UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2008
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 001-14217
654 N. Sam Houston Parkway E., Suite 400, Houston, TX 77073-6033
----------------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(281) 878-1000
--------------
(Registrant's telephone number, including area code)
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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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and smaller reporting company in Rule 12b-2 of the Exchange Act. (check one):
Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerated Filer [ ] Smaller Reporting Company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the close of business of August 5, 2008.
$0.001 Par Value Common Stock 27,267,141 shares
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2008
TABLE OF CONTENTS
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the Three Months and
Six Months Ended June 30, 2008 and June 30, 2007 3
Condensed Consolidated Balance Sheets at June 30, 2008 and December 31, 2007 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2008 and June 30, 2007 5
Notes to Condensed Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-29
Engineering Segment Results 21
Construction Segment Results 24
Automation Segment Results 26
Land Segment Results 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Item 4. Controls and Procedures 30-31
Part II. Other Information
Item 1. Legal Proceedings 32
Item 1A. Risk Factors 32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 5. Other Information 33
Item 6. Exhibits 34
Signatures 35
2
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PART I. - FINANCIAL INFORMATION
-------------------------------
ITEM 1. FINANCIAL STATEMENTS
ENGlobal Corporation
Condensed Consolidated Statements of Income
(Unaudited)
(Dollars in Thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
2008 2007 2008 2007
--------- --------- --------- ---------
Revenues $ 136,011 $ 89,576 $ 234,177 $ 171,235
Direct costs 115,710 75,357 199,530 143,739
--------- --------- --------- ---------
Gross Profit $ 20,301 $ 14,219 $ 34,647 $ 27,496
Selling, general and administrative 8,701 7,290 15,927 15,033
--------- --------- --------- ---------
Operating income $ 11,600 $ 6,929 $ 18,720 $ 12,463
Other Income (Expense):
Other income $ 59 $ 515 $ 85 $ 515
Interest income (expense), net (413) (700) (896) (1,260)
--------- --------- --------- ---------
Income before Income Taxes $ 11,246 $ 6,744 $ 17,909 $ 11,718
Provision for Federal and State Income Taxes 4,544 2,831 7,204 4,650
--------- --------- --------- ---------
Net Income $ 6,702 $ 3,913 $ 10,705 $ 7,068
========= ========= ========= =========
Net Income Per Common Share:
Basic $ 0.25 $ 0.15 $ 0.40 $ 0.26
Diluted $ 0.24 $ 0.14 $ 0.39 $ 0.26
Weighted Average Shares Used in Computing
Net Income Per Share (in thousands):
Basic 27,096 26,864 27,078 26,839
Diluted 27,641 27,290 27,576 27,209
See accompanying notes to interim condensed consolidated financial statements.
3
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ENGlobal Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in Thousands)
ASSETS
------
June 30, December 31,
2008 2007
--------- ---------
Current Assets:
Cash $ 2,344 $ 908
Trade receivables, net 92,886 64,141
Prepaid expenses and other current assets 1,353 2,125
Current portion of notes receivable 156 154
Costs and estimated earnings in excess of billings on uncompleted contracts 4,504 6,981
Deferred tax asset 3,081 3,081
--------- ---------
Total Current Assets $ 104,324 $ 77,390
Property and equipment, net $ 6,115 $ 6,472
Goodwill 20,314 19,926
Other intangible assets, net 3,618 4,112
Long term notes receivable, net of current portion 10,515 10,593
Deferred tax asset, non-current 257 77
Other assets 1,032 1,020
--------- ---------
Total Assets $ 146,175 $ 119,590
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 21,746 $ 10,482
Accrued compensation and benefits 21,199 16,182
Notes payable 202 931
Current portion of long-term lease 168 --
Current portion of long-term debt 1,344 1,508
Deferred rent 497 558
Billings and estimated earnings in excess of costs on uncompleted contracts 388 963
Other current liabilities including taxes payable 5,473 3,851
--------- ---------
Total Current Liabilities $ 51,017 $ 34,475
Long-Term Lease, net of current portion 332 --
Long-Term Debt, net of current portion 26,477 29,318
--------- ---------
Total Liabilities $ 77,826 $ 63,793
--------- ---------
Commitments and Contingencies (Note 9)
Stockholders' Equity:
Common stock - $0.001 par value; 75,000,000 shares authorized; 27,242,141
and 27,051,766 shares issued and outstanding at June 30, 2008 and
December 31, 2007, respectively $ 28 $ 28
Additional paid-in capital 35,489 33,593
Retained earnings 32,886 22,181
Accumulated other comprehensive income (loss) $ (54) $ (5)
--------- ---------
Total Stockholders' Equity 68,349 55,797
--------- ---------
Total Liabilities and Stockholders' Equity $ 146,175 $ 119,590
========= =========
See accompanying notes to interim condensed consolidated financial statements.
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ENGlobal Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
For the Six Months Ended
June 30,
----------------------
2008 2007
--------- ---------
Cash Flows from Operating Activities:
Net income $ 10,705 $ 7,068
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 2,245 1,943
Share-based compensation expense 816 455
Gain on disposal of property, plant and equipment (85) (553)
Deferred income taxes (180) (77)
Changes in current assets and liabilities, net of acquisitions:
Trade receivables (28,745) (9,402)
Billings and estimated earnings in excess of costs 2,477 (4,798)
Prepaid expenses and other assets 400 (785)
Accounts payable 11,265 (4,386)
Accrued compensation and benefits 5,016 3,781
Billings in excess of costs and estimated earnings (575) 2,860
Other liabilities (79) (4,364)
Income taxes receivable/payable 1,256 3,850
--------- ---------
Net cash provided by (used in) operating activities $ 4,516 $ (4,408)
--------- ---------
Cash Flows from Investing Activities:
Property and equipment acquired $ (1,336) $ (1,051)
Proceeds from note receivable 76 20
Additional consideration for acquisitions -- 18
Proceeds from sale of other assets 383 711
--------- ---------
Net cash used in investing activities $ (877) $ (302)
--------- ---------
Cash Flows from Financing Activities:
Borrowings on line of credit $ 128,387 $ 76,453
Payments on line of credit (130,704) (69,494)
Proceeds from issuance of common stock 1,080 194
Borrowing under capital lease 500 --
Long-term debt repayments (1,418) (1,524)
--------- ---------
Net cash (used in) provided by financing activities $ (2,155) $ 5,629
--------- ---------
Effect of Exchange Rate Changes on Cash (48) 3
--------- ---------
Net change in cash $ 1,436 $ 922
Cash, at beginning of period 908 1,403
--------- ---------
Cash, at end of period $ 2,344 $ 2,325
========= =========
Supplemental Disclosures:
Interest paid $ 840 $ 827
--------- ---------
Income taxes paid $ 6,141 $ 3,443
--------- ---------
See accompanying notes to interim condensed consolidated financial statements.
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Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
Our condensed 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.
The condensed consolidated financial statements of ENGlobal Corporation
(which may be referred to as "ENGlobal," the "Company," "we," "us," or
"our") included herein are unaudited for the three month and six month
periods ended June 30, 2008 and 2007, have been prepared from the books and
records of the Company pursuant to the rules and regulations of the
Securities and Exchange Commission, and in the case of the condensed
balance sheet as of December 31, 2007, have been derived from the audited
financial statements. These financial statements reflect all adjustments
(consisting of normal recurring adjustments), which are, in the opinion of
management, necessary to fairly present 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 that these condensed financial statements be
read in conjunction with the Company's audited financial statements for the
year ended December 31, 2007, included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission. The Company
believes that the disclosures made herein are adequate to make the
information presented not misleading.
NOTE 2 - CRITICAL ACCOUNTING POLICIES
A summary of critical accounting policies is disclosed in Note 2 to the
Consolidated Financial Statements included in our 2007 Annual Report on
Form 10-K. Our critical accounting policies are further described under the
caption "Critical Accounting Policies" in Management's Discussion and
Analysis of Financial Condition and Results of Operation in our 2007 Annual
Report on Form 10-K.
NOTE 3 - SHARE-BASED COMPENSATION
Prior to June 6, 2008, the Company sponsored a share-based incentive plan
(the "Plan") as described below. Effective January 1, 2006, the Company
adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 123 (Revised), "Share-Based Payment" ("SFAS No. 123(R)").
Under the fair value recognition provisions of SFAS No. 123(R), share-based
compensation for employees is measured at the grant date based on the value
of the awards and is recognized as expense over the requisite service
period (usually a vesting period). The Company selected the modified
prospective method of adoption described in SFAS No. 123(R). The fair
values of awards recognized under SFAS No. 123(R) are determined based on
the vested portion of the awards; however, the total compensation expense
is recognized on a straight-line basis over the vesting period.
The Company maintained the Plan, under which the Company had the ability to
award non-statutory options, incentive stock options, restricted stock and
stock appreciation rights to employees including non-employee directors.
Under the Plan, a maximum of 3,250,000 shares of our common stock was
approved to be issued or transferred to non-employee directors, officers
and employees pursuant to awards granted. At the date of the Plan's
expiration, June 5, 2008, 502,494 shares remained available under the Plan.
The Company's policy regarding share issuance upon option exercise takes
into consideration the optionee's eligibility and vesting status. Upon
receipt of an optionee's exercise notice and payment, and the Company's
subsequent determination of eligibility, the Company's Chief Governance
Officer or the Chairman of the Compensation Committee instructs our
transfer agent to issue shares of our common stock to the optionee.
Stock options have been granted with exercise prices at or above the market
price on the date of grant. The granted options have vested generally over
one year for non-employee directors and ratably over four years for
officers and employees. The granted options generally have ten year
contractual terms.
In accordance with the provisions of SFAS No. 123(R), total share-based
compensation expense in the amount of $429,000 and $222,000 was recorded in
the three months ended June 30, 2008, and June 30, 2007, respectively.
Total stock-based compensation expense in the amount of $816,000 and
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Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
$455,000 was recorded in the six months ended June 30, 2008, and June 30,
2007, respectively. The total share-based compensation expense was recorded
in selling, general and administrative expense. The total income tax
benefit recognized in the condensed consolidated statements of income for
the share-based arrangements was $90,000 and $38,000 for the three months
ended June 30, 2008, and June 30, 2007, respectively, and $180,000 and
$77,000 for the six months ended June 30, 2008, and June 30, 2007,
respectively.
Compensation expense related to outstanding non-vested stock option awards
under the Plan of $1.1 million had not been recognized at June 30, 2008.
This compensation expense is expected to be recognized over a
weighted-average period of approximately 32 months.
The following table summarizes stock option activity through the second
quarter of 2008:
Weighted
Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Options Price Term (Years) Value (000's)
----------- ---------- ----------- -------------
Balance at December 31, 2007 1,306,500 $ 6.26 7.4 $ 3,920
Granted 140,000 9.44 9.7 -
Exercised (190,375) 5.73 -
Canceled or expired (30,000) 5.27 - -
------------ ---------- ----------- -------------
Balance at June 30, 2008 1,226,125 $ 6.73 5.9 $ 6,564 *
============ ========== =========== =============
Exercisable at June 30, 2008 1,021,925 $ 6.10 6.4 $ 5,036
============ ========== =========== =============
*Based on average stock price through the second quarter of 2008 of $10.11
per share. The average stock price for the same period in 2007 was $7.44
per share. Our common stock was quoted on the NASDAQ Global Select market
during the six months ended June 30, 2008 and on the American Stock
Exchange during the six months ended June 30, 2007. The total fair value of
vested options outstanding as of June 30, 2008 and 2007 was $5.0 million
and $3.1 million, respectively.
The total intrinsic value of options exercised was $967,000 and $587,000
for the six months ended June 30, 2008 and 2007, respectively.
Restricted Stock Unit Awards
In June 2008, the Company granted compensation to each of its three
non-employee directors via restricted stock awards. It was the Company's
intention that such awards be issued pursuant to the Plan. It was later
determined that the grants had been made after the Plan's expiration.
Therefore, the grants of restricted stock were rescinded. On August 8,
2008, the Company replaced the grants of restricted stock with grants of
non-Plan restricted stock units equivalent to 6,420 shares of common stock.
The award of restricted stock units is intended to compensate and retain
the directors over the term of the award. The fair value of the award was
$93,411 per director based on the market price of $14.55 per share of the
Company's stock on the date the award was granted. Upon vesting, the units
will be convertible into cash or, if shareholder approval is obtained,
common stock. The units will vest in equal quarterly installments beginning
on September 30, 2008, so long as the grantee continues to serve as an
independent director of the Company. Recognition of compensation related to
the restricted stock awards will commence in the third quarter of 2008.
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Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 4 - FIXED FEE CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts consisted
of the following at June 30, 2008 and December 31, 2007:
June 30, December 31,
2008 2007
----------------------
(Dollars in Thousands)
----------------------
Costs incurred on uncompleted contracts $ 70,327 $ 74,599
Estimated earnings (losses) on uncompleted contracts (1,328) (1,686)
-------- --------
Earned revenues 68,999 72,913
Less: billings to date 64,883 66,895
-------- --------
Net costs and estimated earnings in excess of billings
on uncompleted contracts $ 4,116 $ 6,018
======== ========
Costs and estimated earnings in excess of billings on uncompleted contracts $ 4,504 $ 6,981
Billings and estimated earnings in excess of cost on uncompleted contracts (388) (963)
-------- --------
Net costs and estimated earnings in excess of billings
on uncompleted contracts $ 4,116 $ 6,018
======== ========
NOTE 5 - LINE OF CREDIT AND DEBT
June 30, December 31,
2008 2007
----------------------
(Dollars in Thousands)
----------------------
Schedule of Long-Term Debt:
Comerica Credit Facility - Line of credit, variable interest at 5.0% at June 30,
2008, maturing in July 2010 $ 25,518 $ 27,835
Sterling Planet and EDGI - Notes payable, interest at 5%, principal payments in
installments of $15,000 plus interest due quarterly, maturing in December 2008 30 60
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, maturing in October 2009 482 667
A.T.I. Inc. - Note payable, interest at 6%, principal payments in installments of
$30,422 including interest due monthly, maturing in January 2009 209 382
Michael Lee - Note payable, interest at 5%, principal payments in installments of
$150,000 plus interest due quarterly, maturing in July 2010 1,200 1,500
Watco Management, Inc. - Note payable, interest at 4%, principal payments in
installments of $137,745 including interest annually, maturing in October 2010 382 382
-------- --------
Total long-term debt 27,821 30,826
Less: current maturities of long-term debt (1,344) (1,508)
-------- --------
Long-term debt, net of current portion $ 26,477 $ 29,318
Borrowings under capital lease 500 --
Less: current maturities of capital lease (168) --
-------- --------
Total $ 26,809 $ 29,318
======== ========
The Company plans additional borrowings of approximately $500,000 under
capital leases during the remainder of 2008.
