ENGlobal Corporation
2004
A N NUA L
R E P OR T
Company Overview & Financial Highlights
Overview
Systems
Since 1977, ENGlobal Corporation has provided
engineering and systems services principally to the
refi ning, petrochemical, pipeline and
petroleum
process industries throughout the United States and
internationally. ENGlobal Corporation’s services span
the lifecycle of a project and include feasibility studies,
engineering, design, procurement and construction
management, as well as associated facility operations
and maintenance. The Company also supplies auto-
mation services, control systems, and uninterruptible
power supplies to clients worldwide.
Engineering
ENGlobal’s engineering segment offers develop-
ment, management and turnkey execution of engineered
projects. ENGlobal also provides inspection services
throughout the United States. Among various subsidiar-
ies, the engineering segment provides (i) engineering
services to the upstream, midstream and downstream
energy industries, (ii) inspection services to industrial
plants throughout the United States, and (iii) Automated
Fuel Handling Systems and instrumentation and control
services to branches of the U.S. military. In 2004, the
engineering segment accounted for 89.8% of ENGlob-
al’s total revenues for the year, and realized a $25.2
million increase in its revenues over fi scal year 2003.
ENGlobal’s systems segment designs, assembles, programs,
installs, integrates and services control and instrumentation
systems for specifi c applications in the energy and processing
related industries. Among various subsidiaries, the systems
segment provides (i) all facets of control and instrumenta-
tion system design, engineering, assembly and testing in-
house, (ii) fabrication and fi eld service support of industrial
grade uninterruptible electrical power systems and battery
chargers, (iii) integrated information technology applica-
tions, and (iv) products and services supporting the advanced
automation and environmental technology fi elds. The systems
segment contributed approximately 10.2% of 2004 revenues.
ENGlobal, with its subsidiaries, now employs
over 1,400 employees in 13 offi ces and occu-
pies over 300,000 square feet of offi ce and
manufacturing space. Further information
about the Company and its subsidiaries is
available at www.ENGlobal.com.
FINANCIAL HIGHLIGHTS
(In thousands, except per share data)
For the years ended December 31,
2004
2003
2002
Income Statement Data: *
Net Revenues
Operating Income
Net Income
Earnings per Share (basic and diluted)
Balance Sheet Data:
Working Capital
Total Assets
Long-Term Debt (net of current portion)
Stockholders’ Equity
$148,888
4,492
2,364
$0.10
$14,503
57,261
15,585
$20,051
$123,719
4,534
2,157
$0.09
$6,505
42,530
7,506
$18,200
$89,122
3,773
1,752
$0.07
$8,416
40,068
12,580
$13,389
* Due to the sale of Thermaire, all items related to the previously reported manufacturing segment have been reclassifi ed to discontinued
operations in order to provide comparative results. Previously reported amounts will not agree to the amounts presented, except net
income.
April 29, 2005
To Our Stockholders:
We are pleased to report that, in 2004, ENGlobal achieved yet another year of growth, as both revenues
and net income again exceeded results from the prior year, setting new corporate records. This
accomplishment – five consecutive years of growth and increased profitability – is certainly one we will
strive to continue.
It is our hope that ENGlobal’s stockholders and employees can fully appreciate this accomplishment, and
share in our pride, given your stake in the Company. The effort required to consistently grow our
business is best illustrated by our own internal motto: “T.E.A.M. ENGlobal - Together ENGlobal
Achieves More.” We cannot thank TEAM ENGlobal enough for their excellent work – undeniably, we
have a winning team.
Financial results are the primary measure by which we live, and the main gauge by which stockholders
and the public view our Company. The Selected Financial Data, on pages 23 and 24 of this Annual
Report, provides an excellent summary of ENGlobal’s financial performance over the last five years
(2000 - 2004).
Although our historical financial results are impressive, we would like to take this opportunity to share
our vision for the future. We plan to position the Company to take advantage of the trends that we see in
our marketplace. Our goal is to produce solid financial growth from operations on a year over year basis.
We have also undertaken several entrepreneurial initiatives, which focus on areas we believe have
excellent potential. Several of these internal ventures are explained in more detail below. Of course, this
activity presents a dilemma, albeit typical, for public companies. That is, management must strive to
balance the competing priorities of (1) producing good financial results on a quarterly basis and (2)
strategically approving expenses aimed at future growth.
We believe that the six industry trends we identified in our last stockholder message are continuing as
follows:
1. Major energy operating companies are continuing to outsource a significant portion of their
engineering and other technical service requirements.
2. The levels of government regulation and compliance requirements on the energy industry show
no sign of abating. As a result, projects relating to refinery clean fuels, pipeline integrity, process
safety management and process analyzer systems continue to provide opportunities for the
Company.
3. Technological obsolescence is continuing to create demand for upgrades and installations of
computer-based control equipment used in our customers’ industries. While these expenditures
are typically discretionary for our clients, spending in this area tends to increase during up cycles
in our industry.
4. It is apparent that government spending for our country’s defense will remain at high levels.
(continued on next page)
Message to Stockholders
Page 2
5. We expect downstream projects (refining/petrochemical) in the U.S. will primarily be related to
maintenance and retrofitting of existing plants. Grassroots plants will be built abroad, due to U.S.
regulatory obstacles and demand from emerging markets.
6. We believe that the demand for energy will continue to grow in the U.S. as well as in other parts
of the world, and that, to satisfy this demand, companies will make substantial capital
investments across the spectrum of the energy business.
In previous communications, we have differentiated between “vertical” growth, meaning growth through
acquisitions, and “horizontal” growth, meaning internal growth. The Company’s past acquisitions have
allowed us to quickly build market share in a particular industry or geographic area, and the Company
continues to investigate the possibility of acquiring businesses that could further expand the Company’s
reach. However, given the management focus required to execute and fully integrate acquired firms, is it
likely that any future acquisitions will be larger than ones completed in the recent past.
We believe our best growth success in the near term will occur through in-house business development
efforts with a strong focus on the trends identified above. ENGlobal has assembled a team of senior
business development professionals that is producing excellent results. Maintaining this team, together
with support staff, and having a senior sales person located at each of our major offices has proven to be
worthwhile.
We consider virtually every employee of ENGlobal, from our CEO down, as working in “sales” to
promote our extraordinary capabilities. In particular, our business development personnel have a vested
interest in our growth, and are chosen carefully based on their many years of sales success and industry
knowledge. In addition, they each bring business relationships that are particular to our various business
segments. Although business development expenses are an increasing percentage of our corporate
overhead, we view our intensive business development efforts as an investment that will provide positive
results in this and future years.
Four ENGlobal business operations achieved outstanding results during 2004. Special recognition is due
to our Beaumont engineering office and our entire In-Plant Services group for their long-term
contribution to the Company. Both are consistent producers that have provided a major part of
ENGlobal’s operating profit over the last several years. We also want to give credit to our Tulsa
engineering office, which recorded a breakthrough year financially. In addition, ENGlobal Systems, Inc.,
which began 2004 with lower than expected performance, steadily built backlog throughout the year,
ending the year on a strong note.
ENGlobal has recently undertaken several entrepreneurial initiatives. Each of these unique opportunities
began when a key individual, either inside or outside the Company, presented a compelling concept to our
management team. We continue to reserve a small amount of our budget for new internal ventures, and
our CEO is tasked with allocating these funds based on management’s thorough analysis of the potential
risks and rewards that each opportunity presents. While managing our core operations will always
receive primary attention, the following strategic initiatives are now active divisions of the Company:
The sulfur recovery business is a niche market -- fewer than five firms in the U.S. focus on this specialty.
This business is being driven by governmental regulatory requirements, with the Environmental
Protection Agency mandating decreased sulfur levels in various energy products. Refiners are currently
required to adhere to ultra low sulfur diesel specifications that call for a maximum sulfur content of 15
parts per million at the delivery point. These requirements reflect an effort to decrease the amount of
sulfur dioxide emitted in the United States, and thus reduce the future impact of acid rain. For this
initiative, the ENGlobal Sulfur Group is fortunate to have on board individuals with highly specialized
(continued on next page)
Message to Stockholders
Page 3
knowledge. As a result, ENGlobal’s office in Dallas has grown its staff to approximately 20 since
opening in September 2004. The primary efforts to date for this office have been business development,
preparation of major project proposals, and assisting with related projects from our other offices.
We recently formed the ENGlobal Automation Group to benefit from the previously discussed trend of
replacing obsolete technology. This group is opening an office in Calgary, Alberta, Canada, our 13th
office location. The catalyst for this new internal initiative was the hiring of a key individual, who has
excellent credentials, and over 20 years of experience in the automation services industry, including
leadership of a $400 million project division for a major supplier of distributed control system equipment.
We believe ENGlobal’s substantial project history, together with the skills of this group’s leader, will
produce solid results for the Company.
Our ENGlobal Polymers Group was formed to benefit from the trend described above relating to
retrofitting downstream U.S. petrochemical plants. The executive leading this division has over 30 years
of experience in the polymers industry and a detailed understanding of this marketplace. The timing of
our entry into this market appears to be favorable as the polymers industry seems to be approving an
increased number of projects relating to maintenance and debottlenecking of plant processes. We
envision that our Polymers Group will continue to see increased activity in future years given its specialty
in materials processing from the reactor downstream.
Each of the groups described above will seek to perform a majority of its work on a lump sum turnkey
(“LSTK”) basis. LSTK projects provide greater revenue than other projects, as ENGlobal is responsible
for both the procurement of material and subcontracted labor. Without a doubt, superior project
management and project controls are the keys to realizing greater profit from a LSTK project. However,
these projects also involve increased risk, which can result from adverse contractual terms, inaccurate
project cost estimation and poor execution. Accordingly, we have taken steps to standardize internal
controls for project administration and related processes, with a goal of having consistent functions in this
area.
ENGlobal is also investigating several exciting new technologies that we expect will perform well in the
future. We believe technology, despite its high acquisition costs, is the best differentiator for an
engineering services business. In this regard, ENGlobal has hired a former group president of an
international engineering and construction company, who is responsible for designating and developing
several emerging prospects. Some of the prospects under review are (1) ethanol, because of the projected
number of new U.S. facilities; and (2) water desalination and wastewater treatment, in which we may
have the opportunity to participate in new revolutionary technology.
As previously reported, we are currently in a hiring mode, but recruitment of qualified personnel is
becoming increasingly more difficult. Along with our larger competitors, the Company is beginning to
use low-cost foreign engineering services to perform certain basic design work, and we expect this
practice to increase over time. The impetus for this effort is our concern that, in the near future, there
may be a shortage of qualified industry personnel to meet our clients’ needs. We expect that international
outsourcing will be a method by which we optimize the effectiveness of our current staff during peak
times; we do not anticipate the loss of ENGlobal U.S. jobs as a result. In this regard, ENGlobal has
performed the proper due-diligence by making on-site visits to pre-qualify firms in Mexico, Central and
South America, and India, and we have successfully utilized a Venezuelan firm on a recent U.S. refinery
project.
(continued on next page)
Message to Stockholders
Page 4
Finally, the Company has invested and become proficient in the use of the latest software design tools. In
addition to significant purchases of software, this effort has also required in many cases new computer
hardware as well as personnel expense for training and startup. This initiative has been client driven and
is a major selling point for securing projects, serving as an important indicator of the Company’s
competitive abilities. For example, (1) ENGlobal has assembled a large team of “Intools” professionals,
who utilize the Intools software to optimize instrumentation and electrical design functions, and (2) the
Company has purchased the latest 3D CAD software, with adoption of this tool growing among our
downstream clients in particular.
In summary, ENGlobal plans to continue utilizing a portion of our potential current income in a way that
we expect will produce future gain for our stockholders. We expect that our ultimate success will result
from careful planning and a variety of distinct efforts. Whether it be (i) further success in our core
businesses, (ii) growth through new internal ventures, or (iii) the acquisition of strategic business partners,
we believe a balanced combination of business initiatives will prove more powerful than any one
initiative alone.
These are exciting times at ENGlobal and there is definitely a ‘buzz’ among our clients and employees.
On behalf of our entire management team, it is our honor to be leading what has been named by
ZweigWhite as the fastest growing engineering company in the United States. We have the utmost
confidence in your Company and we believe ENGlobal has more exciting prospects than at any time in its
history.
We thank you for your support as shown by your investment in ENGlobal Corporation. We and other
members of TEAM ENGlobal are working diligently on your behalf, and will continuously strive to earn
the trust and respect of our valued stockholders.
Sincerely,
Michael L. Burrow, P.E.
Chairman and Chief Executive Officer
William A. Coskey, P.E.
President
ENGlobal Corporation
2004 Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
or
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 X 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.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes
No X
Yes
No X
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 30, 2004 was
$20,777,935 (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, 2005 is as follows:
$0.001 Par Value Common Stock
23,474,839 shares
DOCUMENTS INCORPORATED BY REFERENCE
Responses to Items 10, 11, 12, 13 and 14 of Part III of this report are incorporated herein by reference to certain information
contained in the Company’s definitive proxy statement for its 2005 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 30, 2005.
Transitional Small Business Disclosure Format:
Yes
No X
1
ENGlobal Corporation
2004 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
ITEM 1.
BUSINESS
ITEM 2.
PROPERTIES
ITEM 3.
LEGAL PROCEEDINGS
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
ITEM 6.
SELECTED FINANCIAL DATA
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11.
EXECUTIVE COMPENSATION
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 15.
EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES
PART IV
SIGNATURES
SIGNATURES
PAGE
4
19
20
20
21
22
25
35
35
63
63
63
63
63
63
64
64
70
2
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
PART I
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 availability of parts from vendors; (vii) our ability to increase or 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; (ix) the ability to
hire and retain qualified personnel; (x) the ability to retain existing customers and get new customers and (xi) 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.
3
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. (“Petrocon”) 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.
