of the assets used by
our subsidiary, Thermaire, Inc. The sale is part of an on-going effort to dispose of assets that we believe
detract from our primary area of focus. We are in the process of seeking a buyer for the real property used
by Thermaire, which is not currently occupied.
•
Sales and Marketing
Our various subsidiaries derive revenues primarily from three sources: (1) in-house direct sales; (2) sales
generated by our network of sales representatives; and (3) referrals from existing customers, industry members and
manufacturing representatives. Our sales representatives are teamed with in-house sales managers and are assigned
to industry segments in the United States. Management believes that this method of selling should result in increased
account penetration and enhanced customer service, which should, in turn, create and maintain the foundation for
long-term customer relationships. Our growth depends in large measure on our ability to attract and retain qualified
sales representatives and sales management personnel. Management believes that in-house marketing and sales of
our products allows for more accountability and control, thus increasing profitability.
Products and services are also promoted through general and trade advertising, participation in trade shows
and through on-line Internet communication via our corporate home page at www.englobal.com. The ENGlobal site
provides information about both of our operating segments. We currently use a third-party service provider to
maintain and update our website and those of our subsidiaries on an ongoing basis. Through the ENGlobal website,
we seek to provide visitors with a single point of contact for obtaining information on the services and products
offered by the ENGlobal family of companies.
7
Our business development department focuses on building long-term relationships with customers and
providing customers with product application, engineering and after-the-sale services. Additionally, we seek to
capitalize on cross-selling opportunities existing between our various subsidiaries. Sales leads are often jointly
developed and pursued by the sales personnel from a number of these subsidiaries.
Much of our business is repeat business and we are introduced to new customers in most cases by referrals
from existing customers and industry members, such as manufacturers’ representatives. Further, we anticipate that
our existing customer base and the potential for business development activities will be expanded with each new
acquisition.
We currently employ 13 full-time professional in-house marketers in our business development department
who concentrate on the engineering services segment, and three full-time professional in-house marketers in our
systems segment. We have retained business development agents in the Middle East and the United Kingdom. We
have also formed alliances with other engineering and construction firms in Mexico City and South America.
Customers
Our customer base consists primarily of Fortune 500 companies representing numerous industries within
the United States. While we do not have continuing dependence on any single client or a limited group of clients,
one or a few clients may contribute a substantial portion of our revenues in any given year or over a period of
several consecutive years due to major engineering projects. For example, during 2003, 36% of our total revenues
were attributable to work done by our engineering segment and our systems segment for one major refining and
petrochemical client, ExxonMobil, through multiple client subsidiaries and plant locations. The majority of this
work was performed through the Beaumont location of our engineering segment on a large EPC project.
We have had success undertaking new projects for prior clients and providing ongoing services to clients
following the completion of the projects. Nevertheless, in order to generate revenues in future years, we must
continue efforts to obtain new engineering projects. Historically, we have not generated significant revenues from
government clients, but we hope to further penetrate the government market as a result of the EDG acquisition.
In recent years, the continuing trend among engineering clients and their industry counterparts has been
toward outsourcing and sole sourcing. This trend has fostered the development of ongoing, longer-term
arrangements with clients, rather than one-time limited engagements. These arrangements, often referred to as
partnering relationships, alliances, or sole source contracts, vary in scope, duration and degree of commitment. For
example, engagements may provide for:
•
•
•
•
a minimum number of work man-hours over a specified period;
the provision of at least a designated percentage of the client’s requirements;
the designation of the Company as the client’s sole source of engineering at a specific location or locations;
or
a non-binding preference or intent, or a general contractual framework for what the parties expect will be
an ongoing relationship.
Despite their variety, the Company believes that these partnering relationships have a stabilizing influence
on our service revenues. At present, we maintain some form of partnering or alliance arrangement with
approximately 50 major oil and chemical companies. Most of our projects are specific in nature and we generally
have multiple projects with the same clients. If we were to lose one or more of our significant clients and are unable
to replace them with other customers or other projects, our business would be materially adversely affected.
In the systems segment, our clients include end-users and operators of facilities relating to oil and gas
products, pipelines, refineries, chemical companies and processing plants. Other clients include equipment
manufacturers, construction contractors and other engineering firms that incorporate our control systems into
facilities and products they design, construct and manufacture. As in the engineering segment, in any given year, a
small number of clients may account for a large percentage of the systems segment’s revenues for that year,
depending on the number of major projects undertaken. Though the systems segment frequently receives work from
repeat clients, its client list may vary significantly from year to year.
8
Our ten largest customers, which vary from one period to the next, accounted for 69% and 60% of our total
revenue in 2003 and 2002, respectively. For 2003, our largest clients, in alphabetical order include:
• Engineering: Atofina, BASF, Chevron Phillips, ExxonMobil, Frontier Refining, Motiva Enterprises and
Premcor Refining Group
• Systems: Enterprise Products, Fluor Daniel, Honeywell, Inc. and Yokogawa Corp of America,
We do not have any long-term commitments from these clients and sales of products from the systems
segment are typically made according to the client’s specifications on a purchase order basis. Our potential revenues
are, therefore, dependent on continuing relationships with these customers.
Contracts
We generally enter into two principal types of contracts with our clients: time and materials contracts and
fixed-price contracts. In fiscal 2003, 85% and 15% of our net revenue was derived from time and materials and
fixed-price contracts, respectively. Our various clients determine which type of contract we will enter into for a
particular engagement.
• Time and Materials. Under our time and materials contracts, we are paid for labor at either negotiated
hourly billing rates or reimbursed for allowable hourly rates and for other expenses. Profitability on these
contracts is driven by billable headcount and cost control. Some of these contracts may have upper limits,
referred to as “not to exceed.” If our costs generate billings that exceed the contract ceiling or are not
allowable, we may not be able to obtain full reimbursement. Further, the continuation of each contract
partially depends upon the customer’s discretionary periodic assessment of our performance on that
contract.
• Fixed-Price. Under a fixed-price contract, we provide the customer a total project for an agreed-upon price,
subject to project circumstances and changes in scope. Fixed-price contracts carry certain inherent risks,
including risks of losses from underestimating costs, delays in project completion, problems with new
technologies and economic and other changes that may occur over the contract period. Another risk
includes our ability to secure written change orders prior to commencing work on such orders, which may
prevent our getting paid for work performed. Consequently, the profitability of fixed-price contracts may
vary substantially.
Backlog
Backlog represents the total value of all awarded contracts that have not been completed and will be
recognized as revenues over the life of the project. At February 29, 2004, our gross revenue backlog was
approximately $67.5 million, compared to $54.4 million at December 31, 2002. We estimate that approximately
75% of the gross revenue backlog at February 29, 2004 will be recognized during fiscal 2004.
Gross revenue includes backlog under two types of contracts: (1) contracts for which work authorizations
have been received on a fixed-price basis and not-to-exceed projects that are well defined and (2) time and material
evergreen contracts at an assumed 12 month run-rate, where we place employees at our clients’ site to perform day-
to-day project efforts.
Although backlog reflects business that we consider to be firm, cancellations or scope adjustments may
occur. Further, most contracts with clients may be terminated at will, in which case the client would only be
obligated to us for services provided through the termination date. We have adjusted backlog to reflect project
cancellations, deferrals and revisions in scope and cost (both upward and downward) known at the reporting date;
however, future contract modifications or cancellations may increase or reduce backlog and future revenues. As a
result, no assurances can be given that the amounts included in backlog will ultimately be realized.
9
Customer Service and Support
We provide service and technical support to our customers in varying degrees depending upon the business
line and on customer contractual arrangements. The Company’s technical support staff provides initial telephone
support services for end-user customers and distributors. These services include isolating and verifying reported
product failures and authorizing repair services in support of customer requirements. We also provide on-site
engineering support if a technical issue cannot be resolved over the telephone. On projects for which we have
provided engineering systems, we provide worldwide start-up and commissioning services. We also provide the
manufacturers’ limited warranty coverage for products we sell.
Dependence Upon Suppliers
Our ability to provide clients with services and products in a timely and competitive manner depends on the
availability of products and parts from our suppliers at competitive prices and on reasonable terms. Our suppliers are
not obligated to have products on hand for timely delivery nor can they guarantee product availability in sufficient
quantities to meet our demands. There can be no assurance that we will be able to obtain necessary supplies at prices
or on terms we find acceptable. However, in an effort to maximize product availability and maintain quality control,
we generally procure components from multiple distributors.
For example, all of the product components used by our systems segment are fabricated using components
and materials that are available from numerous domestic suppliers. There are approximately 36 principal suppliers
of these components, each of whom can be replaced by an equally viable competitor. No one manufacturer or
vendor provides products that account for 10% or more of our revenues. Thus, we anticipate little or no difficulty in
obtaining components in sufficient quantities and in a timely manner to support our manufacturing and assembly
operations. Units produced through the systems segment are normally not produced for inventory and component
parts are typically purchased on an as-needed basis.
Despite the foregoing, some of our subsidiaries rely on certain suppliers for necessary components and
there can be no assurance that these components will continue to be available on acceptable terms. If a subsidiary
terminates a long-standing supply relationship, it may be difficult to obtain alternative sources of supply without a
material disruption in our ability to provide products and services to our customers. While we do not believe that
such a disruption is likely, if it did occur, it could have a material adverse effect on our financial condition and
results of operations.
Patents, Trademarks, Licenses
Our success depends in part upon our ability to protect our proprietary technology, which we do primarily
through protection of our trade secrets and confidentiality agreements. We have pending trademark applications on
file with the U.S. Patent and Trademark Office for the names “ENGlobal,” “Flare-Mon” and “Purchased Data.”
There can be no assurance that the protective measures we currently employ will be adequate to prevent the
unauthorized use or disclosure of our technology, or the independent third party development of the same or similar
technology. Although our competitive position to some extent depends on our ability to protect our proprietary and
trade secret information, we believe that other factors, such as the technical expertise and knowledge-base of our
management and technical personnel and the timeliness and quality of the support services we provide, will also
help us to maintain our competitive position.
Government Regulations
The Company and certain of our subsidiaries are subject to various foreign, federal, state, and local laws
and regulations relating to our business and operations, and various health and safety regulations as established by
the Occupational Safety and Health Administration. The Company and members of its professional staff are subject
to a variety of state, local, and foreign licensing, registration and other regulatory requirements governing the
practice of engineering. Many of our engineering professionals are licensed or registered in several states and
foreign jurisdictions. Currently, we are not aware of any situation or condition relating to the regulation of the
Company, its subsidiaries, or personnel that we believe is likely to have a material adverse effect on our results of
operations or financial condition.
10
Employees
As of December 31, 2003, the Company and its subsidiaries employed 1,023 individuals. Of these
employees, 16 were employed in sales and marketing; 606 were employed in engineering and related positions; 116
were employed in technical production positions; 30 were employed as inspectors; 220 were employed as project
support staff; and 35 were employed in administration, finance and management information systems. We believe
that our ability to recruit and retain highly skilled and experienced technical, sales and management personnel has
been and will continue to be, critical to our ability to execute our business plan. None of our employees are
represented by a labor union or are subject to a collective bargaining agreement. We believe that relations with our
employees are good.
2003 Restructure
To streamline our operations, in December 2003, we dissolved a number of inactive subsidiaries, merged
certain subsidiaries out of existence and transferred ownership of other subsidiaries in order to more clearly
delineate, in terms of corporate structure, between our engineering segment and our systems segment. Also in
December 2003, we sold assets of our manufacturing segment, which had been owned by Thermaire, Inc. d/b/a
Thermal Corporation, to Nailor Industries of Texas, Inc., a medium-sized HVAC equipment manufacturer. We no
longer operate a manufacturing segment. In addition, to increase our name recognition, all of our active subsidiaries,
except for Senftleber & Associates, L.P., adopted “ENGlobal” as part of their names. Currently, the subsidiaries in
our segments are:
Engineering segment: ENGlobal Engineering, Inc., RPM Engineering, Inc. d/b/a ENGlobal Engineering,
Inc. and ENGlobal Construction Resources, Inc.
Systems segment: ENGlobal Systems, Inc., ENGlobal Constant Power, Inc., ENGlobal Technologies, Inc.,
Senftleber & Associates, L.P. and ENGlobal Design Group, Inc.
ENGlobal is also the parent of ENGlobal Corporate Services, Inc., which serves as an administrative and
financing subsidiary.
Risk Factors
Set forth below and elsewhere in this Report and in other documents we file with the SEC are risks and
uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking
statements contained in this Report. You should be aware that the occurrence of any of the events described in these
risk factors and elsewhere in this Report could have a material adverse effect on our business, financial condition
and results of operations and that upon the occurrence of any of these events, the trading price of our common stock
could decline.
We are engaged in highly competitive businesses and must typically bid against competitors to obtain
engineering and service contracts.
We are engaged in highly competitive businesses in which customer contracts are typically awarded
through competitive bidding processes. We compete with other general and specialty contractors, both foreign and
domestic, including large international contractors and small local contractors. Some competitors have greater
financial and other resources than we do, which, in some instances, could give them a competitive advantage over
us.
Our business and operating results could be adversely affected by our inability to accurately estimate the
overall risks, revenue or costs on a contract.
We generally enter into two principal types of contracts with our clients: time and materials contracts and
fixed-price contracts. Under our fixed-price contracts, we receive a fixed-price irrespective of the actual costs we
incur and, consequently, we are exposed to a number of risks. These risks include underestimation of costs,
11
problems with new technologies, unforeseen expenditures or difficulties, delays beyond our control and economic
and other changes that may occur during the contract period. Our ability to secure change orders on scope changes
and our ability to invoice for such changes poses an additional risk. In fiscal 2003, approximately 15% of our net
revenue was derived from fixed-price contracts.
Under our time and materials contracts, we are paid for labor at negotiated hourly billing rates or
reimbursement at specified mark-up hourly rates and negotiated rates for other expenses. Profitability on these
contracts is driven by billable headcount and cost control. Some time and materials contracts are subject to contract
ceiling amounts, which may be fixed or performance-based. If our costs generate billings that exceed the contract
ceiling or are not allowable under the provisions of the contract or any applicable regulations, we may not be able to
obtain reimbursement for all of our costs.
Revenue recognition for a contract requires judgment relative to assessing the contract’s estimated risks,
revenue and costs and on making judgments on other technical issues. Due to the size and nature of many of our
contracts, the estimation of overall risk, revenue and cost at completion is complicated and subject to many
variables. Changes in underlying assumptions, circumstances or estimates may also adversely affect future period
financial performance.
Economic downturns could have a negative impact on our businesses.
Demand for the services offered by us has been and is expected to continue to be, subject to significant
fluctuations due to a variety of factors beyond our control, including economic conditions. During economic
downturns, the ability of both private and governmental entities to make expenditures may decline significantly. We
cannot be certain that economic or political conditions will be generally favorable or that there will not be
significant fluctuations adversely affecting our industry as a whole or key markets targeted by us.
Our dependence on one or a few customers could adversely affect us.
One or a few clients have in the past and may in the future contribute a significant portion of our
consolidated revenues in any one year or over a period of several consecutive years. In 2003, approximately 36% of
our revenues were from ten subsidiaries of ExxonMobil and approximately 20% of our revenues were from Chevron
Phillips. As our backlog frequently reflects multiple projects for individual clients, one major customer may
comprise a significant percentage of our backlog at any point in time. Because these significant customers generally
contract with us for specific projects, we may lose these customers from year to year as their projects with us are
completed. If we do not replace them with other customers or other projects, our business could be materially
adversely affected. Additionally, we have long-standing relationships with many of our significant customers. Our
contracts with these customers, however, are on a project-by-project basis and the customers may unilaterally reduce
or discontinue their purchases at any time. The loss of business from any one of such customers could have a
material adverse effect on our business or results of operations.
Our loan agreement also specifies limits in concentration of receivables to any one client (other than
ExxonMobil) to 20% of all trade account balances, thereby reducing our ability to borrow. The limit on the
ExxonMobil balance is set at 30% of all trade receivables.
Additional acquisitions may adversely affect our ability to manage our business.
Our growth has been, in large part, the result of acquisitions of companies. We plan to continue making
acquisitions in the future on terms management considers favorable to us. The successful acquisition of other
companies involves an assessment of future revenue opportunities, operating costs, economies and earnings after the
acquisition is complete, potential industry and business risks and liabilities beyond our control. This assessment is
necessarily inexact and its accuracy is inherently uncertain. In connection with our assessments, we perform reviews
of the subject acquisitions we believe to be generally consistent with industry practices. These reviews, however,
may not reveal all existing or potential problems, nor will they permit a buyer to become sufficiently familiar with
the target companies to assess fully their deficiencies and capabilities. We cannot assure you that we will identify,
finance and complete additional suitable acquisitions on acceptable terms. We may not successfully integrate future
acquisitions. Any acquisitions may require substantial attention from our management, which may limit the amount
12
of time that management can devote to day-to-day operations. Our inability to find additional attractive acquisition
candidates or to effectively manage the integration of any businesses acquired in the future could adversely affect
our ability to grow profitably or at all.
Seasonality of our industry may cause our revenues to fluctuate.