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Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 6 - SEGMENT INFORMATION
ENGlobal has four reportable segments: Engineering, Construction,
Automation and Land. Our segments are strategic business units that offer
different services and products and therefore require different marketing
and management strategies. Our segments have grown through strategic
acquisitions, which have also served to augment management expertise.
The Engineering segment provides consulting services relating to the
development, management and execution of projects requiring professional
engineering and related project services. Services provided by the
Engineering segment include feasibility studies, engineering, design,
procurement, and construction management. The Construction segment provides
construction management personnel and services in the areas of inspection,
mechanical integrity, vendor and turnaround surveillance, field support,
construction, quality assurance and plant asset management. The Automation
segment provides services related to the design, fabrication, and
implementation of process distributed control and analyzer systems,
advanced automation, and information technology projects. The Land segment
provides land management, right-of-way, environmental compliance, and
governmental regulatory compliance services primarily to pipeline, utility
and telecom companies and other owner/operators of infrastructure
facilities throughout the United States and Canada.
The accounting policies of each of the segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates performance based on profit or loss from operations before
interest, income taxes and other income or loss, but after selling, general
and administrative expenses attributable to the reportable segments.
Transactions between reportable segments are at market rates comparable to
terms available from unrelated parties.
(Dollars in Thousands)
For the three months ended
June 30, 2008 Engineering Construction Automation Land All Other Consolidated
-------------------------- ----------- ------------ ---------- ---- --------- ------------
Revenue before eliminations $ 77,480 $ 38,858 $ 11,411 $ 11,842 $ -- $ 139,591
Inter-segment eliminations $ (1) (3,204) (375) -- -- (3,580)
--------- --------- --------- --------- --------- ---------
Revenue $ 77,479 35,654 11,036 11,842 $ 136,011
Gross profit $ 12,779 3,988 1,362 2,172 $ 20,301
SG&A $ 2,262 759 749 881 4,050 $ 8,701
--------- --------- --------- --------- --------- ---------
Operating income $ 10,517 $ 3,229 $ 613 $ 1,291 $ (4,050) $ 11,600
--------- --------- --------- --------- ---------
Other income (expense) (354)
Tax provision (4,544)
---------
Net income $ 6,702
=========
(Dollars in Thousands)
For the three months ended
June 30, 2007
--------------------------
Revenue before eliminations $ 56,972 $ 19,032 $ 9,942 $ 7,104 $ -- $ 93,050
Inter-segment eliminations $ (6) (3,044) (424) -- -- (3,474)
-------- -------- -------- -------- -------- --------
Revenue $ 56,966 15,988 9,518 7,104 -- $ 89,576
Gross profit $ 9,584 2,646 1,112 877 -- $ 14,219
SG&A $ 1,732 666 773 574 3,545 $ 7,290
-------- -------- -------- -------- -------- --------
Operating income $ 7,852 $ 1,980 $ 339 $ 303 $ (3,545) $ 6,929
-------- -------- -------- -------- --------
Other income (expense) (185)
Tax provision (2,831)
--------
Net income $ 3,913
========
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Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 6 - SEGMENT INFORMATION (continued)
(Dollars in Thousands)
For the six months ended
June 30, 2008 Engineering Construction Automation Land All Other Consolidated
------------------------ ----------- ------------ ---------- ---- --------- ------------
Revenue before eliminations $ 129,515 $ 65,875 $ 21,968 $ 20,677 $ -- $ 238,035
Inter-segment eliminations $ (7) (3,321) (530) -- -- (3,858)
--------- --------- --------- --------- --------- ---------
Revenue $ 129,508 62,554 21,438 20,677 -- $ 234,177
Gross profit $ 22,661 6,016 2,406 3,564 -- $ 34,647
SG&A $ 3,557 1,462 1,381 1,558 7,969 $ 15,927
--------- --------- --------- --------- --------- ---------
Operating income $ 19,104 $ 4,554 $ 1,025 $ 2,006 $ (7,969) $ 18,720
--------- --------- --------- --------- ---------
Other income (expense) (811)
Tax provision (7,204)
---------
Net income $ 10,705
=========
(Dollars in Thousands)
For the six months ended
June 30, 2007
------------------------
Revenue before eliminations $ 108,414 $ 33,667 $ 19,765 $ 13,991 $ -- $ 175,837
Inter-segment eliminations $ 1 (3,894) (709) -- -- (4,602)
--------- --------- --------- --------- --------- ---------
Revenue $ 108,415 29,773 19,056 13,991 -- $ 171,235
Gross profit $ 18,748 4,728 1,893 2,127 -- $ 27,496
SG&A $ 3,599 1,293 1,618 1,156 7,367 $ 15,033
--------- --------- --------- --------- --------- ---------
Operating income $ 15,149 $ 3,435 $ 275 $ 971 $ (7,367) $ 12,463
--------- --------- --------- --------- ---------
Other income (expense) (745)
Tax provision (4,650)
---------
Net income $ 7,068
=========
Financial information about geographic areas
--------------------------------------------
Revenue from the Company's non-U.S. operations is not material. Long-lived
assets (principally leasehold improvements and computer equipment) located
in Canada were valued at $70,000 as of June 30, 2008, net of accumulated
depreciation, stated in U.S. dollars.
NOTE 7 - FEDERAL AND STATE INCOME TAXES
The components of income tax expense (benefit) for the three months and six
months ended June 30, 2008 and 2007 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
2008 2007 2008 2007
---- ---- ---- ----
(Dollars in thousands) (Dollars in thousands)
Current $ 4,634 $ 2,869 $ 7,384 $ 4,727
Deferred (90) (38) (180) (77)
------- ------- ------- -------
Total tax provision $ 4,544 $ 2,831 $ 7,204 $ 4,650
======= ======= ======= =======
Effective tax rate 40.4% 42.0% 40.2% 39.7%
------- ------- ------- -------
The estimated effective tax rates are based on estimates using historical
rates adjusted by recurring and non-recurring book to tax differences.
Estimates at June 30, 2008, are based on results of the 2007 year end and
adjusted for estimates of non-recurring differences from the prior year, as
well as anticipated book to tax differences for 2008.
10
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Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 8 - EARNINGS PER SHARE
The following table reconciles the number of shares used to compute basic
earnings per share to the number of shares used to compute diluted earnings
per share ("EPS").
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2008 2007 2008 2007
---- ---- ---- ----
(Shares in thousands) (Shares in thousands)
Weighted average shares outstanding
used to compute basic EPS 27,096 26,864 27,078 26,839
Effect of share-based plan 545 426 498 370
------ ------ ------ ------
Shares used to compute diluted EPS 27,641 27,290 27,576 27,209
====== ====== ====== ======
NOTE 9 -COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company has employment agreements with certain of its executive
officers and certain other officers. Such agreements provide for minimum
salary levels. If the Company terminates the employment of the employee for
any reason other than (1) for cause, as defined in the employment
agreement, (2) voluntary resignation, or (3) the employee's death, the
Company is obligated to provide a severance benefit equal to six months of
the employee's salary, and, at its option, an additional six months at 50%
to 100% of the employee's salary in exchange for an extension of the
employee's agreement not to engage in certain competitive activities. These
agreements are renewable for one year at the Company's option.
Long-term Note Receivable
In the first quarter of 2007, ENGlobal Engineering, Inc. ("EEI") and South
Louisiana Ethanol, LLC ("SLE") executed an agreement for engineering,
procurement and construction (EPC) services relating to the retro-fit of an
ethanol plant in southern Louisiana. The history of the SLE project (the
"SLE Project") is described in Note 12 to the Company's financial
statements included in its Quarterly Report on Form 10-Q for the quarter
ended September 30, 2007 (the "Third Quarter 10-Q") and is discussed
further in the Company's Annual Report on Form 10-K for the year ended
December 31, 2007.
Litigation
From time to time, the Company is involved in various legal proceedings
arising in the ordinary course of business alleging, among other things,
breach of contract or tort in connection with the performance of
professional services, the outcome of which cannot be predicted with
certainty. As of the date of this filing, we are party to several legal
proceedings that we believe have been reserved for or are covered by
insurance, or that, if determined adversely to us individually or in the
aggregate, would not have a material adverse effect on our results of
operations or financial position.
Due to SLE's continued failure to obtain permanent financing, on May 30,
2008, the Company filed suit in the United States District Court for the
Eastern District of Louisiana, Cause Number 08-3601, the Company is seeking
damages of $15.8 million. An independent appraisal, dated March 17, 2008,
from the bridge lending bank's appraiser, Revpro and Associates, indicates
a fair market value of SLE's assets of $35.8 million, an orderly
liquidation value of $25.3 million, and a forced liquidation value of $20.0
million. While the Company believes that in the event the collateral is
liquidated, SLE's obligations to the Company would be paid in full pursuant
to the Collateral Mortgage in favor of the Company, collectability is not
assured at this time. However, at this time the Company believes that the
ultimate disposition of the SLE collateral will not materially adversely
affect our liquidity or overall financial position.
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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 is not aware of any 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.
Building Lease Commitment
As discussed in Note 20 of our 2007 Annual Report on Form 10-K, on February 28, 2008, ENGlobal entered into a lease agreement with a third party relating to the construction of a new facility in Beaumont, Texas. Commencement of the lease agreement and construction of the facility was contingent on the sale of property to the developer/lessor. During May 2008, the Company completed the sale of property to the developer/lessor. Construction has commenced on the new facility and is expected to continue throughout 2008.
NOTE 10 - SUBSEQUENT EVENTS
Sale of Office Building in Baton Rouge
In June 2007, we sold an office building we owned in Baton Rouge, Louisiana. At the time of the sale, we accepted a note receivable from the buyer for approximately $1.4 million. On July 24, 2008, the buyer paid the note in full. The sale of the building was described in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.
SemCrude, L.P.
We have potential exposure to SemCrude, L.P. ("SemCrude"), an affiliate of SemGroup, L.P. ("SemGroup"), related to services provided by our Engineering and Construction segments to SemCrude in connection with the construction of the White Cliffs Pipeline. As of June 30, 2008, on a combined basis our Engineering and Construction segments had received payments from SemCrude totaling approximately $2.7 million. On July 22, 2008, SemGroup and several of its affiliates, including SemCrude (Case Number 08-11525), filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware.
As of June 30, 2008, combined Engineering and Construction segment receivables attributable to SemCrude totaled approximately $2.0 million. As of July 25, 2008, our exposure was approximately $2.8 million. Because SemCrude's account with ENGlobal had historically been paid on a materially current basis, and because it was materially current as of June 30, 2008, we did not reflect any portion of SemCrude's account in either our Engineering segment's or our Construction segment's allowance for doubtful accounts. On July 28, 2008, ENGlobal was notified that the White Cliffs Pipeline project would continue under a third-party manager and that it was anticipated that SemCrude's accounts would be kept current. On August 1, and August 7, 2008, the Company received payments of approximately $941,000 and $339,000, respectively, each of which brought SemCrude's account materially current as of those dates. We have continued performing work on this project.
We are currently unable to quantify what amount of SemCrude's balance, if any, may be uncollectible. However, we believe that the ultimate disposition of SemCrude's asset investment in the White Cliffs Pipeline project will not materially adversely affect our liquidity or overall financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain information contained in this Form 10-Q, the Company's Annual Report on Form 10-K, 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, without 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; customer retention; project reversals; 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. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Generally, the words "anticipate," "believe," "estimate," "expect," "may," and similar expressions, identify forward-looking statements, which generally are not historical in nature. Actual results could differ materially from the results described in the forward-looking statements due to the risks and uncertainties set forth in this Form 10-Q, the specific risk factors identified in the Company's Annual Report on Form 10-K for the year ended December 31, 2007 and those described from time to time in our future reports filed with the Securities and Exchange Commission.
The following discussion is qualified in its entirety by, and should be read in conjunction with, the Company's Condensed Consolidated Financial Statements, including the notes thereto, included in this Form 10-Q and the Company's Annual Report on Form 10-K for the year ended December 31, 2007.
The following list sets forth a general overview of certain significant changes in the Company's financial condition and results of operations for the three months and six months ended June 30, 2008, compared to the corresponding period in 2007.
During the three months During the six months
ended June 30, 2008 ended June 30, 2008
------------------- -------------------
Revenue Increased 51.8% Increased 36.8%
Gross profit Increased 43.0% Increased 26.0%
Operating income Increased 67.4% Increased 50.2%
SG&A expense Increased 19.4% Increased 5.9%
Net income Increased 71.3% Increased 51.5%
|
Management's Discussion and Analysis (continued)
------------------------------------------------
As of As of As of
Selected Balance Sheet Comparisons June 30, December 31, June 30,
2008 2007 2007
-------- -------- --------
(Dollars in Thousands)
-------------------------------
Working capital $ 53,307 $ 42,915 $ 48,707
Total assets $146,175 $119,590 $120,213
Long-term debt, net of current portion $ 26,477 $ 29,318 $ 33,318
Stockholders' equity $ 68,349 $ 55,797 $ 48,583
Long-term debt, net of current portion, decreased 9.6%, or $2.8 million,
from $29.3 million at December 31, 2007 to $26.5 million at June 30, 2008.
As a percentage of stockholders' equity, long-term debt decreased to 38.7%
from 52.5% at these dates. The decrease in long-term debt primarily relates
to the $2.3 million decrease in our line of credit resulting from improved
collections of associated trade receivables. On average, our day's sales
outstanding remained at 61 days for the three-month period ended June 30,
2008, equal to 61 days at December 31, 2007, but decreased from 70 days for
the comparable three-month period in 2007. The Company continues to work
toward improving internal billing and client collection processes.
Total stockholders' equity increased 22.4%, or $12.5 million, from $55.8
million as of December 31, 2007 to $68.3 million as of June 30, 2008.