In the last five years, the Company’s net revenue from continuing operations has grown from $13.6 million in
2000 to $148.9 million in 2004, a compounded annual growth rate of approximately 82%. Since the merger
with Petrocon, the Company’s net revenue from continuous operations has grown from $89.1 million in 2002, a
compounded annual growth rate of approximately 29%. We have accomplished this growth by expanding our
engineering and systems services and geographic presence through a series of strategic acquisitions and through
internal growth initiatives. We now have more than 1,400 full-time equivalent employees in offices
strategically located in Houston, Beaumont, Freeport, Midland and Dallas, Texas; Baton Rouge and Lake
Charles, Louisiana; and Tulsa and Cleveland, Oklahoma.
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 from 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: (i) our Code of Business Conduct and
Ethics for all of our employees, including our Chief Executive Officer and Chief Financial Officer; (ii) our
Code of Ethics for our Chief Executive Officer and Senior Financial Officers; (iii) information concerning our
Directors, and our Board Committees, including Committee charters, and (iv) information concerning
transactions in ENGlobal securities by Directors and officers, is available on our website at www.englobal.com
under the Investor Relations link. 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. As of June 1, 2005, the Company will relocate its corporate headquarters to 654
North Sam Houston Parkway E, Suite 400, Houston, Texas 77060-5914.
4
ITEM 1.
BUSINESS (Continued)
Business Segments
During 2004, we operated two business segments: engineering and systems. The respective contributions to our
total sales in 2004, 2003 and 2002 for the engineering and the systems segments are summarized below.
Segment: (1)
Engineering
Systems
Percentage of Revenues
2003
2002
2004
89.8 %
10.2 %
100.0 %
87.6 %
12.4 %
100.0 %
84.1 %
15.9 %
100.0 %
(1) Does not include manufacturing segment, which was sold in December 2003.
The shift in the percentage of revenue figures between the engineering and systems business segments
highlights the growth the engineering segment has experienced over the last three years. Revenues from the
systems segment have remained constant over the three-year period, while engineering revenues increased 45%
and 23%, respectively, during the periods 2002 to 2003 and 2003 to 2004.
Engineering Segment____________________________________________________________
Revenues from external customers
Operating profit
Total assets
2004
2003
(Amounts in thousands)
2002
$
$
$
133,630
10,512
20,093
$
$
$
108,380
10,716
35,531
$
$
$
74,971
7,148
30,615
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”), ENGlobal Construction Resources, Inc. (“ECR”) and ENGlobal Design Group, Inc.
(“EDG”). 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. EDG primarily provides Automated Fuel Handling Systems and services to branches of the
U.S. military. The engineering segment derives revenues primarily from fees charged for professional and
technical services. As a service company, we are more labor than capital intensive and our income results
from our ability to generate revenues and collect cash under contracts for our employees’ time in excess of
any subcontract, pass-thru materials and equipment and non-labor costs and our selling, general and
administrative (SG&A) expenses.
The engineering segment has approximately 73 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, Dallas, Houston, Midland and Freeport, Texas; and Cleveland and Tulsa, Oklahoma. Our
engineering segment also makes unique, custom-made process related fabricated systems, designed to
customer specifications.
5
ITEM 1.
BUSINESS (Continued)
During 2003, as part of our plan to extend our geographical range and to serve the downstream
petrochemical 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 had a staff of 55 engineers, designers, inspectors and support personnel engaged on contract
projects with several Freeport area clients. This acquisition allowed us to expand into the Freeport area
with experienced staff that has an established reputation. 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 in Geismar, Louisiana.
During 2004, the engineering segment continued its geographical expansion with new offices in Dallas and
Midland, Texas and Cleveland, Oklahoma, plus an additional office in Tulsa, Oklahoma. In January,
through EDG, we acquired certain assets of Engineering Design Group, Inc. (“EDGI”) located 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. In
August, we announced the expansion of its operation in the sulfur reduction business to be operated from
Dallas, Texas. In September, through ECR, we acquired certain assets of AmTech Inspection located in
Midland, Texas. The new division’s revenues are derived primarily from providing inspectors for regional
refining and pipeline operations. In October, again through ECR, ENGlobal acquired certain assets of
Cleveland Inspection Services, Inc. (“CIS”) located in Cleveland, Oklahoma. CIS provides inspection and
construction management services in support of the oil and gas, utility and pipeline industries.
In March 2005, ENGlobal Engineering formed ENGlobal Automation Group (“EAG”) to provide services
relating to the implementation of process control, advance automation and information technology projects
providing our clients with a full range of services, including but not limited to, front-end engineering
feasibility studies and the execution of turnkey engineering, procurement, and construction projects. By
focusing on large-scope projects, EAG intends to pursue distributed control systems (“DCS”) conversion
and new installation projects by utilizing its own resources as well as resources from both ENGlobal
Engineering and ENGlobal Systems. EAG will promote our proven capabilities for plant automation
services and products to respond to an industry progression toward replacing obsolete technology with new
open system architecture distributed control systems.
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 on a full service, turnkey basis. The engineering staff has the
capability of developing a project from the initial planning stages through detailed design and construction
management. Services that we provide include:
conceptual studies;
project definition;
cost estimating;
engineering design;
inspection;
•
•
•
•
•
• 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.
6
ITEM 1.
BUSINESS (Continued)
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 "work sharing" 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 Segment________________________________________________________________
Revenues to external customers
Operating profit (loss)
Total assets
2004
2003
(Amounts in thousands)
2002
$
$
$
15,258
585
4,285
$
$
$
15,339
(38 )
3,913
$
$
$
14,151
851
6,186
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 four wholly-owned subsidiaries: ENGlobal Systems,
Inc. (“ESI”), ENGlobal Constant Power, Inc. (“ECP”), ENGlobal Technologies, Inc. (“ETI”) and
Senftleber & Associates L.P. (“Senftleber”). Beginning in 2005, the operations of ECP, ETI and Senftleber
were merged into ESI and Senftleber was dissolved effective December 31, 2004. The Company now
intends to dissolve ECP and ETI. The systems segment derives revenues primarily from fees on contracts
for the design and assembly of control and instrumentation systems. Income from the systems segment is
derived from our ability to generate revenues and collect cash on fixed price contracts in excess of our costs
for labor, materials and equipment and transportation costs, plus our SG&A expenses.
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 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, modification to existing systems, on-site training and routine maintenance
procedures for client operating personnel.
7
ITEM 1.
BUSINESS (Continued)
ESI also operates (previously through ECP) 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, ESI 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 these products. ESI’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 system units that contain battery chargers.
Additionally, ESI provides products and services supporting the advanced automation and environmental
technology fields. Advanced automation services provided by ESI 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. ESI supports the environmental technology field by providing predictive emissions monitoring
(“PEMS”), continuous emissions monitoring system (“CEMS”), Flare-MonTM (flare monitoring system)
and air emissions consulting.
In October 2003, through ETI, the Company 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 Supervisory Control and Data Acquisition
(SCADA) systems. In December 2004, ESI purchased contract rights and other assets of InfoTech
Engineering Company (“InfoTech”), headquartered in Baton Rouge, Louisiana. The InfoTech acquisition
expands ESI’s capability in controls system integration in both the automation and process control services.
InfoTech’s primary experience is in the onshore and offshore oil and gas and petrochemical industries.
In February of 2005, ESI, along with EPIC Technical Services, Inc., a subsidiary of EPIC Group, Inc.,
formed a new company, EPIC ENGlobal, LLC (“EPIC ENGlobal”), in order to offer turnkey integrated
engineering, automation and construction services. The new company plans to become a single source
provider of construction and engineering services in both domestic and international markets providing
services to include preliminary detailed engineering, process control, power systems, instrumentation,
system integration, control panel and component fabrication, construction and maintenance. EPIC
ENGlobal expects to focus on both upstream and downstream energy sectors, as well as chemical,
petrochemical, food and beverage, power, and pharmaceutical industries. EPIC ENGlobal intends to
provide ESI with an immediate presence in the upstream engineering, construction and fabrication
marketplace. Equally, EPIC Technical Services anticipates that it will be able to use ESI’s engineering,
analytical, distributive control, and systems integration and packaging capabilities. Each company brings
complementary expertise with the ultimate goal of attaining a broader reach across the target markets.
8
ITEM 1.
BUSINESS (Continued)
Competition
The systems segment has been impacted by price variations attributable to cyclical conditions in the oil and
gas, petroleum and processing industries. In addition, during 2004, a large percentage of ESI revenues
were derived from fabrication which has a lower profit margin than other activities. 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; Honeywell; ICS/Triplex; PasTech; Puffer Sweiven; Scallon Controls; and Siemens.
Competition in ESI’s market for power systems and battery backup products 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 (in
alphabetical order): Custom Power; Gutor; LaMarche Mfg.; Powerware; SCI; and Toshiba.
For advanced control consulting, ESI competes directly with large companies such as Honeywell Hyspec.
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 in this area of business.
We believe that pricing, technical competence and ability to provide superior service are the primary bases
of competition.
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; however,
we are also focusing on opportunities for internal growth. 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.
One of the Company’s subsidiaries, ENGlobal Design Group, Inc. (“EDG”), purchased certain assets of Tulsa-
based Engineering Design Group, Inc. (“EDGI”) effective January 23, 2004. We expect that the acquisition of
these assets will enhance its capabilities to obtain contracts relating to government and public sector facilities.
EDG’s most active sector involves Automated Fuel Handling Systems for the U.S. Military. In connection with
the purchase, EDG issued two $150,000 notes bearing interest at 5% maturing in December 2008 and a $2.5
million five-year contingent promissory note, with payments due annually, as part of an earn-out structure based
on revenues of the EDG operations over the next five years. EDG did not pay any cash or issue any stock in the
transaction. The original consideration given for the purchase of certain EDGI assets approximated the fair
value; therefore the transaction did not result in any goodwill. Principal and interest on the $2.5 million five-
year contingent promissory note will be charged to goodwill. As of December 31, 2004, $139,000 in principal
and interest on the contingent promissory note was charged to goodwill.
In October 2004, one of the Company’s subsidiaries, ENGlobal Construction Resources, Inc., purchased the
name and certain assets of Cleveland Inspection Services, Inc. (“CIS”). CIS provides inspection and
construction management services in support of the oil and gas, utility, and pipeline industries. In exchange for
the assets acquired, the Company paid $2.0 million consisting of cash, a promissory note and assumption of
certain designated contract obligations and entered into non-compete agreements with CIS and its principals. In
connection with the acquisition, we hired approximately 180 former CIS employees. CIS is operated as a
division of ENGlobal Construction Resources, Inc., marketing its services using the Cleveland Inspection
Services name.
9
ITEM 1.
BUSINESS (Continued)
In December 2004, ESI purchased contract rights and other assets of InfoTech Engineering Company, LLC, a
limited liability company (“InfoTech”), headquartered in Baton Rouge, Louisiana. In exchange for the contract
rights and other certain assets, the Company paid $325,000 consisting of cash, a promissory note and entered
into a non-compete agreement with the former owner. The InfoTech acquisition expands ESI’s capability in
controls system integration in both the automation and process control services. InfoTech’s primary experience
is in the onshore and offshore oil and gas and petrochemical industries.
During fiscal 2003, the Company completed two acquisitions of operating companies. 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
Freeport, Texas. Petro-Chem primarily provides on-site engineering, design and support personnel to a 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 SCADA systems.
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
37,000 square foot office and manufacturing facility owned by Thermaire was not included in the transaction.
The Company sold the real property previously used by Thermaire in March 2005 (see Item 2. – Properties).
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:
• 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.
• 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.
• 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.
10
ITEM 1.
BUSINESS (Continued)
• 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 purchased computer hardware and software during 2003 to implement Intergraph's
SmartPlant 3D software, which is the next generation platform for the design of plant systems. This
initiative should enhance our marketing position strategically with many customers along the Texas
Gulf Coast. We are also developing our own 3D CADD software tools and acquiring 3D CADD
software tools from other suppliers. In 2003, we created a Polymers Division. In 2004, the Company
acquired certain assets of Engineering Design Group, Inc. to provide a platform for performing
governmental and military projects. The Company also expanded its operations in the sulfur reduction
business.
•
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. The work-sharing program has reduced
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 engineering operations continue to test the use of offshore
technical resources to establish longer-term access to 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. If appropriate opportunities arise, 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. However, due to
opportunities for internal growth, we anticipate fewer acquisitions in the immediate future.
• Continue to Increase Name Recognition. We intend to continue to present a more cohesive image and
continue to increase name recognition whereas all of ENGlobal’s operating subsidiaries will adopt
“ENGlobal” as part of their name.
Sales and Marketing
Our various subsidiaries derive revenues primarily from two sources: (1) in-house direct sales and (2) referrals
from existing customers, industry members and manufacturing representatives. Our in-house sales managers
are assigned to industry segments and territories within 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 utilize in-house resources 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.
11
ITEM 1.
BUSINESS (Continued)
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. If the Company continues its
acquisition program, we would anticipate that our existing customer base and the potential for business
development activities would be expanded with each new acquisition.
We currently employ 14 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 primarily
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 2004, 59% 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. We hope to increase revenues from the government market beyond the $3.3 million
in revenue generated from 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 16 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.
12
ITEM 1.
BUSINESS (Continued)
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.
Our ten largest customers, who vary from one period to the next, accounted for 78% and 69% of our total
revenue in 2004 and 2003, respectively. For 2004, our largest clients, in alphabetical order include:
• Engineering: Basell; BASF; Chevron Phillips; Coffeyville; ExxonMobil; Frontier; Huntsman
Corporation; Motiva Enterprises; Premcor; Sasol North America; and Valero Energy
• Systems: Conoco Phillips; ExxonMobil; Honeywell, Inc.; Jacobs Engineering; 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 2004, 91% and 9% 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 will 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 28, 2005, our gross revenue backlog was approximately
$143 million, compared to $67.5 million at February 29, 2004. We estimate that our backlog at December 31,
2004 was approximately $135 million. We estimate that approximately 75% of the gross revenue backlog at
December 31, 2004 will be recognized during fiscal 2005.
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.
13
ITEM 1.
BUSINESS (Continued)
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.
