UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31,June 30, 2002
[_][ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 001-14217
INDUSTRIAL DATA SYSTEMSENGLOBAL CORPORATION
(Exact name of registrant as specified in its charter)
Nevada
------
(State or, other Jurisdiction of
corporation or organization)
88-0322261
----------
(I.R.S. Employer Identification Number)
600 Century Plaza Drive, Suite 140, Houston, Texas 77073-6033
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(281) 821-3200
--------------
(Registrant's telephone number, including area code)
Industrial Data Systems Corporation
(Former name, former address, and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X[X] No --- ---[ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the close of business of March 31,June 30, 2002.
$0.001 Par Value Preferred Stock.............................. 2,500,000Stock 2,588,000 shares
$0.001 Par Value Common Stock.................................Stock 22,861,199 shares
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31,JUNE 30, 2002
TABLE OF CONTENTS
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31,June 30, 2002 and
December 31, 2001...........................12001 1
Condensed Consolidated Statements of Income for the Three
Months ended March 31,June 30, 2002 and March 31, 2001.................................................................22001 and for the Six Months
ended June 30, 2002 and 2001 2
Condensed Consolidated Statements of Cash Flows for the ThreeSix Months
ended March 31,June 30, 2002 and March 31, 2001.................................................................32001 3
Notes to Condensed Consolidated Financial Statements....................................................4Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................................................7Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Part II. Other Information
Item 1. Legal Proceedings......................................................................................10Proceedings 14
Item 2. Changes in Securities..................................................................................10Securities 14
Item 3. Defaults Upon Senior Securities........................................................................11Securities 14
Item 4. Submission of Matters to a Vote of Security Holders....................................................11Holders 14
Item 5. Other Information......................................................................................11Information 15
Item 6. Exhibits and Reports on Form 8-K.......................................................................118-K 15
Signature .............................................................................................1216
i
Part I. Financial Information
Item 1. Financial Statements
INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETSENGlobal Corporation
Condensed Consolidated Balance Sheets
March 31,June 30, 2002 December 31, 2001
--------------------------- -----------------
(unaudited)
ASSETS
------
CURRENT ASSETS:
Cash $ 370,88468,969 $ 1,244,907
Accounts receivable - trade, less allowance for doubtful accounts of
approximately $209,000$287,000 for 2002 and $271,000 for 2001 13,911,38514,307,117 14,908,069
Inventory 650,709565,299 730,507
Cost and estimated earnings in excess of billings on uncompleted
contracts 712,2811,276,673 691,048
Prepaid and other 671,878329,518 740,670
------------ ----------------------- -----------
Total current assets 16,317,13716,547,576 18,315,201
PROPERTY AND EQUIPMENT, net 4,994,8385,135,955 5,123,115
OTHER ASSETS 328,700329,099 333,567
GOODWILL 14,514,36714,521,406 14,513,806
------------ ----------------------- -----------
Total assets $36,155,042$36,534,036 $38,285,689
============ ======================= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $10,098,296$8,963,645 $9,076,520
Current portion - long term debt 1,063,142 1,357,228
Billings and estimated earnings in excess of cost on uncompleted
contracts 630,513713,807 777,712
Current portion long-term debt 904,156 1,357,228
Current portion capital lease payable 52,000 48,058
Notes payable 183,8972,528 398,974
Preferred dividends payable 50,00017,252 -
Current portion - capital lease payable 50,795 48,058
Income taxes payable 161,170467,030 -
------------ ----------------------- -----------
Total current liabilities 12,237,81311,120,418 11,658,492
Long termLong-term debt, net of current portion 9,218,46610,190,091 12,131,582
Capital lease payable, net of current portion 142,348129,854 149,665
------------ ----------------------- -----------
Total liabilities 21,598,62721,440,363 23,939,739
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 5,000,000 shares authorized,
2,588,000 issued and outstanding and 2,500,000 sharesissued and outstanding
2,500in 2002 and 2001, respectively 2,588 2,500
Common stock, $.001 par value; 75,000,000 shares authorized;
22,861,199 issued and outstanding 22,862 22,862
Additional paid-in capital 11,832,97111,920,883 11,832,971
Retained earnings 2,698,0823,147,340 2,487,617
------------ ----------------------- -----------
Total stockholders'Stockholders' equity 14,556,41515,093,673 14,345,950
------------ ----------------------- -----------
Total liabilities and stockholders'Stockholders' equity $ 36,155,042 $ 38,285,68936,534,036 $38,285,689
============ =======================
See accompanying notes to interim condensed consolidated financial statements.