Holidays and employee vacations during our fourth quarter exert downward pressure on revenues for that
quarter, which is only partially offset by the year-end efforts on the part of many clients to spend any remaining
funds budgeted for engineering services or capital expenditures during the year. The annual budgeting and approval
process under which these clients operate is normally not completed until after the beginning of each new year,
which can depress results for the first quarter. Principally due to these factors, our revenues during the first and
fourth quarters generally tend to be lower than in the second and third quarters.
The failure to attract and retain key professional personnel could adversely affect the Company.
Our success depends on attracting and retaining qualified personnel in a competitive environment. We are
dependent upon our ability to attract and retain highly qualified managerial, technical and business development
personnel. Competition for key personnel is intense. We cannot be certain that we will retain our key managerial,
technical and business development personnel or that we will attract or assimilate key personnel in the future.
Failure to retain or attract such personnel could materially adversely affect our businesses, financial position, results
of operations and cash flows.
Liability claims could result in losses.
Providing engineering and design services involves the risk of contract, professional errors and omissions
and other liability claims, as well as adverse publicity. Further, many of our contracts will require us to indemnify
our clients not only for our negligence, if any, but also for the concurrent negligence of our clients. We currently
maintain liability insurance coverage, including coverage for professional errors and omissions. However, claims
outside of or exceeding our insurance coverage may be made. A significant claim could result in unexpected
liabilities, take management time away from operations and have a material adverse impact on our cash flow.
If the operating result of either segment is adversely affected, an impairment of goodwill could result in
a write down.
Based on factors and circumstances impacting ENGlobal and the business climate in which it operates, the
Company may determine that it is necessary to re-evaluate the carrying value of its goodwill by conducting an
impairment test in accordance with SFAS No. 142. The Company has assigned goodwill to the two segments based
on estimates of the relative fair value of each segment. If changes in the industry, market conditions, or government
regulation negatively impact either of the Company’s segments resulting in lower operating income, if assets are
harmed, if anticipated synergies or cost savings are not realized with newly acquired entities, or if any circumstance
occurs which result in the fair value of either segment reducing below its carrying value, an impairment to goodwill
could be created. In accordance with SFAS No. 142, the Company would be required to write down the carrying
value of goodwill.
Our Board of Directors may authorize future sales of ENGlobal common stock, which could result in a
decrease in value to existing stockholders of the shares they hold.
Our Articles of Incorporation authorize our board of directors to issue up to an additional 49,912,621 shares
of common stock and an additional 2,265,167 shares of preferred stock. These shares may be issued without
stockholder approval unless the issuance is 20% or more of our outstanding common stock, in which case the
American Stock Exchange requires stockholder approval. We may issue shares of stock in the future in connection
with acquisitions or financings. In addition, we may issue shares in connection with our Employee Stock Purchase
Plan and we may issue options as incentives under our Option Plan. Future issuances of substantial amounts of
common stock, or the perception that these sales could occur, may affect the market price of our common stock. In
addition, the ability of the board of directors to issue additional stock may discourage transactions involving actual
13
or potential changes of control of the Company, including transactions that otherwise could involve payment of a
premium over prevailing market prices to holders of our common stock.
Our backlog is subject to unexpected adjustments and cancellations and is, therefore, an uncertain
indicator of our future earnings.
As of February 29, 2004, our backlog was approximately $67.5 million. We cannot assure investors that the
revenues projected in our backlog will be realized or, if realized, will result in profits. Projects may remain in our
backlog for an extended period of time prior to project execution and, once project execution begins, it may occur
unevenly over the current and multiple future periods. In addition, project termination, suspensions or reductions in
scope may occur from time to time with respect to contracts reflected in our backlog. Such backlog reductions
would reduce the revenue and profit we actually receive from contracts reflected in our backlog. Future project
cancellations and scope adjustments could further reduce the dollar amount of our backlog and the revenues and
profits that we actually earn.
Our dependence on subcontractors and equipment manufacturers could adversely affect us.
We rely on third-party subcontractors as well as third-party suppliers and manufacturers to complete our
projects. To the extent that we cannot engage subcontractors or acquire supplies or materials, our ability to complete
a project in a timely fashion or at a profit may be impaired. If the amount we are required to pay for these goods and
services exceeds the amount we have estimated in bidding for fixed-price or cost-plus contracts, we could
experience losses in the performance of these contracts. In addition, if a subcontractor or supplier is unable to
deliver its services or materials according to the negotiated terms for any reason, including the deterioration of its
financial condition, we may be required to purchase the services or materials from another source at a higher price.
This may reduce the profit to be realized or result in a loss on a project for which the services or materials were
needed.
Our quarterly operating results may fluctuate significantly, which could have a negative effect on the
price of our common stock.
Our quarterly revenue, expenses and operating results may fluctuate significantly because of a number of
factors, including:
• Unanticipated changes in contract performance that may effect profitability, particularly with contracts that
have funding limits;
• The seasonality of the spending cycle of our clients;
• Acquisitions or the integration of acquired companies;
• Employee hiring and utilization rates;
• The number and significance of client engagements commenced and completed during a quarter;
• Credit worthiness and solvency of clients;
• The ability of our clients to terminate engagements without penalties;
• Delays incurred in connection with an engagement;
• The size and scope of engagements;
• The timing of expenses incurred for corporate initiatives;
• Reductions in the prices of services offered by our competitors;
• Changes in accounting rules; and
• General economic or political conditions.
Variations in any of these factors could cause significant fluctuations in our operating results from quarter
to quarter and could result in net losses. These fluctuations could result in downward pressure on the market price of
our common stock.
If we are not able to successfully manage our growth strategy, our business and results of operations
may be adversely affected.
14
We have grown rapidly over the last several years. Our growth presents numerous managerial,
administrative, operational and other challenges. Our ability to manage the growth of our operations will require us
to continue to improve our management information systems and maintain discipline in our internal systems and
controls. In addition, our growth will increase our need to attract, develop, motivate and retain both our management
and professional employees. The inability of our management to effectively manage our growth or the inability of
our employees to achieve anticipated performance could have a material adverse effect on our business.
The price of our common stock may be volatile.
Our common stock may be subject to substantial price volatility. The stock market has experienced extreme
price and volume fluctuations that have affected the market price of many companies and that have often been
unrelated to the operating performance of these companies. The overall market and the price of our common stock
may continue to fluctuate greatly. The trading price of our common stock may be significantly affected by various
factors, including:
• Quarter to quarter variations in our financial results, including revenue, profits and other measures of
financial performance or financial condition;
• Announcements by us or our competitors of significant acquisitions;
• Threatened or pending litigation;
• Changes in investors’ and analysts’ perceptions of our business, our competitors’ businesses, or the
businesses we serve;
Investors’ and analysts’ assessments of reports prepared or conclusions reached by third parties;
•
• Broader market fluctuations; and
• General economic or political conditions.
Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability
to retain key employees, many of whom are granted stock options, the value of which are dependent on the
performance of our stock price.
A small number of stockholders own a significant portion of our outstanding common stock, thus
limiting the extent to which other stockholders can effect decisions subject to stockholder vote.
Directors, executive officers and principal stockholders of ENGlobal and their affiliates, beneficially own
approximately 62% of our outstanding common stock on a fully diluted basis. Accordingly, these stockholders, as a
group, are able to control the outcome of stockholder votes, including votes concerning the adoption or amendment
of provisions in our Articles of Incorporation or bylaws and the approval of mergers and other significant corporate
transactions. The existence of these levels of ownership concentrated in a few persons makes it unlikely that any
other holder of common stock will be able to affect the management or direction of the Company. These factors
may also have the effect of delaying or preventing a change in management or voting control of the Company.
Nominees for the board of directors are designated by a voting agreement so stockholders who are not
parties to the voting agreement may not have a meaningful vote in the election of directors.
In connection with our merger with Petrocon Engineering, Inc, holders of approximately 56% of the
outstanding shares of the Company entered into a voting agreement agreeing to vote their shares in the election of
directors in favor of three nominees of Alliance 2000, Ltd. (“Alliance”), two nominees of certain former
shareholders of Petrocon, one nominee of Equus II Incorporated (“Equus”) (the Equus nominee becoming a
nominee of certain former shareholders of Petrocon once the Equus debt is paid) and one nominee selected by the
mutual agreement of Alliance and certain former shareholders of Petrocon. In 2003, Equus forfeited its right to have
a nominee on the board of directors. As a result, under the terms of the voting agreement, certain former
shareholders of Petrocon are entitled to the additional nominee made available through the Equus forfeiture.
15
ITEM 2.
PROPERTIES
Facilities
We lease eleven buildings in the U.S. totaling approximately 250,000 square feet and we own an office
building in Baton Rouge, Louisiana with 27,500 square feet. The leases have remaining terms ranging from monthly
to seven years and are at what we consider to be commercially reasonable rental rates. Our principal office locations
are in Houston and Beaumont, Texas, with other offices in Freeport, Texas, Baton Rouge and Lake Charles,
Louisiana, and Tulsa, Oklahoma. Approximately 199,000 square feet of our total office space is designated for use
by our professional, technical and administrative personnel. We believe that our office and other facilities are well
maintained and adequate for existing and planned operations at each operating location. Our systems segment
performs fabrication assembly at two shop facilities in Houston, Texas with approximately 46,800 square feet of
warehouse space.
We lease approximately 14,000 square feet of office space in Beaumont, Texas with an expiration date of
June, 2005 from a joint venture owned one-third by each of: ENGlobal Engineering, Inc., Michael L. Burrow (the
Company’s CEO), and a stockholder of the Company who owns less than 1% of the Company’s stock. We believe
that this lease is at a commercially reasonable rental rate.
The building formerly occupied by Thermaire, totaling approximately 38,000 square feet, is vacant and on
the market for sale. This space has not been included in the office or warehouse statistics.
One leased facility, formerly occupied by ECP, has been vacated and an early termination notice has been
sent to the landlord. ECP relocated effective January 1, 2004 to a site that ESI occupies to reduce overhead
expenses. The lease on the vacant space will terminate in June 2004 unless a subleasee can be found.
In Tulsa, we are utilizing approximately 60% of our available space. In Houston, we have approximately a
90% utilization of available office space. In Beaumont, we are utilizing 100% of the available space. The Lake
Charles office is approximately 50% occupied and the Baton Rouge and Freeport facilities are approximately 70%
utilized. The Houston warehouse facilities are approximately 70% utilized.
Below is a complete listing of the space leased and owned with the expiration dates of the leases.
Location
Square Feet
Beaumont.........................................................
Houston............................................................
Lake Charles ....................................................
Tulsa ................................................................
Freeport............................................................
Baton Rouge ....................................................
Lease Expiration
Date
2011
2005
42,880
37,798
13,590 Month to Month
51,816
40,227
8,178
32,555
23,000
27,500
277,544
2005
2004
2006
2005
2007
Owned
ITEM 3.
LEGAL PROCEEDINGS
From time to time, we are involved in various legal proceedings arising in the ordinary course of business
that are incidental to our business. As of the date of this filing, we are party to several legal proceedings that have
been reserved for or are covered by insurance, or that, if determined adversely to us individually or in the aggregate,
would not have a material adverse effect on our results of operations or financial position.
During 2003, the Company and its subsidiaries, and more than 40 other parties were named defendants in
several petitions for damages filed in various district courts in Louisiana (East Baton Rouge, Calcasieu, Iberville,
Ascension, and Orleans Parishes) on behalf of former employees of Barnard and Burk, Inc. The plaintiffs, who
16
allege exposure to asbestos during the course of their employment, were employees of Barnard and Burk, Inc.
during a period covering the late 1950’s through the early 1980’s at facilities in Louisiana. In 1994, AMEC
Engineering, Inc. assigned the trade name “Barnard and Burk” to RPM Engineering, Inc. along with selected assets.
No liabilities were assumed by RPM. The Company’s wholly-owned subsidiary, ENGlobal Engineering, Inc.,
formerly known as Petrocon Engineering, Inc., acquired RPM (along with the “Barnard and Burk” trade name) in
1996 pursuant to a stock purchase agreement. Because Petrocon acquired only the “Barnard and Burk” trade name,
and none of its liabilities, the Company is seeking to be extricated from the suits via summary judgment. The
Company believes the lawsuits are without merit and intends to defend them vigorously.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION AND HOLDERS
The Company’s common stock has been quoted on the American Stock Exchange (“AMEX”) since
June 16, 2002, under the symbol “ENG.” From its initial listing on AMEX on June 16, 1998 to June 15, 2002, the
Company’s stock was traded under the symbol “IDS.” Newspaper stock listings identify us as “ENGlobal.”
The following table sets forth the high and low sales prices of our common stock for the periods indicated.
First Quarter........................................
Second Quarter ...................................
Third Quarter ......................................
Fourth Quarter ....................................
Year Ended
December 31, 2003
Year Ended
December 31, 2002
High
1.98
2.97
3.80
2.89
Low
1.00
1.70
2.24
1.87
High
0.92
1.15
0.97
1.52
Low
0.60
0.66
0.76
0.75
The foregoing figures, based on information published by AMEX, do not reflect retail mark-ups or
markdowns and may not represent actual trades.
In connection with our December 2001 merger with Petrocon, we issued 2,500,000 shares of Series A
Preferred Stock, $0.001 par value per share, to Equus II Incorporated. In 2002 and 2003, we issued dividends to
Equus in the form of 88,000 shares and 146,833 shares of Series A Preferred Stock. Effective August 2003, the
Company exercised its right to convert all outstanding Series A Preferred Stock to 1,149,089 shares of common
stock.
As of February 28, 2004, approximately 233 stockholders of record held the Company’s common stock.
This does not include individual participants in security position listings.
17
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information concerning the Company’s equity compensation plans as
of December 31, 2003.
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
(a)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
Number of Securities
Remaining Available For
Future Issuance Under
Equity Compensation Plans
(Excluding Securities in
Column (a))(c)
1,257,168 (1)
234,774 (2)
1,491,942
$ 2.11
4.26
$ 2.45
822,257
-
822,257
Plan Category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
(1)
Includes options issued through our 1998 Incentive Plan. Also includes incentive options granted as replacement
options for outstanding Petrocon incentive options pursuant to the terms of the December 2001 Merger Agreement with
Petrocon. Effective with the Petrocon merger, 1,737,473 shares were placed in escrow by a group of significant
Petrocon stockholders under the terms of an Option Escrow Agreement. Under this agreement, shares from the Option
Escrow will replace shares issued by ENGlobal due to the exercise of converted Petrocon options and warrants. Thus,
the Option Escrow Agreement has the effect of preventing future dilution to ENGlobal stockholders due to exercise of
converted Petrocon options and warrants. The Option Escrow Agreement continues in effect until all existing
replacement options and warrants have been exercised, terminated, or cancelled. During 2003, options to acquire
27,710 shares of common stock were exercised through the Option Escrow Agreement. For a brief description of the
material features of the Plan, see Note 10 of the Notes to the Consolidated Financial Statements.
(2)
Includes non-qualified options granted as replacement options for outstanding Petrocon options pursuant to the terms of
the Merger Agreement (see Note 10 to the Consolidated Financial Statements). These options are included in the
Option Indemnification Agreement discussed in footnote (1).
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on its common stock. The Company intends to
retain any future earnings for reinvestment in its business and does not intend to pay cash dividends in the
foreseeable future. In addition, restrictions contained in our loan agreements governing our credit facility with Fleet
Capital Corporation preclude us from paying any dividends on our common stock while any debt under those
agreements is outstanding. The payment of dividends in the future will depend on numerous factors, including the
Company’s earnings, capital requirements, operating and financial position and general business conditions.
Dividends on outstanding shares of Series A Preferred Stock were paid on the last day of May in 2002 and
2003 in shares of stock of Series A Preferred Stock at a rate of 0.08 shares for each outstanding share of Series A
Preferred Stock. The Company elected to convert all shares of preferred stock to 1,149,089 shares of common stock
in August 2003.
ITEM 6.
SELECTED FINANCIAL DATA
SUMMARY OF SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables set forth our selected financial data. The data for the years ended December 31, 2003, 2002,
and 2001 have been derived from the audited financial statements appearing elsewhere in this document. The data as
of December 31, 2001 and for the years ended December 31, 2000 and 1999 have been derived from audited
financial statements not appearing in this document. You should read the selected financial data set forth below in
conjunction with our financial statements and the notes thereto included in Part IV, Item 15, and Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other financial
18
information appearing elsewhere in this document. In addition, the merger with Petrocon in December 2001 should
be considered in connection with your review of this information.
Note: Due to the sale of Thermaire, all items related to the previously reported manufacturing segment
have been reclassified to discontinued operations in order to provide comparative results. Previously reported
amounts will not agree to the amounts presented below except net income.
2003
Years Ended December 31,
2000
2001
(In thousands, except per share amounts)
2002
1999
Statement of Operations:
Revenues:
Engineering ...........................................
Systems .................................................
Total revenues .......................................
$108,380
15,339
123,719
$74,971
14,151
89,122
$14,235
3,575
17,810
$10,740
2,815
13,555
$5,978
3,109
9,087
Costs and expenses:
Cost of engineering ...............................
Cost of systems .....................................
Selling, general and administrative .......
Total costs and expenses ................
Operating income......................................
Interest income (expense), net ..................
Other income (expense), net .....................