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. The U.S. Patent and Trademark Office
approved our application for the uses of “ENGlobal” and “Integrated Rack” in September 2004 and March
2005, respectively. In addition, we have pending trademark applications on file with the U.S. Patent and
Trademark Office for the names “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, as well as the timeliness and quality of the support services we provide,
will also help us to maintain our competitive position.
14
ITEM 1.
BUSINESS (Continued)
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. 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.
Employees
As of December 31, 2004, the Company and its subsidiaries employed 1,329 individuals. Of these employees,
17 were employed in sales and marketing; 703 were employed in engineering and related positions; 153 were
employed in technical production positions; 171 were employed as inspectors; 219 were employed as project
support staff; and 66 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 is represented by a labor union or is subject to a collective bargaining agreement. We believe that
relations with our employees are good.
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.
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. This is a major risk factor that could
materially impact our operating results.
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, 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 2004, approximately 9% of our net revenue was derived from fixed-price contracts.
15
ITEM 1.
BUSINESS (Continued)
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. This is a major risk factor that could materially impact our operating
results.
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 2004,
approximately 59% of our revenues were from six subsidiaries of ExxonMobil and approximately 6% 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.
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 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.
16
ITEM 1.
BUSINESS (Continued)
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.
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 50,880,784 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 1988 Incentive
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 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 revenues or earnings.
As of December 31, 2004, our backlog was approximately $135 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
terminations, suspensions or reductions in scope may occur from time to time with respect to contracts
17
ITEM 1.
BUSINESS (Continued)
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 or over-commitment of its resources, 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 revenues, expenses and operating results may fluctuate significantly because of a number of
factors, including:
• Unanticipated changes in contract performance that may affect 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.
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.
18
ITEM 1.
BUSINESS (Continued)
If we are not able to successfully manage internal growth initiatives, our business and results of
operations may be adversely affected.
The Company’s growth strategy seeks to utilize its technical expertise in conjunction with industry trends.
To support this strategy, the Company may elect to fund internal growth initiatives targeted at markets that
the Company believes may have significant potential needs for the Company’s services. The downside
risks are that such initiatives could have a negative effect on current earnings until such initiatives reach
critical mass or that industry trends have been misread or delayed and continued funding could have a
negative impact on long term earnings.
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 for 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 revenues, 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 50% 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.
ITEM 2.
PROPERTIES
Facilities
We lease 12 buildings in the U.S. totaling approximately 306,000 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 6
years and are at what we consider to be commercially reasonable rental rates. Our principal office locations are
in Houston and Beaumont, Texas, and Tulsa, Oklahoma. We have other offices in Freeport and Midland,
Texas, Baton Rouge and Lake Charles, Louisiana, and Cleveland, Oklahoma. Approximately 214,000 square
feet of our total office space is designated for 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.
19
ITEM 2.
PROPERTIES (Continued)
Our systems segment performs fabrication assembly in two shop facilities. One facility is in Houston, Texas
with approximately 62,600 square feet of space and a second facility is in Beaumont, Texas with approximately
23,600 square feet of 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.
On March 4, 2005, the Company completed the sale of the 37,000 square foot office and manufacturing facility
formerly occupied by Thermaire for $885,000. This space has not been included in the office or warehouse
statistics. The net proceeds from the sale were used to reduce the Company’s long-term debt.
Below is a complete listing of the space leased and owned with the expiration dates of the leases.
Location
Beaumont:
Houston:
Lake Charles
Tulsa
Freeport
Baton Rouge
Square Feet
42,880
37,798
13,590
51,816
62,641
33,759
8,178
32,555
23,000
27,500
333,717
Lease Expiration Date
2011
2005
Month to Month
2005
2008
2011
2006
2005
2007
Owned
In March 2005, we entered into a lease agreement for the relocation of our corporate headquarters and Houston
engineering office to a 33,759 square foot facility in North Houston. Effective June 1, 2005, approximately 60
employees will move to our new location at 654 North Sam Houston Parkway E, Suite 400, Houston, Texas
77060-5914, which can accommodate up to 150 employees with appropriate space planning. We have executed
a six-year lease valued in excess of $2.3 million, with an option to lease additional space.
ITEM 3.
LEGAL PROCEEDINGS
During 2005, the Company and its subsidiaries were successful in obtaining the dismissal of all but one of the
remaining petitions filed against the Company and its subsidiaries in 2003, on behalf of former employees of
Barnard and Burk, Inc. The Company believes that the remaining petition is without merit and immaterial to
the Company’s business and financial condition.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
20
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Holders
The Company’s common stock has been quoted on the American Stock Exchange (“AMEX”) since June 16,
1998, and is currently traded 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
Fiscal Year Ended December 31
2003
2004
High
2.32
2.43
1.75
3.19
Low
1.96
1.44
1.20
1.21
High
1.98
2.97
3.80
2.89
Low
1.00
1.70
2.24
1.87
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 234,833 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, 2005, approximately 234 stockholders of record held the Company’s common stock. This
does not include individual participants in security position listings.
21
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (Continued)
Equity Compensation Plan Information
The following table sets forth certain information concerning the Company’s equity compensation plans as of
December 31, 2004.
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)
Equity compensation plans
approved by security
holders
Equity compensation plans
not approved by security
holders
Total
1,527,150 (1)
234,774 (2)
1,761,924
2.15
4.26
463,999
-
463,999
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 Comerica
Bank 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 Selected Historical Consolidated Financial Data
The following tables set forth our selected financial data. The data for the years ended December 31, 2004,
2003, and 2002 have been derived from the audited financial statements appearing elsewhere in this document.
The data as of December 31, 2002, 2001 and 2000 and for the years ended December 31, 2001 and 2000 have
(1)
Includes options issued through our 1998 Incentive Plan. For a brief description of the material features of the Plan, see
Note 10 of the Notes to the Consolidated Financial Statements. 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 were used to replace
shares issued by ENGlobal due to the exercise of converted Petrocon options and warrants, preventing future dilution to
ENGlobal stockholders from the exercise of converted Petrocon options and warrants. This agreement was terminated in
September 2004. During 2004, options to acquire 38,242 shares of common stock were exercised through the Option Escrow
Agreement.
(2)
Merger Agreement (see Note 10 to the Consolidated Financial Statements).
Includes non-qualified options granted as replacement options for outstanding Petrocon options pursuant to the terms of the
22
ITEM 6.
SELECTED FINANCIAL DATA (Continued)
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
II, Item 8, Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and other financial 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.
2004
Years Ended December 31,
2002
(in thousands, except per share amounts)
2001
2003
2000
Statement of Operations:
Revenues -
Engineering
Systems
Total revenues
$
133,630 $
15,258
148,888
108,380 $
15,339
123,719
74,971 $
14,151
89,122
14,235 $
3,575
17,810
10,740
2,815
13,555
Costs and expenses -
Engineering
Systems
Selling, general and administrative
Total costs and expenses
Operating income
Interest income (expense), net
Other income (expense), net
Income from continuing operations before provision
for income taxes
Provision for income taxes
Income from operations
Income (loss) from discontinued operations, net of
117,205
13,090
14,101
144,396
4,492
(590 )
118
4,020
1,656
2,364
93,579
13,167
12,439
119,185
4,534
(784 )
(355 )
3,395
1,110
2,285
62,877
11,840
10,632
85,349
3,773
(821 )
143
3,095
1,197
1,898
10,433
3,107
2,836
16,376
1,434
14
14
1,462
595
867
taxes
Income from disposal of discontinued operations
Net income
-
-
2,364 $
(154 )
26
2,157 $
(146 )
-
1,752 $
$
115
-
982 $
8,175
2,156
2,679
13,010
545
49
23
617
151
466
(85 )
-
381
23
ITEM 6.
SELECTED FINANCIAL DATA (Continued)
2004
Years Ended December 31,
2002
(in thousands, except per share amounts)
2003
2001
2000
Per Share Data:
Basic earnings (loss) per share -
Continuing operations
Discontinued operations
Net income per share
Weighted average common
shares outstanding – basic
Diluted earnings (loss) per share -
Continuing operations
Discontinued operations
Net income per share
Weighted average common
shares outstanding – diluted
Cash Flow Data:
Operating activities, net
Investing activities, net
Financing activities, net
Net change in cash and cash equivalents
Balance Sheet Data:
Working capital
Property and equipment, net
Total assets
Long-term debt, net of current portion
Long-term capital leases, net of current portion
Stockholders’ equity
$
$
$
$
$
$
$
$
$
$
$
$
0.10 $
-
0.10 $
0.09 $
-
0.09 $
0.07 $
-
0.07 $
0.07 $
-
0.07 $
0.04
(0.01 )
0.03
23,455
23,301
22,861
13,236
12,965
0.10 $
-
0.10 $
0.09 $
-
0.09 $
0.07 $
-
0.07 $
0.07 $
-
0.07 $
0.04
(0.01 )
0.03
23,786
23,734
23,013
13,236
12,965
(2,391 ) $
(1,811 )
4,170
(32 ) $
6,557 $
(471 )
(6,122 )
(36 ) $
1,302 $
(1,290 )
(1,182 )
(1,170 ) $
744 $
5
253
1,002 $
14,503 $
5,262 $
57,261 $
15,585 $
- $
20,051 $
6,505 $
4,302 $
42,530 $
7,506 $
12 $
18,175 $
8,416 $
4,779 $
40,068 $
12,580 $
17 $
13,389 $
5,703 $
4,095 $
38,286 $
1,357 $
48 $
11,846 $
27
(468 )
19
(422 )
3,217
460
7,052
21
24
4,159
24
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. Note 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 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, construction management, 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.
Contract revenue and contract costs are recorded primarily using the percentage-of-completion (cost-to-cost)
method. Under this method, revenue on long-term contracts is recognized in the ratio that contract costs
actually incurred bears to total estimated costs. Revenue and profit on long-term contracts are subject to
revision throughout the lives of the contracts and any required adjustments are made in the period in which the
revisions become known. Losses on contracts are recorded in full as they are identified.
In the course of providing our services, we routinely provide major engineering, materials, equipment and
subcontractor services. Generally, these materials, equipment and subcontractor costs are passed through to our
clients and, in accordance with industry practice and generally accepted accounting principles, are included in
revenue. Because the use of subcontractor services can change significantly from project to project, changes in
revenue may not be indicative of business trends.
For analytical purposes only, we segregate from our total revenue the revenues recorded from non-labor
material, equipment and subcontractor costs, and the revenue derived from material assets or companies
acquired during the current year, as well as the revenue recognized from material assets or companies acquired
during the first 12 months following their respective dates of acquisition. Revenue recognized from acquired
assets or companies during such first 12 months is referred to as “Acquisition” revenue. We also segregate
gross profits and SG&A expenses derived from material assets or company acquisitions on the same basis as we
segregate revenues.
Our other contract costs include professional compensation and related benefits, together with certain direct and
indirect variable overhead costs. Professional compensation and related benefits represent the majority of these
costs.
25
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
Operating SG&A expense includes management and staff compensation, office costs such as rents and utilities,
depreciation, amortization, travel and other expenses generally unrelated to specific client contracts, but directly
related to the support of a segment’s operation.
Corporate SG&A expense is comprised primarily of marketing and proposal costs, as well as costs related to the
executive, finance, accounting, safety, human resources and information technology departments and other
costs generally unrelated to specific client projects, but which can vary as costs are incurred to support
corporate activities and initiatives.
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. The manufacturing segment is
reported in “Income/(Loss) from Discontinued Operations.”
Revenue
Engineering – labor
Engineering – non-labor
Systems
Acquisition
Total revenue
Gross profit
Engineering – labor
Engineering – non-labor
Systems
Acquisition
Total gross profit
Selling, general and administrative
Non-acquisition
Acquisition
Total
Income from continuing operations
Income (loss) on discontinued operations
Net income
2004
Amount
%
Years Ended December 31,
2003
2002
Amount
%
(in thousands)
Amount
%
$
$
$
$
$
$
$
$
85,929
38,578
13,965
10,416
57.7
25.9
9.4
7.0
148,888 100.0
14,824
159
1,937
1,673
18,593
17.3
0.4
13.9
16.1
12.5
12,267
1,834
14,101
2,364
-
2,364
8.2
1.2
9.5
1.6
-
1.6
$
$
$
$
$
$
$
$
77,507
29,388
14,892
1,932
62.6
23.8
12.0
1.6
123,719 100.0
13,714
938
2,109
212
16,973
17.7
3.2
14.2
11.0
13.7
12,274
165
12,439
9.9
0.1
10.1
2,285
(128 )
2,157
1.8
(0.1 )
1.7
$
$
$
$
$
$
$
$
69,239
5,732
14,151
-
77.7
6.4
15.9
-
89,122 100.0
12,095
-
2,311
-
14,406
10,632
-
10,632
1,898
(146 )
1,752
17.5
-
16.3
-
16.2
11.9
-
11.9
2.1
(0.1 )
2.0
Total revenue increased $25.2 million or 20.3% from $123.7 million in revenue in 2003 to $148.9 million in
revenue in 2004. Overall gross profit increased $1.6 million or 9.5% from $17.0 million in 2003 to $18.6
million in 2004 even though as a percentage of revenue, gross profit decreased from 13.7% in 2003 to 12.5% in
2004. Total SG&A expense increased $1.7 million or 13.4% from $12.4 million in 2003 to $14.1 million in
2004. Income from continuing operations improved by almost $100,000 from $2.3 million in 2003 to $2.4
million in 2004.
26
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Total Revenue
Total engineering revenue, both labor and non-labor, accounted for 83.6% of our total revenue for the year,
increasing $17.6 million from $106.9 million in revenue in 2003 to $124.5 million in revenue in 2004. The
increase in total engineering revenue is attributable to $9.2 million in additional non-labor revenue and $8.4
million in labor revenue.
The increase in non-labor revenue during 2004 represented 52.2% of the increase in total engineering
revenue for the year. The $9.2 million additional non-labor revenue resulted from an increase in non-labor
revenue of $25.5 million on a co-generation project that began in 2003, offset by $16.3 in lower non-labor
revenue from a cyclohexane project that began in 2002. Both the co-generation and cyclohexane projects
are being executed out of our Beaumont office and both are expected to be complete in 2005.