1
INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOMEENGlobal Corporation
Condensed Consolidated Statements of Income
(Unaudited)
For The Three Months Ended March 31,For The Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------------ ---------------------- ----------- -----------
OPERATING REVENUES $ 20,702,727 $ 5,953,906$22,814,394 $5,149,490 $43,517,120 $11,103,396
OPERATING EXPENSES:EXPENSES
Direct costs 17,478,606 4,627,10118,862,197 3,715,135 36,340,803 8,342,236
Selling, general and administrative 2,444,228 754,8982,704,322 866,269 5,148,549 1,621,166
Depreciation and amortization 220,390 32,591
------------ ------------
20,143,224 5,414,590
------------ ------------187,919 66,603 408,309 99,196
----------- ----------- ----------- -----------
Total operating expenses 21,754,438 4,648,007 41,897,661 10,062,598
----------- ----------- ----------- -----------
Operating income 559,503 539,3161,059,956 501,483 1,619,459 1,040,798
OTHER INCOME (EXPENSE)
Other income 117,073 14,63020,789 18,123 137,862 32,754
Interest income (expense) (233,340) (17,227)
------------ ------------
(116,267) (2,597)
------------ ------------(201,264) (21,823) (434,605) (39,050)
----------- ----------- ----------- -----------
Total other income (expense) (180,475) (3,700) (296,743) (6,296)
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 443,236 536,719879,481 497,783 1,322,716 1,034,502
PROVISION FOR INCOME TAXES 177,294 198,500
------------ ------------380,228 205,000 557,522 403,500
----------- ----------- ----------- -----------
NET INCOME 265,942 338,219499,253 292,783 765,194 631,002
PREFERRED STOCK DIVIDENDS 50,000 --
------------ ------------- 105,472 -
----------- ----------- ----------- -----------
EARNINGS AVAILABLE TO COMMON STOCKHOLDERS $ 215,942449,253 $ 338,219
============ ============292,783 $ 659,722 $ 631,002
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ 0.010.02 $ 0.02 $ 0.03 ============ ============$ 0.05
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 22,861,199 12,964,918 ============ ============22,861,199 12,964,918
=========== =========== =========== ===========
See accompanying notes to interim condensed consolidated financial statements.
2
INDUSTRIAL DATA SYSTEMS CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSENGlobal Corporation
Condensed Consoliated Statement of Cash Flows
(Unaudited)
For the ThreeSix Months Ended March 31,June 30,
2002 2001
------------ --------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 265,942765,194 $ 338,219631,002
Adjustment for non-cash items 220,390 32,591391,057 70,655
Changes in working capital, net 2,238,502 (434,479)
------------ ------------775,873 (385,805)
----------- ---------
Net cash provided (used) by operating activities 2,724,834 (63,669)1,932,124 315,852
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment acquired (112,883) (117,715)(193,858) (202,263)
Proceeds from sale of property 42,523 --
------------ -------------
----------- ---------
Net cash used by investing activities (70,360) (117,715)
------------ ------------(151,335) (202,263)
----------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from borrowings under lineLine of credit 24,179,355 --
Payments on line of credit (26,955,906) --borrowings (repayments) (1,599,651) -
Short-term note repayments -- (8,229)(repayments) (396,445) (15,238)
Lease borrowings (repayments) (15,065) --(26,355) -
Long-term borrowings (repayments) (736,881) 153,620
------------ ------------(934,276) (18,038)
----------- ---------
Net cash provided (used) by financing activities (3,528,497) 145,391
------------ ------------(2,956,727) (33,276)
----------- ---------
NET CHANGE IN CASH (874,023) (35,993)(1,175,938) 80,313
CASH, at beginning of period 1,244,907 242,592
------------ ----------------------- ---------
CASH, at end of period $ 370,88468,969 $ 206,599
============ ============322,905
=========== =========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 153,044264,627 $ 17,22721,823
Income taxes paid -- 178,000102,536 235,000
NON-CASH:
Lease to finance equipment -- 50,000- 43,700
Accrual of preferred stock dividend declaration 50,000105,472 -
See accompanying notes to interim condensed consolidated financial statements.
3
INDUSTRIAL DATA SYSTEMSENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of ENGlobal Corporation,
formerly known as Industrial Data Systems Corporation ("IDS"ENGlobal" or the
"Company"), included herein, are unaudited for the three-month periodsix-month periods
ended March 31,June 30, 2002 and 2001. These financial statements reflect all
adjustments (consisting of normal recurring adjustments), which are, in
the opinion of management, necessary to fairly depict the results for the
periods presented. Certain information and note disclosures, normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America, have been
condensed or omitted pursuant to rules and regulations of the Securities
and Exchange Commission. It is suggested these condensed financial
statements be read in conjunction with the Company's audited financial
statements for the years ended December 31, 2001 and 2000, which are
included in the Company's annual report on Form 10-K. The Company
believes that the disclosures made herein are adequate to make the
information presented not misleading.
2. ACQUISITION
The acquisition of Petrocon Engineering, Inc. (the "Merger") was
consummated on December 21, 2001 with an effective date for accounting
purposes of December 31, 2001. Through an indirect subsidiary, IDSthe
Company acquired all the outstanding shares of stock of Petrocon
Engineering, Inc. ("Petrocon") an engineering services company with
offices along the Texas and Louisiana gulf coast in exchange for the
issuance of 9,800,000 shares of IDS stock. None of Petrocon's earnings were
included as part of IDS operations for 2001. Footnote 2 of the Form 10-K
describes all subsidiaries.
3. NAME CHANGE
On June 6, 2002 the stockholders voted on a proposal to amend the
Articles of Incorporation to change the name of the Company from
Industrial Data Systems Corporation to ENGlobal Corporation. The Company
believes the new name reflects its broader capabilities and vision for
future growth, providing a common identity, which will build name
recognition and credibility among existing and potential customers.