Consolidated Results of Operations for the Three Months
Ended June 30, 2008 and 2007
(Unaudited)
For the three months ended
June 30, 2008
(Dollars in Thousands) Engineering Construction Automation Land All Other Consolidated
-------------------------- ----------- ------------ ---------- ---- --------- ------------
Revenue before eliminations $ 77,480 $ 38,858 $ 11,411 $ 11,842 $ -- $ 139,591
Inter-segment eliminations (1) (3,204) (375) -- -- (3,580)
--------- --------- --------- --------- --------- ---------
Revenue $ 77,479 $ 35,654 $ 11,036 $ 11,842 $ -- $ 136,011
--------- --------- --------- --------- --------- ---------
Gross profit $ 12,779 $ 3,988 $ 1,362 $ 2,172 $ -- $ 20,301
SG&A 2,262 759 749 881 4,050 8,701
--------- --------- --------- --------- --------- ---------
Operating income $ 10,517 $ 3,229 $ 613 $ 1,291 $ (4,050) $ 11,600
--------- --------- --------- --------- ---------
Other income (expense) (354)
Tax provision (4,544)
---------
Net income $ 6,702
=========
For the three months ended
June 30, 2007
(Dollars in Thousands)
--------------------------
Revenue before eliminations $ 56,972 $ 19,032 $ 9,942 $ 7,104 $ -- $ 93,050
Inter-segment eliminations (6) (3,044) (424) -- -- (3,474)
-------- -------- -------- -------- -------- --------
Revenue $ 56,966 $ 15,988 $ 9,518 $ 7,104 $ -- $ 89,576
-------- -------- -------- -------- -------- --------
Gross profit $ 9,584 $ 2,646 $ 1,112 $ 877 $ -- $ 14,219
SG&A 1,732 666 773 574 3,545 7,290
-------- -------- -------- -------- -------- --------
Operating income $ 7,852 $ 1,980 $ 339 $ 303 $ (3,545) $ 6,929
-------- -------- -------- -------- --------
Other income (expense) (185)
Tax provision (2,831)
--------
Net income $ 3,913
========
14
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Management's Discussion and Analysis (continued)
------------------------------------------------
Consolidated Results of Operations for the Six Months
Ended June 30, 2008 and 2007
(Unaudited)
For the six months ended
June 30, 2008
(Dollars in Thousands) Engineering Construction Automation Land All Other Consolidated
------------------------ ----------- ------------ ---------- ---- --------- ------------
Revenue before eliminations $ 129,515 $ 65,875 $ 21,968 $ 20,677 $ -- $ 238,035
Inter-segment eliminations (7) (3,321) (530) -- -- (3,858)
--------- --------- --------- --------- --------- ---------
Revenue $ 129,508 $ 62,554 $ 21,438 $ 20,677 $ -- $ 234,177
--------- --------- --------- --------- --------- ---------
Gross profit $ 22,661 $ 6,016 $ 2,406 $ 3,564 $ -- $ 34,647
SG&A 3,557 1,462 1,381 1,558 7,969 $ 15,927
--------- --------- --------- --------- --------- ---------
Operating income $ 19,104 $ 4,554 $ 1,025 $ 2,006 $ (7,969) $ 18,720
--------- --------- --------- --------- ---------
Other income (expense) (811)
Tax provision (7,204)
---------
Net income $ 10,705
=========
For the six months ended
June 30, 2007
(Dollars in Thousands)
-------------------------
Revenue before eliminations $ 108,414 $ 33,667 $ 19,765 $ 13,991 $ -- $ 175,837
Inter-segment eliminations 1 (3,894) (709) -- -- (4,602)
--------- --------- --------- --------- --------- ---------
Revenue $ 108,415 $ 29,773 $ 19,056 $ 13,991 $ -- $ 171,235
--------- --------- --------- --------- --------- ---------
Gross profit $ 18,748 $ 4,728 $ 1,893 $ 2,127 $ -- $ 27,496
SG&A 3,599 1,293 1,618 1,156 7,367 $ 15,033
--------- --------- --------- --------- --------- ---------
Operating income $ 15,149 $ 3,435 $ 275 $ 971 $ (7,367) $ 12,463
--------- --------- --------- --------- ---------
Other income (expense) (745)
Tax provision (4,650)
---------
Net income $ 7,068
=========
15
|
We recorded net income of $6.7 million, or $0.24 per diluted share, for the three months ended June 30, 2008, compared to net income of $3.9 million, or $0.14 per diluted share, for the corresponding period last year. Cumulatively, we recorded net income of $10.7 million, or $0.39 per diluted share, for the six months ended June 30, 2008, compared to net income of $7.1 million, or $0.26 per diluted share, for the corresponding period in 2007.
The Company recognizes service revenue as soon as the services are performed. The majority of the Company's service revenue has historically been provided through cost-plus contracts, whereas a majority of our fabrication and turnkey EPC projects revenue is earned on fixed-price contracts.
Revenue on fixed-price contracts is 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 incurred bear to total estimated contract costs. Revenue and gross margin on fixed-price 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 engineering, materials, and equipment and may provide construction services on a direct hire or subcontractor basis. Generally, the materials, equipment and subcontractor costs are passed through to our clients and reimbursed, along with fees, which in total are at margins lower than those of our normal core business. In accordance with industry practice and generally accepted accounting principles, all such costs and fees are included in reported revenue. The use of subcontractor services can change significantly from project to project; therefore, changes in revenue and gross profit, SG&A expense and operating income as a percent of revenue may not be indicative of the Company's core business trends.
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 contracts, but directly related to the support of a segment's operations.
All other SG&A expense is comprised primarily of business development costs, as well as costs related to the executive, investor relations/governance, finance, accounting, safety, human resources, project controls, legal and information technology departments and other costs generally unrelated to specific projects, but which are incurred to support corporate activities and initiatives.
Industry Overview:
Given the fact that global demand for oil products has tightened the supply of both crude oil as well as refined products, we believe each of ENGlobal's business segments is well positioned within the industry given increased spending on energy infrastructure in North America.
Many ENGlobal offices have benefited from significant capital projects in the downstream refinery market, primarily related to increasing capacity, the utilization of heavy or sour crude oil, and rebuilding facilities damaged by accidents. While many existing projects of this type are underway, it is possible that some refiners will defer significant new spending given a recent tightening of refining margins. The Company expects a continuation of refining projects that are compliance driven, such as EPA environmental initiatives and OSHA safety related projects that can originate as a result of increased audits of U.S.-based refineries. The Company is also currently seeing good opportunities to upgrade obsolete automation and control systems at existing refineries, and also to plan and manage turnaround projects.
The downstream petrochemical industry has historically been a good source of projects for ENGlobal. While not currently as robust as the refining market, we have seen a recent increase in both maintenance and capital spending after several years of relative inactivity. We believe that major grassroots petrochemical projects will continue to be undertaken overseas, either closer to product demand in emerging economies, or located closer to less expensive feed stocks. We expect for the foreseeable future, that petrochemical work undertaken in the U.S. will consist of smaller capital projects or be maintenance related.
Despite past downturns in the industry, pipeline projects have remained fairly constant and we have recently seen a significant increase in project activity. Although pipeline projects tend to require less engineering man hours than similar sized downstream projects, ENGlobal may also provide a pipeline client with several additional services, such as right-of-way acquisition, inspection, and construction management. The drivers we see behind growth in domestic pipeline activity include: 1) natural gas transportation away from the Rocky Mountain area and new gas fields in other parts of the country, 2) natural gas transportation related to LNG import facilities, 3) movement of heavy Canadian crude oil into the United States, and 4) movement of refined products from Gulf Coast refineries to the Midwest and Northeast.
The country's focus on alternative energy has presented the Company with many new project opportunities. The North American Industrial Project Spending Index has recently indicated that capital spending for all alternative energy projects exceeds that for refining and pipeline combined. To date, ENGlobal has mainly focused its efforts on biomass processes, such as those related to coal-to-liquids projects, the production of ethanol and biodiesel, and the utilization of refinery petroleum coke as an energy source. In addition, the Company predicts possible opportunities related to solar energy in the coming years, including the potential opportunity to perform project services on solar collector and poly-silicon (used in photovoltaic cells) production facilities. Most of our alternative-energy projects are for smaller developers rather than our larger, traditional clients.
Revenue:
Revenue increased $46.4 million, or 51.8%, to $136.0 million for the three months ended June 30, 2008, from $89.6 million for the comparable prior-year period. Approximately $77.5 million of the increase is attributable to our Engineering segment, while $35.7 million of the increase is attributable to our Construction segment, $11.0 million of the increase is attributable to our Automation segment, and $11.8 million of the increase is attributable to our Land segment. Revenue from procurement services increased 218.2%, or $12.0 million, to $17.5 million for the three months ended June 30, 2008, from $5.5 million for the comparable period in 2007. This is discussed further in our segment information.
Revenue increased $63.0 million, or 36.8%, to $234.2 million for the six months ended June 30, 2008, from $171.2 million for the comparable prior-year period. Approximately $129.5 million of the increase is attributable to our Engineering segment, while $62.6 million of the increase is attributable to our Construction segment, $21.4 million of the increase is attributable to our Automation segment, and $20.7 million of the increase is attributable to our Land segment. Revenue from procurement services increased 157.4%, or $10.7 million, to $17.5 million for the six months ended June 30, 2008, from $6.8 million for the comparable period in 2007. This is discussed further in our segment information.
Gross Profit:
Gross profit increased $6.1 million, or 43.0%, to $20.3 million for the three months ended June 30, 2008, from $14.2 million for the comparable prior-year period. The $6.1 million increase in gross profit is attributable to a $46.4 million increase in revenue, which was offset by approximately $40.3 million in higher costs and lower margins.
As a percentage of revenue, gross profit decreased 1.0% from 15.9% for the three months ended June 30, 2007, to 14.9% for the three months ended June 30, 2008. The decrease in gross profit margin as a percentage of revenue primarily relates to a shift in revenue mix quarter-over-quarter. Revenues in the Engineering segment for the three months ended June 30, 2008, included $17.5 million in procurement services compared to $5.5 million for the three months ended June 30, 2007. Revenues in the Construction segment for the three months ended June 30, 2008, included $31.0 million in inspection services compared to $12.1 million for the three months ended June 30, 2007. While these two portions of our revenue added $30.9 million to our overall revenue growth, these pass-through type services have typically been performed at lower margins, thereby, resulting in an average reduction of 1.0% in our overall gross margin.
Gross profit increased $7.1 million, or 25.8%, to $34.6 million for the six months ended June 30, 2008, from $27.5 million for the comparable prior-year period. The $7.1 million increase in gross profit is attributable to a $63.0 million increase in revenue, which was offset by approximately $55.9 million in higher costs and lower margins.
As a percentage of revenue, gross profit decreased 1.3% from 16.1% for the six months ended June 30, 2007, to 14.8% for the quarter ended June 30, 2008. . Revenues in the Engineering segment for the three months ended June 30, 2008, included $17.5 million in procurement services compared to $6.8 million for the three months ended June 30, 2007. Revenues in the Construction segment for the three months ended June 30, 2008, included $54.4 million in inspection services compared to $22.8 million for the three months ended June 30, 2007. While these two portions of our revenue added $42.3 million to our overall revenue growth, these pass-through type services have typically been performed at lower margins, thereby, resulting in an average reduction of 1.3% in our overall gross margin.
Selling, General, and Administrative:
As a percentage of revenue, total SG&A expense decreased 1.7% to 6.4% for the three months ended June 30, 2008, from 8.1% for the comparable period in 2007. Total expense for SG&A increased $1.4 million, or 19.2%, to $8.7 million for the three months ended June 30, 2008, from $7.3 million for the comparable prior-year period.
As a percentage of revenue, operating SG&A expense decreased 0.8% to 3.4% for the three months ended June 30, 2008, from 4.2% for the comparable prior-year period. Operating SG&A increased $0.8 million, or 21.1%, to $4.6 million for the three months ended June 30, 2008, from $3.8 million for the comparable prior-year period. Increases in Operating SG&A were primarily related to increases in higher bad debt expense. Operating SG&A is discussed in further detail in each of the segment sections.
As a percentage of revenue, all other SG&A expense decreased 0.9% to 3.0% for the three months ended June 30, 2008, from 3.9% for the comparable prior-year period. All other SG&A expense increased approximately $0.6 million, or 17.1%, to $4.1 million for the three months ended June 30, 2008, from $3.5 million for the comparable prior-year period. The increase over the prior year's all other SG&A expense was related to increases of approximately $169,000 related to stock compensation expense, $99,000 in depreciation and amortization expense, and $236,000 for professional services.
As a percentage of revenue, total SG&A expense decreased 2.0% to 6.8% for the six months ended June 30, 2008, from 8.8% for the comparable period in 2007. Total expense for SG&A increased $0.9 million, or 6.0%, to $15.9 million for the six months ended June 30, 2008, from $15.0 million for the comparable prior-year period.
As a percentage of revenue, operating SG&A expense decreased 1.1% to 3.4% for the six months ended June 30, 2008, from 4.5% for the comparable prior-year period. Operating SG&A expense increased approximately $0.3 million to $7.9 million for the six months ended June 30, 2008, from $7.6 million for the comparable prior-year period. Increases in Operating SG&A were primarily related to increases in higher bad debt expense, offset by identifying certain associate expenses as direct costs rather than overhead.
As a percentage of revenue, all other SG&A expense decreased 0.9% to 3.4% for the six months ended June 30, 2008, from 4.3% for the comparable prior-year period. All other SG&A expense increased approximately $0.6 million, or 8.1%, to $8.0 million for the six months ended June 30, 2008, from $7.4 million for the comparable prior-year period. The increase over the prior year's all other SG&A was related to increases of approximately $321,000 related to stock compensation expense, $224,000 in depreciation and amortization expense, and $152,000 in professional services.
Operating Income:
Operating income increased approximately $4.7 million, or 68.1%, to $11.6 million for the three months ended June 30, 2008, from $6.9 million for to the same period in 2007. As a percentage of revenue, operating income increased 0.7% to 8.5% for the three months ended June 30, 2008, from 7.8% for the comparable prior-year period.
Operating income increased approximately $6.2 million, or 49.6%, to $18.7 million for the six months ended June 30, 2008, from $12.5 million for the comparable period in 2007. As a percentage of revenue, operating income increased 0.7% to 8.0% for the three months ended June 30, 2008, from 7.3% for the comparable prior- year period.
Other Expense, net:
Other expense increased $0.2 million, to $0.4 million for the three months ended June 30, 2008, from $0.2 million for the comparable prior-year period, primarily due to other income related to gain on the sale of the Baton Rouge office building in the second quarter of 2007. Net interest expense on our Credit Facility was reduced from $633,000 in June 2007 (with a rate of 8.25%) to $356,000 in June 2008 (with an average rate of approximately 4.5%). Other expense for the three months ended June 30, 2008, is net of approximately $82,000 gain on the sale of land described in Note 9 above, and other expense for the three months ended June 30, 2007, is net of approximately $500,000 gain on the sale of the Baton Rouge building described in Note 10, above.
Other expense increased $0.1 million, to $0.8 million for the six months ended June 30, 2008, from $0.7 million for the comparable prior-year period, primarily due to other income related to gain on the sale of the Baton Rouge office building in the second quarter of 2007. Net interest expense was reduced related to lower interest rates on our Credit Facility from $1.1 million for the six months ended June 2007, to $794,000 for the six months ended June 2008. Other expense for the three months ended June 30, 2008, is net of approximately $82,000 gain on the sale of land described in Note 9 above, and other expense for the three months ended June 30, 2007, is net of approximately $500,000 gain on the sale of the Baton Rouge building described in Note 10 above.