Income from continuing operations
93,579
13,167
12,439
119,185
4,534
(784)
(355)
62,877
11,840
10,632
85,349
3,773
(821)
143
10,433
3,107
2,836
16,376
1,434
14
14
before provision for income taxes .........
3,395
3,095
1,462
Provision for income taxes .......................
Income from operations ............................
Income (loss) from discontinued
1,110
2,285
1,197
1,898
operations, net of taxes..........................
(154)
(146)
Gain (loss) on disposal of discontinued
operations ..............................................
Net income (loss)...........................
26
$2,157
-
$1,752
595
867
115
-
$982
8,175
2,156
2,679
13,010
545
49
23
617
151
466
(85)
-
$381
4,378
2,459
1,984
8,821
266
44
100
410
199
211
(53)
(481)
$(323)
19
2003
Years Ended December 31,
2000
2001
(In thousands, except per share amounts)
2002
1999
Per Share Data:
Basic earnings (loss) per share:
Continuing operations ............................
Discontinued operations.........................
Net income (loss) per share....................
$ 0.092
(0.005)
0.087
$ 0.073
(0.006)
0.067
$ 0.065
0.009
0.074
$ 0.036
(0.007)
0.029
$ 0.016
(0.041)
(0.025)
Weighted average common shares
outstanding – Basic ................................
23,301
22,861
13,236
12,965
13,056
Diluted earnings (loss) per share:
Continuing operations.............................
Discontinued operations..........................
Net income (loss) per share.....................
$ 0.091
(0.005)
0.086
$ 0.073
(0.006)
0.067
$ 0.065
0.009
0.074
$ 0.036
(0.007)
0.029
$ 0.016
(0.041)
(0.025)
Weighted average common shares
outstanding – Diluted .............................
23,734
23,013
13,236
12,965
13,056
Cash Flow Data:
Operating activities, net ..........................
Investing activities, net ...........................
Financing activities, net ..........................
Discontinued operations, net of tax.........
Net change in cash and cash
$ 6,557
(471)
(6,122)
-
$ 1,302
(1,290)
(1,182)
-
$ 744
5
253
-
$ 27
(468)
19
-
$ 94
(209)
(197)
(250)
equivalents ..........................................
$ (36)
$ (1,170)
$ 1,002
$ (422)
$ (562)
Balance Sheet Data
Working capital.......................................
Property and equipment, net ...................
Total assets..............................................
Long-term debt .......................................
Capital leases ..........................................
Stockholders’ equity ...............................
$ 6,505
4,302
42,530
8,129
20
18,175
$ 8,416
4,779
40,068
13,323
24
13,389
$ 5,703
4,095
38,286
13,489
32
11,846
$ 3,217
460
7,052
21
-
4,159
$ 3,216
240
5,914
-
-
3,975
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion is qualified in its entirety by, and should be read in conjunction with, our
Consolidated Financial Statements including the Notes thereto, included elsewhere in this Annual Report on Form
10-K. Footnote 17 to the Financial Statements contains segment information.
Forward-Looking Statements
Certain information contained in this Form 10-K Annual 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 SEC, press releases, conferences, or otherwise,
may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act
of 1934. This information includes, 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
20
Company and its management, identify forward-looking statements that could differ materially from the results
described in the forward-looking statements due to the risks and uncertainties set forth in this Annual Report on
Form 10-K.
Overview
We furnish engineering consulting and control system services to the petroleum refining, petrochemical,
pipeline, production and processing industries. Our business consists of two segments: engineering and systems.
Our engineering segment offers engineering consulting services to clients for the development, management and
turnkey execution of engineering projects and inspection services. Our systems segment designs, assembles,
programs, installs, integrates and services control and instrumentation systems for specific applications in the energy
and processing related industries.
In 2003, the engineering segment accounted for 87.6% of our total revenues for the year, and realized a
$33.4 million increase in its revenues over fiscal year 2002. This increase in revenues is primarily attributable to a
large co-generation project and a large cyclohexane project, both of which originated out of our Beaumont office.
We expect to complete the cyclohexane project in the first quarter of 2004 and to continue working on the
cogeneration project until 2005. Our engineering segment has been successful in obtaining major projects in the
petroleum refining industry along the Texas Gulf Coast, and mid-continent area. However, we do not currently have
any projects that would replace the cogeneration project when it is completed.
The systems segment contributed 12.4% of our total revenues for fiscal 2003, as its revenues improved $1.2
million from $14.2 million in 2002 to $15.3 million in 2003. This growth is attributable to large fixed-price sales of
remote instrument enclosures to two clients. Although the revenues for this segment improved over 2002, the gross
profit declined due to cost overruns on fixed-price projects and competitive market pressures on pricing.
We formerly operated a third segment, the manufacturing segment. Certain assets of this segment were sold
in December 2003 and its financial results are reported in Discontinued Operations.
Results of Operations
The following table sets forth, for the periods indicated, certain financial data derived from our
consolidated statements of operations and indicates percentage of total revenue for each item (in thousands). The
manufacturing segment is in Discontinued Operations.
Years ended December 31,
2003
2002
2001
Amount
%
Amount
%
Amount
%
Revenue:
Engineering ........................................... $ 108,380
Systems..................................................
15,339
Total revenue.........................................
123,719
87.6
12.4
100.0
$ 74,971
14,151
89,122
84.1
15.9
100.0
$ 14,235
3,575
17,810
79.9
20.1
100.0
Gross profit:
Engineering ..........................................
Systems..................................................
Total gross profit ...................................
Income from continuing operations...........
Income (loss) on discontinued
14,801
2,172
16,973
2,285
13.7
14.2
13.7
1.8
12,095
2,311
14,406
1,898
16.1
16.3
16.2
2.1
3,802
468
4,270
867
operations...............................................
(128)
Net income ................................................ $ 2,157
(0.1)
1.7
(146)
$ 1,752
(0.2)
2.0
115
$ 982
26.7
13.1
24.0
4.9
(0.6)
5.5
21
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Total Revenue. Total revenue increased by $34.6 million or 38.8% from revenues of $89.1 million in 2002
to $123.7 million in 2003. The revenue growth for 2003 compared to 2002 is primarily attributable to the
engineering segment, which was awarded engineering, procurement, and construction (“EPC”) phases of major
projects. The engineering segment realized an increase in its engineering revenues of $33.4 million primarily due to
two large projects at the Beaumont location, a co-generation project and a cyclohexane project. These projects
contributed revenues of more than $42.4 million during 2003, including materials and subcontractors’ revenues of
$29.8 million. Usually the engineering segment’s revenues are derived from direct labor. Procurement activities
contributed to a significant increase in revenues but at a lower mark-up on these EPC projects. The labor-based
revenues for engineering were $73.9 million, $69.8 million, and $13.6 million in 2003, 2002, and 2001, respectively.
By comparison, the procurement-based revenues were $34.5 million, $5.2 million, and $0.6 million in 2003, 2002,
and 2001, respectively. Revenues generated from procurement activities are anticipated to be lower in 2004 than
2003 since the cyclohexane project is concluding in the first quarter of 2004. Gross profit margins are expected to
increase as a percentage of revenues in 2004 because the profits on procurement activities are lower than profits on
direct labor.
Performance in the other areas of the engineering segment was mixed. Significant growth occurred in the
Tulsa area during 2003 with an increase in revenues of 84%, from $2.5 million in 2002 to $4.6 million in 2003. This
growth was due to a concerted marketing effort to bring work to this location. The Houston area, which has
traditionally serviced the pipeline industry, has had disappointing sales. The pipeline industry continues to be over
leveraged, and capital expansions have been on hold for over two years while the industry focuses on debt reduction.
The economy in the Baton Rouge area continued to be very disappointing during the early part of 2003, but
improved in the fourth quarter. However, competition in this area resulted in lower margins. Revenues for 2003
decreased from 2002 by $5.1 million in the Baton Rouge area. Fortunately, the fourth quarter showed signs of
improvement; Baton Rouge revenues improved 24% during the last quarter in 2003 as compared to the same quarter
in 2002.
The systems segment’s revenues improved $1.1 million from $14.2 million in 2002 to $15.3 million in
2003. ESI’s revenues improved $2.1 million from $11.0 million in 2002 to $13.2 million in 2003. This growth was
attributable to large fixed-price sales of remote instrument enclosures to two clients. Offsetting this increase was a
decrease in revenues at ECP of $1.5 million. As of January 2004, ECP has physically moved into the Houston ESI
location to help reduce its overhead expenses by sharing employees and reducing rent and utility costs. ETI, a
previously dormant entity, which was reactivated in 2003, and Senftleber, a November 2003 acquisition, generated
combined revenues of $0.6 million in 2003.
The manufacturing segment was discontinued when certain assets of Thermaire were sold in December
2003. Operational results of this segment are reflected in the caption “Income (loss) from discontinued operations.”
Gross Profit. Gross profit for the Company increased by $2.6 million or 17.8% from $14.4 million in 2002
to $17.0 million in 2003. The margin as a percentage of revenue, however, decreased from 16.2% in 2002 to 13.7%
in 2003. This decrease is primarily due to the increase in EPC types of projects worked in the engineering segment.
The gross profit for the engineering segment increased by $2.7 million or 22.4% from 2002 to 2003. The
engineering segment's 2003 gross profit as a percentage of revenue decreased from 16.1% in 2002 to 13.7% in 2003.
EEI has many contracts pursuant to which ENGlobal employees are assigned to work at client facilities. These
contracts are generally low-risk, with virtually no overhead, and therefore, low margin. Also, the engineering service
segment, which normally functions as a source of professional labor, was awarded EPC jobs in 2003 and 2002 with
large quantities of material and subcontract work. These jobs have traditionally had low mark-ups on the materials
and subcontractors’ work, which deflates the Company’s margins. Engineering contributed 87.2% of the total gross
profits in 2003. Despite its lower margins, the Company would like to obtain additional EPC contracts in 2004, but
currently, no such projects are in the Company’s backlog.
The systems segment gross margin as a percentage of sales decreased from 16.3% in 2002 to 14.2% in
2003. The decline in gross profits was primarily due to cost overruns on fixed-price projects and competitive market
22
pressures on contract pricing. The cost overruns occurred due to rapid growth in ESI’s revenues. Management has
initiated stronger administrative and support services controls in response to the cost overruns.
The Company combined three employee medical insurance plans into one self-insured health plan at the
beginning of 2003. Claim trends throughout the year were lower than expected levels based on past years’
experience. Adjustments to lower the insurance reserve were made in the third and fourth quarters totaling $1.6
million, which resulted in improved gross profits in both engineering and systems segment. The engineering
segment received approximately 90% of the benefit, and the systems segment received approximately 10% of the
benefit.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by
$1.8 million, or 17.0%, from $10.6 million in 2002 to $12.4 million in 2003 primarily due to the creation of a
business development department, which substantially combined all the marketing activities of the engineering
segment into one centralized group and added several new marketing representatives. We believe this centralized
effort will result in better coordination of the Company’s marketing efforts.
Operating Profit. Operating profit increased by $0.8 million or 20.1% from $3.8 million in 2002 to $4.5
million in 2003. However, operating profits decreased as a percentage of total revenue from 4.2% in 2002 to 3.7% in
2003. This decrease was the result of the overall higher revenues and lower profit margins.
In March 2004, the Company announced organizational changes intended to reduce overhead and enhance
profitability. The Company eliminated four operational facilities and consolidated offices to improve efficiency. For
example, ECP was moved into the same facility as ESI, effective January 2004, resulting in improved shop
personnel utilization, reduction of duplicative overhead functions, and reduction of facility expenses. Additionally,
senior management has been realigned to improve operational efficiencies and to better integrate the Company’s
acquisitions into its operations.
Other Income (Expense). Other income decreased from $143,000 to expense of $355,000 from 2002 to
2003, respectively. The expense in 2003 is the loss on the sale of the vacant building in Baton Rouge, as compared
to the income in 2002, which resulted from a legal settlement.
Provision for Income Taxes. The Company received a one-time tax benefit of approximately $138,000 in
2003 from the recapture of depreciation on segregated expenditures in Company owned buildings in Baton Rouge.
The one-time tax benefit decreased the 2003 effective tax rate for income taxes from 39% in 2002 to 33%. The
Company does not expect the benefit to recur in future tax periods.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Total Revenue. Total revenue increased by $71.3 million or 400% from $17.8 million in 2001 to $89.1
million in 2002. Revenue from the engineering segment, which comprised 84.1% and 79.9% of total revenue in
2002 and 2001, respectively, increased by $60.7 million or 427%. This increase was due to the Company’s merger
with Petrocon (the engineering segment of which is referred to as “EEI”). Excluding the revenue from the merged
company, the change in revenues was a decrease from $17.8 million in 2001 to $15.3 million in 2002. We believe
that this decrease was primarily due to the depressed economics of our clients’ industries, which resulted in
restraints on capital expenditures.
In 2002, the Beaumont office of EEI was awarded a large EPC contract with a significant client that
generated over $5 million in revenue, net of $9 million in materials purchased as agent. Due to the depressed
economy in other areas of the country, revenues in the Baton Rouge and Tulsa offices decreased from $5.8 million
in 2001 to $0.8 million in 2002. Houston’s revenues also decreased from 2001 by $1.3 million as a result of poor
economic conditions.
The systems segment contributed 15.9% of total revenues in 2002. Revenues increased from $3.6 million to
$14.2 million in 2001 and 2002, respectively. The increase in sales was due to the acquisition of Petrocon Systems,
Inc. (the systems segment of which is referred to as “ESI”). ESI contributed revenues of $11.2 million to total 2002
23
revenues. Without the merger, revenues would have decreased from $3.5 million to $3.0 million in 2001 and 2002,
respectively. The decrease was due to the depressed market conditions in chargers and battery backup systems.
Gross Profit. Gross profit increased by $10.1 million or 237% from $4.3 million in 2001 to $14.4 million
in 2002. Gross profit from the pre-merger operations decreased in 2002 from 2001 due to the depressed markets as
indicated by lower revenues. The Company decided to maintain key personnel rather than downsize at the risk of
losing short-term profits. The merged operations contributed $12.4 million in gross profits. The overall margin as a
percentage of revenue, however, decreased from 24.0% to 16.2% in 2001 and 2002. This decrease is primarily due
to the shift in types of projects worked in the engineering services segment.
The gross profit for the engineering segment increased by $8.3 million or 218% from 2001 to 2002. The
engineering’s 2002 gross profit as a percentage of revenue decreased from 26.7% to 16.1%. Many of the projects
acquired in connection with the merger were client directed, whereby the employee works at the client site, under
the supervision of the client. These jobs are generally low-risk, have virtually no overhead, and intense competition
results in low margins. Engineering services contributed 84.0% of the total gross profits in 2002.
The systems segment gross margin as a percentage of sales increased from 13.1% in 2001 to 16.3% in
2002. This increase was attributable to the merger with Petrocon. ESI has higher profit, higher risk, fixed fee
projects. ECP also experienced a write-off of inventory in 2001 that was not repeated in 2002, thereby increasing
2002 margins.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by
$7.8 million or 275% from $2.8 million in 2001 to $10.6 million in 2002. With the larger entity, expenses increased
for several overhead departments, including executive, accounting, human resources, safety, information
technology, and business development. Due to the increase in revenues, as a percentage of revenues, these expenses
decreased by 4% from 15.9% to 11.9% in 2001 and 2002, respectively.
Interest Income (Expense). The 2001 interest income of $14,000 resulted from interest on a receivable. In
2002, the interest expense resulted from an increase in the line of credit increase caused by the Petrocon merger.
Liquidity and Capital Resources
Historically, we have satisfied our cash requirements through operations and borrowings under a revolving
credit facility with Fleet Capital Corporation (“Fleet”). As of December 31, 2003, we had working capital of $6.5
million. Long-term debt outstanding on this same date was $8.1 million, reduced from $13.3 million as of December
31, 2002. Our long-term debt includes $5.6 million outstanding under our revolving credit facility with Fleet, and
other long-term debt of $2.5 million. Under the terms and conditions of our revolving credit facility, as of December
31, 2003, we have additional borrowing capacity of approximately $4.7 million after consideration of borrowing
base limitations. We are not subject to any other standby letters of credit, guarantees, repurchase obligations, or
other commitments. We have no off-balance sheet arrangements.
The following table summarizes our contractual obligations as of December 31, 2003:
Payments Due By Period
(in thousands)
Long-term debt..................................
Capital leases.....................................
Operating leases ................................
Total contractual cash obligations .....