4. LINE OF CREDIT AND DEBT
Effective December 31, 2001 as part of the Merger, IDSENGlobal entered into
a financing arrangement with Fleet whereby all of Petrocon's outstanding
debt (the "Credit Facility" comprised of a line of credit and a term
loan), was refinanced. The new loan agreement positions the Fleet debt as
senior to all other debt and includes a line of credit limited to
$15,000,000, subject to borrowing base restrictions and a term loan in
the amount of $500,000. The Credit Facility is collateralized by
substantially all the assets of the Company. At March 31,June 30, 2002, $6,118,000$7,295,000
was outstanding on the line of credit and $344,000$165,000 was outstanding on the
term loan. Both the line
of credit and the term loan mature on June 14, 2003. The interest rate on the line of credit is one-quarter of one
percent plus prime (5.0 percent at March 31,June 30, 2002), and the commitment fee
on the unused line of credit is 0.375 percent. The interest rate on the
term loan is one-half of one percent plus prime (5.25 percent at March 31,June 30,
2002). Monthly principal payments on the term loan plus interest
commenced January 1, 2002 and continue until maturity. The remaining
borrowings available under the line of credit as of March 31,June 30, 2002, were
$3,217,000$1,123,000 after consideration of the borrowing base limitations. The
Company's Credit Facility contains covenants which require the
maintenance of certain ratios, including cumulative fixed charge coverage
and debt coverages and specified levels of certain other items. This
Credit Facility
4
ENGLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
replaced a revolving credit note that was collateralized with accounts
receivable and inventory of the Company.
An amendment to the Credit Facility was agreed upon between Fleet and the
Company on July 31, 2002 whereby the maturity date of the line of credit
and the term loan was extended to June 30, 2005. The amendment also
includes more favorable advance rates on eligible accounts, increased
sub-limits on fixed price contracts and foreign receivables and an
interest rate reduction if certain fixed charge ratios are maintained.
Had the amendment been in place at June 30, 2002, the remaining
borrowings available under the line of credit would have increased by
$1,676,000.
As part of the Merger consideration, Petrocon's pre-Merger debt with
Equus was reorganized, restructured and reduced. Equus agreed to exchange
notes worth $9,700,000 including accrued interest for $2,500,000 in
preferred stock, a payment of $2,000,000, a forgiveness of $2,200,000,
and a new note for $3,000,000. The new note has interest at 9.5 percent
per annum with interest 4
INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
paid quarterly beginning February 15, 2002 and
principal payments being repaid quarterly beginning August 15, 2002. This
note is subordinated to the Company's loan with Fleet.
(in thousands)
March 31,June 30, December 31,
2002 2001
-------- --------------- ------------
Fleet Credit Facility-
Line of credit, interest at prime plus 0.25% (5.00% at
March 31,June 30, 2002), maturing in 20032005 $ 6,118 $7,295 8,894
Term loan, interest at prime plus 0.50% (5.25% at March 31,June 30,
2002), due in monthly installments of $60,000, maturing
through 2003 3442005 165 523
Equus-
Note payable, interest at 9.5%, principal due
quarterly in installments of $110,000, maturing through
2005 3,0343,000 3,000
Vendors-
Notes payable, interest at 8%, due monthly in
decreasing amounts starting at $115,000, maturing
through 2004 785634 1,072
-------- --------
10,281------- -------
11,094 13,489
Less- current maturities (1,063)(904) (1,357)
-------- --------------- -------
Long-term debt, net of current portion $ 9,218 $ 12,132
======== ========$10,190 $12,132
======= =======
Current notes payable include a note which finances commercial insurance
on a short-term basis, with a balance of $184,000$3,000 and $434,000$399,000 as of March 31,June
30, 2002 and December 31, 2001, respectively.
4.5
ENGLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. PREFERRED STOCK DIVIDENDS
The Company's Series A Preferred Stock, $0.001 par value per share, is
held by one shareholder, Equus II Incorporated. Dividends on outstanding
shares of Series A Preferred Stock are payable annually on the last day
of May beginning in 2002 at a rate of 8% of the liquidation amount which
is $1.00 per share plus accrued and unpaid dividends. Dividends may be
paid in cash or at the option of the Company, in shares for each share of
outstanding Series A Preferred Stock. On May 31, 2002, the Company issued
88,000 shares of Series A Preferred Stock as a stock dividend plus $219
for fractional shares.
6. ALLOCATION OF GOODWILL
The Company's plan to pursue potential acquisitions of complementary
businesses was realized on December 21, 2001 through its Merger with
Petrocon. IDSThe Company entered into a letter of intent on April 3, 2001 to
acquire, through mergerMerger with a wholly owned subsidiary, Petrocon
Engineering, Inc., an engineering support services company with offices
along the Texas and Louisiana gulf coast, in exchange for 9,800,000
shares of IDS,the Company, valued at $0.71 per share. The purchase price
totaled $23,806,000. The transaction was financed by issuance of common
stock valued at $6,637,000, net of registration costs, issuance of
preferred stock with a liquidation value of $2,500,000 and assumption of
debt totaling $13,737,000. The purchase resulted in the recognition of an
intangible, goodwill, of $14,514,000.$14,521,000.