Tax Provision:
Income tax expense increased $1.7 million, or 60.7%, to $4.5 million for the three months ended June 30, 2008, from $2.8 million for the comparable prior-year period. The estimated effective tax rate was 40.4% for the three months ended June 30, 2008, compared to 42.0% for the comparable prior-year period.
Income tax expense increased $2.6 million, or 56.5%, to $7.2 million for the six months ended June 30, 2008, from $4.6 million for the comparable prior-year period. The estimated effective tax rate was 40.2% for the six months ended June 30, 2008, compared to 39.7% for the comparable prior-year period and 39.7% for the twelve-month period ended December 31, 2007.
The estimated effective tax rates are based on estimates using historical rates adjusted by recurring and non-recurring book to tax differences. Estimates at June 30, 2008, are based on results of the 2007 year end and adjusted for estimates of non-recurring differences from the prior year, as well as anticipated book to tax differences for 2008.
Net Income:
Net income for the three months ended June 30, 2008 increased $2.8 million, or 71.8%, to $6.7 million from $3.9 million for the comparable prior-year period. As a percentage of revenue, net income increased 0.5% to 4.9% for the three months ended June 30, 2008, from 4.4% for the three months ended June 30, 2007.
Net income for the six months ended June 30, 2008 increased $3.6 million, or 50.7%, to $10.7 million from $7.1 million for the comparable prior-year period. As a percentage of revenue, net income increased 0.5% to 4.6% for the three months ended June 30, 2008, from 4.1% for the three months ended June 30, 2007.
Overview
The Company defines liquidity as its ability to pay liabilities as they become due, fund the business operations and meet monetary contractual obligations. Our primary source of funds to meet liquidity needs during the period ended June 30, 2008 was borrowings under our senior revolving Credit Facility, also. Cash on hand at June 30, 2008 totaled $2.3 million and availability under the Credit Facility totaled $23.3 million resulting in cash and previously arranged borrowing capacity to meet additional liquidity needs of $25.6 million. As of June 30, 2008, management believes the Company is positioned to meet its liquidity requirements for the next 12 months.
We are a growth company and we manage our business to achieve reasonable growth objectives that are commensurate with profitable operations given existing and anticipated economic conditions. The outlook for our continued organic growth is generally favorable. We also expect to have opportunities to make strategic acquisitions. We intend to continue to meet both of the incremental liquidity needs through our internally generated profits and
existing borrowing arrangements. In 2008, we began to utilize capital lease arrangements for a significant upgrade in our computing equipment. We expect that the capital lease commitment will approximate $1.0 million when completed by the end of 2008.
The competitive contracting environment exposes us to situations where our clients may become unable or unwilling to complete a contract and meet their obligations to us in the normal course of business. These situations cause unexpected liquidity requirements, lower than expected profits and even losses. We currently are financing more than $10 million relating to such a situation (i.e. the SLE Project note receivable) as described more fully in Note 9 to the Condensed Consolidated Financial Statements. While this situation has caused the Company to incur higher interest costs than would otherwise have been incurred, our liquidity remains sufficient to meet our objectives.
However, cash and the availability of cash could be materially restricted if:
(1) circumstances prevent the timely internal processing of invoices,
(2) amounts billed are not collected or are not collected in a timely
manner,
(3) project mix shifts from cost-reimbursable to fixed-price
contracts during periods of growth,
(4) the Company loses one or more of its major customers,
(5) the Company experiences material cost overruns on fixed-price
contracts,
(6) our client mix shifts from our historical owner-operator client
base to more developer-based clients,
(7) acquisitions are not accretive or integrated timely, or
(8) we not able to meet the covenants of the Credit Facility.
If any such event occurs, we would be forced to consider alternative financing options.
Cash Flows from Operating Activities:
Operations generated approximately $4.5 million in net cash for the six months ended June 30, 2008, compared with net cash used for operations of $4.4 million during the same period in 2007. Operations generated approximately $4.1 million in net cash for the three months ended June 30, 2008, compared to the $0.4 million generated for the three months ended March 31, 2008. The unfavorable changes in working capital accounts during the six-month period ended June 30, 2008, which negatively impacted cash flows, were more than offset by income and non-cash provided by operating activities. The primary changes in working capital accounts were due to the following:
o Increased Trade Receivables - The increase was primarily the
result of an overall increase in operating activity. Our
collections on past due Accounts Receivable balances continue to
improve.
o Increased Accounts Payable - The increase was primarily the
result of increases in vendor and sub-contractor charges due to
increased operating activity in our Engineering segment during
the three months ended June 30, 2008. The material portion of
these obligations must be met during the third quarter of 2008
and are expected to be funded through receipts from collections
of Trade Receivables. An additional $1.3 million in payments
scheduled to be made during the second quarter of 2008 for
commitments related to the SLE Project were extended due to
delays in execution of settlement and release documents. The SLE
obligations are expected to also be met during the third quarter
of 2008.
o Increased Accrued Compensation and Benefits - The increase was
primarily due to timing of bi-weekly payroll and benefits
payments for the three months ended June 30, 2008.
Management's Discussion and Analysis (continued)
------------------------------------------------
Engineering Segment Results
---------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------------------------------ ---------------------------------------------
2008 2007 2008 2007
------------------------------------------------------------------------------------------
(Dollars in Thousands)
------------------------------------------------------------------------------------------
Revenue before eliminations $ 77,480 $ 56,972 $ 129,515 $ 108,414
Inter-segment eliminations (1) (6) (7) 1
---------- ----------- ------------ -----------
Total revenue $ 77,479 $ 56,966 $ 129,508 $ 108,415
========== =========== ============ ===========
Detailed revenue:
Detail-design $ 46,041 59.4% $ 33,531 58.9% $ 83,976 64.9% $ 66,327 61.2%
Field services 13,069 16.9% 14,035 24.7% 26,057 20.1% 27,793 25.6%
Procurement services 17,466 22.5% 5,454 9.6% 17,500 13.5% 6,786 6.3%
Fixed-price 903 1.2% 3,946 6.8% 1,975 1.5% 7,509 6.9%
---------- ----------- ------------- -----------
Total revenue: $ 77,479 100.0% $ 56,966 100.0% $ 129,508 100.0% $ 108,415 100.0%
Gross profit: $ 12,779 16.5% $ 9,584 16.8% $ 22,661 17.5% $ 18,748 17.3%
Operating SG&A expense: $ 2,262 2.9% $ 1,732 3.0% $ 3,557 2.7% $ 3,599 3.3%
---------- ----------- ------------- -----------
Operating income: $ 10,517 13.6% $ 7,852 13.8% $ 19,104 14.8% $ 15,149 14.0%
========== =========== ============= ===========
Overview of Engineering Segment:
Our Engineering segment continues to benefit from a large project load
generated primarily by both its downstream and midstream clients. The
industry's refining and pipeline segments continue to be very active,
supplying a large percentage of the Company's backlog. ENGlobal is
benefiting from the renewed interest of its chemical/petrochemical clients
in maintenance and small capital projects as product margins in this
marketplace improve.
Revenue:
Engineering segment revenue increased $20.5 million, or 36.0%, to $77.5
million for the three months ended June 30, 2008, from $57.0 million for
the comparable prior-year period.
Engineering segment revenue increased $21.1 million, or 19.5%, to $129.5
million for the six months ended June 30, 2008, from $108.4 million for the
comparable prior-year period.
The increase in Engineering segment revenue was primarily brought about by
increased activity in the engineering and construction markets.
Refining-related activity has been particularly strong, and includes
projects to expand existing facilities and utilize heavier sour crude.
Capital spending in the pipeline area is also trending higher, with
numerous projects in North America currently underway to deliver crude oil,
natural gas, petrochemicals and refined products. Renewable energy appears
to be an emerging area of activity and potential growth, with the Company
currently performing a variety of services for ethanol, biodiesel,
coal-to-liquids, petroleum coke to ammonia, and other biomass processes.
The increases in detail-design services and procurement services are
directly related to rebuilding a refinery. Procurement services include
subcontractor placements, equipment purchases, and other procurement
activities necessary to rebuild the damaged facilities. Most of the
services rendered to date have occurred in the second quarter of 2008,
impacting both the three months and six months ended June 30, 2008.
21
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Our detail-design services proved strong with revenue increasing 37.3%, or $12.5 million, to $46.0 million for the three months ended June 30, 2008, from $33.5 million for the comparable period in 2007. As a percentage of the total Engineering segment revenue, detail-design revenue increased 0.5% to 59.4% in 2008 from 58.9% in 2007.
Our detail-design services proved strong with revenue increasing 26.7%, or $17.7 million, to $84.0 million for the six months ended June 30, 2008, from $66.3 million for the comparable period in 2007. As a percentage of the total Engineering segment revenue, detail-design revenue increased 3.7% to 64.9% in 2008 from 61.2% in 2007.
Our field services revenues remained relatively stable with a decrease of 6.4%, or $0.9 million, to $13.1 million for the three months ended June 30, 2008, from $14.0 million for the comparable period in 2007. As a percentage of the total Engineering segment revenue, field services revenue decreased 7.8% to 16.9% in 2008 from 24.7% in 2007.
Our field services revenues remained relatively stable with a decrease of 6.1%, or $1.7 million, to $26.1 million for the six months ended June 30, 2008, from $27.8 million for the comparable period in 2007. As a percentage of the total Engineering segment revenue, field services revenue decreased 5.5% to 20.1% in 2008 from 25.6% in 2007.
Revenue from procurement services increased 218.2%, or $12.0 million, to $17.5 million for the three months ended June 30, 2008, from $5.5 million for the comparable period in 2007. As a percentage of the total Engineering segment revenue, procurement services revenue increased 12.9% to 22.5% for the three months ended June 30, 2008, from 9.6% for the comparable period in 2007. The level of procurement services is project dependent and varies over time depending on the volume of procurement activity our customers choose to do themselves as opposed to using our services.
Revenue from procurement services increased 157.4%, or $10.7 million, to $17.5 million for the six months ended June 30, 2008, from $6.8 million for the comparable period in 2007. As a percentage of the total Engineering segment revenue, procurement services revenue increased 7.2% to 13.5% for the six months ended June 30, 2008, from 6.3% for the comparable period in 2007. The level of procurement services is project dependent and varies over time depending on the volume of procurement activity our customers choose to do themselves as opposed to using our services.
Fixed-price revenue decreased 76.9%, or $3.0 million, to $0.9 million for the three months ended June 30, 2008, from $3.9 million for the comparable period in 2007. As a percentage of the total Engineering segment revenue, fixed-price revenue decreased 4.6% to 1.2% for the three months ended June 30, 2008, from 6.8% for the comparable period in 2007 as the Company neared completion of certain EPC contracts.
Fixed-price revenue decreased 73.3%, or $5.5 million, to $2.0 million for the six months ended June 30, 2008, from $7.5 million for the comparable period in 2007. As a percentage of the total Engineering segment revenue, fixed-price revenue decreased 5.4% to 1.5% for the six months ended June 30, 2008, from 6.9% for the comparable period in 2007 as the Company neared completion of certain EPC contracts.
Gross Profit:
Our Engineering segment's gross profit increased $3.2 million, or 33.3%, to $12.8 million for the three months ended June 30, 2008, from $9.6 million for the comparable period in 2007. As a percentage of the total Engineering segment revenue, gross profit decreased by 0.3% to 16.5% from 16.8% for the three months ended June 30, 2008 and 2007, respectively. The overall $3.2 million increase in gross profit was attributable to the $20.5 million increase in total revenue, including approximately $17.5 million in lower margin procurement revenue.
Our Engineering segment's gross profit increased $4.0 million, or 21.4%, to $22.7 million for the six months ended June 30, 2008, from $18.7 million for the comparable period in 2007. As a percentage of the total Engineering segment revenue, gross profit increased by 0.2% to 17.5% from 17.3% for the six months ended June 30, 2008 and 2007, respectively. Of the overall $4.0 million increase in gross profit, approximately $3.5 million was attributable to the $21.1 million increase in total revenue, plus approximately $0.5 million in improved margins. The increase in margins can be attributed to the reduced activity in low margin/high dollar procurement projects, as these projects are being replaced with higher margin, core revenue derived from labor activity. Margin improvement slowed in the second quarter of 2008, as Engineering revenue included approximately $17.5 million in lower margin procurement revenue.
Selling, General, and Administrative:
Our Engineering segment's SG&A expense increased $0.6 million, or 35.3%, to $2.3 million for the three months ended June 30, 2008, from $1.7 million for the comparable period in 2007. The increase in the Engineering segment's SG&A expense came from approximately $0.8 million in higher bad debt expense offset by approximately $0.2 million in employee and associated costs reclassified to direct expense. As a percentage of the total Engineering segment revenue, the segment's SG&A costs decreased by 0.1% to 2.9% from 3.0% for the three months ended June 30, 2008 and 2007, respectively.
Our Engineering segment's SG&A expense remained flat at $3.6 million for the six months ended June 30, 2008, from $3.6 million for the comparable period in 2007. The differences in the Engineering segment's SG&A expense are attributable to approximately $0.5 million in lower employee and associated costs re-classified to direct expense in 2008, $0.1 million in non-recurring costs associated with closing the Dallas office during the first quarter of 2007, a $0.7 million increase in bad debt expense and a $0.1 million decrease in share-based incentives for the six months ended June 30, 2008. As a percentage of the total Engineering segment revenue, the segment's SG&A costs decreased by 0.6% to 2.7% from 3.3% for the six months ended June 30, 2008 and 2007, respectively.
Operating Income:
Operating income for the Engineering segment increased $2.6 million, or 32.9%, to $10.5 million for the three months ended June 30, 2008, from $7.9 million for the comparable prior-year period. As a percentage of the total Engineering segment revenue, operating income decreased by 0.2% to 13.6% for the three months ended June 30, 2008, from 13.8% for the comparable prior-year period, primarily due to increased procurement services.
Operating income for the Engineering segment increased $4.0 million, or 26.5%, to $19.1 million for the six months ended June 30, 2008, from $15.1 million for the comparable prior-year period. As a percentage of the total Engineering segment revenue, operating income increased by 0.8% to 14.8% for the six months ended June 30, 2008, from 14.0% for the comparable prior-year period.