2004
$ 623
10
1,383
$ 2,016
2005
$ 7,481
7
785
$ 8,273
2006
2007
$ 25
1
453
$ 479
-
-
332
$ 332
2008 and
thereafter
-
-
1,245
$1,245
Total
$ 8,129
18
4,198
$ 12,345
Our revolving credit facility with Fleet is senior to all other debt and includes a line of credit that is limited
to $15 million, subject to borrowing base restrictions. The line of credit is collateralized by eligible trade accounts
receivable and substantially all of the other assets of the Company and its subsidiaries. Eligible trade accounts
include any account arising in the ordinary course of ENGlobal’s or any of its subsidiaries’ business, which are due
24
and unpaid no more than 90 days after the original invoice date. Our financial covenants under the senior credit
facility are based on monthly senior debt to EBITDA, cumulative fixed charge ratio, and cost in excess of billings
maximum amount. Negative covenants in the agreement require us to obtain Fleet’s written consent before making
capital expenditures which in the aggregate exceed the 2003 limit of $1.2 million. The loan agreement also limits
collateral eligibility on accounts arising out of fixed cost contracts to a total unpaid amount to $3.0 million and on
performance accounts with respect to accrued time on cost reimbursable contracts to $5.0 million. The loan
agreement places limits on concentration of accounts receivable balances of any one client. Our ability to borrow is
effected if any client (except ExxonMobil) has 20% of the net amount of all eligible accounts. ExxonMobil’s
concentration balance is limited to 30% of the net amount of all eligible accounts. The line of credit matures on
June 14, 2005 at which time we intend to refinance with Fleet or another bank. The interest rate on the line of credit
is one-quarter of one percent plus prime (4.25% at December 31, 2003), and the commitment fee on the unused line
of credit is 0.375%.
Our credit facility with Fleet Capital Corporation requires that we report monthly to Fleet on the status of
our compliance with our covenants. The breach of specific covenants, as well as other events, constitute an “Event
of Default” under the terms of the agreement. Upon the occurrence and during the continuance of an Event of
Default, all or any portion of the obligations under the agreement shall, at the option of Fleet, become due and
payable. Also, while an Event of Default exists, the principal amount of all loans bears interest at a rate per annum
equal to two percent above the current rate. The Company must meet all covenants through the maturity date of the
credit facility. We believe that the Company will remain in compliance with all the loan covenants although no
assurances can be given that we will be able to do so. The credit facility between Fleet and the Company was
modified to increase the limit on 2003 capital expenditures to $1.2 million.
We also have three long-term notes, subordinate to the Fleet debt:
•
•
•
$2.3 million note to Equus II Incorporated bearing interest at 9.5% and maturing in 2005. The Equus debt
was assumed as a result of the Petrocon merger. Principal amounts of $110,000 are paid quarterly with
accrued interest.
$151,000 note to Petrocon Arabia Limited (“PAL”) bearing interest at 8% and maturing in June 2004. The
principal on the PAL debt is paid in monthly installments of $25,000 and interest is paid annually.
$75,000 note to Petro-Chem paid in annual installments of $25,000 and maturing in 2006. The Petro-Chem
note was issued as part of the acquisition of Petro-Chem.
In connection with our merger with Petrocon, we issued 2,500,000 shares of our Series A convertible
preferred stock to Equus II Incorporated, entitling Equus to receive cumulative dividends at an annual rate of 8.0%
payable in cash or in kind. Stock dividends of 88,000 shares of preferred stock were issued in 2002, and 146,833
shares were issued in 2003. In August 2003, the Company elected to convert all outstanding preferred stock held by
Equus to 1,149,089 shares of common stock.
Cash Flow
Operating activities provided net cash totaling $6.6 million, $1.3 million, and $744,000 during fiscal years
2003, 2002, and 2001, respectively. Much of the increase in our cash flow from operating activities is attributable to
the growth in our engineering segment.
Investing activities used cash totaling $471,000 in 2003, compared to $1.3 million in 2002; they provided
$5,000 in 2001. In 2003, our investing activities consisted of capital additions of $1.1 million primarily for
computers and leasehold improvements to our Beaumont office. We used $425,000 for the acquisitions of Senftleber
and Petro-Chem. Partially offsetting these expenditures were cash proceeds from the sale of our building in Baton
Rouge and from the sale of Thermaire.
Financing activities used cash totaling $6.1 million and $1.2 million, and provided cash of $253,000 during
2003, 2002, and 2001, respectively. Our primary financing mechanism is our revolving line of credit with Fleet. The
line of credit has been used principally to finance accounts receivable. During 2003, our payments, net of
borrowings, on the line of credit were $4.5 million, and we repaid an aggregate of $1.1 million on our long-term
debt to Equus and PAL.
25
The merger with Petrocon in December 2001 was a $23.8 million non-cash purchase transaction made
through the issuance of common and preferred stock and assumption of debt. Non-cash transactions include the
issuance of stock dividends of $102,000 and $88,000 during 2003 and 2002, respectively. During 2003, our
preferred stock was converted to common stock valued at $2,735,000. We also acquired insurance with notes
payable of $1,085,000, $772,000, and $228,000 in 2003, 2002, and 2001, respectively.
We received tax refunds of $390,000 in 2002 from state authorities for franchise taxes related to prior years
for the Petrocon companies. No such refunds were received in 2003.
The Company believes that it has available necessary cash for operations 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 accounts receivable, if such accounts are not collected within 90 days of the original invoice date, or if
our project mix shifts from cost reimbursable to fixed cost contracts during significant periods of growth.
Our loan agreement places limits on our ability to borrow based on the concentration of sales to individual
clients. The accounts receivable balance of any one customer (except ExxonMobil) may not exceed 20% of all net
eligible accounts. ExxonMobil’s concentration balance is limited to 30% of all net eligible accounts. As of
December 31, 2003, our additional borrowing capacity was reduced by $865,000 due to the concentration limit.
If losses occur, we may not be able to meet our monthly fixed charge ratio covenant under our credit
facility with Fleet. In that event, if we are unable to obtain a waiver or amendment of the covenant, we may be
unable to make further borrowings and may be required to repay all loans then outstanding under the credit facility.
We do not hold any derivative financial instruments for trading purposes or otherwise. Furthermore, we
have not engaged in energy or commodity trading activities and do not anticipate doing so in the future, nor do we
have any transactions involving unconsolidated entities or special purpose entities.
Asset Management
We typically sell our products and services on short-term credit terms and seek to minimize our credit risk
by performing credit checks and conducting our own collection efforts. Our trade accounts receivable increased to
$20.2 million from $16.0 million as of December 31, 2003 and 2002, respectively, primarily due to increased sales
in the Beaumont area. Some of our contract terms specify a shortened five-day payment cycle. This has reduced the
number of days outstanding for trade accounts receivable from 65 days at December 31, 2002 to 54 days at
December 31, 2002. Bad debt expenses have been insignificant (approximately 0.2% of revenues and 0.2% of
revenues in 2003 and 2002, respectively). We have increased our allowance for doubtful accounts from $282,000 to
$376,000, or 1.7% and 1.8% of the trade accounts receivable balance for 2002 and 2003, respectively.
Related Party Transactions
ENGlobal Engineering leases office space from PEI Investments, a joint venture in which ENGlobal
Engineering has a one-third interest, Michael L. Burrow (the Company’s CEO) has a one-third interest, and a
stockholder who owns less than 1% of the Company’s common stock has a one-third interest. Rentals paid under the
lease were $100,000 for each of 2003, 2002 and 2001. The lease expires in 2005. We believe that this lease is at a
commercially reasonable rental rate.
Risk Management
In performing services for our clients, we could potentially be liable for breach of contract, personal injury,
property damage, or negligence, including professional errors and omissions. We often agree to indemnify our
clients for losses and expenses incurred as a result of our negligence and, in certain cases, the concurrent negligence
of the clients. Our quality control and assurance program includes a control function to establish standards and
procedures for performance and for documentation of project tasks, and an assurance function to audit and to
monitor compliance with procedures and quality standards. We maintain liability insurance for bodily injury and
26
third-party property damage, professional errors and omissions, and workers compensation coverage, which we
consider sufficient to insure against these risks, subject to self-insured amounts.
Holidays and employee vacations during our fourth quarter exert downward pressure on revenues for that
quarter, which is only partially offset by the year-end efforts on the part of many clients to spend any remaining
funds budgeted for engineering services or capital expenditures during the year. The annual budgeting and approval
process under which these clients operate is normally not completed until after the beginning of each new year,
which can depress results for the first quarter. Principally due to these factors, our revenues during the first and
fourth quarters generally tend to be lower than in the second and third quarters.
Critical Accounting Policies
Revenue Recognition -- Our revenues are largely composed of engineering service revenue and product
sales. We recognize service revenue as soon as such services are performed and we recognize revenue from the sales
of products upon shipment to the customer. The majority of our services are provided through time-and-material
contracts (also referred to as cost-plus contracts), many of which have not-to-exceed provisions that place a cap on
the revenue that we may receive under a particular contract. These time and material billings are produced every two
weeks.
On occasion, we serve as purchasing agent, procuring subcontractors, material, and equipment on behalf of
a client and passing the cost on to the client with no mark-up or profit. In accordance with Statement of Position
(“SOP”) 81-1, revenues and costs for these type purchases are not included in total revenues and costs. For financial
reporting this “pass-through” type of transaction is reported net.
Profits and losses on fixed-fee contracts are recorded on the percentage-of-completion method of
accounting, measured by the percentage-of-contract costs incurred to date to estimated total contract costs for each
contract. Contract costs include amounts paid to subcontractors. Anticipated losses on uncompleted construction
contracts are charged to operations as soon as such losses can be estimated. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined.
The asset, “costs and estimated earnings in excess of billings on uncompleted contracts,” represents
revenues recognized in excess of amounts billed on fixed-fee contracts. The liability “billings in excess of costs and
estimated profits on uncompleted contracts” represents amounts billed in excess of revenues recognized on fixed-fee
contracts.
Use of Estimates -- The preparation of our consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and
assumptions that affect the amounts reported in these financial statements and accompanying results. Actual results
could differ from these estimates. One example includes the estimates of uncollectability of our accounts receivable.
Management specifically analyzes the accounts receivable balances, historical bad debts, customer credit-
worthiness, and changes in our customers’ payment trends when evaluating the provisions for bad debts.
Goodwill -- In conjunction with each acquisition, we must allocate the cost of the acquired entity to the
assets and liabilities assumed based on their estimated fair values at the date of acquisition. As additional
information becomes available, adjustments may be made to the original estimates within a short time subsequent to
the acquisition. Goodwill is not amortized but instead is periodically assessed for impairment. The impairment
testing entails estimating current market value of the segments, based on management’s estimate of market
conditions including pricing, demand, competition, operating costs and other factors. Determining the fair value of
assets and liabilities acquired involves professional judgment and is ultimately based on management’s assessment
of the value of the assets acquired. We believe our estimates for these items are reasonable, but there is no assurance
that actual amounts will not vary significantly from estimated amounts. Consistent with SFAS 142, we have not
amortized goodwill related to the merger with Petrocon, but instead tested the balance for impairment.
27
Litigation -- We are subject to legal proceedings and claims that have arisen in the ordinary course of its
business. Based on legal analysis and advice from our attorneys, allowances have been made for any litigation that
management believes could have a material adverse effect on our financial condition or results of operations.
Principles of Consolidation -- The consolidated financial statements include the accounts of ENGlobal and
all wholly owned subsidiaries. ENGlobal owns 100% of all of its affiliates. All intercompany transactions and
accounts are eliminated in the consolidation.
Recent Accounting Pronouncements
SFAS No. 150, issued in May 2003, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity, establishes standards for the measurement and classification of such financial
instruments. If the instrument has characteristics of liability, it is to be classified as a debt instrument. The effective
date of the statement is June 15, 2003. We have adopted the statement; however, management does not believe the
effect of adopting this statement will have a material impact on our financial position, results of operations, or cash
flows.
In January 2003, the Financial Accounting Standard Board (“FASB”) issued Interpretation No. 46 (“FIN
46”), “Consolidation of Variable Interest Entities,” FIN 46 clarifies the application of Accounting Research Bulletin
No. 51, “Consolidated Financial Statements,” and addresses consolidation by business enterprises of variable
interest entities (more commonly known as “Special Purpose Entities” or “SPE’s”). In December 2003, FASB
issued FIN No. 46R which replaced FIN 46 and clarified ARB 51. This interpretation provides guidance on how to
identify a variable interest entity and determine when the assets, liabilities, non-controlling interests and results of
operations of a variable interest entity should be consolidated by the primary beneficiary. The primary beneficiary is
the enterprise that will absorb a majority of the variable interest entity’s expected losses or receive a majority of the
expected residual returns as a result of holding variable interests. This FIN requires the consolidation of results of
variable interest entities in which the Company is the primary beneficiary of the variable interest entity. As of
December 31, 2003, the Company did not own an interest in a variable interest entity that met the consolidation
requirements and as such the adoption of FIN No. 46R did not have any effect on the financial condition, results of
operations, or liquidity of the Company. Interests in entities acquired or created after December 31, 2003 will be
evaluated based on FIN No. 46R criteria and consolidated, if required.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2003 and 2002, 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. There are no investments at December 31, 2003. Accordingly, the Company has no quantitative
information concerning the market risk of participating in such investments.
As of December 31, 2003 and 2002, 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. 133.
The Company has no market risk exposure in the areas of interest rate risk because there is no investment
portfolio as of December 31, 2003. Currently, the Company does not engage in foreign currency hedging activities
nor is the Company exposed to currency exchange rate fluctuation.
28
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited consolidated balance sheets for ENGlobal Corporation, as of December 31, 2003 and 2002 and
statements of income, cash flows, and stockholders’ equity for the three-year period ended December 31, 2003, are
attached hereto and made part hereof.
INDEX
Page
INDEPENDENT AUDITOR’S REPORT...................................................................................................................30
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002........................................................................................................................31
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2003, 2002 and 2001.........................................................................................32
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
Years Ended December 31, 2003, 2002 and 2001.........................................................................................33
CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended December 31, 2003, 2002 and 2001.........................................................................................34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .................................................................................35
29
INDEPENDENT AUDITOR’S REPORT
To the Board of Directors and Stockholders
ENGlobal Corporation
We have audited the accompanying consolidated balance sheets of ENGlobal Corporation as of December 31, 2003
and 2002, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the
years in the three-year period ended December 31, 2003. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of ENGlobal Corporation and Subsidiaries as of December 31, 2003 and 2002, and
the results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2003, in conformity with accounting principles generally accepted in the United States of America.
Hein & Associates LLP
Houston, Texas
March 12, 2004
30
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
ASSETS
2003
2002
CURRENT ASSETS:
Cash
Trade receivables, net
Prepaid expenses and other current assets
Cost and estimated earnings in excess of billings on uncompleted contracts
Deferred tax asset
Inventories
Total current assets
PROPERTY AND EQUIPMENT, net
Net Assets of Discontinued Operations
GOODWILL
DEFERRED TAX ASSET
OTHER ASSETS
Total assets
$ 39,439
20,244,172
1,260,296
1,022,726
477,000
118,340
23,161,973
4,302,430
860,728
13,752,564
-
452,695
$ 42,530,390
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
Accrued compensation and benefits
Notes payable
Current portion of long-term debt
Billings and estimated earnings in excess of costs on uncompleted contracts
Federal income taxes payable
Dividends payable
Other liabilities
Total current liabilities
Net Liabilities of Discontinued Operation
Long-term Debt, Net of Current Portion
Long-term Leases, Net of Current Portion
Deferred Tax Liability
Total liabilities
COMMITMENTS AND CONTINGENCIES (NOTES 8, 9, 10 AND 18)
REDEEMABLE PREFERRED STOCK:
Series A redeemable convertible preferred stock: 2,265,167 shares and
5,000,000 shares authorized 2003 and 2002, respectively ; 0 (at 2003)
and 2,588,000 (at 2002) issued and outstanding; stated at redemption
value, $1.00 per share
STOCKHOLDERS’ EQUITY:
Common stock; $0.001 par value; 75,000,000 shares authorized; 24,034,288
and 22,861,199 shares issued and outstanding at December 31, 2003 and
2002, respectively
Paid-in capital
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to these consolidated financial statements.
31
$ 75,095
16,025,280
753,662
2,043,603
461,000
228,396
19,587,036
4,779,575
1,756,475
13,209,378
402,000
333,552
$ 40,068,016
$ 3,880,021
3,898,413
485,850
743,039
811,845
319,228
120,773
911,607
11,170,776
324,055
12,579,702
16,702
-
24,091,235
$ 9,821,030
4,302,136
771,225
623,230
374,339
103,609
-
661,699
16,657,268
24,164
7,506,062
12,042
156,000
24,355,536
-
2,588,000
24,034
12,094,382
6,056,438
18,174,854
$ 42,530,390
22,862
9,335,471
4,030,448
13,388,781
$ 40,068,016
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
OPERATING REVENUES:
Engineering
Systems
Total revenue
DIRECT COSTS:
Engineering
Systems
Total direct costs
GROSS PROFIT
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
OPERATING INCOME
Interest expense
Other income and expenses
INCOME FROM CONTINUING OPERATIONS BEFORE PROVISIONS FOR
INCOME TAXES
PROVISION FOR INCOME TAXES
INCOME FROM CONTINUING OPERATIONS
LOSS FROM DISCONTINUED OPERATIONS:
Income/(loss) from operations of discontinued segment,
net of tax ($75,066, $92,373 benefit and $78,934 expense, respectively)
Gain from sale of discontinued segment, net of tax of ($12,834)
NET INCOME
Years Ended December 31,
2002
2001
2003
$ 108,380,100
15,339,002
123,719,102
$74,971,506
14,151,089
89,122,595
$ 14,235,042
3,574,591
17,809,633
93,578,716
13,166,811
106,745,527
16,973,575
12,439,408
62,876,626
11,839,820
74,716,446
14,406,149
10,632,357
4,534,167
(784,227
(355,174)
3,773,792
(820,976
142,559
10,432,512
3,107,085
13,539,597
4,270,036
2,835,769
1,434,267
13,516
13,695
3,394,766
3,095,375
1,461,478
1,109,496
2,285,269
1,197,067
1,898,308
(154,615)
26,434
2,157,088
(146,485)
-
1,751,823
594,695
866,783
115,049
-
981,832
PREFERRED DIVIDENDS
NET INCOME AVAILABLE FOR COMMON STOCK
131,100
$ 2,025,988
208,992
$1,542,831
-
$ 981,832
BASIC EARNINGS PER SHARE FROM CONTINUING OPERATIONS
BASIC EARNINGS PER SHARE FROM DISCONTINUED OPERATIONS
BASIC EARNINGS PER SHARE FROM NET INCOME AVAILABLE TO COMMON
STOCK
$0.092
$(0.005)
$0.073
$(0.006)
$0.087
$0.067
$0.065
$0.009
$0.074
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING FOR BASIC
23,300,600
22,861,199
13,236,049
DILUTED EARNINGS PER SHARE FROM CONTINUED OPERATIONS
DILUTED EARNINGS PER SHARE FROM DISCONTINUED OPERATIONS
DILUTED EARNINGS PER SHARE FROM INCOME AVAILABLE TO COMMON
STOCK
0.091
(0.005)
0.073
(0.006)
0.086
0.067
0.065
0.009
0.074
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING FOR DILUTED
23,733,807
23,013,016
13,236,049
See accompanying notes to these consolidated financial statements.