During any reporting period non-labor revenue could have a significant impact on total revenue, but
normally such non-labor revenue would represent lower margin activity on EPC type projects. The non-
labor based revenue for engineering was $38.6 million, $29.4 million and $5.7 million in 2004, 2003 and
2002, respectively. By comparison, labor-based revenue, without the addition of labor-based revenue from
acquisitions, totaled $85.9 million, $77.5 million and $69.2 million in 2004, 2003 and 2002, respectively.
Non-labor revenue includes certain material, equipment and subcontractor cost passed through to clients
with no mark-up or at a mark-up well below that normally achieved on labor revenue. In accordance with
generally accepted accounting principles, non-labor revenue is included in total revenue. Non-labor
revenue is expected to increase in 2005 due to activity on both the Coffeyville and Frontier projects.
The increase of $8.4 million in engineering labor revenue during 2004 came primarily from additional
labor revenue of $4.9 million through the Tulsa office, $2.4 million through the Beaumont office and $1.1
million from all other office locations. Our engineering segment has been successful in obtaining major
projects in the petroleum refining industry in the mid-continent area for the Tulsa office, but we do not
currently have a large project that would replace the co-generation project when it is completed by our
Beaumont office.
In 2005, the Company was awarded two significant projects to be completed primarily out of our Tulsa
office. Coffeyville Resources Refining & Marketing, LLC (“CRRM”) has entered into an agreement with
ENGlobal for detailed engineering and procurement services for CRRM’s ultra low sulfur diesel fuel
facilities at its Coffeyville, Kansas refinery on a cost reimbursable basis. We estimate that the agreement
will result in approximately 150,000 man-hours in engineering and related activities in addition to a
significant amount of revenue attributable to the procurement of materials and equipment. The project
began in January 2005 and is scheduled to conclude in the third quarter of 2006. Frontier Refining, Inc. has
awarded ENGlobal a contract to provide lump sum turnkey services for engineering, procurement and
construction for modifications to produce ultra low sulfur diesel at Frontier’s Cheyenne, Wyoming refinery.
The Company estimates revenue from the Frontier contract to be approximately $7 million. The project
began in February 2005 and is scheduled to complete in the spring of 2006.
The systems segment contributed 9.4% of our total revenue for the year, as its revenue declined $900,000
from $14.9 million in 2003 to $14.0 million in revenue in 2004. Our systems segment began 2005 with a
project backlog of $7.6 million, representing the largest booking of new work in the segment’s history.
During the fourth quarter of 2004, the systems segment was awarded projects totaling $2.8 million from
Honeywell to build eight turnkey remote instrument enclosures (“RIEs”) of which six units are scheduled
for completion during the second quarter and additional units following in the third and fourth quarters of
2005. In the first quarter of 2005, Honeywell awarded the Company three additional turnkey RIEs totaling
$1.6 million with one unit scheduled for delivery in the second quarter and two units scheduled for delivery
in the fourth quarter of 2005.
27
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
Revenue from acquired companies accounted for 7.0% of our total revenue during 2004, increasing by $8.5
million or 447% from $1.9 million in revenue in 2003 to $10.4 million in revenue in 2004. Revenue
recognized from acquired assets or companies during the first 12 months of their operation within
ENGlobal is referred to as “Acquisition” revenue. Acquisition revenue in 2004 includes revenue of $3.6
million, $3.3 million, $1.7 million, $1.3 million and $500,000 from EDG, CIS, Petro-Chem, Senftleber and
AmTech, respectively.
We formerly operated a third segment, the manufacturing segment. Certain assets of this segment were
sold in December 2003 and March 2005 and its financial results during 2003 and 2004 are reported in
“Income/(Loss) from Discontinued Operations.”
Gross Profit
Gross profit from engineering labor increased $1.1 million or 8.1% from $13.7 million in 2003 to $14.8
million in 2004. Gross profit from our Tulsa location improved $1.7 million or 286.1% from $600,000 in
2003 to $2.3 million in 2004. Gross profits based on engineering labor revenue from all other engineering
operations decreased $600,000 or 4.7%. Gross profit from labor declined as a percentage of labor revenue
from 17.7% in 2003 to 17.3% in 2004. Gross margin from in-office projects increased from 22.8% in 2003
to 23.3% in 2004 only to be offset by higher non-project labor cost invested in estimating larger EPC
projects and in internal growth initiatives such as low sulfur diesel. Margins from our field service
operation were lower by .3% primarily due to the impact of integration costs and recognition of lower
profits on $3.3 million in revenue generated by the acquisition of CIS during the last quarter of 2004.
Gross profit from engineering non-labor revenue declined $779,000 or 83% from $938,000 in 2003 to
$159,000 in 2004 as a direct result of the decrease of $16.3 million in non-labor revenue on the
cyclohexane project. The Coffeyville project began in January 2005 and includes cost reimbursable
procurement services including a fee on approximately $24 million in materials and equipment.
Gross profit for our systems segment declined $200,000 or 8.2% from $2.1 million in 2003 to $1.9 million
in 2004. Competitive market pressures on pricing, project management, cost containment against project
budgets, and stronger support service controls continue to provide challenges for management in response
to growth initiatives and record backlog levels. The acquisition of contract rights and other assets from
InfoTech during the fourth quarter of 2004 could have a short-term negative impact on the systems
segment’s gross profit until new employees and new projects are fully integrated into the Company’s
operations.
Gross profits from acquisitions increased $1.5 million or 689.2% from $200,000 in 2003 to $1.7 million in
2004. Gross profit from acquired assets or companies during their first 12 months of operations within the
Company is recorded and referred to as “Acquisition” gross profit. Acquisition gross profit in 2004
includes gross profit of $800,000, $400,000, $200,000, $200,000, and $100,000 from EDG, CIS, Petro-
Chem, Senftleber and AmTech, respectively.
Selling, General and Administrative (“SG&A”) Expenses
Selling, general and administrative expenses not directly related to acquisitions remained level at $12.3
million for both 2003 and 2004 and as a percentage of total revenue decreased from 10% in 2003 to 8.9%
in 2004.
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, effective January 2004, within the systems segment, ECP relocated offices and shop
facilities into the same facility as ESI resulting in improved shop personnel utilization, reduction of duplicative
overhead functions and reduction of facility expenses. As a result, during 2004, the systems segment SG&A
expenses decreased $500,000 or 28.6% from $2.0 million in 2003 to $1.5 million in 2004.
28
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
Corporate SG&A charges increased $198,000 due to additional software enhancements to our billings
system to meet client format demands, plus $222,000 related to proposal and internal growth initiatives.
Engineering SG&A expenses increased $80,000 due to numerous miscellaneous items.
SG&A expenses from acquisitions increased $1.7 million from $100,000 in 2003 to $1.8 million in 2004.
SG&A expenses from acquired assets or companies during their first 12 months of operations within the
Company have been recorded and are referred to as “Acquisition” under SG&A expenses. Acquisition
SG&A in 2004 includes $1.3 million, $250,000, and $150,000 from EDG, CIS, Petro-Chem respectively,
plus $100,000 for all other acquisition activity.
Operating Profit
Operating profit remained constant at $4.5 million in 2003 and 2004, decreasing as a percentage of total
revenue from 3.7% in 2003 to 3.0% in 2004. If total revenue and total operating profit are both adjusted
whereby the impact of non-labor material, equipment and subcontractor cost are eliminated from both total
revenue and total operating profit, our adjusted operating profit as a percentage of adjusted revenue would
have increased from 3.8% to 3.9%.
Other Income (Expense)
Other income (expense) changed from $355,000 expense in 2003 to $118,000 income in 2004. The
expense in 2003 was the result of a book basis loss on the sale of the vacant office building in Baton
Rouge, as compared to the income in 2004, which resulted from a legal settlement.
Provision for Income Taxes
Additional tax expense during the year increased the 2004 effective tax rate to 42% from 33% in 2003.
The effective tax now and in the future will be approximately 38%.
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 the co-generation and cyclohexane projects. These projects contributed revenues of more
than $42.4 million during 2003,
including non-labor revenue from materials, equipment and
subcontractors’ charges of $29.4 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 revenue for engineering were $77.5 million and $69.2 million in
2003 and 2002, respectively. By comparison, the procurement-based revenues were $34.5 million and $5.2
million in 2003 and 2002, respectively.
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, had lower than expected sales. The pipeline
industry continues to be over leveraged, and many capital expansions have been on hold for over two years
while the industry focused on debt reduction. The economy in the Baton Rouge area continued to be flat
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. The fourth quarter showed signs of improvement as Baton Rouge revenues improved 24% during the
last quarter in 2003 as compared to the same quarter in 2002.
29
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
The systems segment’s revenues improved $700,000 from $14.2 million in 2002 to $14.9 million in 2003.
ESI’s revenues improved $2.1 million from $11.0 million in 2002 to $12.8 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 decreases the
Company’s margins. Engineering contributed 87.2% of the total gross profits in 2003.
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 pressures on contract pricing. The cost overruns occurred due to rapid growth in ESI’s
revenues. Management 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’
experiences. 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 the engineering and systems segments. 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.
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.
30
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
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.
Liquidity and Capital Resources
Historically, we have satisfied our cash requirements through operations and borrowings under a revolving
credit facility. The Company’s current credit facility is with Comerica Bank (“Comerica”) and consists of a
line of credit maturing July 27, 2007. The loan agreement positions Comerica as senior to all other debt. The
line of credit is limited to $22.0 million subject to loan covenant restrictions. The Comerica Credit Facility is
collateralized by substantially all the assets of the Company. As of December 31, 2004, the outstanding balance
on the line of credit was $13.5 million and we had working capital of $14.5 million. Our total long-term debt
outstanding on December 31, 2004 was $16.2 million (see Note 7), an increase from $8.1 million as of
December 31, 2003. Our long-term debt includes $13.5 million outstanding under our revolving credit facility
with Comerica, and other long-term debt of $2.7 million. Under the terms and conditions of our revolving
credit facility, as of December 31, 2004, we have additional borrowing capacity of approximately $4 million
after consideration of borrowing base limitations. We are not currently subject to any other standby letters of
credit, guarantees, repurchase obligations, or other commitments. We have no off-balance sheet arrangements.
The Company has been awarded a significant project with Coffeyville Resources Refining & Marketing, LLC
(“CRRM”) and entered into an Agreement for Engineering and Procurement Services to provide detailed
engineering and procurement services for CRRM’s ultra low sulfur diesel fuel facilities at its Coffeyville,
Kansas refinery on a cost reimbursable basis. We estimate that the agreement will result in approximately
150,000 man-hours in engineering and related activities in addition to a significant amount of revenue
attributable to the procurement of materials and equipment. The terms of the agreement require that any
progress payments made by CRRM for project items must be secured by one or more irrevocable stand-by
letters of credit issued on the account of ENGlobal. The project began in January 2005 and is scheduled to
complete in the third quarter of 2006.
The following table summarizes our contractual obligations as of December 31, 2004:
Payments Due by Period
2005
2006
2007
2008
2009 and
thereafter
Total
Long-term debt
Capital leases
Operating leases
Total contractual cash obligations
$
$
622 $
4
1,551
2,177 $
748 $
-
1,221
1,969 $
(in thousands)
14,065 $
-
1,333
15,398 $
535 $
-
968
1,503 $
237 $
-
2,556
2,793 $
16,207
4
7,629
23,840
We have several long-term notes that are subordinate to the Comerica debt.
•
$255,000 in two notes of $127,500 each to Sterling Planet and EDGI, each bearing interest at 5% and
maturing in 2008. Principal amounts of $15,000 are paid quarterly with accrued interest. The Sterling
Planet and EDGI notes were issued as part of the purchase of certain assets of EDGI.
31
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
•
•
•
$385,000 payable to Significant PEI shareholders resulting from termination of the 2001 agreements
(see Note 18 in consolidated financial statements); payable in two remaining equal installments before
December 31, 2005 and 2006.
$1,762,000 in four notes to Cleveland Inspection Services, Inc., CIS Technical, Inc., and F. D. Curtis,
each discounted using 5% interest rate maturing in 2009. Principal amounts of $100,000 are paid
quarterly. The notes were issued as part of the purchase of certain assets of Cleveland Inspection
Services, Inc.
$195,000 in a note to InfoTech Engineering, Inc., bearing interest at 5% and maturing in 2007.
Principal amounts of $65,000 are paid annually with accrued interest. The note was issued as a part of
the acquisition of certain assets of InfoTech Engineering, Inc.
Cash Flow
Operating activities required the use of $2.4 million in cash for the fiscal year ended December 31, 2004.
During the fiscal years ended December 31, 2003 and 2002, operating activities provided net cash totaling $6.6
million and $1.3 million, respectively. Much of the decrease in our cash flow from operating activities occurred
early in the fourth quarter of 2004 due to the acquisition of CIS which was completed in October 2004.
Subsequently, cash flow returned to a positive position in January 2005 as the integration of the CIS acquisition
was substantially completed.
Investing activities used cash totaling $1.8 million in 2004, compared to $471,000 in 2003 and $1.3 million in
2002. In 2004, our investing activities consisted of capital additions of $1.2 million primarily for computers
and leasehold improvements to our Beaumont office. We used $625,000 in the fourth quarter of 2004 to close
the acquisitions of EDGI, AmTech, Cleveland Inspection Services, Inc., and InfoTech.
Financing activities provided cash totaling $4.2 million in 2004 and used cash totaling $6.1 million and $1.2
million during 2003 and 2002, respectively. Our primary financing mechanism is our revolving line of credit.
The line of credit has been used principally to finance accounts receivable. During 2004, our borrowings, net of
payments, on the line of credit were $8.0 million, and we repaid an aggregate of $3.8 million on our short-term
and long-term debt.
Non-cash transactions include $2.6 million notes payable issued related to acquisitions and $592,000 note
payable issued for treasury stock. Non-cash transactions include the issuance of stock dividends of $147,000
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 $1,092,000, $1,085,000, and
$772,000 in 2004, 2003, and 2002, respectively.