Management's Discussion and Analysis (continued)
------------------------------------------------
Construction Segment Results
----------------------------
Three Months Ended Six Months Ended
June 30 June 30
--------------------------------------------- ----------------------------------------
2008 2007 2008 2007
-------------------- --------------------- ------------------- ------------------
(Dollars in Thousands)
------------------------------------------------------------------------------------------
Revenue before eliminations $ 38,858 $ 19,032 $ 65,875 $ 33,667
Inter-segment eliminations (3,204) (3,044) (3,321) (3,894)
---------- ------------ ---------- ----------
Total revenue $ 35,654 $ 15,988 $ 62,554 $ 29,773
========== ============ ========== ==========
Detailed revenue:
Inspection 31,026 87.0% 12,065 75.5% 54,420 87.0% 22,768 76.5%
Construction Services 4,628 13.0% 3,923 24.5% 8,134 13.0% 7,005 23.5%
---------- ------------ ---------- ----------
Total revenue: $ 35,654 100.0% $ 15,988 100.0% $ 62,554 100.0% $ 29,773 100.0%
Gross profit: $ 3,988 11.2% $ 2,646 16.6% $ 6,016 9.6% $ 4,728 15.9%
Operating SG&A expense: $ 759 2.1% $ 666 4.2% 1,462 2.3% 1,293 4.4%
---------- ------------ ---------- ----------
Operating income: $ 3,229 9.1% $ 1,980 12.4% $ 4,554 7.3% $ 3,435 11.5%
========== ============ ========== ==========
Overview of Construction Segment:
Revenue:
Our Construction segment's revenue increased $19.7 million, or 123.1%, to
$35.7 million for the three months ended June 30, 2008, from $16.0 million
for the comparable prior-year period. We have experienced significant
growth in our inspection related revenue due to increased capital spending
mainly by our pipeline clients. While inspection related revenues increased
$18.9 million, or approximately 156.2%, to $31.0 million for the three
months ended June 30, 2008, from $12.1 million for the comparable
prior-year period, the contribution to gross profit was reduced. To
increase market share and remain competitive, we accepted work at lower
margins. Increased variable costs associated with labor to perform
proposals, project controls and project management also contributed to the
decrease in gross profit. Increased market share has contributed to the
increase in our construction services revenues. Construction services
revenues increased $0.7 million, or 17.9%, to $4.6 for the three months
ended June 30, 2008, from $3.9 million for the comparable period in 2007.
Our Construction segment's revenue increased $32.8 million, or 110.1%, to
$62.6 million for the six months ended June 30, 2008, from $29.8 million
for the comparable prior-year period. We have experienced significant
growth in our inspection related revenue due to increased capital spending
mainly by our pipeline clients. While inspection related revenues increased
$31.6 million, or approximately 138.6%, to $54.4 million for the six months
ended June 30, 2008, from $22.8 million for the comparable prior-year
period, the contribution to gross profit was effectively unchanged.
Increased variable costs associated with labor to perform proposals,
project controls and project management also contributed to the decrease in
gross profit. Increased market share has contributed to the increase in our
construction services revenues. Construction services revenues increased
$1.1 million, or 15.7%, to $8.1 for the six months ended June 30, 2008,
from $7.0 million for the comparable period in 2007.
Our Construction and Engineering segments are both providing services in
connection with the refinery rebuild with many of those services being
performed at tighter margins. The Construction segment is taking actions to
develop new business and added a quality control manager in the third
quarter of 2008.
24
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Management's Discussion and Analysis (continued)
------------------------------------------------
Gross profit:
Our Construction segment's gross profit increased approximately $1.4
million, or 53.8%, to $4.0 million for the three months ended June 30,
2008, from $2.6 million for the comparable prior-year period and, as a
percentage of the total Construction segment revenue, gross profit
decreased by 5.4% to 11.2% from 16.6% for the respective periods. The
decrease in gross profit percentage is primarily attributable to the major
increase in revenue related to an increase in our provision of inspection
services, where increased employee-related costs and competitive pressure
on bill rates resulted in lower margins.
Our Construction segment's gross profit decreased approximately $1.3
million, or 27.7%, to $6.0 million for the six months ended June 30, 2008,
from $4.7 million for the comparable prior-year period and, as a percentage
of the total Construction segment revenue, gross profit decreased by 6.3%
to 9.6% from 15.9% for the respective periods. The decrease in gross profit
percentage is primarily attributable to the major increase in revenue
related to an increase in our provision of inspection services, where
increased employee-related costs and competitive pressure on bill rates
resulted in lower margins.
Selling, General, and Administrative:
Our Construction segment's SG&A expense increased approximately $0.1
million, or 14.3%, to $0.8 million for the three months ended June 30,
2008, from $0.7 million for the same period in 2007. As a percentage of the
total Construction segment revenue, SG&A expense decreased by 2.1% to 2.1%
from 4.2% for the respective periods.
Our Construction segment's SG&A expense increased approximately $0.2
million, or 15.4%, to $1.5 million for the six months ended June 30, 2008,
from $1.3 million for the same period in 2007. As a percentage of the total
Construction segment revenue, SG&A expense decreased by 2.1% to 2.3% from
4.4% for the respective periods.
Operating Income:
Our Construction segment's operating income increased $1.2 million, or
60.0%, to $3.2 million for the three months ended June 30, 2008, from $2.0
million for the comparable prior-year period. As a percentage of the total
Construction segment revenue, operating income decreased by 3.3% to 9.1%
for the three months ended June 30, 2008, from 12.4% for the comparable
prior-year period.
Our Construction segment's operating income increased $1.2 million, or
35.3%, to $4.6 million for the six months ended June 30, 2008, from $3.4
million for the comparable prior-year period. As a percentage of the total
Construction segment revenue, operating income decreased by 4.2% to 7.3%
for the six months ended June 30, 2008, from 11.5% for the comparable
prior-year period.
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Management's Discussion and Analysis (continued)
------------------------------------------------
Automation Segment Results
--------------------------
Three Months Ended Six Months Ended
June 30 June 30
---------------------------------------------- -------------------------------------------
2008 2007 2008 2007
--------------------- ------------------------ ---------------------- --------------------
(Dollars in Thousands)
-------------------------------------------------------------------------------------------
Revenue before eliminations $ 11,411 $ 9,942 $ 21,968 $ 19,765
Inter-segment eliminations (375) (424) (530) (709)
---------- ------------ ---------- ----------
Total revenue $ 11,036 $ 9,518 $ 21,438 $ 19,056
========== ============ ========== ==========
Detailed revenue:
Fabrication 6,938 62.9% 5,638 59.2% 13,621 63.5% 11,148 58.5%
Non-Fabrication 4,098 37.1% 3,880 40.8% 7,817 36.5% 7,908 41.5%
---------- ------------ ---------- ----------
Total revenue: $ 11,036 100.0% $ 9,518 100.0% $ 21,438 100.0% $ 19,056 100.0%
Gross profit: $ 1,362 12.3% $ 1,112 11.7% $ 2,406 11.2% $ 1,893 9.9%
Operating SG&A expense: $ 749 6.8% $ 773 8.1% 1,381 6.4% 1,618 8.5%
---------- ------------ ---------- ----------
Operating income: $ 613 5.5% $ 339 3.6% $ 1,025 4.8% $ 275 1.4%
========== ============ ========== ==========
Overview of Automation Segment:
Revenue:
Our Automation segment's revenue increased approximately $1.5 million, or
15.8%, to $11.0 million for the three months ended June 30, 2008, from $9.5
million for the comparable prior-year period.
Our Automation segment's revenue increased approximately $2.3 million, or
12.0%, to $21.4 million for the six months ended June 30, 2008, from $19.1
million for the comparable prior-year period.
The Automation segment is aggressively pursuing new business going into the
third quarter. The plant expansions along the upper Texas Gulf Coast may
provide a number of opportunities for remote instrument enclosures ("RIEs")
and analytical systems, which this segment is poised to provide. The
Automation segment experienced a significant increase in its
engineering-services proposal activity during this period. The segment
continues to evaluate potential acquisitions with the goal of complimenting
its current portfolio.
Gross profit:
The Automation segment's gross profit increased approximately $0.3 million,
or 27.3%, to $1.4 million for the three months ended June 30, 2008, from
$1.1 million for the comparable prior-year period. As a percentage of the
total Automation segment revenue, gross profit increased by 0.6% to 12.3%,
from 11.7% for the three months ended June 30, 2008 and 2007, respectively.
The Automation segment's gross profit increased approximately $0.5 million,
or 26.3%, to $2.4 million for the six months ended June 30, 2008, from $1.9
million for the comparable prior-year period. As a percentage of the total
Automation segment revenue, gross profit increased by 1.3% to 11.2%, from
9.9% for the six months ended June 30, 2008 and 2007, respectively. Margins
on fixed-price projects increased significantly in 2008 compared to the
same period in 2007. Project review processes put in place in 2007 are
beginning to yield bottom line results.
Selling, General, and Administrative:
Our Automation segment's SG&A expense remained relatively flat for the
three months ended June 30, 2008, from $0.8 million for the same period in
2007. As a percentage of the total Automation segment revenue, SG&A expense
decreased by 1.3% to 6.8%, from 8.1% for the three months ended June 30,
2008 and 2007, respectively.
26
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Management's Discussion and Analysis (continued)
------------------------------------------------
Our Automation segment's SG&A expense decreased approximately $0.2 million,
or 12.5%, to $1.4 million for the six months ended June 30, 2008, from $1.6
million for the same period in 2007. As a percentage of the total
Automation segment revenue, SG&A expense decreased by 2.1% to 6.4%, from
8.5% for the six months ended June 30, 2008 and 2007, respectively.
Operating Income:
The Automation segment recorded an operating income of $0.6 million for the
three months ended June 30, 2008, compared to operating income of $0.3
million for the three months ended June 30, 2007. As a percentage of the
total Automation segment revenue, operating income increased by 1.9% to
5.5% for the three months ended June 30, 2008, from 3.6% for the comparable
prior-year period. Improved control of direct costs and overhead
contributed to the increased operating income of the Automation segment
during the three months ended June 30, 2008.
The Automation segment recorded an operating income of $1.0 million for the
six months ended June 30, 2008, compared to operating income of $0.3
million for the six months ended June 30, 2007. As a percentage of the
total Automation segment revenue, operating income increased by 3.4% to
4.8% for the six months ended June 30, 2008, from 1.4% for the comparable
prior-year period. Improved control of direct costs and overhead
contributed to the increased operating income of the Automation segment
during the six months ended June 30, 2008.
27
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Management's Discussion and Analysis (continued)
------------------------------------------------
Land Segment Results
--------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------------------------------------ -----------------------------------------
2008 2007 2008 2007
----------------------- ------------------------ ---------------------- ------------------
(Dollars in Thousands)
------------------------------------------------------------------------------------------
Revenue before eliminations $ 11,842 $ 7,104 $ 20,677 $ 13,991
Inter-segment eliminations - - - -
---------- ------------ ---------- ----------
Total revenue $ 11,842 100.0% $ 7,104 100.0% $ 20,677 100.0% $ 13,991 100.0%
========== ============ ========== ==========
Gross profit: $ 2,172 18.3% $ 877 12.4% $ 3,564 17.2% $ 2,127 15.2%
Operating SG&A expense: $ 881 7.4% $ 574 8.1% 1,558 7.5% 1,156 8.3%
---------- ------------ ---------- ----------
Operating income: $ 1,291 10.9% $ 303 4.3% $ 2,006 9.7% $ 971 6.9%
========== ============ ========== ==========
Overview of Land Segment:
Revenue:
The Land segment's revenue increased approximately $4.7 million, or 66.2%,
to $11.8 million for the three months ended June 30, 2008, from $7.1
million for the comparable prior-year period.
The Land segment's revenue increased approximately $6.7 million, or 47.9%,
to $20.7 million for the six months ended June 30, 2008, from $14.0 million
for the comparable prior-year period.
The Land segment was formed out of our acquisition of WRC Corporation in
May 2006, which was renamed ENGlobal Land, Inc. in January 2008. The Land
segment provides services to a cross-section of clients in the energy
markets. With energy a concern across the country, the Land segment is
working on its teamwork and efficiencies in order to address its clients'
needs. Energy concerns are expected to increase as the country attempts to
shift its dependence on foreign energy to reliance on domestic sources.
Gross profit:
The Land segment's gross profit increased approximately $1.3 million, or
144.4%, to $2.2 million for the three months ended June 30, 2008, from $0.9
million for the comparable prior-year period. As a percentage of the total
Land segment revenue, gross profit increased by 5.9% to 18.3%, from 12.4%
for the three months ended June 30, 2008 and 2007, respectively. As we
focused on growing this segment's business, we increased the number of its
personnel. As a result, our gross profit margins decreased because we were
not able to immediately pass through to clients the resulting increased
costs of labor and expenses. We renegotiated billing rates on existing
contracts to accommodate these increased costs and implemented these
changes in the acceptance of new work. As the gross profit percentage has
increased by 5.9% for the three months ended June 30, 2008, the success of
these modifications and our growth is becoming apparent.
The Land segment's gross profit increased approximately $1.5 million, or
71.4%, to $3.6 million for the six months ended June 30, 2008, from $2.1
million for the comparable prior-year period. As a percentage of the total
Land segment revenue, gross profit increased by 2.0% to 17.2%, from 15.2%
for the six months ended June 30, 2008 and 2007, respectively.
Selling, General, and Administrative:
The Land segment's SG&A expense increased approximately $0.3 million, or
50.0%, to $0.9 million for the three months ended June 30, 2008, from $0.6
million for the same period in 2007. As a percentage of the total Land
segment revenue, SG&A expense decreased by 0.7% to 7.4%, from 8.1% for the
three months ended June 30, 2008 and 2007, respectively. Increases in SG&A
costs for the three months ended June 30, 2008, were related to $131,000 in
higher salaries and associated expenses primarily associated with our
growth, and an increase in bad debt expense of $138,000.
28
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The Land segment's SG&A expense increased approximately $0.4 million, or 33.3%, to $1.6 million for the six months ended June 30, 2008, from $1.2 million for the same period in 2007. As a percentage of the total Land segment revenue, SG&A expense decreased by 0.8% to 7.5%, from 8.3% for the six months ended June 30, 2008 and 2007, respectively. Most of the increases in SG&A costs for the six months ended June 30, 2008, were related to $132,000 in higher salaries and associated expenses primarily associated with our growth, and an increase in bad debt expense of $163,000.
Operating Income:
The Land segment recorded an operating income of $1.3 million for the three months ended June 30, 2008, compared to an operating income of $0.3 million for the three months ended June 30, 2007. As a percentage of the total Land segment revenue, operating income increased 6.6% to 10.9% for the three months ended June 30, 2008, from 4.3% for the same period in 2007.
The Land segment recorded an operating income of $2.0 million for the three months ended June 30, 2008, compared to an operating income of $1.0 million for the three months ended June 30, 2007. As a percentage of the total Land segment revenue, operating income decreased 2.8% to 9.7% for the three months ended June 30, 2008, from 6.9% for the same period in 2007.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable, notes and capital leases payable, and debt obligations. The book value of cash and cash equivalents, accounts receivable, accounts payable and short-term notes payable are considered to be representative of fair value because of the short maturity of these instruments.