32
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
BALANCES, JANUARY 1, 2001
Acquisition: Issued stock for purchase of
Petrocon Engineering, Inc. net of
registration costs
Acquisition: Issued stock for investment
advisor and 8% preferred stock issued
to Equus for forgiveness of debt
Forgiveness of Note Receivable -
Stockholder for purchase option to
acquire Company stock
Net income
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Retained
Earnings
Note-
Receivable
Shareholder
Total
Stockholders
Equity
12,964,918
$ 12,965
$ 2,640,154 $ 1,702,285
$ (196,500)
$ 4,158,904
9,800,000
9,800
6,627,054
-
-
6,636,854
96,281
97
68,263
68,360
-
-
-
-
-
-
(196,500)
981,832
196,500
-
-
981,832
-
-
-
-
-
11,845,950
(208,992)
1,751,823
13,388,781
(131,099)
2,734,833
25,250
2,157,088
$ 18,174,854
2,487,617
(208,992)
1,751,823
4,030,448
(131,099)
BALANCES, DECEMBER 31, 2001
Preferred stock dividends
Net income
22,861,199
22,862
9,335,471
-
-
-
BALANCES, DECEMBER 31, 2002
Preferred stock dividend
Conversion of preferred stock 2.38
preferred shares to each common share
Exercise of stock options
Net Income
22,861,199
22,862
9,335,471
1,149,089
24,000
-
1,148
24
-
2,733,685
25,226
-
2,157,088
BALANCES, DECEMBER 31, 2003
24,034,288
$ 24,034
$ 12,094,382 $ 6,056,438
See accompanying notes to these consolidated financial statements.
33
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Deferred income tax expense
Gain on sale of investments
Loss on disposal of property, plant and equipment
Changes in current assets and liabilities, net of acquisitions:
Trade receivables
Inventory
Costs and estimated earnings in excess of billings
Prepaid expenses and other assets
Accounts payable
Accrued compensation and benefits
Billings in excess of costs and estimated earnings
Other liabilities
Income taxes receivable (payable)
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment
Software upgrade
Proceeds from sale of Baton Rouge building
Acquisition of Senftleber
Acquisition of Petro-Chem
Redemption of bonds
Proceeds from Sale of Thermaire
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit
Payments on line of credit
Exercise of options to common stock
Short-term borrowings (repayments)
Preferred dividends accrual
Capital lease repayments
Long-term debt repayments
Net cash provided by (used in) financing activities
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, AT END OF YEAR
NON-CASH TRANSACTIONS:
Acquisition of Petrocon with issuance of common and preferred
stock and assumption of debt
Stock issued for preferred dividend
Insurance acquired with notes payable
Property and equipment acquired under capital lease
Conversion of preferred stock to common stock
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for -
Interest
State and federal income taxes
Dividend payment
Refunds from state franchise taxes
Years Ended December 31,
2002
2003
2001
$ 2,157,088
$ 1,751,823
$ 981,832
824,476
542,000
-
312,307
(3,947,817)
110,056
1,020,877
372,419
5,695,662
403,724
(437,506)
(280,166)
(215,619)
6,557,501
(1,146,351)
-
554,866
(399,900)
(25,000)
-
545,198
(471,187)
712,991
437,000
-
-
(1,117,211)
462,652
(1,313,096)
251,530
(1,265,601)
1,198,724
34,133
(169,822)
319,228
1,302,351
(423,344)
(909,627)
42,523
-
-
-
-
(1,290,448)
172,926
319,154
(64,223)
-
(1,010,414)
174,292
71,472
495,286
(533,121)
-
-
240,656
(104,151)
743,709
(459,068)
-
-
-
-
464,223
-
5,155
127,650,133
(132,178,422)
25,250
(484,023)
-
(4,365)
(1,130,544)
(6,121,970)
(35,656)
75,095
$ 39,439
111,764,457
(110,574,665)
-
(684,626)
(120,773)
(50,661)
(1,515,447)
(1,181,715)
(1,169,812)
1,244,907
$ 75,095
1,114,300
(361,617)
-
-
-
(40,514)
(458,718)
253,451
1,002,315
242,592
$ 1,244,907
-
146,833
1,085,363
-
2,734,834
771,793
734,615
105,040
-
-
88,000
771,502
-
-
$ 23,805,675
-
228,254
53,393
-
744,103
486,697
-
389,714
83,213
263,780
-
-
See accompanying notes to these consolidated financial statements.
34
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
BACKGROUND AND BASIS OF PRESENTATION
Basis of Presentation
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in
the United States of America. Our Company consolidates all of its wholly-owned subsidiaries and all significant
inter-company accounts and transactions have been eliminated in the consolidation.
Organization – Brief descriptions of the active companies included in the consolidated group follow:
ENGlobal Corporation (“ENGlobal”) – a Nevada holding company.
ENGlobal Corporate Services, Inc. (“ECS”) – provides the corporate oversight function.
ENGlobal Engineering, Inc. (“EEI”) – provides general engineering for industrial customers primarily along the
Texas Gulf Coast and Oklahoma with specialties in the areas of distributive control systems, power distribution,
process design and process safety management.
ENGlobal Construction Resources, Inc.(“ECR”) – provides technical and inspection personnel within client
facilities for the petrochemical industry.
RPM Engineering, Inc. d/b/a ENGlobal Engineering, Inc. (“RPM”) – provides engineering services in southeast
Louisiana.
ENGlobal Systems, Inc. (“ESI”) – provides design, fabrication, installation, start-up, checkout and maintenance of
specialized systems such as programmable logic controller (PLC) systems integration, supervisory controls and data
acquisition (SCADA) and triple modular redundancy (TMR) systems, distribution control system (DCS), and
analyzer systems.
ENGlobal Constant Power, Inc. (“ECP”) – fabricates industrial grade uninterruptible electrical power systems,
battery chargers and microprocessor systems for service in the high-end industrial market.
ENGlobal Technologies, Inc. (“ETI”) – reactivated in January 2003; provides advanced automation controls such as
software analyzers and intelligent optimization software for the power and processing industries.
Senftleber & Associates, L.P. (“Senftleber”) – provides pipeline support and consulting along the Gulf Coast.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents – Cash and cash equivalents include cash in bank at December 31, 2003. The
Company’s banking system provides for daily replenishment of major bank accounts for check-clearing
requirements. Accordingly, there were negative book balances of $0.9 million on December 31, 2003 and $1.4
million on December 31, 2002. Such balances result from outstanding checks that have not yet been paid by the
bank and are reclassified to accounts payable in the accompanying consolidated balance sheets. The Company has
no cash equivalents at December 31, 2003 or 2002.
Inventories – Inventories are composed primarily of raw materials and component parts (enclosures, electronics, PC
boards and wire) and are carried at the lower of cost or market value, with cost determined on the first-in, first-out
(“FIFO”) method of accounting.
Revenue Recognition – The Company’s revenues are composed of engineering service revenue and product sales.
The Company recognizes service revenue as soon as such services are performed and product sales upon shipment
to the customer. The majority of the Company’s services are provided through cost-plus contracts.
35
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
On occasion, the Company, serving as purchasing agent on behalf of the client, procures material and equipment
whereby the cost is reimbursed by the client with no mark-up or profit. In accordance with Statement of Position
(SOP) 81-1, revenues and costs for these type purchases are not included in total revenues and costs. For financial
reporting this “pass-through” type of transaction is reported net. During 2003 and 2002, pass-through transactions
totaled $5.6 million and $9.5 million, respectively.
Profits and losses on fixed-fee contracts are recorded on the percentage-of-completion method of accounting,
measured by the percentage-of-contract costs incurred to date relative to estimated total contract costs. Contract
costs include total labor material, subcontractors, and supplies. Anticipated losses on uncompleted construction
contracts are charged to operations as soon as such losses can be estimated. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined.
The asset, “costs and estimated earnings in excess of billings on uncompleted contracts,” represents revenues
recognized in excess of amounts billed on fixed-fee contracts. The liability “billings in excess of costs and estimated
profits on uncompleted contracts” represents amounts billed in excess of revenues recognized on fixed-fee contracts.
Property and Equipment – All property and equipment is stated at cost, adjusted for accumulated depreciation.
Depreciation is calculated using a straight-line method over the estimated useful lives of the related assets. The
useful life is estimated to be three years for computers and autos, five years for software, furniture and fixtures, 10
years for machinery and equipment, and 39 years for buildings. Leasehold improvements are amortized over the
term of the related lease.
Goodwill – In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS 142
requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually. SFAS 142 also requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated residual values and reviewed for impairment in
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
The Company adopted SFAS 142 effective January 1, 2002. Upon adoption, the Company tested goodwill for
impairment at January 1, 2002 according to the provisions of SFAS 142, which resulted in no impairment required
as a cumulative effect of accounting change. The Company tested goodwill for impairment at December 31, 2002
and 2003 resulting in no impairment of goodwill.
Prior to adoption of SFAS 142, the Company recorded $16,000 of amortization expense related to goodwill during
the year ended December 31, 2001. As a result of adopting SFAS 142, the Company did not recognize any goodwill
amortization during the year ended December 31, 2003 and 2002.
The following table reconciles previously reported net income and earnings per share as if the provisions of SFAS
142 were in effect in 2001.
2003
2002
2001
Reported net income...........................................................
Add back goodwill amortization ........................................
Adjusted net income...........................................................
Earnings per Share:
Basic – as reported .........................................................
Basic – pro forma............................................................
Diluted – as reported.......................................................
Diluted – pro forma.........................................................
$ 2,157,088
-
$ 2,157,088
$ 0.087
0.087
0.086
0.086
$ 1,751,823
-
$ 1,751,823
$ 0.068
0.068
0.068
0.068
$ 981,832
16,200
$ 998,032
$ 0.074
0.075
0.074
0.075
36
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Petro-Chem acquisition resulted in an increase of $115,000 in goodwill. The Senftleber acquisition resulted in
an increase of $428,000 in goodwill. With the sale of Thermaire, an adjustment to write off $2,000 in goodwill was
made.
Long-lived Assets – The Company reviews long-lived assets and certain identifiable intangible assets for impairment
annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the
use of the asset and its eventual disposition is less than its carrying amount. The Company has not identified any
such impairment losses.
Software Development Costs – Under the provisions of SOP-98-1 ENGlobal capitalizes costs associated with
software developed or obtained for internal use when both the preliminary project stage is completed and when
management authorizes funding for the project which is deemed probable of completion. Costs include 1) external
direct costs of materials and services incurred in obtaining and developing the software, and 2) payroll and payroll
related costs for employees who are directly associated with and devote time to the project. Capitalization of these
costs ceases no later than the point at which the project is substantially complete and ready for its intended use. At
that time, the costs are reclassified to fixed assets. The accounting system upgrade was completed at the end of 2002
and depreciation began in January 2003.
Dispositions – Assets Held for Sale and Discontinued Operations - In management’s ongoing strategic efforts to
increase the Company’s focus on core engineering consulting services, the Company sold its Thermaire
manufacturing operations. During 2001, ENGlobal decided to seek a buyer for Thermaire, the only company in the
manufacturing segment. Thermaire manufactured air-handling equipment for commercial heating, ventilation, and
cooling systems. The sale benefits the Company by improving its strategic focus on engineering services and
systems.
Effective November 2001, the Board of Directors authorized the sale of Thermaire. A significant portion of
Thermaire’s assets was sold to Nailor Industries of Texas, Inc., a medium-sized HVAC equipment manufacturer, on
December 15, 2003. This business has been included in “Discontinued operations” and the assets and liabilities have
been separately identified on the Balance Sheet for all periods presented. The sales from discontinued operations for
the years ended December 31, 2003, 2002 and 2001 were $2.0 million, $2.4 million, and $4.2 million, respectively.
These sales were excluded from revenues from continuing operations reported on the income statement. Thermaire
experienced pre-tax losses during 2003 and 2002 of $230,000 and $239,000, respectively, and pre-tax income of
$194,000 in 2001. The income (loss) from discontinued operations does not include any charges to reduce the book
value of the business held for sale to its fair market value less cost to sell, since the fair value of the business
exceeded book value.
The major classes of assets and liabilities “held for sale” included in the Consolidated Balance Sheets as of
December 31 are as follows (in thousands):
Assets
Accounts receivable, net..........................................................................................
Inventories...............................................................................................................
Other current assets .................................................................................................
Goodwill..................................................................................................................
Property, plant and equipment, net, held for sale ....................................................
Total assets “held for sale” ......................................................................................
Liabilities
Accounts Payable ....................................................................................................
Other current liabilities............................................................................................
Long-term leases .....................................................................................................
Total liabilities associated with assets “held for sale”.............................................
2003
2002
$ 183
-
-
-
678
$ 861
$2
22
-
$ 24
$ 466
303
6
2
979
$ 1,756
$160
77
87
$ 324
37
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Income Taxes – The Company accounts for deferred income taxes in accordance with the asset and liability method,
whereby deferred income taxes are recognized for the tax consequences of temporary differences by applying
enacted statutory tax rates applicable to future years to differences between the financial statement and tax bases of
its existing assets and liabilities. The provision for income taxes represents the current tax payable or refundable for
the period plus or minus the tax effect of the net change in the deferred tax assets and liabilities during the period.
Stock Based Compensation – The Company applies SFAS No. 123, Accounting for Stock-Based Compensation,
which encourages, but does not require, companies to recognize compensation expense for grants of stock, stock
options, and other equity instruments to employees based on fair value. The Company has elected to record
compensation expense in accordance with Accounting Principles Board (APB) Opinion No. 25, which calculates
compensation as the difference between an option’s exercise price and the current price of the underlying stock. (For
equity instruments issued to employees, see Note 10 that contains required pro forma disclosure of the impact of
adopting SFAS No. 123)
Earnings Per Share – Basic earnings per share was computed as follows:
Reconciliation of Earnings per share calculation
2002
2003
2001
Basic
2,285,269
131,100
2,154,169
(128,181)
Income from continuing operations ...............
Preferred dividends ........................................
Income available to common stockholders
from continuing operations ............................
Income (loss) from discontinued operations ..
Net income available to common
shareholders....................................................
Weighted average number of shares
outstanding (basic) ......................................... 23,300,600
Weighted average number of shares
outstanding (diluted) ......................................
Income (loss) per share available from
common stock:
Income from continuing operations................
Income (loss) from discontinued operations ..
Income available to common stock ................
0.092
(0.005)
0.087
2,025,988
Diluted
2,285,269
131,100
Basic
1,898,308
208,992
Diluted
1,898,308
208,992
Basic
866,783
-
Diluted
866,783
-
2,154,169
(128,181)
1,689,316
(146,485)
1,689,316
(146,485)
866,783
115,049
866,783
115,049
2,025,988
1,542,831
1,542,831
981,832
981,832
22,861,199
13,236,049
23,733,807
23,013,016
13,236,049
0.091
(0.005)
0.086
0.073
(0.006)
0.067
0.073
(0.006)
0.067
0.065
0.009
0.074
0.065
0.009
0.074
Diluted earnings per share are computed including the impact of all potentially dilutive securities. Potentially
dilutive securities that have not been included in the computation of earnings per share include 560,031 options
exercisable from $2.32 to $6.24, issued from 1995 through 2003. These options were not included because the
exercise prices were greater than the market price of the common shares and, therefore, the effect would be anti-
dilutive. The following table sets forth the shares outstanding for the earnings per share calculations for the years
ended December 31, 2003, 2002 and 2001.
Common stock issued, beginning of year ....................................... 22,861,199
439,401
Weighted average common stock issued ........................................
Shares used in computing basic earnings per ................................. 22,300,600
Assumed conversion of dilutive stock options................................