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 timely, or if our project mix shifts from cost
reimbursable to fixed cost contracts during significant periods of growth.
If losses occur, we may not be able to meet our monthly fixed charge ratio covenant under our credit facility
with Comerica. 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.
32
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
Asset Management
We typically sell our products and services on short-term credit and seek to minimize our credit risk by
performing credit checks and conducting our own collection efforts. Our trade accounts receivable increased to
$30.8 million from $20.2 million as of December 31, 2004 and 2003, respectively, primarily due to increased
revenue growth and timing issues related to delays in client payments to both EEI and ESI totaling $3.0 million
each. Trade receivables increased $1.6 million and $1.4 million respectively for CIS and EDG, primarily due to
a delay in integration of CIS billings immediately following the acquisition and a large foreign receivable from
a client of EDG. Delays in client payments beyond contract terms specifying a shortened five-day payment
cycle and our extending 60-day payment terms to a major client have contributed to the increase in the number
of days outstanding for trade accounts receivable from 54 days at December 31, 2003 to 62 days at December
31, 2004. Our actual bad debt expense has been approximately 0.2% of revenues for the periods ending
December 31, 2004 and 2003. We increased our allowance for doubtful accounts from $376,000 to $476,000 or
1.8% and 1.5% of the trade accounts receivable balance for 2003 and 2004, respectively.
Related Party Transactions
ENGlobal Engineering, Inc. leases office space from PEI Investments, a joint venture in which ENGlobal
Engineering, Inc. 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 $135,000, $135,000 and $124,000 for 2004, 2003 and 2002, respectively. 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 our 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 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.
Seasonality
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. 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 by 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.
33
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
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.
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.
Recent Accounting Pronouncements
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123, (revised 2004)
‘Share-Based Payment” (“SFAS 123(R)”). This statement is a revision of Statement of Financial Accounting
Standards No. 123, “Accounting for Stock-Based Compensation” as amended (“SFAS123”), and requires
entities to measure the cost of employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. The cost will be recognized over the period during which an
employee is required to provide services in exchange for the award (usually the vesting period). SFAS 123(R)
covers various share-based compensation arrangement rights and employee share purchase plans. SFAS 123(R)
eliminates the ability to use the intrinsic value methods of accounting for share options, as provided in
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). SFAS
123(R) is effective as of the beginning of the first interim period that begins after June 15, 2005, with early
adoption encouraged. The Company is currently evaluating the statement’s transition methods and does not
expect this statement to have an effect materially different than that of the pro forma SFAS 123 disclosures
provided in Note 10 to the Company’s Consolidated Financial Statements.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, “Exchanges of
Non-monetary Assets, an amendment of APB Opinion No. 29” (“SFAS 153”). This Statement amends APB
Opinion No. 29 to permit the exchange of non-monetary assets to be recorded on a carry over basis when the
non-monetary assets do not have commercial substance. This is an exception to the basic measurement
principal of measuring a non-monetary asset exchange at fair value. A non-monetary asset exchange has
commercial substance if the future cash flows of the entity are expected to change significantly as a result of the
exchange. SFAS 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005. The adoption of this standard is not expected to impact the Company’s Consolidated Financial
Statements.
34
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
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, 2004, 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, 2004 and 2003, 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, 2004. Accordingly, the Company has no quantitative
information concerning the market risk of participating in such investments.
As of December 31, 2004 and 2003, 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’s primary interest rate risk relates to its variable-rate line of credit debt obligation, which totaled
$13.5 million and $5.6 million as of December 31, 2004 and 2003, respectively. Assuming a 10% increase in
the interest rate on this variable-rate debt obligation (i.e., an increase from the actual average interest rate of
4.38% as of December 31, 2004, to an average interest rate of 4.82%), annual interest expense would have been
approximately $42,000 higher in 2004 based on the annual average balance. The Company does not have any
interest rate swap or exchange agreements.
The Company has no market risk exposure in the areas of interest rate risk from investments because the
Company did not have an investment portfolio as of December 31, 2004. Currently, the Company does not
engage in foreign currency hedging activities nor is the Company exposed to currency exchange rate
fluctuation.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMTARY DATA
The audited consolidated balance sheets for ENGlobal Corporation, as of December 31, 2004 and 2003 and
statements of income, cash flows and stockholders’ equity for the three-year period ended December 31, 2004,
are attached hereto and made part hereof.
35
INDEX
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2004, 2003 and 2002
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2004, 2003 and 2002
CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended December 31, 2004, 2003 and 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE
SCHEDULE II
Valuation and Qualifying Accounts
Page
37
38
39
40
41
42
61
62
36
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
ENGlobal Corporation
We have audited the accompanying consolidated balance sheets of ENGlobal Corporation as of December 31, 2004
and 2003, 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, 2004. 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 the standards of the Public Company Accounting Oversight Board
(United States). 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. The Company has determined that
it is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides 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, 2004 and 2003, and
the results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2004, in conformity with U.S. generally accepted accounting principles.
Hein & Associates LLP
Houston, Texas
March 10, 2005
37
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
ASSETS
Current Assets
Cash
Trade receivables, net
Prepaid expenses and other current assets
Costs and estimated earnings in excess of billings on uncompleted contracts
Deferred tax asset
Inventories
Assets held for sale
Federal income taxes receivable
Total Current Assets
Property and Equipment, net
Net Assets of Discontinued Operations
Goodwill
Other Assets
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable
Accrued compensation and benefits
Notes payable
Current portion of long-term debt
Current portion of capital lease
Billings and estimated earnings in excess of costs on uncompleted contracts
Federal income taxes 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, 11, 15, 18 and 19)
Stockholders’ Equity
Series A redeemable convertible preferred stock - $0.001 par value, with fair value of
$1.00 per share; 2,265,167 shares authorized 2004 and 2003, respectively; 0 shares
issued and outstanding 2004 and 2003, respectively
Common stock - $0.001 par value; 75,000,000 shares authorized; 23,466,839
and 24,034,288 shares outstanding and 24,119,216 and 24,034,288 issued at December
31, 2004 and 2003, respectively
Additional paid-in capital
Retained earnings
Treasury stock - 652,377 shares at cost
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
2004
$
8,006
30,839,597
1,984,274
1,113,330
640,380
172,715
678,106
118,000
35,554,408
5,262,370
-
15,284,220
1,159,750
$
2003
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
$ 57,260,748
$
42,530,390
$ 10,512,123
6,059,221
839,606
622,410
4,371
2,313,954
-
699,601
21,051,286
-
15,585,152
-
573,380
$
9,821,030
4,302,136
771,225
623,230
7,818
374,339
103,609
653,881
16,657,268
24,164
7,506,062
12,042
156,000
37,209,818
24,355,536
-
-
24,119
12,198,215
8,420,827
(592,231 )
24,034
12,094,382
6,056,438
-
20,050,930
18,174,854
$ 57,260,748
$
42,530,390
See accompanying notes to these consolidated financial statements.
38
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Operating Revenues
Engineering
Systems
Total Revenue
Direct Costs
Engineering
Systems
Total Direct Costs
Gross Profit
Years Ended December 31,
2003
2002
2004
$
133,630,281
15,257,960
148,888,241
$
108,380,100
15,339,002
123,719,102
$
74,971,506
14,151,089
89,122,595
117,204,900
13,089,874
130,294,774
93,578,716
13,166,811
106,745,527
62,876,626
11,839,820
74,716,446
18,593,467
16,973,575
14,406,149
Selling, General, and Administrative Expenses
14,101,497
12,439,408
10,632,357
Operating Income
Interest Expense
Other income (expense)
Income from Continuing Operations
before Provisions for Income Taxes
Provision for Income Taxes
Income from Continuing Operations
Income/(Loss) from Discontinued Operations
Loss from operations of discontinued segment,
net of tax ($75,066, $92,373 benefit, respectively)
Gain from sale of discontinued segment,
net of tax ($12,834)
Net Income
Preferred Dividends
Net Income Available for Common Stock
Basic Earnings per Share from Continuing Operations
Basic Earnings per Share from Discontinued Operations
Basic Earnings per Share from Net Income
Available for Common Stock
Weighted Average Common Shares Outstanding for Basic
Diluted Earnings per Share from Continuing Operations
Diluted Earnings per Share from Discontinued Operations
Diluted Earnings per Share from Income
Available for Common Stock
4,491,970
(590,227 )
118,409
4,020,152
1,655,763
2,364,389
4,534,167
(784,227 )
(355,175 )
3,394,765
1,109,496
2,285,269
3,773,792
(820,976 )
142,559
3,095,375
1,197,067
1,898,308
-
-
(154,615 )
(146,485 )
26,434
-
2,364,389
2,157,088
1,751,823
-
2,364,389
0.10
-
0.10
23,454,545
0.10
-
0.10
$
$
$
$
$
131,100
2,025,988
0.09
-
0.09
23,300,600
0.09
-
0.09
$
$
$
$
$
208,992
1,542,831
0.07
-
0.07
22,861,199
0.07
-
0.07
$
$
$
$
$
Weighted Average Common Shares Outstanding for Diluted
23,785,939
23,733,807
23,013,016
See accompanying notes to these consolidated financial statements.
39
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Additional
Common Stock
Shares
22,861,19
Stock
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Total
Stockholde
rs’
Equity
11,845,95
0
(208,992 )
1,751,823
- $
-
-
BALANCES-JANUARY 1, 2002
Preferred stock dividend
Net income
9 $
-
-
22,862 $ 9,335,471 $ 2,487,617 $
-
-
(208,992 )
1,751,823
-
-
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
BALANCES-DECEMBER 31, 2003
Exercise of options
Common stock purchased for treasury
Common stock issued through
employee
stock purchase plan
Net income
22,861,19
9
-
1,149,089
24,000
-
24,034,28
8
38,242
(652,377 )
22,862
-
9,335,471
-
4,030,448
(131,098 )
1,148
24
-
2,733,685
25,226
-
-
-
2,157,088
-
-
-
-
-
24,034
38
-
12,094,38
2
42,474
-
6,056,438
-
-
-
-
(592,231 )
13,388,78
1
(131,098 )
2,734,833
25,250
2,157,088
18,174,85
4
42,512
(592,231 )
46,686
-
47
-
61,359
-
-
2,364,389
-
-
61,406
2,364,389
BALANCES-DECEMBER 31, 2004
9 $
24,119 $
5 $ 8,420,827 $ (592,231 ) $
23,466,83
12,198,21
20,050,93
0
See accompanying notes to these consolidated financial statements.
40
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 (used in) operating activities -
Depreciation and amortization
Deferred income tax expense
Loss on disposal of property, plant and equipment
Changes in current assets and liabilities, net of acquisitions -
Trade receivables
Inventories
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 (used in) operating activities
Cash Flows from Investing Activities
Purchase of property and equipment
Software upgrade
Proceeds from sale of Baton Rouge building
Additional consideration for acquisitions
Proceeds from sale of equipment
Proceeds from sale of Thermaire
Net cash used in investing activities
Cash Flows from Financing Activities
Borrowings on line of credit
Payments on line of credit
Proceeds from issuance of 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 – beginning of year
Cash and Cash Equivalents – end of year
Non-Cash Transactions
Stock issued for preferred dividend
Insurance acquired with notes payable
Conversion of preferred stock to common stock
Acquisition of assets of EDG, AmTech, CIS and InfoTech with
issuance of notes payable
Acquisition of treasury stock with note payable
Supplemental Cash Flow Information
Cash paid during the year for -
Interest
State and federal income taxes
Dividend payment
Refund from state franchise taxes
$
$
$
2004
Years Ended December 31,
2003
2002
$
2,364,389
$
2,157,088
$
1,751,823
1,246,532
254,000
2,564
(10,595,425 )
(54,375 )
(90,604 )
231,401
691,093
1,713,253
1,939,616
128,114
(221,610 )
(2,391,052 )
(1,195,588 )
-
-
(625,000 )
9,897
-
(1,810,691 )
134,571,349
(126,597,915 )
103,918
(1,071,885 )
-
(12,478 )
(2,822,679 )
4,170,310
(31,433 )
39,439
8,006
-
1,092,096
-
2,575,000
592,231
420,627
1,196,761
-
-
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
(424,900 )
-
545,198
(471,187 )
127,650,133
(132,178,422 )
25,250
(484,023 )
-
(4,364 )
(1,130,544 )
(6,121,970 )
(35,656 )
75,095
39,439
146,833
1,085,363
2,734,834
-
-
771,793
734,615
105,040
-
$
$
$
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 )
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
88,000
771,502
-
-
-
744,103
486,697
-
389,714
$
$
$
See accompanying notes to these consolidated financial statements.
41
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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”) – our public holding company.
ENGlobal Corporate Services, Inc. (“ECS”) – provides the corporate oversight function.
ENGlobal Engineering, Inc. (“EEI”) – provides general engineering for industrial customers primarily in the United
States 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 petroleum industry.
RPM Engineering, Inc. d/b/a ENGlobal Engineering, Inc. (“RPM”) – provides engineering services primarily 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.
ENGlobal Design Group, Inc. (“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.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash
Cash includes cash in bank at December 31, 2004. The Company’s banking system provides for daily replenishment of
major bank accounts for check-clearing requirements. Accordingly, there were negative book balances of $3.3 million on
December 31, 2004 and $0.9 million on December 31, 2003. 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.
Inventories
Inventories carried by our ECP subsidiary 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.
42
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. The majority of the Company’s services are provided through cost-
plus contracts.
On occasion, the Company, serving as an agent for the client, procures material and equipment on behalf of the client
whereby the cost of such material and equipment is reimbursed 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 2004 and 2003, pass-through transactions totaled
$15.9 million and $5.6 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 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 3 years for
computers and autos, 5 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, 2003 and 2004 resulting in no
impairment of goodwill.
In 2004, acquisitions of assets of several companies resulted in an increase of $1,725,00 to goodwill. Acquisitions of the
assets of Engineering Design Group, Inc. (“EDGI”), InfoTech, and Cleveland Inspection Services, Inc. (“CIS”) resulted in
increases to goodwill of $139,000, $270,000 and $1,316,000, respectively.