The initial business strategy of the combined company will focusfocuses on cross-marketing
its engineering capabilities and, following a reduction in its debt
burden, completing mergers and acquisitions in its engineering business.
Since there is little overlap in the engineering customer bases of the
two companies, there is considerable potential to enhance the internal
growth of the combined company through cross-marketing. An intense
marketing effort focused on those customers who are identified as most
likely to buy the additional services offered through the combined
company will be the highest priority.
5
INDUSTRIAL DATA SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTShas commenced.
In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," goodwill is no longer amortized
over its estimated useful life, but rather will be subject to at least an
annual assessment for impairment. The initial test for impairment, as of
January 1, 2002, must be completed by the end of the second quarter of
2002. The Company is currently in the process ofhas completed such valuation.valuation and no impairment has been
incurred. Goodwill for the Company for the threesix months ended March 31,June 30, 2001
was $4,000. Net income for the firstsecond quarter of 2001 and the six months
ended June 30, 2001, adjusted to exclude goodwill amortization, would
have changed to $336,000$295,000 and $635,000, respectively ($0.030.02 per share and
$0.05 per share, respectively, would have remained the same).
The unaudited proforma combined historical results, as if Petrocon had
been acquired at the beginning of fiscal 2001 as compared to the results
of operations for the three months and six months ended June 30, 2002 are
estimated to be:
(In thousands, except per share data) 2002 2001
- ------------------------------------- ------------ -------------
Net sales $20,703 $23,717
Net income from continuing
operations 559 1,236
Three months ended June 30, Six months ended June 30,
(In thousands, except per share data) 2002 2001 2002 2001
----------------------------------------------- -------- -------- --------- --------
Net sales $22,814 $21,704 $43,517 $ 45,421
Net income from continuing operations 499 405 765 742
Net earnings per share from continuing
operations - basic and diluted 0.01 0.02 0.02 0.03 0.03
6
ENGLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The proforma results presented above do not include amortization of the
goodwill, but do include the reduction of forgiven and restructured
interest expense on debt. The proforma results do not purport to be
indicative of what actually would have occurred if the acquisition had
been completed as of the beginning of each fiscal period presented, nor
are they necessarily indicative of future consolidated results.
5.7. FIXED FEE CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts
consisted of the following at June 30, 2002 and December 31, 2001 (in
thousands):
June 30, December 31,
2002 2001
-------- -----------
Costs incurred on uncompleted contracts $ 10,374 $ 7,293
Estimated earnings on uncompleted contracts 1,972 1,091
-------- --------
Earned revenues 12,346 8,384
Less billings to date (11,784) (8,431)
-------- --------
Net cost and estimated earnings in excess (under)
billings uncompleted contracts $ 562 $ (47)
======== ========
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 1,276 $ 731
Billings and estimated earnings in excess of costs on
uncompleted contracts (714) (778)
-------- --------
Net cost and estimated earnings in excess (under)
billings uncompleted contracts $ 562 $ (47)
======== ========
7
ENGLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. SEGMENT INFORMATION
The Company operates in three business segments: (1) engineering
consulting services primarily to major integrated oil and gas companies;
(2) engineered systems, providing design and implementation of control
systems for specific applications primarily in the energy and process
industries, uninterruptible power systems and battery chargers; and (3)
manufacturing of air handling equipment for commercial heating,
ventilation and cooling systems. Sales and operating income set forth in
the following table are the results of these segments. Segment operating
profit (loss) is defined as profit (loss) before interest and income
taxes. The amounts reported in the corporate segment include those
activities that are allocated to the operating segments.
Segment information for the three months ended March 31,June 30, 2002 and 2001,
respectively, wasis as follows (in thousands)
Engineering Engineered
2002 Services Systems Manufacturing Corporate Total
---- -------- ------------------ ---------- ------------- --------- ------------
2002 Net sales fromto
external customers $18,625 $3,440 $ 749 $ - $22,814
Operating profit (loss) 1,772 323 23 (1,058) 1,060
2001 Net sales to
external customers $ 17,8753,332 $ 2,287 $ 541812 $1,005 $ - $20,703$ 5,149
Operating profit (loss) 1,461 174 (53) (1,023) 559555 64 138 (256) 501
Segment information for the six months ended June 30, 2002 and 2001,
respectively, is as follows (in thousands):
Engineering Engineered
2001
Services Systems Manufacturing Corporate Total
---- -------- ------------------ ---------- ------------- --------- ------------
2002 Net sales fromto
external customers $36,499 $5,728 $1,290 $ - $43,517
Operating profit (loss) 3,233 497 (30) (2,081) 1,619
2001 Net sales to
external customers $ 3,947 $ 1,046 $ 9617,279 $1,858 $1,966 $ - $ 5,954$11,103
Operating profit (loss) 616 150 64 (291) 5391,122 251 215 (547) 1,041
68
Item 2. Management's Discussion And Analysis And Results Of Operations
Forward-Looking Statements
Certain information contained in this Form 10-Q Quarterly Report, the
Company's Annual Report to Stockholders, as well as other written and oral
statements made or incorporated by reference from time to time by the Company
and its representatives in other reports, filings with the Securities and
Exchange Commission, press releases, conferences, or otherwise, may be deemed to
be forward-looking statements with the meaning of Section 21E of the Securities
Exchange Act of 1934. This information includes, with limitation, statements
concerning the Company's future financial position, and results of operations;
planned capital expenditures; business strategy and other plans for future
operations; the future mix of revenues and business; commitments and contingent
liabilities; and future demand and industry conditions. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. When used in this report, the words "anticipate," "believe,"
"estimate," "expect," "may," and similar expressions, as they relate to the
Company and its management, identify forward-looking statements. Actual results
could differ materially from the results described in the forward-looking
statements due to the risks and uncertainties set forth with this Quarterly
Report on Form 10-Q.
