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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended May 31, 1997.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File No. 0-18716
MATRIX SERVICE COMPANY
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization)
10701 East Ute Street
Tulsa, Oklahoma
(Address of Principal Executive Offices)
73-1352174 (I.R.S. Employer Identification No.)
74116 (Zip Code)
Registrant's telephone number, including area code: (918) 838-8822.
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock,
par value $0.01 per share (Title of class)
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 shorter period
that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The approximate aggregate market value of the registrant's common stock
(based upon the August 26, 1997 closing sale price of the common stock
as reported by the NASDAQ National Market System) held by non-affiliates
as of August 26, 1997 was approximately $72,370,042.
The number of shares of the registrant's common stock outstanding as of
August 26, 1997 was 9,491,153 shares.
Documents Incorporated by Reference
Certain sections of the registrant's definitive proxy statement relating
to the registrant's 1996 annual meeting of stockholders, which definitive
proxy statement will be filed within 120 days of the end of the registrant's
fiscal year, are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
Part I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
PART I
Item 1. Business
TABLE OF CONTENTS
Part I
Page
----
Item 1. Business 1
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Part II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 22
Part III
Item 10. Directors and Executive Officers of the Registrant 23
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial
Owners and Management 23
Item 13. Certain Relationships and Related Transactions 23
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 24
PART I
Item 1. Business
Background
Matrix Service Company (the "Company") provides specialized on-site
maintenance and construction services for petroleum refining and storage
facilities and water storage tanks and systems for the municipal and
private industry sector. Owners of these facilities use the Company's
services in an effort to improve operating efficiencies and to comply with
stringent environmental and safety regulations. Through its subsidiaries
Matrix Service, Inc.("Matrix"), San Luis Tank Piping Construction Co., Inc.,
and an affiliated company West Coast Industrial Coatings, Inc. (collectively
"San Luis"), Heath Engineering, Ltd., and an affiliated company ("Heath"),
Brown Steel Contractors, Inc. and affiliated companies (collectively, "Brown")
and Mayflower Vapor Seal Corporation ("Mayflower"), the Company provides
maintenance and construction services and related products for large
aboveground storage tanks ("ASTs") holding petroleum, petrochemical and
other products and piping systems located at petroleum refineries and bulk
storage terminals. Also, the Company provides field-erected, elevated and
ground-level water tanks for the municipal and private industry sector.
Through its subsidiaries, Midwest Industrial Contractors, Inc. ("Midwest"),
and Colt Construction Company ("Colt"), the Company provides maintenance and
construction services for refineries. Midwest and Colt specialize in
performing "turnarounds", which involve complex, time-sensitive maintenance
of the critical operating units of a refinery. The Company focuses on
fluid catalytic cracking units and process heaters, but has the ability to
work on all units within a refinery.
The Company was incorporated in Delaware in 1989 to become a holding company
for Matrix, which was incorporated in Oklahoma in 1984, and Petrotank
Equipment Inc. ("Petrotank"), which was incorporated in Oklahoma in 1988.
In October 1990, the Company acquired through a subsidiary substantially all
of the assets and operations of Midwest. In June 1991, the Company acquired
San Luis (the "San Luis Acquisition"). In December 1992, the Company acquired
through a subsidiary substantially all of the assets and operations of Colt.
In June 1993, the Company acquired substantially all of the assets and assumed
certain liabilities of Heath. In July 1993, the Company entered into a joint
venture (Al Shafai-Midwest Constructors) with a Saudi Arabian company to
perform mechanical contracting services in the Kingdom of Saudi Arabia.
Al Shafai-Midwest Constructors is 49% owned by Midwest International, Inc.,
a wholly-owned subsidiary of the Company. Al Shafai-Midwest Constructors was
issued a commercial license to perform services in Saudi Arabia in June 1993.