In 2003, the Petro-Chem and Senftleber acquisitions resulted in increases in goodwill of $115,000 and $428,000,
respectively and an adjustment to lower goodwill by $2,000 was made as a result of the sale of Thermaire.
43
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
The project controls system upgrade was completed at the end of 2004 and depreciation on costs of $350,000 will begin in
January 2005.
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, its
only company in the manufacturing segment. Thermaire manufactured air-handling equipment for commercial heating,
ventilation and cooling systems. The sale benefited 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 on December 15, 2003. This business has been included in “Income/(Loss) from
Discontinued Operations” and the assets and liabilities have been separately identified on the Balance Sheet for all periods
presented. The revenues from discontinued operations for the years ended December 31, 2003, 2002 were $2.0 million and
$2.4 million, respectively. These revenues 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.
The 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:
Assets
Accounts receivable, net
Property, plant and equipment, net, held for sale
Total assets “held for sale”
Liabilities
Accounts payable
Other current liabilities
Total liabilities associated with assets “held for sale”
2004
2003
(in thousands)
$
$
$
$
-
678
678
-
-
-
$
$
$
$
183
678
861
2
22
24
44
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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
2003
2002
2004
Basic
Diluted
Basic
Diluted
Basic
Diluted
$ 2,364,389 $ 2,364,389 $ 2,285,269 $ 2,285,269 $ 1,898,308 $ 1,898,308
208,992
208,992
131,100
131,100
-
-
2,364,389
-
1,689,316
(146,485 )
$ 2,364,389 $ 2,364,389 $ 2,025,988 $ 2,025,988 $ 1,542,831 $ 1,542,831
1,689,316
(146,485 )
2,154,169
(128,181 )
2,154,169
(128,181 )
2,364,389
-
23,454,54
5
23,300,60
0
22,861,19
9
23,785,93
9
23,733,80
7
23,013,01
6
Income from continuing operations
Preferred dividends
Income available for common stock from
continuing operations
Loss from discontinued operations
Net income available for common stock
Weighted average number of shares
outstanding for basic
Weighted average number of shares
outstanding for diluted
Net income (loss) per share available
for common stock
Income from continuing operations
Loss from discontinued operations
Net income available for common
$
0.10 $
-
0.10 $
-
0.09 $
-
0.09 $
-
0.07 $
-
0.07
-
0.07
stock
0.10
0.10
0.09
0.09
0.07
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 497,171 options exercisable from
$4.26 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 stock and, therefore, the effect would be anti-dilutive.
45
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The following table sets forth the shares outstanding for the earnings per share calculations for the years ended December
31, 2004, 2003 and 2002.
Common stock issued – beginning of year
Weighted average common stock issued (repurchased)
Shares used in computing basic earnings per share
Assumed conversion of dilutive stock options
Shares used in computing diluted earnings per share
2004
24,034,288
(579,743 )
23,454,545
331,394
23,785,939
2003
22,861,199
439,401
23,300,600
433,207
23,733,807
2002
22,861,199
-
22,861,199
151,817
23,013,016
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.
NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123, (revised 2004) ”Share-Based
Payment” (“SFAS 123(R)”). This statement is a revision of Statement of Financial Accounting Standards No. 123,
“Accounting for Stock-Based Compensation” as amended (“SFAS123”), and requires entities to measure the cost of
employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.
The cost will be recognized over the period during which an employee is required to provide services in exchange for the
award (usually the vesting period). SFAS 123(R) covers various share-based compensation arrangement rights and
employee share purchase plans. SFAS 123(R) eliminates the ability to use the intrinsic value methods of accounting for
share options, as provided in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”
(“APB 25”). SFAS 123(R) is effective as of the beginning of the first interim period that begins after June 15, 2005, with
early adoption encouraged. The Company is currently evaluating the statement’s transition methods and does not expect
this statement to have an effect materially different than that of the pro forma SFAS 123 disclosures provided in Note 10 to
the Company’s Consolidated Financial Statements.
46
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, “Exchanges of Non-monetary
Assets, an amendment of APB Opinion NO. 29” (“SFAS 153”). This Statement amends APB Opinion No 29 to permit the
exchange of non-monetary assets to be recorded on a carry over basis when the non-monetary assets do not have
commercial substance. This is an exception to the basic measurement principal of measuring a non-monetary asset
exchange at fair value. A non-monetary asset exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS 153 is effective for non-monetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of this standard is not expected to impact the
Company’s Consolidated Financial Statements.
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 and 2004, 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, 2004 will be evaluated based on FIN No. 46R criteria and consolidated, if required.
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2004 and 2003:
Land
Building
Computer equipment and software
Shop equipment
Furniture and fixtures
Building and leasehold improvement
Autos and trucks
Accumulated depreciation and amortization
Software upgrade in process
Property and equipment, net
2004
2003
(in thousands)
202
1,359
4,038
783
303
692
169
7,546
(2,645 )
4,901
361
5,262
$
$
202
1,357
2,855
362
121
671
79
5,647
(1,642 )
4,005
297
4,302
$
$
Depreciation expense was $1,002,000, $781,000, and $601,000 in 2004, 2003 and 2002, respectively.
The Company owned an office building in Baton Rouge, which had been vacated due to the consolidation of the Baton
Rouge operations into one facility. The Company sold the building in September 2003 resulting in cash proceeds of
$555,000 and a book loss of $312,000. The Company used the cash proceeds from the sale of the building to reduce long-
term debt.
47
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – PROPERTY AND EQUIPMENT (Continued)
The office and manufacturing facility owned by Thermaire has been reclassified to Assets held for sale for 2004 from
Assets of Discontinued Operations for 2003 and 2002. (See Note 16)
NOTE 5 – DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
The components of trade receivables as of December 31, 2004 and 2003 are as follows:
Amounts billed at December 31
Amounts billable at December 31,
billed January of the following year
Retainage
Less: Allowance for un-collectible accounts
Trade receivables, net
2004
2003
(in thousands)
$
21,204
$
14,133
9,177
935
(476 )
30,840
$
6,093
394
(376 )
20,244
$
The components of other liabilities as of December 31, 2004 and 2003 are as follows:
Reserve for known contingencies (Note 18)
Accrued interest
State taxes
Other
Other liabilities
NOTE 6 – FIXED-FEE CONTRACTS
2004
2003
(in thousands)
51
161
198
290
700
$
$
478
48
39
97
662
$
$
Costs, estimated earnings and billings on uncompleted contracts consisted of the following at December 31, 2004 and 2003:
2004
2003
Costs incurred on uncompleted contracts
Estimated earnings on uncompleted contracts
Earned revenues
Less: Billings to date
Net costs 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 costs and estimated earnings in excess of
billings on uncompleted contracts
48
$
$
$
$
(in thousands)
8,292
1,584
9,876
(11,077 )
14,333
1,862
16,195
(15,546 )
(1,201 )
$
649
1,113
$
1,023
(2,314 )
(374 )
$
(1,201 )
$
649
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – LINE OF CREDIT AND DEBT
At the end of the year, the Company had a Credit Facility with Comerica Bank (“Comerica”) that consisted of a line of
credit maturing on July 27, 2007 (the “Comerica Credit Facility”). The loan agreement positioned Comerica as senior to all
other debt. The line of credit is limited to $22.0 million, subject to loan covenant restrictions. The Comerica Credit
Facility is collateralized by substantially all the assets of the Company. The outstanding balance on the line of credit as of
December 31, 2004 was $13.5 million. At the election of the Company, the interest rate will be the lesser of prime or a
three tiered Eurodollar rate, plus 150, 175, or 200 basis points, respectively, based on the ratio of total funded debt to
EBITDA for the trailing 12 months of less than 2.00, between 2.00 and 2.50, and greater than 2.50, respectively. The
commitment fee of the unused line of credit is 0.250%. The remaining borrowings available under the line of credit as of
December 31, 2004 were $4.0 million after consideration of loan covenant restrictions.
The Comerica Credit Facility contains covenants requiring the Company, as of the end of each calendar month, to maintain
certain ratios, including total average funded debt to EBITDA; total average funded debt to total liabilities, plus net worth;
and total funded debt to accounts/unbilled receivables. The Company is also required, as of the end of each quarter, to
maintain minimum levels of net worth, plus the Company must comply with an annual limitation on capital expenditures.
The Company was in compliance with all covenants under the Comerica Credit Facility as of December 31, 2004.
Long-term debt consisted of the following at December 31, 2004 and 2003:
Comerica Credit Facility – Line of credit, prime (5.25% at December 31,
2004), maturing in July 2007
Fleet Credit Facility – retired in July 2004
The following notes are subordinate to the credit facility
and are unsecured:
Equus II – Note payable, interest at 9.5%, principal and interest due
quarterly in installments of $110,000, scheduled to mature in December
2005, retired July 2004
Petrocon Arabia Limited – Note payable, interest at 8%, principal due in
monthly payments of $25,000 and interest due annually, retired in June
2004
Petro-Chem – Note payable, principal due in annual installments of
$25,000, scheduled to mature in January 2006, retired in April 2004
Sterling Planet and EDGI – Notes payable, interest at 5%, principal
payments installments of $15,000 and interest due quarterly, maturing
in December 2008
Significant PEI Shareholders (See Note 18)
Cleveland Inspection Services, Inc., CIS Technical Services and
F.D. Curtis – Notes payable, discounted at 5% interest, principal in
installments of $100,000 due quarterly scheduled to mature October
2009
InfoTech Engineering, Inc. – Note payable, interest at 5%, principal
payments in installments of $65,000 plus interest due annually,
maturing in December 2007
Miscellaneous
Total long-term debt
Less: Current maturities
2004
2003
(in thousands)
$
13,530
-
$
-
5,556
-
-
-
255
385
1,762
195
80
16,207
(622 )
2,340
151
75
-
-
-
-
7
8,129
(623 )
Long-term debt, net of current portion
$
15,585
$
7,506
49
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – LINE OF CREDIT AND DEBT (Continued)
Maturities of long-term debt as of December 31, 2004, are as follows:
Years Ending December 31,
2005
2006
2007
2008
2009 and after
Total long-term debt
Maturities
(in
thousands)
$
$
622
748
14,065
535
237
16,207
Current notes payable include a note at both December 31, 2004 and 2003, to finance commercial insurance on a short-term
basis, with a balance of $840,000 and $771,000 as of December 31, 2004 and 2003, respectively. The current note payable
for 2004 bears interest at 4.87% and is payable in monthly installments of principal and interest totaling $122,000 through
July 2005.
NOTE 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, 2004 are as follows:
Years Ending December 31,
2005
2006
2007
2008
2009 and after
Total minimum lease payments
NOTE 9 – PROFIT SHARING PLAN
Operating
(in
thousands)
$
$
1,551
1,221
1,333
968
2,556
7,629
The Company terminated one of its two 401(k) profit sharing plans at the end of 2003 and employee participants are now
covered under the remaining 401(k) Plan. For eligible employees, the Company makes mandatory matching contributions
equal to 50% of employee contributions up to 4% of employee compensation, as defined. The Company, as determined by
the Board of Directors, may make other discretionary contributions. 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 $221,000, $144,000 and $172,000, respectively, for the years ended December 31, 2004,
2003, and 2002.
50
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 equaled or exceeded the market price of the stock on the date
of the grant. Had the method prescribed by SFAS No. 123 been applied, the Company’s net income available to common
stockholders for the years ended December 31, 2004, 2003 and 2002 would have been changed to the pro forma amount
indicated below:
Net income available for common stock-as reported
Compensation expenses if the fair value method had been
applied to the grants
Net income available for common stock-pro forma
2004
2,364,389
(112,830 )
2,251,559
$
$
2003
2,025,988
(64,492 )
1,961,496
$
$
2002
1,542,831
(233,361 )
1,309,470
$
$
Net income per share-as reported
Basic
Diluted
Net income available per share-pro forma
Basic
Diluted
0.10
0.10
0.10
0.10
0.09
0.09
0.08
0.08
0.07
0.07
0.06
0.06
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 2004, 2003, and
2002: dividend yield of 0%, expected volatility of 56%, 73%, and 93%, risk-free interest rates of 5% for each year
presented, and expected lives of two years.
Each option granted in 2004 has an exercise price of $1.81 to $2.05 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 on the date of the grant.
51
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – STOCK OPTION PLAN (Continued)
The following table summarizes stock option activity for the periods indicated:
$0.96-$2.39
Options at Exercise Prices
$6.24
$4.26
Total
Outstanding – January 1, 2002
Granted
Canceled or expired
Exercised
Outstanding – December 31, 2002
Granted
Canceled or expired
Exercised
Outstanding – December 31, 2003
Granted
Cancelled or expired
Exercised
Outstanding – December 31, 2004
Exercisable at December 31, 2004
941,530
20,000
(35,000 )
-
926,530
120,000
(2,909 )
(51,710 )
991,911
386,000
(25,826 )
(87,332 )
1,264,753
1,112,686
129,082
-
(2,085 )
-
126,997
-
(63,142 )
-
63,855
-
(1,401 )
-
62,454
62,454
202,131
-
(729 )
-
201,402
-
-
-
201,402
-
(1,459 )
-
199,943
167,869
Available for grant at December 31, 2004
Weighted-average fair value of options at grant date, granted in 2004
Weighted-average fair value of options, granted in 2003
Weighted-average exercise price all outstanding options at December 31, 2004
Weighted-average remaining vesting life of all options outstanding at December 31, 2004
1,272,743
20,000
(37,814 )
-
1,254,929
120,000
(66,051 )
(51,710 )
1,257,168
386,000
(28,686 )
(87,332 )
1,527,150
1,343,009
463,999
$ 2.15
$ 2.01
$ 2.10
2.5 years
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.
NOTE 11 – RELATED-PARTY TRANSACTIONS
ENGlobal Engineering leases office space from PEI Investments, a joint venture in which ENGlobal Engineering, Inc. 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 $135,000, $135,000 and
$124,000 for 2004, 2003 and 2002, respectively. The lease expires in 2005.