We do not utilize financial instruments for trading purposes and we do not hold any derivative financial instruments that could expose us to significant market risk. In the normal course of business, our results of operations are exposed to risks associated with fluctuations in interest rates and currency exchange rates.
Our exposure to market risk for changes in interest rates relates primarily to our obligations under the Comerica Credit Facility. As of June 30, 2008, $25.5 million had been borrowed under the Credit Facility, accruing interest at 4.75% per year, excluding amortization of prepaid financing costs. A 10% increase in the short-term borrowing rates on the Credit Facility outstanding as of June 30, 2008 would be 47.5 basis points. Such an increase in interest rates would increase our annual interest expense by approximately $121,000, assuming the amount of debt outstanding remains constant.
In general, our exposure to fluctuating exchange rates relates to the effects of translating the financial statements of our Canadian subsidiary from the Canadian dollar to the U.S. dollar. We follow the provisions of SFAS No. 52 - "Foreign Currency Translation" in preparing our condensed consolidated financial statements. Currently, we do not engage in foreign currency hedging activities.
ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures of a registrant designed to ensure that information required to be disclosed by the registrant in the reports that it files or submits under the Exchange Act is properly recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and forms. Disclosure controls and procedures include processes to accumulate and evaluate relevant information and communicate such information to a registrant's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.
We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2008, as required by Rule 13a-15 of the Exchange Act. As described below, material weaknesses were identified in our internal control over financial reporting as of June 30, 2008. Based on the evaluation described above, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2008, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms.
Changes in Internal Control over Financial Reporting
In our Form 10-K for the year ended December 31, 2007, we disclosed certain material weaknesses in internal control over financial reporting, which are identified below. Neither material weakness has been remediated as of June 30, 2008.
Deficiencies in the Company's Control Environment and Accounting System Controls.
We did not effectively and accurately close the general ledger in a timely manner and we did not provide complete and accurate disclosure in our notes to financial statements, as required by generally accepted accounting principles. Specifically, the Company lacks sufficient knowledge and expertise in financial reporting to adequately handle complex or non-routine accounting issues, resulting in the following:
- failure in a timely manner to properly evaluate goodwill for
potential impairment in accordance with SFAS 142, "Goodwill and
Other Intangible Assets";
- difficulty in obtaining timely resolution of SEC comments related
to the above item, causing a delay in the Company's period-end
closing process for its 2007 Form 10-K; and
- failure to effectively utilize third-party specialists in a
timely manner to assist with complex or non-routine accounting
issues.
As noted above, no change in our internal control over financial reporting occurred during the six months ended June 30, 2008, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Remediation Initiatives
Management, with oversight from the Audit Committee of the Board of Directors, has been addressing the material weaknesses discussed above. While progress has been made, these remedial steps have not been completed; however, the Company has performed additional analysis and procedures in order to ensure that the condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q were prepared in accordance with generally accepted accounting principles in the United States. Although the Company's remediation efforts are underway, control weaknesses will not be considered remediated until new internal controls over financial reporting are implemented and operational for a sufficient period of time to allow for effective testing and are tested, and management and its independent registered certified public accounting firm conclude that these controls are operating effectively. Management, along with its outside consultants, and the Audit Committee of the Company's Board of Directors are working to determine the most effective way to implement the remedial measures listed below, and, if necessary, to develop additional remedial measures to address the internal control deficiencies identified above. The Company is monitoring the effectiveness of planned actions and will make any other changes and take such other actions as management or the Audit Committee determines to be appropriate. The Company's remediation efforts include:
o engagement of various third-party consultants to assist us with
specific technical accounting issues;
o engagement of third-party consultants to provide valuation
services in accordance with SFAS 142;
o implementation of quarterly and annual disclosure checklists,
which are utilized in connection with the completion of our
quarterly financial statements;
o provision of additional training to accounting staff on SFAS 142,
SEC reporting principles, and GAAP; and
o implementation of periodic accounting management meetings where
our accounting processes and procedures are communicated and
reinforced.
The Company has been holding quarterly meetings of the accounting staff to facilitate quarterly closing procedures and review of quarterly checklists. Certain training needs have been addressed as a result. The Company has engaged Sirius Solutions to review specific non-recurring technical accounting issues and to review SEC disclosure checklists to improve compliance.
ITEM 1. LEGAL PROCEEDINGS
As discussed in Note 9 above, in the first quarter of 2007 ENGlobal Engineering, Inc. and South Louisiana Ethanol, LLC ("SLE") executed an agreement for EPC services relating to the retro-fit of an ethanol plan in southern Louisiana. The history of the SLE Project is described in Note 12 to the Company's financial statements included in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 (the "Third Quarter 10-Q") and is discussed further in the Company's Annual Report on Form 10-K for the year ended December 31, 2007. Due to the continued failure of SLE to obtain permanent financing, on May 30, 2008, the Company filed suit in the United States District Court for the Eastern District of Louisiana, Cause Number 08-3601. The Company is seeking damages of $15.8 million.
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, is not expected to have a material effect upon the consolidated financial position or operations of the Company.
ITEM 1A. RISK FACTORS
Our business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for work performed and materials supplied. We bear the risk that our clients will pay us late or not at all. Though we evaluate and attempt to monitor our clients' financial condition, there is no guarantee that we will accurately assess their creditworthiness. Financial difficulties or business failure experienced by one or more of our major customers could have a material adverse affect on both our ability to collect receivables and our results of operations.
As discussed further in Note 9 above, due to the continued failure of South Louisiana Ethanol, LLC ("SLE") to obtain permanent financing, the Company has filed suit against SLE seeking damages of $15.8 million. While the Company believes that in the event that the collateral is liquidated, SLE's obligations to the Company would be paid in full pursuant to the Collateral Mortgage in favor of the Company, collectability is not assured at this time.
As discussed further in Note 10 above, we have potential exposure to SemCrude, L.P. ("SemCrude"), an affiliate of SemGroup, L.P. ("SemGroup), related to services provided by our Engineering and Construction segments in connection with construction of the White Cliffs Pipeline. While SemCrude's account was materially current as of August 7, 2008, the Company is pursuing various legal remedies in connection with the SemGroup situation, and we are currently unable to quantify what amount of SemCrude's balance, if any, may be uncollectible.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial conditions or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 19, 2008, the Company held its Annual Meeting of Stockholders. As of the April 21, 2008 record date, 27,063,541 shares of Common Stock were entitled to vote at the meeting. Represented at the meeting in person or by proxy were 23,980,538 shares, or 88.6% of the total shares of Common Stock entitled to vote at the meeting.
The purpose of the meeting was the re-election of four directors to a one-year term. All of management's nominees as listed in the Company's proxy statement were elected. The following table sets forth the results of the election:
Shares Voted FOR Shares WITHHELD
---------------- ---------------
William A. Coskey, P.E. 23,488,022 492,516
David W. Gent, P.E. 23,358,326 622,212
Randall B. Hale 23,359,599 620,939
David C. Roussel 23,444,659 535,879
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ITEM 5. OTHER INFORMATION
In June 2008, ENGlobal's Board of Directors authorized the Company's entry into indemnification agreements with the following Company directors and executive officers: William A. Coskey, P.E. (Chairman of the Board and Chief Executive Officer), Robert W. Raiford (Chief Financial Officer and Treasurer), Michael M. Patton, P.E. (Senior Vice President, Business Development), R. David Kelley (Senior Vice President, Corporate Services), Randall B. Hale (Director), David W. Gent (Director), and David C. Roussel (Director).
Under each indemnification agreement, the Company agrees to indemnify the officer or director signing the agreement against expenses (including reasonable attorneys' fees) and other types of losses incurred by reason of his serving the Company, or other enterprise at the Company's request, as an officer, director, employee, or agent, subject to certain limitations. The Company also agrees to advance his expenses, and each officer and director undertakes to repay the advances should a court ultimately determine that indemnification was not authorized.
The above description does not purport to be complete and is qualified in its entirety by reference to the full text of the form of indemnification agreement, which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q and incorporated into this Item 5 by reference.
In June 2008, the Company granted compensation to each of its three non-employee directors via restricted stock awards. It was the Company's intention that such awards be issued pursuant to the Plan. It was later determined that the grants had been made after the Plan's expiration. Therefore, the grants of restricted stock were rescinded. On August 8, 2008, the Company replaced the grants of restricted stock with grants of non-Plan restricted stock units equivalent to 6,420 shares of common stock. The award of restricted stock units is intended to compensate and retain the directors over the term of the award. The fair value of the award was $93,411 per director based on the market price of $14.55 per share of the Company's stock on the date the award was granted. Upon vesting, the units will be convertible into cash or, if shareholder approval is obtained, common stock. The units will vest in equal quarterly installments beginning on September 30, 2008, so long as the grantee continues to serve as an independent director of the Company. Recognition of compensation related to the restricted stock awards will commence in the third quarter of 2008. The form of Restricted Stock Unit Award Agreement granted to the non-employee directors is included as Exhibit 10.2 to this Quarterly Report on Form 10-Q and incorporated into this Item 5 by reference.
ITEM 6. EXHIBITS
10.1 Form of Indemnification Agreement between ENGlobal Corporation and its Directors and Executive Officers
10.2 Form of Restricted Stock Unit Award Agreement between ENGlobal Corporation and its Independent Non-employee Directors
31.1 Certifications Pursuant to Rule 13a - 14(a) of the Securities Exchange Act of 1934 for the Second Quarter 2008
31.2 Certifications Pursuant to Rule 13a - 14(a) of the Securities Exchange Act of 1934 for the Second Quarter 2008
32.0 Certification Pursuant to Rule 13a - 14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Second Quarter 2008
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ENGlobal Corporation
Dated: August 11, 2008
By: /s/ Robert W. Raiford
------------------------------
Robert W. Raiford
Chief Financial Officer and Treasurer
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Exhibit 10.1
ENGLOBAL CORPORATION
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (this "Agreement") is made as of June 19, 2008, by and between ENGlobal Corporation, a Nevada corporation (the "Company"), and _________________ ("Indemnitee").
R E C I T A L S
WHEREAS, the Company and Indemnitee recognize the increasing difficulty in obtaining directors' and officers' liability insurance, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting officers and directors to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited; and
WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as officers and directors of the Company and to indemnify its officers and directors so as to provide them with the maximum protection permitted by law.
NOW, THEREFORE, in consideration for Indemnitee's services as an officer or director of the Company, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
(a) Third Party Proceedings. The Company shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit, proceeding or any alternative dispute resolution mechanism, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including reasonable attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action, suit or proceeding if Indemnitee is not liable pursuant to Nevada Revised Statutes ("NRS") ss. 78.138, or if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that Indemnitee is liable pursuant to NRS ss. 78.138 or did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, or that, with respect to any criminal action or proceeding, Indemnitee had reasonable cause to believe that Indemnitee's conduct was unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including amounts paid in settlement and reasonable attorneys' fees) actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or suit if Indemnitee is not liable pursuant to NRS ss. 78.138 or Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, except that no indemnification shall be made for any claim, issue or matter as to which Indemnitee has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the Company or for amounts paid in settlement to the Company, unless and only to the extent that the court in which such action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses as the court deems proper.
(c) Mandatory Payment of Expenses. To the extent that Indemnitee has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1(a) and 1(b), or in defense of any claim, issue or matter therein, Indemnitee shall be indemnified against expenses (including reasonable attorneys' fees) actually and reasonably incurred by Indemnitee in connection therewith.
2. Agreement to Serve. In consideration of the protection afforded by this Agreement, if Indemnitee is a director of the Company he agrees to serve at least for the 90 days after the effective date of this Agreement as a director and not to resign voluntarily during such period without the written consent of a majority of the Board of Directors. If Indemnitee is an officer of the Company not serving under an employment contract, he agrees to serve in such capacity at least for the 90 days after the effective date of this Agreement and not to resign voluntarily during such period without the written consent of a majority of the Board of Directors. Following the applicable period set forth above, Indemnitee agrees to continue to serve in such capacity at the will of the Company (or under separate agreement, if such agreement exists) so long as he is duly appointed or elected and qualified in accordance with the applicable provisions of the Bylaws of the Company or any subsidiary of the Company or until such time as he tenders his resignation in writing. Nothing contained in this Agreement is intended to create in Indemnitee any right to continued employment.
3. Expenses; Indemnification Procedure.
(a) Advancement of Expenses. The Company shall advance all expenses
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referenced in
Section 1(a) or 1(b) (but not amounts actually paid in settlement of any such
action, suit or proceeding). Indemnitee hereby undertakes to repay such amounts
advanced only if, and to the extent that, it is ultimately determined by a court
of competent jurisdiction that Indemnitee is not entitled to be indemnified by
the Company as authorized hereby.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to his right to be indemnified under this Agreement, give the Company written notice as soon as practicable of any claim for which Indemnitee will or could seek indemnification under this Agreement. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power.
(c) Procedure. Any indemnification and advances provided for in
Section 1 and this Section 3 shall be made no later than 30 days after receipt
of the written request of Indemnitee, provided that a determination is made
within such 30-day period that, as to Indemnitee's specific case,
indemnification of Indemnitee is proper in the circumstances. Such determination
shall be made: (a) by the Company's stockholders; (b) by the Company's Board of
Directors by majority vote of a quorum consisting of directors who were not
parties to the action, suit or proceeding; (c) if a majority vote of a quorum
consisting of directors who were not parties to the action, suit or proceeding
so orders, by independent legal counsel in a written opinion; or (d) if a quorum
consisting of directors who were not parties to the action, suit or proceeding
cannot be obtained, by independent legal counsel in a written opinion. If a
claim under this Agreement, under any statute, or under any provision of the
Company's Articles of Incorporation or Bylaws providing for indemnification, is
not paid in full by the Company within 30 days after a written request for
payment thereof has first been received by the Company, Indemnitee may, but need
not, at any time thereafter bring an action against the Company to recover the
unpaid amount of the claim and, subject to Sections 8 and 9(g) of this
Agreement, Indemnitee shall also be entitled to be paid for the expenses
(including reasonable attorneys' fees) of bringing such action. It shall be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in connection with any action, suit or proceeding in advance
of its final disposition) that Indemnitee has not met the standards of conduct
which make it permissible under applicable law for the Company to indemnify
Indemnitee for the amount claimed. However, Indemnitee shall be entitled to
receive interim payments of expenses pursuant to Section 3(a) unless and until
such defense may be finally adjudicated by court order or judgment from which no
further right of appeal exists. It is the parties' intention that if the Company
contests Indemnitee's right to indemnification, the question of Indemnitee's
right to indemnification shall be for a court of competent jurisdiction to
decide, and neither the failure of the Company (including its Board of
Directors, any committee or subgroup of the Board of Directors, independent
legal counsel, or its stockholders) to have made a determination that
indemnification of Indemnitee is proper in the circumstances because Indemnitee
has met the applicable standard of conduct required by applicable law, nor an
actual determination by the Company (including it Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its stockholders) that Indemnitee has not met such applicable standard of
conduct, shall create a presumption that Indemnitee has or has not met the
applicable standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of a claim pursuant to Section 3(b), the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated under Section 3(a) to advance the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee (which approval shall not be unreasonably withheld), upon the delivery to Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by
Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ his counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company.