In May 1995, the Company discontinued operations in Saudi Arabia, and is in
the process of liquidating the joint venture. In April 1994, the Company
acquired Brown. In August 1994 the Company acquired certain assets of
Mayflower Vapor Seal Corporation. Unless the context otherwise requires,
all references herein to the Company include Matrix Service Company and its
subsidiaries. The Company's principal executive offices are located at
10701 East Ute Street, Tulsa, Oklahoma 74116, and its telephone number at
such address is (918) 838-8822.
Recent Development - The MainServ Acquisition
On June 17, 1997, the Company acquired (the "MainServ Acquisition") General
Service Corporation and affiliated companies (collectively, "MainServ").
MainServ provides services and products similar to those provided by Matrix
and operates primarily in the Northeast part of the United States, with
products sales to U.S. and foreign customers. The aggregate consideration
payable for the MainServ Acquisition is up to$7.75 million, including
certain potential future payments. A portion of the consideration was
payable by delivery at the closing of the transaction of (i) $4.75 million
in cash, and (ii) a $250,000 promissory notes payable in 12 equal quarterly
installments. In addition, the stockholders and stock appreciation rights
holders of MainServ are entitled to receive in the future up to an additional
$2.75 million in cash if MainServ satisfies certain earnings requirements.
The MainServ Acquisition will be accounted for under the "Purchase" method
of accounting and will result in the creation of approximately $2.9 million
of intangibles (excluding goodwill that would be attributable to the $2.75
million contingent earnout payment if it is paid), of which $2.3 million,
representing the goodwill, will be amortized by the Company over a 40-year
period and $600 thousand, attributable to noncompetition covenants, will be
amortized over a three-year period. See the Notes to the Company's
consolidated financial statements included elsewhere in this annual report.
Aboveground Storage Tank Operations
The Company's AST operations include the maintenance, repair, inspection,
design and construction of ASTs, and the equipping of these tanks with
devices mandated by current and proposed environmental regulations. These
devices include a variety of floating roof and seal assemblies, tank bottoms
and secondary containment systems, each of which is designed to enable tank
owners and operators to comply with federal and state air and water quality
guidelines and regulations regarding leaks and spills of petroleum products
from storage facilities.The Company manufactures and sells certain of these
devices, including a line of patented floating roof seals. These seals,
which are marketed under the Company's Flex-A-Seal and Flex-A-Span trademarks,
reduce losses of stored petroleum products through evaporation and,
consequently, reduce air pollution. In addition, the seals reduce the amount
of rainwater that enters the tanks, reduce the hazards of rim fires thereby
reducing product contamination, lowering waste-water disposal costs, and
reduce tank owner's overall risk. The Company's secondary containment
systems allow tank owners to detect leaks in the tanks at an early stage,
before groundwater or surface water contamination has occurred. In addition,
the systems help to control leakage until the tank can be repaired.
AST Market and Regulatory Background
The American Petroleum Institute has estimated that there are approximately
700,000 ASTs in the United States that store crude oil, condensate, lube
oils, distillates, gasolines and various other petroleum products. These
tanks range in capacity from 26 barrels (42 gal/barrel) to in excess of
1,000,000 barrels. The Company's principal focus is inspecting,
maintaining, repairing, designing and constructing large ASTs, with
capacities ranging from approximately 50 to 1,000,000 barrels. The Company
believes, based on industry statistics, that there are over 120,000 of
these large tanks currently in use, accounting for more than 70% of the
domestic petroleum product storage capacity. These ASTs are employed
primarily by the refining and storage segments of the petroleum industry.
The petrochemical industry also employs a significant number of large ASTs.
Historically, many AST owners limited capital expenditures on ASTs to new
construction and periodic maintenance on an as-needed basis. Typically,
these expenditures decreased during periods of depressed conditions in the
petroleum and petrochemical industries, as AST owners sought to defer
expenditures not immediately required for continued operations.