NOTE 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.
52
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS (Continued)
For the years ended December 31, 2004, 2003, and 2002, the Company had sales in the engineering segment totaling
approximately $87.9 million, $45.2 million and $30.6 million attributable to a single customer. During 2004, sales to one
major customer represented over 59% of total sales. During 2003 and 2002, a single customer represented approximately
36% and 30% of total sales, respectively. At December 31, 2004, the Company had amounts due from one customer
totaling $7.0 million; no other customer exceeded 10% of trade receivables at that date. At December 31, 2003, one
customer had amounts in excess of 10% of trade receivables, totaling $5.1 million.
NOTE 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 II Incorporated 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 at the time of
issuance. 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.
NOTE 14 – FEDERAL INCOME TAXES
The components of income tax expense (benefit) from continuing operations for the years ended December 31, 2004, 2003
and 2002 were as follows:
Current
Federal
State
Deferred
Total tax provision
2004
2003
(in thousands)
2002
$
$
975
427
1,402
254
1,656
$
$
536
30
566
543
1,109
$
$
800
(40 )
760
437
1,197
The components of the deferred tax asset (liability) consisted of the following at December 31, 2004 and 2003:
Deferred tax asset
Allowance for doubtful accounts
Net operating loss from prior ownership change
Accruals not yet deductible for tax purposes
$
Deferred tax assets
Deferred tax liabilities
Depreciation
Goodwill
Deferred tax liability
Deferred tax asset, net
2004
2003
(in thousands)
$
162
-
478
640
(558 )
(15 )
(573 )
128
135
349
612
(291 )
-
(291 )
321
$
67
$
53
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – FEDERAL INCOME TAXES (Continued)
During the year ended December 31, 2002, the Company resolved certain issues related to a net operating loss carry
forward (“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.
The following is a reconciliation of expected to actual income tax expense from continuing operations:
Federal income tax expense at 34%
State and foreign taxes, net of tax effect
Nondeductible expenses
Prior year tax under-accrual
Other
2004
1,147
212
53
190
54
1,656
2003
(in thousands)
1,154
$
2
31
-
(78 )
1,109
$
$
$
$
$
2002
1,052
(26 )
15
-
156
1,197
The Company’s net operating loss carry forward at December 31, 2001 of approximately $1,416,000 has been fully utilized
in the 2004 tax year.
NOTE 15 - ACQUISITIONS
The Company’s acquisition strategy is focused on developing breadth and depth of expertise within the organization by
continuing to search for candidates that fit into one of two profiles. First, the Company considers acquisition candidates
with revenues in the $10 million range that would provide new service capabilities for its clients. Second, the Company
considers acquisition candidates of various sized operations that have capabilities in a given market segment or geographic
location.
Assets acquired and liabilities assumed by the Company have been recorded on the Company’s Consolidated Balance
Sheets as of the respective acquisition dates based upon their estimated fair values at such dates. The results of operations
of our acquisitions have been included in the Company’s Consolidated Statement of Income since their respective dates of
acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities
assumed has been allocated to goodwill.
In September 2004, the Company retained Sanders Morris Harris (“SMH”) as the exclusive advisor to the Company to
identify strategic transactions. Sanders Morris Harris is a full service investment bank focused on providing corporate
finance and merger and acquisition services to private and public middle-market companies. In connection with its
engagement, Sanders Morris Harris will assist the Company in formulating, evaluating and implementing possible
alternatives for enhancing shareholder value. The Company emphasized that there is no assurance the strategic review will
lead to any transaction and that it is committed to its continuing operations while strategic opportunities are identified and
reviewed. The engagement of SMH was suspended in February 2005 (see Note 19).
One of the Company’s subsidiaries, ENGlobal Design Group, (“EDG”), purchased certain assets of Tulsa-based
Engineering Design Group, Inc. (“EDGI”) effective February 1, 2004. The Company expects that the acquisition of these
assets will enhance its capabilities related to 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 purchase, the Company
acquired $344,000 in tangible assets including furniture and fixtures, computer equipment and software being amortized
over an average of 4.6 years. EDG also assumed liability for $44,000 in accrued compensated absences for former EDGI
employees hired at the time of the purchase, issued two $150,000 notes bearing interest at 5% maturing in December 2008
and a $2.5 million five-year contingent promissory note, with payments due annually, as part of an earn-out structure based
on revenues of the EDG operations over the next five years. EDG did not pay any cash or issue any stock in the
54
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – ACQUISITIONS (Continued)
transaction. The original consideration given for the purchase of certain EDGI assets approximated the fair value of the net
assets acquired; therefore no goodwill arose from the transaction. Principal and interest on the $2.5 million five-year
contingent promissory note will be charged to goodwill. As of December 31, 2004, $139,000 in principal and interest on
the contingent promissory note has been charged to goodwill and is being amortized over 15 years for tax purposes.
In October 2004, one of the Company’s subsidiaries, ENGlobal Construction Resources, Inc., purchased the name and
certain assets of Cleveland Inspection Services, Inc. (“CIS”). CIS provides inspection and construction management
services in support of the oil and gas, utility, and pipeline industries. The Company paid $2.5 million consisting of cash,
discounted promissory notes and assumption of certain designated contract obligations and entered into non-compete
agreements with CIS and its principals in exchange for approximately $1.0 million in machinery and equipment, furniture
and fixtures, computer equipment, software and other intangible assets with all intangible assets are being amortized over 5
years. The acquisition also resulted in approximately $1.3 million in goodwill being recorded and amortized over 15 years
for tax purposes. In addition, the Company hired approximately 180 former CIS employees and operates its newly
purchased assets as a division of ENGlobal Construction Resources, Inc., marketing its services using the Cleveland
Inspection Services name.
In December 2004, ESI purchased contract rights and other assets of InfoTech Engineering Company, LLC, a limited
liability company (“InfoTech”), headquartered in Baton Rouge, Louisiana. The Company paid $325,000 in cash, a
promissory note and entered into a non-compete agreement with the former owner in exchange for approximately $55,000
in computer equipment with all intangible assets being amortized over 3 years. The acquisition resulted in approximately
$270,000 in goodwill being recorded and amortized over 15 years for tax purposes. The InfoTech acquisition expands
ESI’s capability in controls system integration in both the automation and process control services. InfoTech’s primary
experience is in the onshore and offshore oil and gas and petrochemical industries.
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. The new Freeport operations began in June as a division of EEI. Senftleber, a limited partnership,
provides support in the pipeline industry in Houston. The Senftleber acquisition occurred in November as a subsidiary of
ETI. The acquisitions had an aggregate cost of $425,000. There is no earn-out provision in either transaction. Goodwill
was created with both transactions: $115,000 for Petro-Chem and $428,000 for Senftleber. 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.
55
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – ACQUISITIONS (Continued)
The unaudited pro forma combined historical results, as if the significant acquisitions had taken place at the beginning of
the fiscal 2004, 2003 and 2002, respectively are estimated to be:
Net sales as reported
Pro forma sales of acquired companies
Pro forma net sales
Net income as reported
Pro forma income (loss) 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
NOTE 16 – SALE OF THERMAIRE
$
$
2004
148,888
486
149,374
2003
(in thousands)
123,719
$
13,434
137,153
$
2,364
(128 )
2,236
0.10
(0.01 )
0.10
0.10
-
0.10
2,157
(1,824 )
333
0.09
(0.01 )
0.01
0.09
(0.01 )
0.01
$
$
2002
89,123
6,092
95,215
1,751
493
2,244
0.07
0.02
0.01
0.07
0.02
0.01
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 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 had 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. The office and manufacturing facility
was sold in March 2005 (see Note 19).
NOTE 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.
56
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 – SEGMENT INFORMATION (Continued)
Segment information for 2004, 2003 and 2002 was as follows:
2004
Net sales from external customers
$
133,630 $
15,258 $
- $
148,888
Engineering
Systems
Corporate
Total
(in thousands)
Operating profit (loss)
Depreciation and amortization
Tangible assets
Goodwill
Capital expenditures
2003
10,512
706
31,971
14,151
1,378
585
108
6,673
1,133
20
(6,605 )
432
3,332
-
67
4,492
1,246
41,976
15,284
1,465
Net sales from external customers
$
108,380 $
15,339 $
- $
123,719
Operating profit (loss)
Depreciation and amortization
Tangible assets
Goodwill
Capital expenditures
2002
10,716
375
22,642
12,889
902
(38 )
89
3,049
864
105
(6,144 )
360
3,048
-
139
Net sales from external customers
$
74,971 $
14,151 $
- $
Operating profit (loss)
Depreciation and amortization
Tangible assets
Goodwill
Capital expenditures
7,148
376
17,841
12,774
156
851
49
5,751
435
56
(4,225 )
288
3,267
-
1,121
4,534
824
28,762
13,753
1,146
89,122
3,774
713
26,859
13,209
1,333
NOTE 18 – COMMITMENTS AND CONTINGENCIES
In connection with the 2001 merger of Petrocon Engineering, Inc. (“Petrocon”) and a wholly-owned subsidiary of
ENGlobal Corporation, certain former Petrocon shareholders (the “Significant PEI Shareholders”) entered into an
Indemnification Escrow Agreement, an Option Escrow Agreement, a Voting Agreement and a Significant PEI Shareholder
Voting Agreement (collectively, the “2001 Agreements”). In August 2004, the Company and the requisite percentage of
Significant PEI Shareholders entered into a Termination Agreement (the “Termination Agreement”) terminating the 2001
Agreements. The 2001 Agreements included the following:
Indemnification Escrow.
Pursuant to the Indemnification Escrow Agreement, 1,000,000 shares of ENGlobal common stock owned by the
Significant PEI Shareholders were deposited into an escrow to serve as a fund against which the Company could make
claims for indemnity pursuant to the Merger Agreement with Petrocon. Pursuant to the terms of the Termination
Agreement, the remaining shares in the Indemnification Escrow agreement will be released pro rata to the Significant
PEI Shareholders.
Voting Agreement.
ENGlobal, the Significant PEI Shareholders, and certain other parties entered into a Voting Agreement which obligated
the parties thereto to vote for certain persons to serve on the Board of Directors of ENGlobal. Pursuant to the terms of
the Termination Agreement, the Voting Agreement has been terminated.
57
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 – COMMITMENTS AND CONTINGENCIES (Continued)
Significant PEI Shareholder Voting Agreement.
The Significant PEI Shareholders entered into a Significant PEI Shareholders Voting Agreement governing the manner
in which they would designate three ENGlobal director nominees under the Voting Agreement and vote shares held in
escrow. Pursuant to the terms of the Termination Agreement, the Significant PEI Shareholders Voting Agreement has
been terminated.
Option Escrow.
Pursuant to the Option Escrow Agreement, the Significant PEI Shareholders deposited 1,737,473 shares of ENGlobal
common stock into an escrow account. The Option Escrow Agreement required that if ENGlobal issued shares of its
common stock on the exercise of incentive options granted as replacement options for outstanding Petrocon incentive
options (“Replacement Options”), a like number of shares of ENGlobal common stock would be surrendered from the
escrow account to ENGlobal. As a result, no dilution to ENGlobal stockholders would occur upon the exercise of
Replacement Options.
The Company’s management has since determined that, due to the cost and complexity associated with administering the
2001 Agreements, it would be in the best interest of the Company and its stockholders to terminate the same. Pursuant to
the terms of the Termination Agreement, ENGlobal purchased the 652,377 shares being held in escrow underlying the
Replacement Options with an exercise price of $0.96 per share for a discounted payment of $592,231, payable over three
years to the Significant PEI Shareholders. ENGlobal also terminated its rights to any of the remaining shares held in
escrow and those shares were distributed to the Significant PEI Shareholders. The transaction resulted in 652,377 shares of
Treasury Stock and a decrease in Shareholders’ Equity of $592,231 until such time as the replacement options are exercised
and the exercise price is remitted to the Company.
Employment Agreements
The Company has employment agreements with its executive officers and certain other officers, the terms of which expire
through June 2007. Such agreements provide for minimum salary levels. The aggregate commitment for future salaries at
December 31, 2004, 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 two 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. On October 20, 2004, the Company exercised its right to extend the term of the agreements for one additional one-
year period beginning on December 21, 2004.
Litigation
From time to time, the Company and its subsidiaries become parties to various legal proceedings arising in the ordinary
course of normal business activities. While we cannot predict the outcome of these proceedings, in our opinion and based
on reports of counsel any liability arising from such matters, individually or in the aggregate, are not expected to have a
material affect upon the consolidated financial position or operations of the Company, after giving effect of recorded
reserves.
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 $125,000 per occurrence and approximately $4.2 million in aggregate
in each policy year being covered by a separate insurance policy.
58
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 – SUBSEQUENT EVENTS
On February 11, 2005, the Company’s errors and omissions insurance carrier settled the claim filed by Engineered Carbons,
Inc. against the Company in the 60th District Court at Jefferson County, Texas (see Note 18) within the Company’s errors
and omissions policy limits. As a result of the settlement and after all material expenses were accounted for, the Company
was able to reduce the combined level of its reserves and recorded a $98,000 benefit against operating results for 2004.
On March 4, 2005, the Company completed the sale of the 37,000 square feet office and manufacturing facility owned by
Thermaire for $885,000 (see Note 16). The proceeds were used to reduce long-term debt.
During February and March of 2005, the Company and its subsidiaries were successful in getting dismissal of all but one of
the petitions for damages filed in various district courts in Louisiana on behalf of former employees of Barnard and Burk,
Inc. alleging exposure to asbestos during the course of their employment (see Note 18). The Company believes that the
remaining petition is without merit and immaterial to the Company's business and financial condition.
On February 28, 2005, the Company suspended the engagement of Sanders Morris Harris as the exclusive advisor to the
Company to identify strategic acquisition opportunities and assist the Company in evaluating and negotiating the terms of
potential strategic transactions. The Company will engage SMH in the future on an as needed basis to assist in the
evaluation and possible negotiation of terms for any specific strategic transaction.