The following discussion is qualified in its entirety by, and should be
read in conjunction with, the Company's Consolidated Financial Statements
including the notes thereto, included in the Company's Annual Report on Form
10-K for the year ended December 31, 2001.
Overview
On April 3, 2001, the Company entered into a non-binding letter of
intent relating to a proposed Merger between a newly created subsidiary of the
Company and Petrocon Engineering, Inc. The Merger was consummated on December
21, 2001 with an effective date for accounting purposes of December 31, 2001.
The new Company will provideprovides a broader range of services over a larger geographic
area. The Merger has resulted in some immediate expenses relating to
consolidation of the operations of the two companies; however, the Company
believes that the long-term impact of the Merger will be beneficial to the
Company. The Company filed current reports of Unscheduled Material Events on
Form 8-K on January 7, 2002 and Form 8-K/A on March 5, 2002 describing the
Merger. The result of operations in 2002 includes the newly merged entity.
7On June 6, 2002 in a vote at the Annual Meeting, the stockholders
overwhelmingly approved a proposal to amend the Articles of Incorporation to
change the name of the Company from Industrial Data Systems Corporation to
ENGlobal Corporation. The Company believes the new name reflects its broader
capabilities and vision for future growth, providing a common identity, which
will build name recognition and credibility among our existing and potential
customers.
9
Results of Operations
The Company operates in three segments, the engineering services
segment, the engineered systems segment, and the manufacturing segment. The
following table sets forth, for the periods indicated, the appropriate
percentages of sales generated by each of the operating segments.
Percentage of Revenue
---------------------
For the three months ended March 31,
Operating Segment 2002 2001
----------------- ---- ----
Engineering services 86.3 % 66.3 %
Engineered systems 11.0 17.6
Manufacturing 2.6 16.1
----- -----
Total revenue 100.0 % 100.0 %
Percentage of Revenue
---------------------
For the three months ended June 30, For the six months ended June 30,
Operating Segment 2002 2001 2002 2001
----------------- ---- ---- ---- ----
Engineering services 81.6% 64.7% 83.9% 65.6%
Engineered systems 15.1 15.8 13.1 16.7
Manufacturing 3.3 19.5 3.0 17.7
----- ----- ----- -----
Total revenue 100.0% 100.0% 100.0% 100.0%
Three Months Ended March 31,June 30, 2002 Compared to Three Months Ended March 31,June 30, 2001
Total Revenue. Total revenue increased by $14,749,000$17,665,000 or 248%343% from
$5,954,000$5,149,000 for the three months ended March 31,June 30, 2001, compared to $20,703,000$22,814,000 in
2002. Revenue from the engineering services segment, which comprised 86.3%81.6% of
total revenue for the three months ended March 31,June 30, 2002, increased by $13,928,000$15,293,000
or 353%458%. The Petrocon companies generated revenues of $15,096,000$14,399,000 in the
engineering services segment.segment during the three months ended June 30, 2002.
Revenue from the engineered systems segment was $2,287,000,$3,441,000, which
comprised 11.0%15.1% of total revenue for the three months ended March 31,June 30, 2002, an
increase of $1,241,000$2,629,000 or 119%324% over the same period in 2001. Of this increase,
$1,501,000$2,403,000 resulted from the Petrocon Merger.
Revenue generated by the manufacturing segment for the three months
ended March 31,June 30, 2002 decreased by $420,000$257,000 or 44%26% from the same period in 2001.
Due to the acquisition of Petrocon, the manufacturing segment has become a
smaller portion of total revenues, declining from 16.1%19.5% of total revenues for
the three months ended March 31,June 30, 2001 to 2.6%3.3% for the three months ended March 31,June 30,
2002. The Company believes that the decline in revenues in both the manufacturing segment
and the original IDS engineered systems
segment is a result of the economic slowdown in the fourth quarter of 2001
andcontinuing through the firstsecond quarter 2002.