In the two most recent years, there has been some increased demand for AST
services; however, during fiscal years 1995 and 1994 there was a decrease
in the overall demand for AST services, generally related to conditions in
the petroleum industry. During the last three years, several factors have
shifted new responsibilities to AST service companies. First, increased
safety and health requirements have caused owners of the facilities to rely
on outside sources who have the safety equipment and training to provide
repair and maintenance services. Second, increasingly stringent federal and
state regulations regarding air, soil and water contamination from petroleum
storage facilities, and the related potential liability associated with
responsibility for environmental damage, have led AST owners to rely on
service companies to provide more preventive maintenance and equip their
ASTs with various pollution control devices. Third, many technical personnel
left the petroleum and petrochemical industries resulting in a loss of in-house
AST management expertise. Fourth, recent changes in the marketing of gasoline
and changes in the supply of refined petroleum products resulting from the
closing of certain refineries have caused an increase in demand for new
tankage to provide storage facilities at new locations. Fifth, environmental
requirements for oxygenated fuels has also created a demand for new tanks.
The principal environmental regulations that affect AST owners generally
fall within two categories - air pollution regulations and soil and water
contamination regulations. See "Business - Other Business Matters -
Regulation." Regulations adopted by the United States Environmental
Protection Agency ("EPA") and several states provide incentives to owners
and operators of ASTs to maintain and inspect their tanks on a regular
basis and, in some cases, to install double tank bottoms and other
secondary containment systems to prevent contamination of soil and water
and allow for early detection of leaks. The EPA and numerous states have
also adopted regulations generally requiring facilities that hold petroleum
products, petrochemicals and other volatile liquids be equipped with roof
and seal assemblies that substantially decrease atmospheric emissions from
these liquids. Because many existing ASTs were designed with a floating
roof assembly that contained only a single roof seal, these regulations
have required many AST owners to retrofit their tanks with new roof and
seal assemblies. See "Aboveground Storage Tank Operations - AST Services
and Products" and "Other Business Matters - Regulation."
On March 29, 1990, the EPA published the Toxicity Characteristic Leachate
Procedure (the "TCLP") regulation, which provided new guidelines for
identifying certain wastes as "hazardous" under the Resource Conservation
Recovery Act of 1976 ("RCRA"). The TCLP regulation continues to be
amended. The regulation generally provides that a waste will be considered
hazardous if the leachate from the TCLP leaching procedure test contains
any one of several identified substances at concentrations higher than
prescribed levels. These substances include benzene, a common component
of petroleum wastes from refineries. Benzene was not included in the prior
EPA leaching procedure test, which has been replaced by the TCLP. The
Company believes that regulations pursuant to the TCLP and RCRA have been,
and will continue to be, beneficial to its business by requiring its
customers to construct new storage tanks to replace existing surface
impoundments. See "Other Business Matters - Regulation."
In January 1991, the American Petroleum Institute ("API") adopted industry
standards for the maintenance, inspection and repair of existing ASTs. The
API standards provide the industry for the first time with uniform guidelines
for the maintenance and repair of ASTs. The Company believes that these
standards have resulted, and will continue to result, in an increased
level of AST maintenance and repair on the part of many AST owners.
AST Services and Products
The Company provides its customers with a comprehensive range of AST
services and products. The Company specializes in maintenance and repair
of ASTs and retro-fitting existing ASTs with a variety of pollution control
devices as part of its general maintenance services. In addition, the
Company constructs new ASTs, provides AST inspection and manufactures tank
appurtenances.
New Construction
The Company designs, fabricates and constructs new ASTs to both petroleum
and water industry standards and customer specifications. These tanks
range in capacity from approximately 50 barrels to 1,000,000 barrels.
Clients require new tanks in conjunction with expansion plans, replacement
of old or damaged tanks, storage for additional product lines to meet
environmental requirements, replacement of surface impoundments and changes
in population.