1,433,207
Shares used in computing diluted earnings per share...................... 23,733,807
22,861,199
-
22,861,199
151,817
23,013,016
12,964,918
271,131
13,236,049
-
13,236,049
2003
2002
2001
38
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Use of Estimates – The preparation of the Company’s consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America requires the Company’s management to
make estimates and assumptions that affect the amounts reported in these financial statements and accompanying
results. Actual results could differ from these estimates.
Fair Value of Financial Instruments – The fair value of financial instruments, primarily accounts receivable, notes
receivable, accounts payable and notes payable, closely approximate the carrying values of the instruments due to
the short-term maturities of such instruments.
Comprehensive Income – Comprehensive income is defined as all changes in stockholders’ equity, exclusive of
transactions with owners, such as capital investments. Comprehensive income includes net income or loss, changes
in certain assets and liabilities that are reported directly in equity, such as translation adjustments on investments in
foreign subsidiaries and certain changes in minimum pension liabilities. The Company’s comprehensive income is
equal to its net income for all periods presented in these financial statements.
Reclassifications – Amounts in prior years’ financial statements are reclassified as necessary to conform to the
current year’s presentation. Such reclassifications had no effect on net income.
3.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 150, issued in May 2003, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity, establishes standards for the measurement and classification of such financial instruments. If
the instrument has characteristics of liability, it is to be classified as a debt instrument. The effective date of the
statement is June 15, 2003. Adoption of this statement had no impact on the Company.
In January 2003, the Financial Accounting Standard Board (“FASB”) issued Interpretation No. 46 (“FIN 46”),
“Consolidation of Variable Interest Entities.” FIN 46 clarifies the application of Accounting Research Bulletin No.
51, “Consolidated Financial Statements,” and addresses consolidation by business enterprises of variable interest
entities (more commonly known as Special Purpose Entities or SPE’s). In December 2003, FASB issued FIN No.
46R which replaced FIN 46 and clarified ARB 51. This interpretation provides guidance on how to identify a
variable interest entity and determine when the assets, liabilities, non-controlling interests and results of operations
of a variable interest entity should be consolidated by the primary beneficiary. The primary beneficiary is the
enterprise that will absorb a majority of the variable interest entity’s expected losses or receive a majority of the
expected residual returns as a result of holding variable interests. This FIN requires the consolidation of results of
variable interest entities in which the Company is the primary beneficiary of the variable interest entity. As of
December 31, 2003, the Company did not own an interest in a variable interest entity that met the consolidation
requirements and as such the adoption of FIN No. 46R did not have any effect on the financial condition, results of
operations, or liquidity of the Company. Interests in entities acquired or created after December 31, 2003 will be
evaluated based on FIN No. 46R criteria and consolidated, if required.
39
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
4.
PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2003 and 2002 (in thousands):
Land......................................................................
Building ................................................................
Computer equipment and software.......................
Shop equipment ....................................................
Furniture and fixtures ...........................................
Building and leasehold improvements..................
Autos and trucks ...................................................
Accumulated depreciation and amortization ........
Software upgrade in process.................................
Property and equipment, net.................................
2003
$ 202
1,357
2,855
362
121
671
79
5,647
(1,642)
4,005
297
$ 4,302
2002
$ 500
1,952
1,610
336
92
191
75
4,756
(887)
3,869
910
$ 4,779
Depreciation expense was $781,000, $601,000, and $157,000 in 2003, 2002 and 2001, respectively.
The Company owned an office building in Baton Rouge, which was vacant. The Company sold the building in
September 2003 resulting in cash proceeds of $555,000 and a loss of $312,000. The Company used the proceeds
from the sale of the building to reduce long-term debt.
The office and manufacturing facility owned by Thermaire has been reclassified to Assets of Discontinued
Operations for 2003 and 2002. (See Note 16)
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
The components of trade receivables as of December 31, 2003 and 2002 are as follows (in thousands):
Amounts billed at December 31 .................................................
Amounts billable at December 31, billed January of the
following year.............................................................................
Retainage ....................................................................................
Less – Allowance for uncollectible accounts..............................
Trade receivables, net .................................................................
2003
$14,133
6,093
394
(376)
$20,244
2002
$13,498
2,617
192
(282)
$16,025
The components of other liabilities as of December 31, 2003 and 2002 are as follows (in thousands):
Reserve for known contingencies (Note 18)............................
Accrued interest .......................................................................
State taxes ................................................................................
Other ........................................................................................
Other liabilities ........................................................................
2003
478
48
39
97
$ 662
2002
715
75
15
107
$ 912
During 2001, ENGlobal decided to seek a buyer for Thermaire, the only company in the manufacturing segment,
which manufactured air-handling equipment for commercial heating, ventilation, and cooling systems. On
December 15, 2003, the sale of certain assets to Nailor Industries of Texas, Inc. was completed.
40
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
6.
FIXED-FEE CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts consisted of the following at December 31, 2003
and 2002 (in thousands):
Costs incurred on uncompleted contracts.................................................................
Estimated earnings on uncompleted contracts .........................................................
Earned revenues .......................................................................................................
Less billings to date..................................................................................................
Net cost and estimated earnings in excess of billings on uncompleted contracts ....
Costs and estimated earnings in excess of billings on uncompleted contracts .........
Billings in excess of costs and estimated earnings on uncompleted contracts .........
Net cost and estimated earnings in excess of billings uncompleted contracts .........
2003
$ 14,333
1,862
16,195
(15,546)
$ 649
$ 1,023
(374)
$ 649
2002
$ 18,629
3,096
21,725
(20,493)
$ 1,232
$ 2,044
(812)
$ 1,232
7.
LINE OF CREDIT AND DEBT
ENGlobal has a financing arrangement with Fleet Capital Corporation in the form of a credit facility that includes a
line of credit limited to $15.0 million, subject to borrowing base restrictions. The credit facility is senior to all other
debt and is collateralized by substantially all the assets of the Company. At December 31, 2003, $5.6 million was
outstanding on the line of credit. The line of credit matures on June 14, 2005. The interest rate on the line of credit is
one quarter of one percent plus prime (4.25 percent at December 31, 2003), and the commitment fee on the unused
line of credit is 0.375 percent. The remaining borrowings available under the line of credit as of December 31, 2003,
were $4.7 million after consideration of the borrowing base limitations. The Company’s credit facility contains
covenants that require the maintenance of certain ratios, including cumulative fixed charge coverage and specified
levels of certain other items. Amounts outstanding under this line of credit are carried in long-term liabilities in the
accompanying consolidated balance sheet due to the maturity date extending into 2005.
Long-term debt consisted of the following at December 31, 2003 and 2002 (in thousands):
Fleet - Line of credit, prime plus 0.25% (4.25% at December 31, 2003), maturing
in 2005 ..................................................................................................................
$ 5,556
$ 10,084
2003
2002
The following notes are subordinate to the Fleet credit facility and are unsecured:
Equus - Note payable, interest at 9.5%, principal and interest due quarterly in
installments of $110,000, maturing through 2005 ...................................................
Petrocon Arabia Limited - Note payable, interest at 8%, principal due in monthly
payments of $25,000 and interest due annually, maturing in June 2004..................
Petro-Chem – Note payable, principal due in annual installments of $25,000,
maturing in 2006 ......................................................................................................
Miscellaneous...........................................................................................................
Total long-term debt.................................................................................................
Less- current maturities............................................................................................
Long-term debt, net of current portion.....................................................................
2,340
151
75
7
8,129
(623)
$ 7,506
2,780
451
-
8
13,323
(743)
$ 12,580
Maturities of long-term debt as of December 31, 2003, are as follows (in thousands):
Years Ending December 31,
2004 ...........................................................................
2005 ...........................................................................
2006 ...........................................................................
Total long-term debt ..................................................
623
7,481
25
$ 8,129
41
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Current notes payable include a note which finances commercial insurance on a short-term basis, with a balance of
$721,000 and $485,000 as of December 31, 2003 and 2002, respectively. The notes which bear interest at 7.25%,
and are payable in monthly installments of principal and interest totaling $108,000 through July 24, 2004. Also,
notes to Mrs. Senftleber and the Senftleber Family Trust for the acquisition of Senftleber & Associates, L.P. have a
balance of $50,000 at December 31, 2003 and mature in October 2004.
8.
OPERATING LEASES
The Company leases equipment and office space under long-term operating lease agreements.
The future minimum rental payments on operating leases (with initial or remaining non-cancelable terms in excess
of one year) as of December 31, 2003 follows (in thousands):
YEARS ENDING DECEMBER 31,
2004 ...........................................................................
2005 ...........................................................................
2006 ...........................................................................
2007 ...........................................................................
2008 ...........................................................................
Total minimum lease payments .................................
Operating
$ 1,383
785
453
332
1,245
$ 4,198
Rental expense for all operating leases, including those with terms less than one year, amounted to approximately
$1.4 million, $1.3 million and $364,000 for the years ended December 31, 2003, 2002, and 2001, respectively.
9.
PROFIT SHARING PLAN
The Company consolidated two 401(k) profit sharing plans at the end of 2003 covering substantially all employees.
For eligible employees, the Company makes mandatory matching contributions equal to 50% of employee
contributions up to 4% of employee compensation, as defined. Other discretionary contributions made by the
Company are determined by the Board of Directors. The employees may elect to make contributions pursuant to a
salary reduction agreement upon meeting age and length-of-service requirements. The Company made contributions
of approximately $144,000, $172,000, and $194,000, respectively, for the years ended December 31, 2003, 2002,
and 2001.
42
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
10.
STOCK OPTION PLAN
The Company has an incentive plan that provides for the issuance of options to acquire up to 2,200,000 shares of
common stock. The incentive plan (“Option Plan”) provides for grants of non-statutory options, incentive stock
options, restricted stock awards and stock appreciation rights. No compensation cost has been recognized for grants
under the Option Plan because the exercise price of the options granted to employees equals or exceeds the market
price of the stock on the date of the grants. Had the method prescribed by SFAS No. 123 been applied, the
Company’s December 31, 2003 and 2002, net income available to common stockholders would have been changed
to the pro forma amount indicated below:
2003
2002
2001
Net income available to common stock - as reported .....................
Compensation expenses if the fair value method had been
$ 2,025,988
$ 1,542,831
$ 981,832
applied to the grants ....................................................................
Net income available to common stock - pro forma.......................
64,492
$ 1,961,496
233,361
$ 1,309,470
27,091
$ 954,741
Net income per share – as reported
Basic............................................................................................
Diluted.........................................................................................
Net income available per share - pro forma
Basic............................................................................................
Diluted.........................................................................................
0.087
0.086
0.084
0.083
0.067
0.067
0.057
0.057
0.074
0.074
0.072
0.072
Effective with the Petrocon merger, a group of significant stockholders placed 1,737,473 shares of common stock in
escrow under an Option Escrow Agreement. Under the terms of this agreement, shares issued by ENGlobal, upon
exercise of converted Petrocon options, will be replaced by shares from the escrow account. The Option Escrow
Agreement has the effect of preventing dilution to the original ENGlobal stockholders upon the exercise of
converted Petrocon options. The Option Escrow Agreement stays in effect until all existing options have been
exercised, terminated, or cancelled. During 2003, 27,710 converted Petrocon options were exercised using shares
from the Option Escrow Pool.
The Company applies the intrinsic value method of accounting prescribed by APB Opinion No. 25 and related
interpretations in accounting for stock-based compensation plans. Accordingly, compensation cost for stock options
is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of grant over the
amount an employee must pay to acquire the stock. The fair value of each option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for
grants in 2003, 2002, and 2001: dividend yield of 0%, expected volatility of 93%, 93%, and 94%, risk-free interest
rates of 5%, and expected lives of two years.
Each option granted in 2003 has an exercise price of $1.87 or $2.32 per share, and vests over 12 months. The
Petrocon converted options granted in 2001 effective with the Merger have exercise prices ranging from $0.96 to
$6.24. Other options have exercise prices of $1.00 and $1.25 per share. The maximum term of the options is ten
years. Substantially all of the options were granted at the market price of the stock.
43
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes stock option activity for the periods indicated:
Options at Exercise Prices
$4.26
$6.24
$0.96 - $1.25
226,000
10,000
733,030
(27,500)
-
941,530
20,000
(35,000)
-
926,530
120,000
(2,909)
(51,710)
991,911
918,285
Outstanding, January 1, 2001
Granted
Granted in connection with a merger
Canceled or expired
Exercised
Outstanding, December 31, 2001
Granted
Canceled or expired
Exercised
Outstanding, December 31,2002
Granted.
Canceled or expired
Exercised
Outstanding, December 31, 2003
Exercisable at December 31, 2003
Available for grant at December 31, 2003
Weighted-average fair value of options at grant date, granted in 2003
Weighted-average fair value of options, granted in 2001 and 2002
Weighted-average exercise price all outstanding options at December 31, 2003
Weighted-average remaining vesting life of all options outstanding at December 31, 2003
-
-
129,082
-
-
129,082
-
(2,085)
-
126,997
-
(63,142)
-
63,855
63,855
-
-
202,131
-
-
202,131
-
(729)
-
201,402
-
-
-
201,402
153,291
Total
226,000
10,000
1,064,243
(27,500)
-
1,272,743
20,000
(37,814)
-
1,254,929
120,000
(66,051)
(51,710)
1,257,168
1,135,431
822,257
$2.10
$2.34
$2.11
3.27yrs
The summary above does not include 234,774 non-qualified options issued at the time of the Merger to replace
existing options issued by Petrocon in consideration for services. Such options have an exercise price of $4.26 per
share and expire in September 2006.
Replacement warrants of 305,102 (not included in the table above) with an exercise price of $6.24 expired in
October 2003.
11.
RELATED-PARTY TRANSACTIONS
ENGlobal Engineering leases office space from PEI Investments, a joint venture in which ENGlobal Engineering
has a one-third interest, Michael L. Burrow (the Company’s CEO) has a one-third interest, and a stockholder who
owns less than 1% of the Company’s common stock has a one-third interest. Rentals paid under these leases were
$100,000 for 2003, 2002 and 2001. The lease expires in 2005.
12.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company provides engineering and fabricated systems and services primarily to major integrated oil and gas
companies throughout the world. It also fabricates power systems and battery chargers. The Company performs
ongoing credit evaluations of its customers and generally does not require collateral. Management reviews all trade
receivable balances that exceed 30 days past due and based on its assessment of current credit worthiness, estimate
what portion, if any seems doubtful for collection. A valuation allowance that reflects management’s best estimate
of the amounts that will not be collected is established.
Financial instruments that potentially subject the Company to concentration of credit risk are accounts receivable.
The Company performs ongoing credit evaluations as to the financial condition of its customers. Generally, no
collateral is required.
44
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
For the years ended December 31, 2003, 2002, and 2001, the Company had sales in the engineering segment totaling
approximately $45.2 million, $30.6 million, and $5.4 million attributable to a single customer. During 2003, sales to
one major customer represented over 36% of total sales. During 2002 and 2001, a single customer represented
approximately 30% and 25% of total sales, respectively. At December 31, 2003, the Company had amounts due
from one customer totaling $5.1 million; no other customer exceeded 10% of trade receivables at that date. At
December 31, 2002, three customers had amounts in excess of 10% of trade receivables, totaling $1.6 million. Due
to the limits imposed by our loan agreement on concentration of receivables with a single client, our available
borrowings under the line of credit were reduced by $865,000 at December 31, 2003.
13.
REDEEMABLE PREFERRED STOCK
ENGlobal has a class of preferred stock with 5,000,000 shares originally authorized for issuance. The Company
issued to Equus 2,500,000 shares of preferred stock in 2001 and stock dividends totaling 88,000 shares in 2002 and
146,833 shares in 2003. Par value for the preferred stock was $0.001 with a fair value of $1.00 per share. The
preferred shares outstanding were converted into 1,149,089 shares of common stock in August 2003. Following the
conversion, the Company reduced the authorized shares of preferred stock to 2,265,167.
14.
FEDERAL INCOME TAXES
The components of income tax expense (benefit) from continuing operations were as follows (in thousands):
YearsEndedDecember31,
2002
2003
2001
Current:
Federal .....................................................
State .........................................................
Deferred...................................................
Tax provision...........................................
$ 536
30
566
543
$ 1,109
$ 800
(40)
760
437
$ 1,197
$ 120
135
255
319
$ 574
The components of the Company’s deferred tax asset (liability) consisted of the following at December 31, 2003 and
2002 (in thousands):
Deferred tax asset:
Allowance for doubtful accounts .................................
Net operating loss from prior ownership change .........
Accruals not yet deductible for tax purposes ...............
Net deferred tax assets ............................................
Deferred tax liabilities:
Depreciation.................................................................
Deferred tax asset , net ............................................
2003
$ 128
135
349
612
(291)
$ 321
2002
$ 96
535
365
996
(133)
$ 863
During the year ended December 31, 2002, the Company resolved certain issues related to a net operating loss
carryforward (“NOL”). Upon such resolution, the Company recorded a purchase price adjustment from goodwill to
a deferred tax asset totaling approximately $1.3 million and decreased the valuation allowance accordingly.
45
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following is a reconciliation of expected to actual income tax expense from continuing operations (in
thousands):
Federal income tax expense at 34% .............