Gross Profit. Gross profit increased by $1,897,000$2,518,000 or 143%176% from
$1,327,000$1,434,000 for the three months ended March 31,June 30, 2001 to $3,224,000$3,952,000 for the same
period in 2002. The gross margin as a percentage of total revenues decreased
from 22.3%27.9% for the period ended March 31,June 30, 2001 to 15.6%17.3% for the same period in
2002. Although theThe decrease in gross margin occurred in every segment,the engineering services and
manufacturing segments, with the largest decrease came in the engineering services
segment, which had a gross margin of 14.5%16.6% for the three months ended March 31,June 30,
2002, down from a gross margin of 21.0%29.4% for the same period in 2001. This
decrease in gross margins occurred throughout the Company largely due to lower sales created by a sluggish national
economy, particularly in the gas and energy related sector, the completion of lucrative lump-sum
turnkey projects in the Houston division and the impact of lower utilization
rates in the Baton Rouge and Houston offices where theTulsa offices. The Company felt that short termin the Baton
Rouge area, short-term retention of core staff members was necessary to meet
longer-term objectives. Lower utilization rates, particularly in the Baton Rouge
and HoustonTulsa divisions, impacted margins negatively. The Company instituted lay
offs in Tulsa in the second quarter of 2002 in an attempt to ease the pressure
of these lower utilization rates.
The gross profit for the engineered systems segment decreasedincreased from
23.3%18.3% for the period ended March 31,June 30, 2001 to 21.5%19.0% for the same period in 2002.
This decreaseincrease occurred due to the completionaddition of severala lucrative large lump sum projects and slow start for new projectsproject
in 2002 due to the sluggish economy.systems segment.
10
The manufacturing segment's gross margin generated in the period ended
March 31,June 30, 2002 as compared to the same period in 2001 was $136,000$210,000 or 25.1%28.0% as
compared to $256,000$306,000 or 26.6%30.5%.
8
Other income and expenses. During the firstsecond quarter 2002, ENGlobal's
interest expense increased by $197,000 from $4,000 due to the assumption of
certain debt as a result of the Merger.
Net income. Net income after taxes increased by $206,000 or 71% from
$293,000 for the three months ended June 30, 2001 to $499,000 for the same
period in 2002.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Total Revenue. Total revenue increased from $11,103,000 to $43,517,000
or 292% for the six months ended June 30, 2001 as compared to the same period in
2002. The largest segment, engineering services, contributed $36,500,000 or
83.9% of total revenues. The Merger with the Petrocon companies contributed
$30,186,000 in revenues or 83% of the engineering services revenues during the
six months ended June 30, 2002.
The engineered systems segment increased revenues from $1,858,000 for
the six months ended June 30, 2001 to $5,728,000 for the six months ended June
30, 2002 or a 208% increase. The impact of the Merger contributed $3,904,000 in
revenues for the six months period ended June 30, 2002.
The manufacturing division had revenues of $1,290,000 for the six
months ended June 30, 2002 as compared to $1,967,000 for the same period last
year. The decrease of $677,000 or 34% is the result of the economic downturn
from the fourth quarter of 2001 continuing through the second quarter of 2002.
Management feels that a slow recovery began during the second quarter and is
improving.
Gross Profit. Gross profit increased by $4,415,000 or 160% from
$2,761,000 to $7,176,000 for the six months ended June 30, 2002 as compared to
the same period last year. The gross margin as a percentage of revenues
decreased from 24.9% to 16.5% for these two periods. The decrease in the gross
margin in the engineering services segment from 24.8% for the six months ended
June 30, 2001 to 15.6% for the six months ended June 30, 2002 is due to the
completion of lucrative lump sum turnkey projects in the Houston division and
lower utilization rates in the Baton Rouge, Houston, and Tulsa offices. The
Company has instituted layoffs in Tulsa to ease the pressure of these lower
utilization rates.
The gross profit for the engineered systems segment decreased modestly
from 21% to 20% for the six-month period ending June 30, 2001 and 2002. The
manufacturing segment's gross profit declined from $562,000 to $346,000 with
margins declining from 28.6% to 26.8% for the six months ended June 30, 2001 and
2002, respectively.
Other income and expenses. During the six months ended June 30, 2002,
the Company received a $110,000 settlement on its previous claim against a
software provider whose product did not meet the expectations of the Company.
There were no similar settlements in 2001. This increase in income was offset by
the increase in interest expense. With the Merger, certain debt was assumed by the Company
which increased interest expense from $17,000$39,000 to $233,000$435,000 from the first threesix
months of 2001 as compared to the first threesix months of 2002. This increase
occurred as a result of the Merger when certain debt was assumed by the Company.
Net income. Net income after taxes decreased by $72,000increased from $631,000 for the six
months ended June 30, 2001 to $765,000 for the six months ended June 30, 2002 or
21% from
$338,000 for the three months ended March 31, 2001 to $266,000 for the same
period in 2002. As a percentage of total revenue, the net income percentage was
1.3% for the three months ended March 31, 2002 and 5.7% for same period in 2001..