4. Additional Indemnification Rights; Nonexclusivity.
(a) Scope. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify Indemnitee to the fullest extent permitted by the NRS, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Articles of Incorporation, the Company's Bylaws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute, or rule which expands the right of a Nevada corporation to indemnify a member of its board of directors or an officer, such changes shall be, ipso facto, within the purview of Indemnitee's rights and Company's obligations, under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a Nevada corporation to indemnify a member of its board of directors or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company's Articles of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested directors, the NRS, or otherwise, for either an action in Indemnitee's official capacity or action in another capacity while holding such office, except that indemnification, unless ordered by a court pursuant to NRS ss. 78.7502 or for the advancement of expenses made pursuant to Section 3, may not be made to or on behalf of Indemnitee if a final adjudication establishes that Indemnitee's acts or omissions involved intentional misconduct, fraud or a knowing violation of the law and was material to the cause of action. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he may have ceased to serve in such capacity at the time of any action, suit or other covered proceeding.
5. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually and reasonably incurred by him in the investigation, defense, appeal or settlement of any civil or criminal action, suit or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled.
6. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge that in certain instances, federal law or applicable public policy may prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee.
7. Officer and Director Liability Insurance. The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain a policy greater in value than the Company's current Director and Officer Liability Insurance Policy with Great American Insurance Company, Policy # DOL5593151 (the "Current D&O Policy"), or to maintain the Current D&O Policy providing the officers and directors of the Company with coverage for losses from wrongful acts, or to ensure the Company's performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining or maintaining such insurance coverage against the protection afforded by such coverage. In all policies of director and officer liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer. Notwithstanding the foregoing, the Company shall have no obligation to maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a subsidiary or parent of the Company. The Company agrees to provide Indemnitee with a copy of the Current D&O Policy, and to notify Indemnitee, or to cause the insurance company to notify Indemnitee, of cancellation of or changes to the Current D&O Policy.
8. Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under ss. 78.7502 of the NRS, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors has approved the initiation or bringing of such suit; or
(b) Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous; or
(c) No Duplicative Payments. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the extent that Indemnitee has otherwise actually received payment (under any insurance policy, provision of the Company's certificate of incorporation, bylaws, or otherwise) of the amounts otherwise payable hereunder; or
(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute.
9. Miscellaneous.
(a) Choice of Law. This Agreement and all disputes related hereto, whether in contract or tort, in law or in equity, or otherwise, shall be governed by and its provisions construed in accordance with the laws of the State of Nevada, as applied to contracts between Nevada residents entered into and to be performed entirely within Nevada without regard to the conflict of law principles thereof.
(b) Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Nevada for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of Nevada.
(c) Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing and signed by the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver.
(d) Entire Agreement. This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto.
(e) Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of Indemnitee and Indemnitee's heirs, executors and administrators.
(f) Severability. If and to the extent that any provision of this Agreement is held by final judgment of a court of competent jurisdiction to be invalid, illegal or unenforceable, then to such extent the invalid, illegal or unenforceable provision shall be severed from the remainder of this Agreement, and the remainder of this Agreement shall be enforced. In addition, the invalid, illegal or unenforceable provision shall be deemed to be automatically modified, and, as so modified, to be included in this Agreement, such modification being made to the minimum extent necessary to render the provision valid, legal and enforceable. Notwithstanding the foregoing, however, if the severed or modified provision concerns all or a portion of the essential consideration to be delivered under this Agreement by one party to the other, the remaining provisions of this Agreement shall also be modified to the extent necessary to equitably adjust the parties' respective rights and obligations hereunder.
(g) Attorneys' Fees. In the event that any action is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys' fees, incurred by Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such
action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys' fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee's material defenses to such action were made in bad faith or were frivolous.
(h) Notice. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be delivered personally by hand or by courier, mailed by United States first-class mail, postage prepaid, sent by facsimile or sent by electronic mail directed to the party to be notified at the address, facsimile number or electronic mail address indicated for such person on the signature page hereof, or at such other address, facsimile number or electronic mail address as such party may designate by 10 days' advance written notice to the other party hereto. All such notices and other communications shall be deemed given upon personal delivery, on the date of mailing, upon confirmation of facsimile transfer or when directed to the electronic mail address set forth on the signature page hereof.
(i) Construction. Whenever used in this Agreement, the singular number will include the plural, and the plural number will include the singular, and pronouns in the masculine, feminine, or neuter gender will include each other gender. Headings are used for convenience only, and are not to be given substantive effect. All references to section numbers and exhibits in this Agreement are references to sections and exhibits in this Agreement, unless otherwise specifically indicated. All exhibits and schedules are incorporated in this Agreement as if set forth herein in full. Recitals are part of this Agreement and shall be considered in its interpretation.
(j) Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company against Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern.
(k) Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights.
(l) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original.
EXECUTED as of the date first above written.
ENGLOBAL CORPORATION
Chief Executive Officer
Address:
654 N. Sam Houston Parkway E., Ste. 400
Houston, Texas 77060
"Indemnitee"
Address:
Exhibit 10.2
Restricted Stock Unit Award No. ___
ENGLOBAL CORPORATION
RESTRICTED STOCK UNIT
AWARD AGREEMENT
(Non-Employee Director)
PART I
Recipient:
Award Date: August __, 2008
Aggregate Number of Restricted Stock Units: 6,420
Vesting Schedule: The Units will vest for one year in
equal increments of 1,605 shares on
each of September 30, 2008,
December 31, 2008, March 31, 2009
and June 30, 2009, so long as
Recipient is continuing to serve as
a director of the Company on the
vesting dates.
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THE COMPANY RECOMMENDS THAT RECIPIENT CONSULT WITH HIS OR HER PERSONAL TAX ADVISOR UPON THE GRANTING OF THE AWARD TO DISCUSS POSSIBLE TAX RAMIFICATIONS, PARTICULARLY WITH RESPECT TO SECTION 409A OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE").
Part II of this Agreement is attached hereto and incorporated herein for all purposes. EXECUTED to be effective as of the Award Date.
ENGLOBAL CORPORATION
RECIPIENT
Address:
PART 1 - Page 1
PART II
This Restricted Stock Unit Award Agreement (this "Agreement") is entered into by ENGlobal Corporation, a Nevada corporation (the "Company"), and Recipient named on Part I ("Recipient"), as of the date set forth on Part I (the "Award Date").
RECITALS:
This Agreement replaces and supersedes the Restricted Stock Award Agreement dated June 19, 2008 entered into by the Company and Recipient.
The Company has determined to cancel the restricted shares (the "Restricted Shares") that were granted to Recipient pursuant to the Restricted Stock Award Agreement dated June 19, 2008 and the Amended and Restated 1998 Incentive Plan (the "Plan") and award to Recipient in lieu thereof restricted stock units (the "Units") on the terms and conditions set forth in this Agreement.
THEREFORE, the Company and Recipient agree as follows:
1. Cancellation of Restricted Shares. The Restricted Shares are hereby cancelled.
2. Restricted Stock Unit Award. The Company grants Recipient the right (the "Award") to receive the aggregate number of Units set forth on Part I (such number being subject to adjustment as provided herein) on the terms and conditions set forth in this Agreement. Each Unit shall cover one share of common stock, $0.001 par value per share, of the Company ("Shares" or "Stock"). The Award granted under this Agreement is subject to the vesting restrictions described in Section 4 and Section 6, restrictions on transferability as described in Section 7, and other terms and conditions described in this Agreement (the "Restrictions").
3. Administration. This Agreement will be administered by the Compensation Committee of the Board of Directors and by the full Board of Directors with respect to members of the Compensation Committee (the "Committee"). The Committee has sole and complete discretion with respect to all matters reserved to it by the Board of Directors of the Company, and decisions of the Committee with respect to this Agreement shall be final and binding upon Recipient.
4. Vesting and Term of the Award.
(a) General. The Restrictions shall lapse in accordance with the Vesting Schedule set forth on Part I. Units which have vested are referred to as "Vested Units." Units which have not vested are referred to as "Unvested Units." In general, Unvested Units will become Vested Units in accordance with the Vesting Schedule set forth on Part I only if Recipient has continuously served as a director of the Company from the Award Date through the applicable vesting date.
(b) Change in Control. In the event of a Change in Control (as defined below), the Committee may, in its sole discretion, provide that the Restrictions on the Units shall immediately lapse. For purposes of this Agreement, "Change in Control" means the event that is deemed to occur if:
PART II - Page 1
(i) any person, other than the Company, any majority-owned subsidiary of the Company, any employee benefit plan of the Company or of a majority-owned subsidiary of the Company or of a corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of Stock of the Company, or any trustee or other fiduciary holding securities under an employee benefit plan of the Company or of a majority-owned subsidiary of the Company or of a corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of Stock of the Company, (an "Acquiring Person") is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company representing fifty percent or more of the combined voting power of the then outstanding voting securities of the Company; provided, however, for purposes of this Agreement, an Acquiring Person shall not include William A. Coskey, Hulda L. Coskey, Alliance 2000, Ltd., or their respective affiliates or other donees or entities formed by them for estate planning or similar purposes (the "Coskey Group"); provided, further, if the Coskey Group shall cease to be the beneficial owner, directly or indirectly, of securities of the Company representing at least fifty percent of the combined voting power or the then outstanding voting securities of the Company, then the Coskey Group, upon reacquiring fifty percent or more of such voting power, shall be deemed to be an Acquiring Person; or
(ii) the individuals who, as of the Award Date, constitute the Board of Directors and any other individual who becomes a director of the Company after that date and whose election or appointment by the Board of Directors or nomination for election by the Company's shareholders was approved by a vote of at least a majority of the directors then comprising the Board of Directors cease for any reason to constitute at least a majority of the Board of Directors
(iii) a public announcement is made of a tender or exchange offer by any Acquiring Person for fifty percent or more of the outstanding voting securities of the Company, and the Board of Directors approves or fails to oppose that tender or exchange offer in its statements in Schedule 14D-9 under the Securities Exchange Act of 1934; or
(iv) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation or partnership (or, if no such approval is required, the consummation of such a merger or consolidation of the Company), other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately before the consummation thereof continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or of a parent of the surviving entity) a majority of the combined voting power of the voting securities of the surviving entity (or its parent) outstanding immediately after that merger or consolidation; or
(v) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets (or, if no such approval is required, the consummation of such a liquidation, sale, or disposition in one transaction or series of related transactions) other than a liquidation, sale, or disposition of all or substantially all the Company's assets in one transaction or a series of related transactions to a corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of Stock of the Company.
PART II - Page 2
5. Settlement of Units.
(a) Upon the lapsing of Restrictions as provided in Section 4 or
Section 6 hereof, Recipient shall be entitled to receive, in exchange for
the cancellation of all outstanding Vested Units, either cash or Stock, as
determined in the Committee's sole discretion, having a value equal to the
total Fair Market Value of the Shares covered by such Vested Units, less
any applicable withholding taxes as described in Section 11 below;
provided, that Vested Units shall not be settled in Stock if ---------- the
issuance of Shares would violate the requirements of any applicable federal
or state securities laws, or the rules governing any national or regional
securities exchange upon which the Stock is listed or reporting system
(such as NASDAQ) on which the sales prices of the Stock is reported,
including any requirement that the shareholders of the Company approve such
issuance of Shares. Vested Shares shall be settled as soon as practicable
but not later than two and one-half months following the calendar year in
which the Restrictions lapse. For purposes of this Agreement, except as
otherwise provide, "Fair Market Value" means, for a particular day:
(i) If shares of Stock of the same class are listed or admitted to unlisted trading privileges on any national or regional securities exchange at the date of determining the Fair Market Value, then the last reported sale price, regular way, on the composite tape of that exchange on the last trading day before the date in question or, if no such sale takes place on that trading day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to unlisted trading privileges on that securities exchange; or
(ii) If shares of Stock of the same class are not listed or
admitted to unlisted trading privileges as provided in subparagraph
(i), and if bid and asked prices for shares of Stock of the same class
in the over-the-counter market are reported by NASDAQ (or, if not so
reported, by the National Quotation Bureau Incorporated) at the date
of determining the Fair Market Value, then the average of the high bid
and low asked prices on the last trading day before the date in
question; or
(iii) If shares of Stock of the same class are not listed or
admitted to unlisted trading privileges as provided in subparagraph
(i) and bid and asked prices therefore are not reported by NASDAQ (or
the National Quotation Bureau Incorporated) as provided in
subparagraph (ii) at the date of determining the Fair Market Value,
then the value determined in good faith by the Committee, which
determination shall be conclusive for all purposes; or
(iv) If shares of Stock of the same class are listed or admitted to unlisted trading privileges as provided in subparagraph (i) or bid and asked prices therefore are reported by NASDAQ (or the National Quotation Bureau Incorporated) as provided in subparagraph (ii) at the date of determining the Fair Market Value, but the volume of trading is so low that the Board of Directors determines in good faith that such prices are not indicative of the fair value of the Stock, then the value determined in good faith by the Committee, which determination shall be conclusive for all purposes notwithstanding the provisions of subparagraphs (i) or (ii).
PART II - Page 3
(b) Stock Certificates. If, in the Committee's sole discretion, Vested Units are to be settled in Stock, stock certificates evidencing the settlement of Vested Units into Shares shall be issued as of the date the Restrictions lapse and registered in Recipient's name. Certificates representing the unrestricted Shares will be delivered to Recipient as soon as practicable but not later than the date which is two and one-half months following the calendar year in which the Restrictions lapse.
(c) Delay for Compelling Business Reasons. Notwithstanding any provision of this Section 5 to the contrary, the date on which Vested Units may be settled may be delayed beyond the date which is two and one-half months following the calendar year in which the Restrictions lapse; provided such delay satisfies the requirements of this paragraph (c).
(i) Going Concern. In the event the Company determines that the settlement of Vested Units on the date specified in this Agreement would jeopardize the ability of the Company to continue as a going concern, the Committee, in its sole discretion, may delay the settlement of Vested Units until the first taxable year of Recipient in which the Company notifies the Committee that the settlement would not have such effect.