State and foreign taxes, net of tax effect ......
Nondeductible expenses...............................
Other ............................................................
2003
$ 1,154
2
31
(78)
$ 1,109
2002
$ 1,052
(26)
15
156
$ 1,197
2001
$ 497
-
28
70
$ 595
The Company has a net operating loss carryforward of approximately $1,000,000 utilized in the calculation of tax
expense for 2003 and 2002. The Company has an additional net operating loss carryforward of approximately
$500,000 that is subject to limitations on utilization due to prior ownership changes.
15.
ACQUISITIONS
The Company has a near-term strategy to develop breadth and depth within the organization through acquisitions. In
December 2001, ENGlobal acquired Petrocon Engineering, Inc., a privately held Texas corporation. The
consummation of the merger was accounted for as a purchase transaction for accounting purposes with an effective
date of December 31, 2001. Accordingly, the results of operations including the newly acquired company are
included in the consolidated statement of income for the years ended December 31, 2003 and 2002.
Two acquisitions were completed in 2003, Senftleber & Associates, L.P. and Petro-Chem Engineering, Inc. Through
the Petro-Chem transaction, selected assets were acquired expanding the Company’s presence in Freeport, Texas
and surrounding area. Senftleber, a limited partnership, provides support in the pipeline industry in Houston. The
new Freeport operations began in June as a part of EEI. The Senftleber acquisition occurred in November.
Senftleber is a subsidiary of ETI.
The acquisitions had an aggregate cost of $425,000. There is no earnout provision in either transaction. Goodwill
was created with both transactions: $115,000 for Petro-Chem and $428,000 for Senftleber. The Senftleber goodwill
will be deductible for tax purposes. Since these acquisitions are accounted for as a purchase transaction, the
accounting is prospective and the operations are combined as of the date of the purchase.
The unaudited pro forma combined historical results, as if the acquisitions had taken place at the beginning of the
fiscal 2003, 2002, and 2001, respectively are estimated to be:
2003
Net sales as reported ........................................................ $ 123,719
Pro forma sales of acquired companies ...........................
2,967
Pro forma net sales ..........................................................
126,686
2002
$ 89,123
6,092
95,215
Net income as reported ....................................................
Pro forma income of acquired companies .......................
Basic per share data as reported.......................................
Pro forma per share data of acquired companies .............
Pro forma basic per share data.........................................
Diluted per share data as reported....................................
Pro forma per share data of acquired companies .............
Pro forma diluted per share data ......................................
2,157
211
2,367
0.087
0.009
0.096
0.086
0.009
0.095
1,751
493
2,244
0.067
0.022
0.089
0.067
0.021
0.088
46
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
16.
SALE OF THERMAIRE
The Company completed its sale of assets of its subsidiary, Thermaire, Inc., d/b/a Thermal Corporation, the only
company in the manufacturing segment, to Nailor Industries of Texas, Inc., a medium-sized HVAC equipment
manufacturer, in December 2003. The disposition had been actively pursued since November 2001 in order to
permit the Company to strategically focus on its core operations. This discontinued segment has reported losses
from operations of $154,000 and $146,000 in 2003 and 2002, respectively, and income of $115,000 in 2001. The
sale resulted in the receipt of $545,000 in cash and a $26,000 gain, net of tax. The proceeds were used to reduce
long-term debt. The 37,000 square foot office and manufacturing facility owned by Thermaire was not included in
the transaction and has been separately listed for sale.
17.
SEGMENT INFORMATION
With the sale of the manufacturing segment, the Company now operates in two business segments: engineering and
systems. The engineering segment provides services primarily to major integrated oil and gas companies. The
systems segment operates primarily full-service systems/controls engineering and integration with some
uninterruptible power systems and battery chargers. Sales, operating income, identifiable assets, capital expenditures
and depreciation for each segment are set forth in the following table. The amount in the corporate segment includes
those activities that are not allocated to the operating segments.
Segment information for 2003, 2002, and 2001 was as follows (in thousands):
2003
Engineering
Net sales from external customers ........................ $ 108,380
4,575
Operating profit (loss) ..........................................
Depreciation and amortization..............................
375
22,642
Tangible assets......................................................
12,889
Goodwill ...............................................................
902
Capital expenditures .............................................
Systems
$ 15,339
(803)
89
3,049
864
105
Corporate
-
762
360
3,048
-
139
Total
$ 123,719
4,534
824
28,762
13,753
1,146
2002
Net sales from external customers ........................
Operating profit (loss) ..........................................
Depreciation and amortization..............................
Tangible assets......................................................
Goodwill ...............................................................
Capital expenditures .............................................
$ 74,971
937
376
17,841
12,774
156
$ 14,151
(271)
49
5,751
435
56
-
3,108
288
3,267
-
1,121
$ 89,122
3,774
713
26,859
13,209
1,333
2001
Net sales from external customers ........................
Operating profit (loss) ..........................................
Depreciation and amortization..............................
Tangible assets......................................................
Goodwill ...............................................................
Capital expenditures .............................................
$ 14,235
1,571
116
18,389
12,774
324
$ 3,575
(65)
4
2,152
435
70
-
(71)
53
932
-
65
$ 17,810
1,435
173
21,473
13,209
459
47
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
18.
CONTINGENCIES
Employment Agreements
The Company has employment agreements with its executive officers and certain other officers, the terms of which
expire between December 2004 and December 2006. Such agreements provide for minimum salary levels. The
aggregate commitment for future salaries at December 31, 2003, excluding bonuses, was approximately
$3.0 million. If the Company terminates the employment of the employee for any reason other than 1) termination
for cause, 2) voluntary resignation, or 3) employee’s death, the Company is obligated to provide a severance benefit
equal to four or six months of the employee’s salary, and, at its option, an additional four months at 50% of the
employee’s salary. These agreements are renewable for one year at the Company’s option.
Litigation
The Company is subject to legal proceedings and claims that have arisen in the ordinary course of its business.
Based on legal analysis and advice from its attorneys, allowances have been made for any litigation that
management of the Company believes could have a material adverse effect on its financial condition or results of
operations.
A claim of failure of contractual performance has been levied against the Company and is covered by insurance. The
Company is aggressively defending itself against this claim. In another matter, a claim regarding the calculation of
an earnout payment has been asserted against the Company. The Company vigorously disputes the claim. The
Company cannot determine the exposure amount, if any, on these two claims but estimates the cost could range
from $0 to $300,000. Reserves have been established to cover this contingency.
During 2003, the Company and its subsidiaries, and more than 40 other parties were named defendants in several
petitions for damages filed in various district courts in Louisiana (East Baton Rouge, Calcasieu, Iberville,
Ascension, and Orleans Parishes) on behalf of former employees of Barnard and Burk, Inc. The plaintiffs, who
allege exposure to asbestos during the course of their employment, were employees of Barnard and Burk, Inc.
during a period covering the late 1950’s through the early 1980’s at facilities located in Louisiana. In 1994, AMEC
Engineering, Inc. assigned the trade name “Barnard and Burk” to RPM Engineering, Inc. along with selected assets.
No liabilities were assumed by RPM. The Company’s wholly owned subsidiary, ENGlobal Engineering, Inc.,
formerly known as Petrocon Engineering, Inc., acquired RPM (along with the “Barnard and Burk” trade name) in
1996 pursuant to a stock purchase agreement. Because Petrocon acquired only the “Barnard and Burk” trade name,
and none of its liabilities, the Company is seeking to be extricated from the suits via summary judgment. A specific
amount of relief has not been stipulated. The Company believes the lawsuits are without merit and intends to defend
them vigorously.
Insurance
The Company carries a broad range of insurance coverage, including general and business automobile liability,
commercial property, professional errors and omissions, workers’ compensation insurance and a general umbrella
policy. The Company has not incurred significant claims in excess of insurance recoveries. ENGlobal is partially
self-funded for health insurance claims. Provisions for expected future payments are accrued based on the
Company’s experience. Specific stop loss levels provide protection for the Company with $100,000 per occurrence
and approximately $3.5 million in aggregate in each policy year being covered by a separate insurance policy.
401(k)
The Company amended the Petrocon 401(k) Plan (now referred to as the ENGlobal Plan) effective January 1, 2004
and dissolved the former IDS 401(k) Plan. Employees who participated in the IDS Plan were allowed to rollover
their 401(k) balance into the ENGlobal Plan. Employees are eligible to participate at the beginning of each calendar
quarter after 60 days of employment. The Company makes mandatory matching contributions to certain eligible
48
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
employees equal to 50% of the employee contribution up to a maximum of 4% of the employee’s compensation as
defined in the Plan Document. The Company made contributions of $144,000, $172,000 and $194,000, respectively
in 2003, 2002, and 2001. Additional discretionary contributions may be made as directed by the Board of Directors.
No discretionary contributions were made in 2003, 2002, or 2001.
19.
Subsequent Events
ENGlobal announced in January that a subsidiary, ENGlobal Design Group, Inc. completed the acquisition of
certain assets of Tulsa-based Engineering Design Group, Inc. (“EDG”). With this acquisition, ENGlobal expects to
gain additional capabilities related to the design, installation and maintenance of various government and public
sector facilities. EDG’s most active sector is the Automated Fuel Handling Systems that serve the U.S. military. In
connection with the acquisition, the Company issued two $150,000 notes bearing interest at 5%, maturing in 2008
and a $2.5 million five-year contingent promissory note together with an earnout structure based on revenues of the
EDG operations over the next five years. There was no cash or stock consideration paid, or EDG debt assumed, as a
result of the transaction.
Effective April 1, 2004 the Company is making available an Employee Stock Purchase Plan, whereby employees
may have a portion of their payroll deducted for the purpose of purchasing shares of ENGlobal Common Stock at
the lower of the price of stock at the beginning of each quarterly offering period or 90% of the price at the end of
such offering period.
The Company remains in active negotiations with several other acquisition candidates. The Company’s goal is to
complete these transactions on terms that will be accretive to earnings per share and will not substantially impact
loan covenants. There can be no assurance that these acquisitions will be completed, or if completed, that the
operations of the acquired companies will be successfully integrated into the Company’s operations.
49
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
20.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
All quarterly periods and the annual data have been restated to reflect the discontinued operations separate from
continuing operations. The quarterly data will not agree to previously issued quarterly statements as a result of this
restatement.
Revenues:
Engineering ......................................................................
Systems ............................................................................
Total .................................................................................
Gross Profit:
Engineering ......................................................................
Systems ............................................................................
Total .................................................................................
Percentage of Sales
Engineering ......................................................................
Systems ............................................................................
Total .................................................................................
Income from continuing operations.....................................
Loss on discontinued segment .........................................
Gain on disposal of discontinued segment .......................
Net income
Earnings per share (basic):
Income from continuing operations .................................
Loss on discontinued operations ......................................
Net income .......................................................................
Earnings per share (diluted):
Income from continuing operations .................................
Loss on discontinued operations ......................................
Net income .......................................................................
For the quarters ended - 2003
(In thousands, except per share amounts)
March
June
September
December
$ 18,315
4,691
$ 23,006
$ 25,257
4,015
$ 29,272
$ 3,123
804
$ 3,927
$ 3,782
441
$ 4,223
17.1%
17.1%
17.1%
$ 514
(6)
-
$ 508
0.020
-
0.020
0.020
-
0.020
15.0%
11.0%
14.4%
$ 563
(29)
-
$ 534
0.022
(0.001)
0.021
0.022
(0.001)
0.021
$ 32,376
3,059
$ 35,435
$ 3,941
400
$ 4,341
12.2%
13.1%
12.3%
$ 393
(11)
-
$ 382
0.016
(0.001)
0.015
0.016
(0.001)
0.015
$ 32,432
3,574
$ 36,006
$ 3,955
527
$ 4,482
12.2%
14.7%
12.4%
$ 815
(108)
26
$ 732
0.034
(0.003)
0.031
0.033
(0.003)
0.030
50
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
For the quarters ended - 2002
(In thousands, except per share amounts)
March
June
September
December
$ 19,440
3,130
$ 22,570
$ 3,071
29
$ 3,100
15.8%
0.9%
13.7%
$ 488
(26)
-
$ 462
$ 19,032
5,293
$ 24,325
$ 3,338
838
$ 4,176
17.5%
15.8%
17.2%
$ 614
(89)
-
$ 525
$ 17,874
2,287
$ 20,161
$ 18,625
3,441
$ 22,066
$ 2,596
492
$ 3,088
$ 3,090
653
$ 3,743
16.6%
19.0%
17.0%
$ 489
10
-
$ 499
14.5%
21.5%
15.3%
$ 307
(41)
-
$ 266
0.011
(0.002)
0.009
0.020
-
0.020
0.019
(0.001)
0.018
0.023
(0.003)
0.020
Revenues:
Engineering ......................................................................
Systems ............................................................................
Total .................................................................................
Gross Profit:
Engineering ......................................................................
Systems ............................................................................
Total .................................................................................
Percentage of Sales
Engineering ......................................................................
Systems ............................................................................
Total .................................................................................
Income from continuing operations.....................................
Loss on discontinued segment .........................................
Gain on disposal of discontinued segment .......................
Net income
Earnings per share (basic and diluted):
Income from continuing operations .................................
Loss on discontinued operations ......................................
Net income .......................................................................
51
INDEPENDENT AUDITOR’S REPORT
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
ENGlobal Corporation
We have audited, in accordance with auditing standards generally accepted in the United States of America, the
consolidated financial statements of ENGlobal Corporation and Subsidiaries included in this Form 10-K and have
issued our report thereon dated March 12, 2004. Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The financial statement schedule listed in Item 16(b) herein (Schedule II
– Valuation and Qualifying Accounts) is the responsibility of the Company’s management and is presented for the
purpose of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial
statements. The financial statement schedule has been subjected to the auditing procedures applied to the audits of
the basic financial statements and in our opinion, is fairly stated in all material respects with the financial data
required to be set forth therein in relation to the basic financial statements taken as a whole.
Hein & Associates LLP
Houston, Texas
March 12, 2004
52
SCHEDULE II
ENGLOBAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(A)
Description
(B)
Balance at
Beginning
of the
Period
(C)
Additions
(D)
Deductions-
Write offs
(E)
Balance at
End of
Period
December 31, 2003
Allowance for doubtful accounts .................................
December 31, 2002
Allowance for doubtful accounts .................................
December 31, 2001
Allowance for doubtful accounts .................................
$ 282
$ 282
$ 188
$ 376
$ 271
$ 215
$ 204
$ 282
$ 17
$ 254
$ -
$ 271
Note: Column C (2) has been omitted, as all answers would be “none.”
53
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There are no changes in or disagreements with the Company’s accountants on accounting and financial
disclosure.
ITEM 9A.
CONTROLS AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and
procedures designed to provide reasonable assurance that information required to be disclosed in the periodic reports
we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the rules
of the SEC. We carried out an evaluation as of December 31, 2003, under the supervision and the participation of
our management, including our chief executive officer and chief financial officer, of the design and operation of the
disclosure controls and procedures pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934.
Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure
controls and procedures are effective in timely alerting them to material information relating to the Company that is
required to be included in our periodic SEC filings.
(b)
Changes in internal controls over financial reporting. There have been no significant changes in
internal controls over financial reporting or other factors subsequent to December 31, 2003.
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information about our executive officers and Directors is incorporated by reference from the discussion in
our proxy statement for the 2004 Annual Meeting of Stockholders under the heading “Directors and Executive
Officers of the Registrant.” Information about compliance with Section 16(a) of the Securities Exchange Act of
1934 is incorporated by reference from the discussion under the heading Section 16(a) Beneficial Ownership
Reporting Compliance in our proxy statement for the 2004 Annual Meeting of Stockholders. Information about our
Audit Committee, including the members of the committee, and our Audit Committee financial experts is
incorporated by reference from the discussion under the headings The Audit Committee and Audit Committee
Financial Experts in our proxy statement for the 2004 Annual Meeting of Stockholders. Information about our Code
of Ethics governing our directors and employees, including our Chief Executive Officer and Chief Financial, is
incorporated by reference from the discussion under the heading ENGlobal Policies on Business Ethics and Conduct
in our proxy statement for the 2004 Annual Meeting of Stockholders
ITEM 11.
EXECUTIVE COMPENSATION
The information under the caption Executive Compensation contained in our proxy statement for the 2004
Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption Security Ownership of Certain Beneficial Owners and Management
contained in our Proxy Statement for the 2004 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption Certain Relationships and Related Transactions contained our proxy
statement for the 2004 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Information about the fees for 2003 and 2002 for professional services rendered by our independent
auditors is incorporated by reference from the discussion under the heading Audit and Non-Audit Fees in Item 2 of
54
our proxy statement for the 2004 Annual Meeting of Stockholders. Our Audit Committee’s policy on pre-approval
of audit and permissible non-audit services of our independent auditors is incorporated by reference from the section
captioned Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Auditor in Item 2 of our proxy statement for the 2004 Annual Meeting of Stockholders.
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)
(b)
1.
2.
3.
Financial Statements: The consolidated financial statements are contained herein as listed on the
“Index” on page 35 hereof.
Schedules: All schedules have been omitted since the information required by the schedule is not
applicable, or is not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the Financial Statements and notes thereto.
Exhibits. The exhibits listed in the accompanying index to exhibits are filed or incorporated by
reference as part of this Report.