11
Liquidity and Capital Resources
Effective December 31, 2001 as part of the Merger, IDSENGlobal entered
into a financing arrangement with Fleet whereby all of Petrocon's outstanding
debt (the "Credit Facility" comprised of a line of credit and a term loan), was
refinanced. The new loan agreement positions the Fleet debt as senior to all
other debt and includes a line of credit limited to $15,000,000, subject to
borrowing base restrictions and a term loan in the amount of $500,000. The
Credit Facility is collateralized by substantially all the assets of the
Company. At March 31,June 30, 2002, $6,118,000$7,295,000 was outstanding on the line of credit and
$344,000$165,000 was outstanding on the term loan. Both the line of credit and the term
loan mature on June 14, 2003. The interest rate on the line of
credit is one-quarter of one percent plus prime, and the commitment fee on the
unused line of credit is 0.375 percent. The interest rate on the term loan is
one-half of one percent plus prime. Monthly principal payments on the term loan
plus interest commenced January 1, 2002 and continue until maturity. The
remaining borrowings available under the line of credit as of March 31,June 30, 2002 were
$3,217,000$1,123,000 after consideration of the borrowing base limitations. The Company's
Credit Facility contains covenants, which require the maintenance of certain
ratios, including cumulative fixed charge coverage and debt coverages and
specified levels of certain other items.
An amendment to the Credit Facility was agreed upon between Fleet and
the Company on July 31, 2002 whereby the maturity date of the line of credit and
the term loan was extended to June 30, 2005. The amendment also includes more
favorable advance rates on eligible accounts, increased sub-limits on fixed
price contracts and foreign receivables and an interest rate reduction if
certain fixed charge ratios are maintained. Had the amendment been in place at
June 30, 2002, the remaining borrowings available under the line of credit
would have increased by $1,676,000.
The Company must meet all financial covenants through the maturity date
of the Credit Facility. Management believes the Company will remain in
compliance with all loan covenants, although no assurances can be given.
As of March 31,June 30, 2002, the Company's cash position was sufficient to meet
its working capital requirements. EBITDA, earnings before interest, taxes,
depreciation and amortization, for the threesix months ended March 31,June 30, 2002 was
$780,000.$2,028,000. Any future decrease in demand for the Company's services or products
would reduce the availability of funds through operations. The Company's working
capital was $4,079,000$5,427,000 and $6,657,000 at March 31,June 30, 2002 and December 31, 2001,
respectively.
As noted above in the Result of March 31,Operations, some of the locations have
experienced lower utilization rates that have impacted margins negatively. In an
attempt to ease the pressure caused by lower utilization rates, the Company has
instituted layoffs in Tulsa during the second quarter of 2002.
As of June 30, 2002, IDSENGlobal had long-term debt outstanding of
$10,281,000.$11,094,000. This long-term debt includes the Credit Facility of $6,118,000$7,295,000 on
the line of credit and $344,000$165,000 on the term loan, both of which mature inon or
before June 2003, and
becoming a current debt in the second quarter of 2002.30, 2005.
12
Cash Flow
Operating activities provided net cash totaling $2,725,000$1,932,000 and used net
cash of $64,000$316,000
for the threesix months ended March 31,June 30, 2002 and 2001, respectively. Trade receivables
decreased $997,000$601,000 since December 31, 2001. Inventory decreased by $80,000$165,000 for
the same period.
Investing activities used cash totaling $70,000$151,000 for the threesix months
ended March 31,June 30, 2002 and $118,000$202,000 for the same period in 2001. The Company's
investing activities that used cash during the period ended March 31,June 30, 2002 waswere
for the purchase of property and equipment.
9
Financing activities used cash totaling $3,528,000$2,957,000 for the threesix months
ended March 31,June 30, 2002, including the repayment of the line of credit and long-term
debt. Financing activities providedused cash totaling $145,000$33,000 for the same period in
2001.
The Company believes that it has available necessary cash for the next
12 months. Cash and the availability of cash, could be materially restricted if
circumstances prevent the timely internal processing of invoices into receivable
accounts, if such accounts are not collected within 90 days of the original
invoice date, or if project mix shifts from cost reimbursable to fixed costs
contracts during significant periods of growth.
If losses occur, IDSENGlobal may not be able to meet the monthly fixed
charge ratio covenant of the Fleet Credit Facility. In that event, if IDSENGlobal
is unable to obtain a waiver or amendment of the covenant, IDSthe Company may be
unable to borrow under the Credit Facility and may have to repay all loans then
outstanding under the Credit Facility.
Asset Management
The Company's cash flow from operations has been affected primarily by
the timing of its collection of trade accounts receivable. The Company typically
sells its products and services on short-term credit terms and seeks to minimize
its credit risk by performing credit checks and conducting its own collection
efforts. The Company had net trade accounts receivable of $13,911,000$14,307,000 and
$14,908,000 at March 31,June 30, 2002 and December 31, 2001, respectively. The number of
days' sales outstanding in trade accounts receivable was 60 days and 79 days,
respectively.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of June 30, 2002 and December 31, 2001, the Company did not
participate in any derivative financial instruments or other financial and
commodity instruments for which fair value disclosure would be required under
SFAS No. 107 or SFAS No. 133. There are no investments at June 30, 2002 or
December 31, 2001. Accordingly, the Company has no quantitative information
concerning the market risk of participating in such investments.
The Company has no market risk exposure in the areas of interest rate
risk because there is no investment portfolio as of June 30, 2001. Currently the
Company does not engage in foreign currency hedging activities nor is the
Company exposed to currency exchange rate fluctuation.