(ii) Loss of Deduction. In the event the Company determines that
its federal income tax deduction for benefits recognized or paid upon
settlement of Vested Units would not be permitted due to the
application of Section 162(m) of the Code, and as of the Award date
such loss of deduction was unforeseeable, the Committee, in its sole
discretion, may delay the date on which Vested Units would otherwise
be settled, provided that Vested Units are settled in the first
taxable year of Recipient in which the Company reasonably anticipates
(or should reasonably anticipate) that the federal income tax
deduction of such benefit would not be barred by application of
Section 162(m) of the Code.
(iii) Administrative Delay in Payment. In the event the Company determines that it is administratively impracticable to settle the Vested Units on the date such Vested Units would otherwise be settled, and such impracticability was reasonably unforeseeable as of the Award Date, the settlement of Vested Units may be delayed until the first taxable year of Recipient in which settlement is administratively practicable.
6. Termination of Directorship. If Recipient's service as a director of the Company is terminated for any reason other than (i) Recipient's death or (ii) Recipient's Disability (as defined below), then all Unvested Units held pursuant to this Agreement as of the date of the termination (or for which restrictions have not lapsed) shall be cancelled without any payment or other consideration to Recipient, and Recipient shall have no further right, title or interest in the Unvested Units.
(a) Death. Upon the death of Recipient, all Unvested Units held by Recipient pursuant to this Agreement shall become Vested Units immediately as of the date of death.
PART II - Page 4
(b) Disability. If Recipient's service as a director is terminated by reason of Recipient's Disability, then all Unvested Units held by Recipient as of the date of termination for Disability shall become Vested Units immediately as of the date of termination. For purposes of this Agreement, "Disability" shall mean, as determined by the Board of Directors in the sole discretion exercised in good faith of the Board of Directors, a physical or mental impairment of sufficient severity that either Recipient is unable to continue performing the duties he performed before such impairment or Recipient's condition entitles him to disability benefits under any insurance of the Company and that impairment or condition is cited by the Company as the reason for termination of Recipient's service as a director.
7. Nontransferability. The Award granted by this Agreement is made solely to Recipient and is nontransferable, except that amounts payable with respect to Units that vest upon Recipient's death shall be paid to Recipient's estate. The Award and the Units, and any rights and privileges in connection therewith, cannot otherwise be transferred, assigned, pledged or hypothecated by Recipient, or by any other person, in any way, whether by operation of law or otherwise, and may not be subject to execution, attachment, garnishment or similar process. In the event of any such occurrence, Recipient's right to have Unvested Units vest and become Vested Units will immediately and automatically terminate.
8. Adjustments. If there is any change in the capital structure of the Company through merger, consolidation, reorganization, recapitalization, stock dividend, stock split, combination of shares or similar event, the rights of Recipient under Section 2 above, shall be adjusted as follows:
(a) If at any time, or from time to time, the Company shall subdivide as a whole (by reclassification, by a Stock split, by the issuance of a distribution on Stock payable in Stock, or otherwise) the number of shares of Stock then outstanding into a greater number of shares of Stock, then the number of Shares covered by the Unvested Units shall be increased proportionately, without changing the aggregate value of the Unvested Units.
(b) If at any time, or from time to time, the Company shall consolidate as a whole (by reclassification, reverse Stock split, or otherwise) the number of shares of Stock then outstanding into a lesser number of shares of Stock, then the number of Shares covered by the Unvested Units shall be decreased proportionately, without changing the aggregate value of the Unvested Units.
(c) Notwithstanding the foregoing paragraphs of this Section 8, no adjustment shall be made with respect to Vested Units that have not been settled as of the date of the change in capital structure of the Company.
(d) Whenever the number of Shares covered by the Units is required to be adjusted as provided in this Section 8, the Committee shall promptly prepare a notice setting forth, in reasonable detail, the event requiring adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the change in the number of Shares subject to the Units after giving effect to the adjustments. The Committee shall promptly give Recipient such a notice.
(e) Adjustments under paragraphs (a) and (b) shall be made by the Committee, and its determination as to what adjustments shall be made and the extent thereof shall be final, binding, and conclusive. No fractional interest shall be issued under the Award on account of any such adjustments.
PART II - Page 5
9. Dividend Equivalent Rights. Recipient shall be entitled to receive cash payments equal to any cash dividends and other distributions paid with respect to a corresponding number of Shares for each Unit held by Recipient; provided, that if any such dividends or distributions are paid in Shares, the Fair Market Value of such Shares shall be converted into restricted stock units, and further provided that such restricted stock units shall be subject to the same Restrictions as apply to the Units with respect to which they relate. Dividend equivalents paid in cash shall be paid to Recipient at the same time that actual cash dividends and other distributions are paid to the shareholders of the Company, and in no event later than the date which is two and one-half months following the calendar year in which such dividends are declared.
10. Tax Gross-Up Payment. To the extent that Recipient submitted a Code
Section 83(b) election to the Internal Revenue Service (with a copy sent to the
Company) for the Restricted Shares which are cancelled pursuant to Section 1 of
this Agreement, if Recipient's Unvested Units vest in accordance with the
vesting schedule set forth on Part I and if the Fair Market Value of the Stock
exceeds $13.25 at the time that such Vested Units are settled, then Recipient
shall receive a payment equal to the quotient of W divided by V; where V equals
the difference of 100% minus the federal income tax rate applicable to
Recipient's ordinary income for the year in which such Vested Shares are
settled; where W equals the difference of X minus Y; where X equals the product
of Z multiplied by the federal income tax rate applicable to Recipient's
ordinary income for the year in which such Vested Shares are settled; where Y
equals the product of Z multiplied by the federal income tax rate applicable to
Recipient's long-term capital gains for the year in which such Vested Shares are
settled; and where Z equals the product of the number of such Vested Units (not
to exceed the number of Restricted Shares with respect to which Section 83(b)
elections were submitted) multiplied by the difference of the Fair Market Value
of the Stock at the time that such Vested Units are settled minus $13.25. Such
gross-up payment shall be made at the same time the Vested Units are settled
under Section 5.
11. Tax Withholding Obligations. Recipient shall be required to deposit
with the Company an amount of cash equal to the amount determined by the Company
to be required with respect to any withholding taxes, FICA contributions, or the
like under any federal, state, or local statute, ordinance, rule, or regulation
in connection with the settlement of the Units. Alternatively, the Company may,
at its sole election, withhold the required amounts from Recipient's pay during
the pay periods next following the date on which any such applicable tax
liability otherwise arises. The Committee, in its discretion, may permit
Recipient, subject to such conditions as the Committee shall require, to elect
to have the Company withhold either (i) an amount of cash otherwise payable or
(ii) a number of Shares otherwise deliverable having a Fair Market Value
sufficient to satisfy the statutory minimum of all or part of the Participant's
estimated total federal, state, and local tax obligations associated with
vesting or settlement of the Units.
12. Rights as Shareholder. Recipient shall not have voting or any other rights as a shareholder of the Company with respect to the Units. Upon settlement of Vested Units into Shares, if applicable, Recipient will obtain full voting and other rights as a shareholder of the Company with respect to such Shares.
13. Amendment. This Agreement may be amended only by a written agreement executed by the Company and Recipient. Notwithstanding the foregoing, this Agreement may be amended solely by the Committee by a writing which specifically states that it is amending this Agreement, so long as a copy of such amendment
PART II - Page 6
is delivered to Recipient, and provided no such amendment adversely effecting the rights of Recipient hereunder may be made without Recipient's written consent. Without limiting the foregoing, the Committee reserves the right to change by written notice to Recipient, the provisions of the Award or this Agreement in any way it may deem necessary or advisable to carry out the purposes of the grant as a result of any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision, provided that any such change shall be applicable only to Unvested Units.
14. Notice. All notices required or permitted under this Agreement must be in writing and personally delivered or sent by mail and shall be deemed to be delivered on the date on which actually received by the Company properly addressed to the person who is to receive it. Until changed in accordance with this Agreement, the Company and Recipient specify their respective addresses as:
Company: ENGlobal Corporation
654 N. Sam Houston Pkwy. E.
Suite 400
Houston, Texas 77060-5914
Attn: Natalie S. Hairston
Recipient: As indicated on Part I
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15. Information Confidential. As partial consideration for the granting of the Award, Recipient agrees that he will keep confidential all information and knowledge that he has relating to the manner and amount of Recipient's participation in the Plan. However, such information may be disclosed as required by law and may be given in confidence to Recipient's spouse, tax, legal and financial advisors, or to the extent necessary to obtain a loan, to a financial institution.
16. Market Stand-Off.
(a) In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, if requested by the Company, Recipient shall agree not to sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to, any Shares without the prior written consent of the Company or its underwriters. This restriction (the "Market Stand-Off") shall be in effect for the period determined by the Company, but no longer than 180 days from the effective date of the final prospectus.
(b) Recipient shall be subject to the Market Stand-Off only if the officers and directors of the Company are also subject to similar restrictions.
(c) Any new, substituted or additional securities that are distributed with respect to the Shares shall be immediately subject to the Market Stand-Off, to the same extent as the Shares are covered by such provisions.
PART II - Page 7
(d) In order to enforce the Market Stand-Off, the Company may impose stop transfer instructions with respect to the Shares until the end of the applicable stand-off period.
17. No Guarantee of Continuation as a Director. This Agreement does not confer upon Recipient any right to continue to serve as a director of the Company. This Agreement shall not limit the right of the Company or its shareholders to remove Recipient as a director at any time, with or without cause, as permitted by the Company's Articles of Incorporation and Bylaws and by applicable law.
18. No Obligation to Accept Award. Recipient shall have no obligation to accept the Award granted pursuant to this Agreement.
19. Governing Law; Construction. Except to the extent provided by the Nevada Revised Statutes, this Agreement shall be governed by the laws of the State of Texas without regard to choice of law and conflicts of law principles that direct the application of the laws of a different state. The courts of Harris County, Texas shall have exclusive jurisdiction over this Agreement, and each of the parties consents to the exercise of jurisdiction over it by such courts and waives any objection to any action being brought in such courts based on any grounds, including improper venue and forum non conveniens. Captions are for ease of reference only and shall not be considered in construing this Agreement. Pronouns shall be deemed to include the masculine, feminine, neuter, singular and plural as the context may require. All exhibits are incorporated in this Agreement by reference and are a part hereof.
20. Proprietary Information. In consideration of the Company's grant of the Award and the Company's agreement to provide Recipient with confidential information of the Company, Recipient agrees to keep confidential and not to use or disclose to others at any time during the term of this Agreement or after its termination, except as expressly consented to in writing by the Company or required by law, any secrets or confidential technology or proprietary information of the Company, including, without limitation, any customer list, marketing plans or materials, or other trade secrets of the Company, or any matter ascertained by Recipient through Recipient's affiliation with the Company, the use or disclosure of which might reasonably be construed to be contrary to the best interests of the Company or to give any other party a competitive advantage to the Company. Recipient further agrees that should Recipient's term as a director of the Company terminate, Recipient will neither take nor retain, without prior written authorization from the Company, any documents pertaining to the Company. Without limiting the generality of the foregoing, Recipient agrees that he will not retain, use or disclose any papers, customer lists, marketing materials or information, books, records, files, or other documents, copies thereof, or notes or other materials derived therefrom, or other confidential information of any kind belonging to the Company pertaining to the Company's business, sales, financial condition, or products. Without limiting other possible remedies to the Company for the breach of this covenant, Recipient agrees that injunctive or other equitable relief shall be available to enforce this covenant, such relief to be without the necessity of posting a bond. Recipient further agrees that if any restriction contained in this Section is held by any court to be unenforceable or unreasonable, a lesser restriction shall be enforced in its place and remaining restrictions contained herein shall be enforced independently of each other. Recipient's obligations under this Section apply to all confidential information of the Company as well as to any and all confidential information relating to the Company's Subsidiaries and Affiliates.
PART II - Page 8
21. Severability. If any provision of this Agreement is held by final judgment of a court of competent jurisdiction to be invalid, illegal or unenforceable, such invalid, illegal or unenforceable provision shall be severed from the remainder of this Agreement, and the remainder of this Agreement shall be enforced. In addition, the invalid, illegal or unenforceable provision shall be deemed to be automatically modified, and, as so modified, to be included in this Agreement, such modification being made to the minimum extent necessary to render the provision valid, legal and enforceable. Notwithstanding the foregoing, however, if the severed or modified provision concerns all or a portion of the essential consideration to be delivered under this Agreement by one party to the other, the remaining provisions of this Agreement shall also be modified to the extent necessary to equitably adjust the parties' respective rights and obligations hereunder.
22. Entire Agreement. Except as provided below, this Agreement, including the exhibits and schedules, if any, contains the entire agreement of the parties with respect to its subject matter, and supersedes all prior agreements between them, whether oral or written, of any nature whatsoever with respect to the subject matter hereof, including the Restricted Stock Award Agreement dated June 19, 2008. However, this Agreement does not supersede the Company's rights under any agreement between Recipient and the Company that protects the Company's proprietary information or intellectual property. Rather, all such rights of the Company under any such agreements shall be in addition to the rights granted herein.
* * * * *
PART II - Page 9
SPOUSAL CONSENT
I, spouse of ______________, have read and am aware of, understand and fully consent and agree to the provisions of the Agreement attached hereto and its binding effect upon any interest, community or otherwise, I may own now or hereafter in any Units or Shares, and agree that the termination of my marriage to ____________ for any reason shall not have the effect of removing any Units or Shares otherwise subject to the Agreement from the coverage thereof. I hereby evidence such awareness, understanding, consent and agreement by joining in the Agreement and by executing this Agreement below.
Printed Name:
Address:
PART II - Page 10
Exhibit 31.1
CERTIFICATION
I, William A. Coskey, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarter ended June 30, 2008 of ENGlobal Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 11, 2008 By: /s/ William A. Coskey
-------------------------
William A. Coskey
Chief Executive Officer
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Exhibit 31.2
CERTIFICATION
I, Robert W. Raiford, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarter ended June 30, 2008 of ENGlobal Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 11, 2008 By: /s/ Robert W. Raiford
-------------------------
Robert W. Raiford
Chief Financial Officer
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Exhibit 32
CERTIFICATION
Each of the undersigned hereby certifies, for the purposes of section 1350 of chapter 63 of title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of ENGlobal Corporation ("ENGlobal"), that, to his knowledge, the Quarterly Report of ENGlobal on Form 10-Q for the period ended June 30, 2008, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operation of ENGlobal. This written statement is being furnished to the Securities and Exchange Commission as an exhibit to such Form 10-Q. A signed original of this statement has been provided to ENGlobal and will be retained by ENGlobal and furnished to the Securities and Exchange Commission or its staff upon request.
Date: August 11, 2008 By: /s/ William A. Coskey
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William A. Coskey
Chief Executive Officer
Date: August 11, 2008 By: /s/ Robert W. Raiford
-------------------------
Robert W. Raiford
Chief Financial Officer and
Treasurer
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