NOTE 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 for 2003 will not agree to previously issued quarterly statements as a result of this
restatement.
March
For the Quarters Ended - 2004
September
June
(in thousands, except per share amounts)
December
Revenues per segment
Engineering
Systems
Total
Gross profit per segment
Engineering
Systems
Total
Gross profit percentage
Engineering
Systems
Total
$
$
$
$
28,463
2,529
30,992
3,876
324
4,200
$
$
$
$
31,470
2,813
34,283
4,020
216
4,236
$
$
$
$
32,796
4,476
37,272
4,010
810
4,820
$
$
$
$
13.6 %
12.8 %
13.6 %
12.8 %
7.7 %
12.4 %
12.2 %
18.1 %
12.9 %
Net income
$
471
$
421
$
755
$
Earnings per share – basic
Earnings per share – diluted
0.02
0.02
0.02
0.02
0.03
0.03
40,901
5,440
46,341
4,519
819
5,338
11.0 %
15.1 %
11.5 %
717
0.03
0.03
59
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 – QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (Continued)
March
For the Quarters Ended - 2003
September
June
(in thousands, except per share amounts)
December
$
$
$
$
18,315
4,691
23,006
3,123
804
3,927
Revenues per segment
Engineering
Systems
Total
Gross profit per segment
Engineering
Systems
Total
Gross profit percentage
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
$
$
$
$
$
17.1 %
17.1 %
17.1 %
514
(6 )
-
508
0.02
-
0.02
0.02
-
0.02
25,257
4,015
29,272
3,782
441
4,223
15.0 %
11.0 %
14.4 %
563
(29 )
-
534
0.02
-
0.02
0.02
-
0.02
$
$
$
$
$
$
$
$
$
$
32,376
3,059
35,435
3,941
400
4,341
12.2 %
13.1 %
12.3 %
393
(11 )
-
382
0.02
-
0.02
0.02
-
0.02
$
$
$
$
$
$
$
$
$
$
32,432
3,574
36,006
3,955
527
4,482
12.2 %
14.7 %
12.4 %
815
(108 )
26
733
0.03
-
0.03
0.03
-
0.03
$
$
$
$
$
$
$
$
$
$
60
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
ENGlobal Corporation
We have audited, in accordance with auditing the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements of ENGlobal Corporation and Subsidiaries included in this Form 10-K and
have issued our report thereon dated March 10, 2005. 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 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 10, 2005
61
Schedule II
ENGlobal Corporation
VALUATION AND QUALIFYING ACCOUNTS
Description
Allowance for doubtful accounts
For year ended December 31, 2004
For year ended December 31, 2003
For year ended December 31, 2002
Balance -
Beginning
of Period
Additions
Deductions-
Write offs
(in thousands)
Balance -
End of
Period
$
$
$
376 $
282 $
271 $
134 $
282 $
215 $
(34 ) $
(188 ) $
(204 ) $
476
376
282
62
ITEM 9.
CHANAGES 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 and forms of the SEC. We carried out an evaluation as of December 31, 2004, 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 changes in internal control
over financial reporting during the fiscal quarter ended December 31, 2004 that has materially affected, or
is reasonably likely to affect, the registrant’s internal control over financial reporting.
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
PART III
The information under the captions Election of Directors, Section 16(a) Beneficial Ownership Reporting
Compliance and Corporate Code of Conduct, in our definitive proxy statement for our 2005 annual
meeting of stockholders to be filed with the SEC pursuant to Regulation 14A under the Securities and
Exchange Act of 1034, as amended, is incorporated herein by reference.
ITEM 11.
EXECUTIVE COMPENSATION
The information under the caption Executive Compensation contained in our definitive proxy statement for
our 2005 annual meeting of stockholders to be filed with the SEC pursuant to Regulation 14A under the
Securities and Exchange Act of 1034, as amended, 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 definitive proxy statement for our 2005 annual meeting of stockholders to be filed with the
SEC pursuant to Regulation 14A under the Securities and Exchange Act of 1034, as amended, is
incorporated herein by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption Certain Relationships and Related Transactions contained our definitive
proxy statement for our 2005 annual meeting of stockholders to be filed with the SEC pursuant to
Regulation 14A under the Securities and Exchange Act of 1034, as amended, is incorporated herein by
reference.
63
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information under the caption Principal Accounting Fees and Services in our definitive proxy
statement for our 2005 annual meeting of stockholders to be filed with the SEC pursuant to Regulation 14A
under the Securities and Exchange Act of 1034, as amended, is incorporated herein by reference.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
(a)
1.
Financial Statements
PART IV
Reference is made to the consolidated financial statements, the reports herein, the notes
herein and supplemental data in PART II, Item 8 on page 35 of this Form 10-K.
2.
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.
3. Exhibits
The exhibits listed in the accompanying index to exhibits are filed or incorporated by
reference as part of this Report.
(b)
Reports on Form 8-K
1.
2.
3.
Three reports on Form 8-K were filed by the Company during the quarter ended December
31, 2004:
Termination Agreement by and among ENGlobal Corporation, Equus II Incorporated,
Alliance 2000, Ltd., Significant PEI Shareholders, Michael L. Burrow, as shareholder
representative for the Significant PEI Shareholders, and Johnny J. Williams, Esq., as
Escrow Agent, dated September 28, 2004, incorporated by reference as Exhibit 99.1 to
the Company’s Form 8-K filed with the Securities and Exchange Commission on
October 1, 2004.
ENGlobal Corporation Key Manager Incentive Plan dated December 16, 2004,
incorporated by reference as Exhibit 10.1 to the Company’s Form 8-K filed with the
Securities and Exchange Commission on December 21, 2004.
ENGlobal Corporation Executive Level Incentive Plan dated December 16, 2004,
incorporated by reference as Exhibit 10.1 to the Company’s Form 8-K filed with the
Securities and Exchange Commission on December 21, 2004.
64
Number
Description
INDEX OF EXHIBITS
2.1
2.2
2.3
3.1
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
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.
Restated Articles of Incorporation of ENGlobal Corporation dated August 8, 2002, incorporated by
reference to the Company’s Quarterly Report on Form 10-Q 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.
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.
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.
65
Number
Description
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
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.
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.
10.20
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.
66
Number
Description
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
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, IDS
Engineering, Inc., Thermaire, 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 10-Q for the quarter ended June 30, 2002 filed with the Securities
and Exchange Commission on August 12, 2002.
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
10-Q 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 10-Q 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 10-Q 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 10-Q 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 10-Q 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 10-Q 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 10-Q for the quarter ended March
31, 2003 filed with the Securities and Exchange Commission on May 13, 2003.
67
Number
Description
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
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 10-Q 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 10-Q 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.
Second Amendment of the ENGlobal Engineering, Inc. 401(k) Plan dated January 1, 2004 (formerly called
the “Petrocon Engineering, Inc. 401(k) Plan”), incorporated by reference as Exhibit 10.77 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities
and Exchange Commission on March 30, 2004.
ENGlobal Corporation Employee Stock Purchase Plan dated March 2, 2004, incorporated by reference as
Exhibit 10.1 to the Company’s Form S-8 registration statement filed with the Securities and Exchange
Commission on March 12, 2004, incorporated by reference as Exhibit 10.78 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange
Commission on March 30, 2004.
Lease Agreement between between ENGlobal Design Group, Inc. and TC Meridian Tower LP dated
January 24, 2004, incorporated by reference as Exhibit 10.79 to the Company’s Annual Report on Form
10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March
30, 2004.
Credit Agreement by and between Comerica Bank and ENGlobal Corporation and its subsidiaries dated
July 27, 2004, incorporated by reference as Exhibit 10.1 to the Company’s Form 8-K filed with the
Securities and Exchange Commission on August 9, 2004.
Security Agreement by and between Comerica Bank and ENGlobal Corporation and its subsidiaries dated
July 27, 2004, incorporated by reference as Exhibit 10.2 to the Company’s Form 8-K filed with the
Securities and Exchange Commission on August 9, 2004.
Master Revolving Note by and between Comerica Bank and ENGlobal Corporation and its subsidiaries
dated July 27, 2004, incorporated by reference as Exhibit 10.3 to the Company’s Form 8-K filed with the
Securities and Exchange Commission on August 9, 2004.
Termination Agreement by and among ENGlobal Corporation, Equus II Incorporated, Alliance 2000, Ltd.,
Significant PEI Shareholders, Michael L. Burrow, as shareholder representative for the Significant PEI
Shareholders, and Johnny J. Williams, Esq., as Escrow Agent, dated September 28, 2004, incorporated by
reference as Exhibit 99.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission
on October 1, 2004.
68
Number
Description
10.46
10.47
ENGlobal Corporation Key Manager Incentive Plan dated December 16, 2004, incorporated by reference
as Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on
December 21, 2004.
ENGlobal Corporation Executive Level Incentive Plan dated December 16, 2004, incorporated by
reference as Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission
on December 21, 2004.
10.48*
Third Amendment of the ENGlobal Engineering, Inc. 401(k) Plan (formerly called the “Petrocon
Engineering, Inc. 401(k) Plan”). dated March 9, 2005 and effective January 1, 2005.
11.1
14.1
14.2
21.1
23.1*
31.1*
31.2*
32.1*
32.2*
Statement Regarding Computation of Per Share Earnings is included as Note 2 to the Notes to
Consolidated Financial Statements.
ENGlobal Corporation Code of Ethics for Chief Executive Officer and Senior Financial Officers dated
March 25, 2004, incorporated by reference as Exhibit 99.5 to the Company’s Annual Report on Form 10-
K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March
30, 2004.
ENGlobal Corporation Code of Business Conduct and Ethics dated March 25, 2004, incorporated by
reference as Exhibit 99.6 to the Company’s Annual Report on Form 10-K for the year ended December 31,
2003 filed with the Securities and Exchange Commission on March 30, 2004.
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, incorporated by reference as Exhibit 21.1 to the Company’s Annual Report on Form 10-K for the
year ended December 31, 2003 filed with the Securities and Exchange Commission on March 30, 2004.
Consent of Hein & Associates LLP
Certification pursuant to Section 302 of the Sarbanes-Oxley Act for 2002 for the Year Ended December
31, 2004 for the Chief Executive Officer
Certification pursuant to Section 302 of the Sarbanes-Oxley Act for 2002 for the Year Ended December
31, 2004 for the Chief Financial Officer
Certification pursuant to Section 906 of the Sarbanes-Oxley Act for 2002 for the Year Ended December
31, 2004 for the Chief Executive Officer
Certification pursuant to Section 906 of the Sarbanes-Oxley Act for 2002 for the Year Ended December
31, 2004 for the Chief Financial Officer
*
Filed herewith.
69
SIGNATURES
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.
ENGlobal CORPORATION
Dated: March 24, 2005
By: /s/ Michael L. Burrow
Michael L. Burrow, P.E.,
Chairman of the Board, Chief Executive Officer, Director
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:
By: /s/ Michael L. Burrow
Michael L. Burrow, P.E.
Chairman of the Board, Chief Executive Officer, Director
By: /s/ William A. Coskey
William A. Coskey, P.E.
President, Chief Operating Officer, Director
By: /s/ Robert W. Raiford
Robert W. Raiford
Chief Financial Officer, Treasurer
By: /s/ David W. Gent
David W. Gent, P.E., Director
By: /s/ Randall B. Hale
Randall B. Hale, Director
By: /s/ David C. Roussel
David C. Roussel, Director
70
Offi cers
Michael L. Burrow, P.E.
Chairman of the Board and Chief Executive Offi cer
William A. Coskey, P.E.
President
Robert W. Raiford
Chief Financial Offi cer and Treasurer
Michael M. Patton, P.E.
Senior Vice President - Business Development
Natalie S. Hairston
Investor Relations Offi cer,
Chief Governance Offi cer and Corporate Secretary
INDEPENDENT ACCOUNTANTS
Hein & Associates LLP
Houston, Texas
CORPORATE COUNSEL
Jenkens & Gilchrist, P.C.
Austin, Texas
PRINCIPAL CORPORATE OFFICE
ENGlobal Corporation
600 Century Plaza Drive, Suite 140
Houston, Texas 77073-6033
Upon relocation in July 2005:
654 North Sam Houston Parkway East, Suite 400
Houston, Texas 77060-5914
ir@ENGlobal.com www.ENGlobal.com
Corporate Information
Board of Directors
Michael L. Burrow, P.E.
Chairman of the Board and Chief Executive Offi cer
ENGlobal Corporation
William A. Coskey, P.E.
President
ENGlobal Corporation
David W. Gent, P.E.
Vice President, Director of International Engineering
and Chief Information Offi cer
Bray International, Inc.
Randall B. Hale
Chairman and Chief Executive Offi cer
ConGlobal Industries, Inc.
David C. Roussel
Management Consultant
Randall & Dewey, Inc.
SECURITIES LISTING
The common stock of ENGlobal Corporation
is listed on the American Stock Exchange
under the trading symbol “ENG”.
TRANSFER AGENT & REGISTRAR
Computershare Investor Services LLC
2 North LaSalle Street
Chicago, Illinois 60602
(312) 588-4652 - ENG stockholders dedicated line
The statements in this annual report that relate to the future are
forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities and
Exchange Act of 1934 and involve risks and uncertainties, and are
based on assumptions that the Company believes are in good faith
are reasonable but which may be materially different from actual
results.
Readers are encouraged to refer to the risk disclosures in the
Company’s reports on Form 10-K, 10-Q, and 8-K, as applicable.
ENGlobal Corporation
600 Century Plaza Drive
Suite 140
Houston, Texas 77073-6033
ENGlobal Corporation
654 North Sam Houston Parkway East
Suite 400
Houston, Texas 77060-5914
Phone:
281.821.3200
Fax:
281.209.2409
Phone:
281.821.3200
New Address as of July 1, 2005
Fax:
281.209.2409
Ranked #1
Ranked #59
THE TOP
500
2004
DESIGN
FIRMS
WINNER
www.ENGlobal.com