13
PART II. Other Information
Item 1. Legal Proceedings
From time to time, the Company is involved in various legal proceedings
arising in the ordinary course of business. The Company is currently party to
legal proceedings that have been reserved for, are covered by insurance, or
that, if determined adversely to usthe Company, individually or in the aggregate,
would not have a material affect on the Company's results of operations.
Two claimsAs reported in Form 10-Q for the quarterly period ended March 31, 2002
a claim filed in the 60th District Court of Jefferson County, Texas and a claim
filed in the 14th District Court of Parish of Calcasieu, Louisiana,
respectively, that
involveinvolved alleged failure of contractual performance purportedly
caused by faulty design. If the Company is found to have any liability, it
believes that such liability would be covered by errors and omissions insurance,
except for the deductible which was accrued in a prior period. Both of these
cases areremain in the discovery phase. The Company believes that these lawsuits
are without merit and plans to vigorously defend itself in both lawsuits.
Item 2. Changes in Securities and Use of Proceeds
None.
10
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.The Annual Meeting of the Stockholders of the Company was held on June
6, 2002 at 10:00 a.m. at the corporate offices of the Company in Houston, Texas.
A total of 21,438,878 shares of common stock, which is 93.78% of the shares
outstanding on April 8, 2002 were represented at the meeting, either in person
or by proxy. The stockholders approved three proposals, solicited by proxy. The
vote tabulations follow:
1. The following directors were elected to serve until the next Annual Meeting
of Stockholders and until their successors have been elected and qualified.
DIRECTORS FOR AGAINST ABSTAIN
--------- --- ------- -------
Michael L. Burrow, P.E. 21,331,299 0 107,579
William A. Coskey, P.E. 21,331,299 0 107,579
Hulda L. Coskey 21,331,299 0 107,579
David W. Gent, P.E. 21,329,299 0 109,579
Jimmie N. Carpenter, P.E. 20,822,248 0 616,630
David C. Roussel 21,329,099 0 109,779
Randall B. Hale 21,331,299 0 107,579
2. Ratification of the appointment of Hein + Associates LLP as the Company's
independent auditors.
FOR AGAINST ABSTAIN
--- ------- -------
21,431,234 4,060 3,584
14
3. Ratification of the Amendment to the Articles of Incorporation to change
the name of Industrial Data Systems Corporation to ENGlobal Corporation.
FOR AGAINST ABSTAIN
--- ------- -------
21,385,286 48,655 4,937
These were all the matters submitted to the Stockholders at the Annual
Meeting.
Item 5. Other Information
None.During the second quarter 2002, the Company combined the business
development efforts of its various subsidiaries into a corporate level Business
Development department through an officer level position reporting directly to
the Chief Executive Officer. The new Senior Vice President will be responsible
for the coordination of the sales and marketing strategies among the Company's
various operations. In an effort to standardize and streamline the business
development and marketing efforts, a new marketing plan has already been
developed and implemented which will directly and closely monitor the results of
the business development team.
Item 6. Exhibits and Reports on Form 8-K
a. Form 8-K
During the quarter ended March 31,June 30, 2002 the Company fileddid not file a
report on Form 8-K8-K.
b. Exhibits
3.15 Amendment to Articles of Incorporation of Industrial Data Systems
Corporation dated June 6, 2002 changing the name of the corporation
to ENGlobal Corporation
10.63 Second Amended and a report on Form 8-K/A pertaining to the Merger withRestated Lease Agreement between Corporate
Property Associates 4 and Petrocon Engineering, Inc., as follows:
Form 8-K, Current Report of Unscheduled Material Events, filed on January
7, for Beaumont
office space dated February 28, 2002
described the acquisition of Petrocon Engineering, Inc.
Form 8-K/A, Current Report of Unscheduled Material Events, filed on March
5,10.64 Guaranty and Suretyship Agreement between Industrial Data Systems
Corporation and Corporate Property Associates 4 dated April 26, 2002
contained the audited balance sheets10.65 ENGlobal Corporation Incentive Bonus Plan dated June 12, 2002
99.4 Charter of the business acquired asCompensation Committee adopted June 6, 2002
99.5 Audit Committee Charter adopted June 6, 2002
99.6 Certification Pursuant to Section 906 of December 31, 2000 and 1999 and the unaudited balance sheet asSarbanes-Oxley Act of
September 30, 2001 and the audited related statements of operations,
stockholders' equity (deficit) and cash flows for the three years ended
December 31, 2000, 1999 and 1998 and the unaudited statements of
operations, stockholders' equity (deficit) and cash flows for the nine
months ended September 30, 2001 and 2000. The Form 8-K/A also contained
unaudited Pro Forma Combined Financial Data for IDS giving effect to the
Merger.
b. Exhibits
None.
112002 dated August 8, 2002
15
SIGNATUREc. Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INDUSTRIAL DATA SYSTEMSENGlobal CORPORATION
Dated: May 9,August 8, 2002 By: /s/ Robert W. Raiford
--------------------------------------------------------------------------------
Robert W. Raiford,
Chief Financial Officer, Treasurer
and Assistant Secretary
1216