Reports on Form 8-K. Three reports on Form 8-K were filed by the Company during the quarter ended
December 31, 2003.
1.
On October 20, 2003, ENGlobal filed a current report on Form 8-K containing a press release
relating to its award of a contract with ExxonMobil Corporation.
On November 3, 2003, ENGlobal filed a current report on Form 8-K disclosing its acquisition of
Senftleber & Associates, L.P.
On November 12, 2003, ENGlobal filed a current report on Form 8-K disclosing its earnings for
the third quarter of 2003.
2.
3.
Number
Description
INDEX OF EXHIBITS
2.23.1
2.24
2.25
3.2
3.16
4.1
10.2
Agreement and Plan of Merger by and between Industrial Data Systems Corporation, IDS
Engineering Management, LC, PEI Acquisition, Inc. and Petrocon Engineering, Inc.,
incorporated by reference to the Company’s Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2001 filed with the Securities and Exchange Commission on August
14, 2001.
First Amendment of the Agreement and Plan of Merger, incorporated by reference to
Amendment One of the Company’s Form S-4 filed with the Securities and Exchange
Commission on October 19, 2001.
Letter Agreement of the Agreement and Plan of Merger, incorporated by reference to
Amendment One of the Company’s Form S-4 filed with the Securities and Exchange
Commission on October 19, 2001.
Corporate Bylaws, Industrial Data Systems Corporation dated October 15, 1997,
incorporated by reference as Exhibit 3 to the Company’s Annual Report on Form 10-KSB/A
for the year ended December 31, 1997 filed with the Securities and Exchange Commission
on April 10, 1998.
Restated Articles of Incorporation of ENGlobal Corporation dated August 8, 2002,
incorporated by reference to the Company’s Quarterly Report on Form-10Q for the quarter
ended September 30, 2002 filed with the Securities and Exchange Commission on
November 14, 2002.
Form of Common Stock Certificate of Industrial Data Systems Corporation, incorporated by
reference to Amendment One of the Company’s Form S-4 filed with the Securities and
Exchange Commission on October 19, 2001.
Blanket Service Contract – Exxon Pipeline Company, incorporated by reference as Exhibit
10.6 to the Company’s Annual Report on Form 10-KSB/A for the year ended December 31,
1996 filed with the Securities and Exchange Commission on May 14, 1997.
55
Number
Description
10.3
10.8
10.32
10.33
10.42
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.52
Blanket Service Contract – Marathon Oil Company, incorporated by reference as Exhibit
10.7 to the Company’s Annual Report on Form 10-KSB/A for the year ended December 31,
1996 filed with the Securities and Exchange Commission on May 14, 1997.
Fourth Amendment of the Lease between Industrial Data Systems, Inc. and 600 C.C.
Business Park Ltd. dated September 1, 1998, incorporated by reference as Exhibit 10.24 to
the Company’s Annual Report on Form 10-KSB/A for the year ended December 31, 1998.
Blanket Service Contract with Caspian Consortium-R, incorporated by reference as Exhibit
10.32 to the Company’s Annual Report on Form 10-KSB for the year ended December 31,
1999.
Blanket Service Contract with Caspian Consortium-K, incorporated by reference Exhibit
10.33 to the Company’s Annual Report on Form 10-KSB for the year ended December 31,
1999.
Standard Industrial Lease Agreement between Houston Industrial Assets, L.P. and Constant
Power Manufacturing, Inc. dated May 30, 2001, incorporated by reference to the Company’s
Quarterly Report on Form 10-QSB for the quarter ended June 30, 2001 filed with the
Securities and Exchange Commission on August 14, 2001.
Settlement Agreement and Plan of Reorganization dated July 31, 2001 among Petrocon
Engineering, Inc., Industrial Data Systems Corporation, PEI Acquisition, Inc., and Equus II
Incorporated, incorporated by reference to the Company’s Annual Report on Form 10-KSB
for the year ended December 31, 2001.
Promissory Note between Petrocon Engineering, Inc. and Equus II Incorporated dated
December 21, 2001, incorporated by reference to the Company’s Annual Report on Form
10-KSB for the year ended December 31, 2001.
Form of Guaranty by and among Fleet Capital Corporation, Petrocon Engineering, Inc., PEI
Acquisition, Inc., and Equus II Incorporated dated December 21, 2001, incorporated by
reference to the Company’s Annual Report on Form 10-KSB for the year ended December
31, 2001.
Security Agreement among Fleet Capital Corporation, Petrocon Engineering, Inc., and
Equus II Incorporated dated December 21,2001, incorporated by reference to the Company’s
Annual Report on Form 10-KSB for the year ended December 31, 2001.
Mortgage and Security Agreement among Fleet Capital Corporation, Equus II Incorporated,
and Petrocon Engineering, Inc. dated December 21, 2001, incorporated by reference to the
Company’s Annual Report on Form 10-KSB for the year ended December 31, 2001.
Option Pool Agreement between Industrial Data Systems Corporation and Alliance 2000,
Ltd. Dated December 21, 2001, incorporated by reference to the Company’s Annual Report
on Form 10-KSB for the year ended December 31, 2001.
Indemnification Escrow Agreement among Industrial Data Systems Corporation, PEI
Acquisitions, the individuals listed as “Significant PEI Shareholders”, and Johnny Williams,
Escrow Agent dated December 21, 2001, incorporated by reference to the Company’s
Annual Report on Form 10-KSB for the year ended December 31, 2001.
Option Escrow Agreement among Industrial Data Systems Corporation, PEI Acquisitions,
the individuals listed as “Significant PEI Shareholders”, and Johnny Williams, Escrow
Agent dated December 21, 2001, incorporated by reference to the Company’s Annual
Report on Form 10-KSB for the year ended December 31, 2001.
Voting Agreement among Industrial Data Systems Corporation, Equus II Corporation,
Alliance 2000, Ltd. and individuals listed as “Significant PEI Shareholders” dated December
21, 2001, incorporated by reference to the Company’s Annual Report on Form 10-KSB for
the year ended December 31, 2001.
56
Number
Description
10.53
10.54
10.55
10.57
10.58
10.59
10.60
10.61
10.62
10.63
Second Amended and Restated Loan and Security Agreement by and among IDS
Engineering, Inc., Thermaire, Inc., Constant Power Manufacturing, Inc., Industrial Data
Systems, Inc., IDS Engineering Management, LC, Petrocon Engineering, Inc., Triangle
Engineers and Constructors, Inc., Petrocon Systems, Inc., Petrocon Engineering of
Louisiana, Inc., R.P.M. Engineering, Inc., Petrocon Construction Resources, Inc., Alliance
Engineering Associates, Inc., and Fleet Capital Corporation dated December 21, 2001,
incorporated by reference to the Company’s Annual Report on Form 10-KSB for the year
ended December 31, 2001.
Amended and Restated Revolving Note between Fleet Capital Corporation and IDS
Engineering, Inc., Thermaire, Inc., Constant Power Manufacturing, Inc., Industrial Data
Systems, Inc., IDS Engineering Management, LC, Petrocon Engineering, Inc., Triangle
Engineers and Constructors, Inc., Petrocon Systems, Inc., Petrocon Engineering of
Louisiana, Inc., R.P.M. Engineering, Inc., Petrocon Construction Resources, Inc., Alliance
Engineering Associates, Inc. dated December 21, 2001, incorporated by reference to the
Company’s Annual Report on Form 10-KSB for the year ended December 31, 2001.
Stock Pledge Agreement between Industrial Data Systems, Inc. and Fleet Capital
Corporation dated December 21, 2001, incorporated by reference to the Company’s Annual
Report on Form 10-KSB for the year ended December 31, 2001.
Amended and Restated Stock Pledge Agreement between Petrocon Engineering, Inc. and
Fleet Capital Corporation dated December 21, 2001, incorporated by reference to the
Company’s Annual Report on Form 10-KSB for the year ended December 31, 2001.
Continuing Guaranty Agreement between Fleet Capital Corporation and “Borrowers”
known as IDS Engineering, Inc., Thermaire, Inc., Constant Power Manufacturing, Inc.,
Industrial Data Systems, Inc., IDS Engineering Management, LC, Petrocon Engineering,
Inc., Triangle Engineers and Constructors, Inc., Petrocon Systems, Inc., Petrocon
Engineering of Louisiana, Inc., R.P.M. Engineering, Inc., Petrocon Construction Resources,
Inc., Alliance Engineering Associates, Inc. dated December 21, 2001, incorporated by
reference to the Company’s Annual Report on Form 10-KSB for the year ended December
31, 2001.
Amended and Restated Patent Security Agreement between Petrocon Engineering, Inc. and
Fleet Capital Corporation dated December 21, 2001, incorporated by reference to the
Company’s Annual Report on Form 10-KSB for the year ended December 31, 2001.
Amended and Restated Patent Security Agreement between Petrocon Technologies, Inc. and
Fleet Capital Corporation dated December 21, 2001, incorporated by reference to the
Company’s Annual Report on Form 10-KSB for the year ended December 31, 2001.
Amended and Restated Trademark Security Agreement between R.P.M. Engineering, Inc.
and Fleet Capital Corporation dated December 21, 2001, incorporated by reference to the
Company’s Annual Report on Form 10-KSB for the year ended December 31, 2001.
Intercreditor Agreement by and among Fleet Capital Corporation, Equus II Incorporated,
Petrocon Engineering, Inc. (Borrower) together with the Loan Party (Industrial Data
Systems Corporation,
Inc., Constant Power
Manufacturing, Inc., Industrial Data Systems, Inc., IDS Engineering Management, LC,
Triangle Engineers and Constructors, Inc., Petrocon Systems, Inc., Petrocon Engineering of
Louisiana, Inc., R.P.M. Engineering, Inc., Petrocon Construction Resources, Inc., Petrocon
Technologies, Inc., and Alliance Engineering Associates, Inc. dated December 21, 2001,
incorporated by reference to the Company’s Annual Report on Form 10-KSB for the year
ended December 31, 2001.
Second Amended and Restated Lease Agreement between Corporate Property Associates 4
and Petrocon Engineering, Inc. for Beaumont office space dated February 28, 2002,
incorporated by reference to the Company’s Quarterly Report on Form-10Q for the quarter
ended June 30, 2002 filed with the Securities and Exchange Commission on August 12,
2002.
IDS Engineering,
Inc., Thermaire,
57
Number
Description
10.64
10.65
10.65-A
10.65-B
10.66
10.67
10.68
10.69
10.70
10.72
10.73
10.74
10.75
10.76
Guaranty and Suretyship Agreement between Industrial Data Systems Corporation and
Corporate Property Associates 4 dated April 26, 2002, incorporated by reference to the
Company’s Quarterly Report on Form-10Q for the quarter ended June 30, 2002 filed with
the Securities and Exchange Commission on August 12, 2002.
ENGlobal Corporation Incentive Bonus Plan dated June 12, 2002, incorporated by reference
to the Company’s Quarterly Report on Form-10Q for the quarter ended June 30, 2002 filed
with the Securities and Exchange Commission on August 12, 2002.
Amendment of the 1998 Incentive Plan, incorporated by reference to the Company’s Form
S-8 Registration Statement filed with the Securities and Exchange Commission on June 9,
2003.
Amendment No. 2 of the 1998 Incentive Plan, incorporated by reference to the Company’s
Form S-8 Registration Statement filed with the Securities and Exchange Commission on
June 9, 2003.
Lease Agreement between Petrocon Engineering, Inc. and Phelan Investments on July 25,
2002, incorporated by reference to the Company’s Quarterly Report on Form-10Q for the
quarter ended September 30, 2002 filed with the Securities and Exchange Commission on
November 14, 2002.
Second Amendment of the Second Amended and Restated Loan and Security Agreement as
of July 31, 2002 between IDS Engineering and Subsidiaries and Fleet Capital Corporation,
incorporated by reference to the Company’s Quarterly Report on Form-10Q for the quarter
ended September 30, 2002 filed with the Securities and Exchange Commission on
November 14, 2002.
Amendment of the Intercreditor Agreement between Fleet Capital Corporation, Equus II
Incorporated and ENGlobal Corporation dated July 31, 2002, incorporated by reference to
the Company’s Quarterly Report on Form-10Q for the quarter ended September 30, 2002
filed with the Securities and Exchange Commission on November 14, 2002.
Fifth Amendment of Lease Agreement between IDS and 600 C.C. Business Park Ltd.,
incorporated by reference to the Company’s Quarterly Report on Form-10Q for the quarter
ended September 30, 2002 filed with the Securities and Exchange Commission on
November 14, 2002.
Lease Agreement between PEI Investments and Petrocon Engineering, Inc. dated July 1,
2002, incorporated by reference to the Company’s Quarterly Report on Form-10Q for the
quarter ended March 31, 2003 filed with the Securities and Exchange Commission on May
13, 2003.
Lease Agreement between Petro-Chem Engineering and ENGlobal Engineering, Inc. dated
June 4, 2003, incorporated by reference to the Company’s Quarterly Report on Form-10Q
for the quarter ended June 30, 2003 filed with the Securities and Exchange Commission on
August 14, 2003.
Contract between BASF and ENGlobal Engineering, Inc. dated June 9, 2003, incorporated
by reference to the Company’s Quarterly Report on Form-10Q for the quarter ended June
30, 2003 filed with the Securities and Exchange Commission on August 14, 2003.
Sublease Agreements between Family Connect, Inc., a tenant of CitiPlex Towers Building
and IDS Engineering dated February 2, 2003, incorporated by reference to the Company’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 filed with the
Securities and Exchange Commission on November 14, 2003.
Lease Agreement between Oral Roberts University and IDS Engineering, dba ENGlobal
Engineering, Inc. dated October 20, 2003, incorporated by reference to the Company’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 filed with the
Securities and Exchange Commission on November 14, 2003.
Sixth Amendment of the Second Amended and Restated Loan and Security Agreement as of
June 30, 2003 between ENGlobal Corporation and Subsidiaries and Fleet Capital
Corporation, incorporated by reference to the Company’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2003 filed with the Securities and Exchange
Commission on November 14, 2003.
58
Number
Description
10.77*
10.78*
10.79*
11.1
21.1*
23.1*
31.1*
31.2*
32.1*
32.2*
99.1*
99.2*
99.3*
99.4*
99.5*
99.6*
99.7*
Second Amendment of the ENGlobal Engineering, Inc. 401(k) Plan dated January 1, 2004
(formerly called the “Petrocon Engineering, Inc. 401(k) Plan”)
ENGlobal Corporation Employee Stock Purchase Plan dated March 2, 2004, incorporated by
reference to the Company’s Form S-8 registration statement filed with the Securities and
Exchange Commission on March 12, 2004.
Office lease between TC Meridian Tower LP and ENGlobal Design Group, Inc. dated
January 24, 2004
Statement Regarding Computation of Per Share Earnings is included as Note 2 to the Notes
to Consolidated Financial Statements.
Subsidiaries of the Registrant, incorporated by reference to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange
Commission on March 27, 2003.
Consent of Hein + Associates
Certification pursuant to Section 302 of the Sarbanes-Oxley Act for 2002 for the Year Ended
December 31, 2003 for the Chief Financial Officer
Certification pursuant to Section 302 of the Sarbanes-Oxley Act for 2002 for the Year Ended
December 31, 2003 for the Chief Financial Officer
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act for 2002 for the Year
Ended December 31, 2003 for the Chief Financial Officer
Certification pursuant to Section 906 of the Sarbanes-Oxley Act for 2002 for the Year Ended
December 31, 2003 for the Chief Financial Officer
Charter of the Audit Committee of the Board of Directors of ENGlobal Corporation dated
December 18, 2003
Charter of the Compensation Committee of the Board of Directors of ENGlobal Corporation
dated March 25, 2004
Charter of the Nominating/ Corporate Governance Committee of the Board of Directors of
ENGlobal Corporation dated March 25, 2004
ENGlobal Corporation Employee Complaint Procedures and Non-Retaliation Policy dated
March 25, 2004
ENGlobal Corporation Code of Ethics for Chief Executive Officer and Senior Financial
Officers dated March 25, 2004
ENGlobal Corporation Code of Business Conduct and Ethics dated March 25, 2004
ENGlobal Corporation Disclosure Policy dated March 25, 2004
*
Filed herewith.
59
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused
this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
ENGLOBAL CORPORATION
/s/ Michael L. Burrow
By:
Michael L. Burrow
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature
Capacity
Date
/s/ Michael L. Burrow
Michael L. Burrow
/s/ William A. Coskey
William A. Coskey
Chief Executive Officer and Chairman of
the Board and Directors
March 8, 2004
President, Chief Operating Officer and
Director
March 8, 2004
/s/ Robert W. Raiford
Chief Financial Officer and Treasurer
March 8, 2004
Robert W. Raiford
/s/ Hulda L. Coskey
Director
March 8, 2004
Hulda L. Coskey
/s/ Jimmie N. Carpenter
Jimmie N. Carpenter
/s/ David W. Gent
David W. Gent
/s/ Randall B. Hale
Randall B. Hale
/s/ David C. Roussel
David C. Roussel
Director
Director
Director
Director
60
March 8, 2004
March 8, 2004
March 8, 2004
March 8, 2004