Maintenance and Modification
The Company derives a significant portion of its revenues from providing
AST maintenance, repair and modification services. The principal services
in this area involve the design, construction and installation of floating
roof and seal assemblies, the design and construction of secondary
containment systems (double bottoms), and the provision of a variety of
services for underground and aboveground piping systems. The Company also
installs, maintains and modifies tank appurtenances, including spiral
stairways, platforms, water drain-off assemblies, roof drains, gauging
systems, fire protection systems, rolling ladders and structural supports.
Floating Roof and Seal Assemblies. Many ASTs are equipped with a floating
roof and seal assembly. A floating roof consists of a circular piece of
welded steel or thin aluminum that floats on the surface of the stored
petroleum product. The floating roof is required by environmental
regulations to minimize vapor emissions and reduce fire hazard. A floating
roof also prevents losses of stored petroleum products. The seal spans the
gap between the rim of the floating roof and the tank wall. The seal
prevents vapor emissions from an AST by creating the tightest possible seal
around the perimeter of the roof while still allowing movement of the roof
and seal downward and upward with the level of stored product. In
addition, the Company's seal system prevents substantially all rain water
from entering the tank. The type of seal assembly the Company most
commonly installs consists of a primary mechanical "shoe" seal and a
secondary flexible seal mounted above the shoe seal. A mechanical shoe
seal is a metal sheet connected to the outer rim of a floating roof and
held vertically against the wall of the storage vessel by hangers and
springs system. A flexible coated "vapor" fabric spans the space between
the metal shoe and the floating roof. The secondary seal is composed of a
flexible tip and an additional vapor fabric mounted on a metallic
compression plate attached to the rim of the floating roof. The Company's
seals are manufactured from a variety of materials designed for
compatibility with specific petroleum products. All of the seals installed
by the Company may be installed while the tank is in service, which reduces
tank owners' maintenance, cleaning and disposal costs. In addition to a
mechanical shoe seal coupled with a secondary flexible seal, the Company
also installs a variety of other types of seal systems designed to meet
customer specifications.
Secondary Containment Systems. The Company constructs a variety of
secondary containment systems under or around ASTs according to its own
design or the design provided by its customers. Secondary leak detection
systems allow tank owners to detect leaks in the tanks at an early stage
before groundwater contamination has occurred. In addition, the systems
help to contain leakage until the tank can be repaired.
The most common type of secondary containment system constructed involves
installing a liner of high-density polyethylene, reinforced polyurethane
or a layer of impervious clay under the steel tank bottom. The space
between the liner and elevation of the new bottom is then filled with
a layer of concrete or sand. A cathodic protection system may be installed
between the liner and the new bottom to help control corrosion. Leak
detection ports are installed between the liner and steel bottom to
allow for visual inspection while the tank is in service.
The Company believes that during the 1990's a substantial number of AST
owners have installed, and will continue to install, secondary containment
systems.
Elevated Tanks
In April 1994, as a result of the Company's efforts to expand its product
base, the Company purchased Brown Steel, which designs, fabricates and
erects elevated tanks for water storage for municipalities and industrial
customers. Brown's facilities in Georgia include fabrication equipment,
and buildings containing 184,350 square feet support the elevated tank
operations. The equipment gives Brown the ability to produce two-dimension
roll in steel for the fabrication of spherical shaped tanks. This facility
is qualified to perform services on equipment that requires American Society
of Mechanical Engineering Code Stamps ("ASME Codes"). Demand for these types
of tanks is expected to increase given the current upturn in housing starts
resulting in a corresponding increase in the demand for water.
Manufacturing
The Company owns and operates a "state-of-the-art" fabrication facility
located on 13 acres at the Tulsa Port of Catoosa. The Company owns the
building and equipment. This facility has the capacity to fabricate new
tanks, new tank components and all maintenance, retrofit and repair parts
including fixed roofs, floating roofs, seal assemblies, shell plate and
tank appurtenances. The Tulsa Port has transportation service via railroad
and Mississippi River barge facilities in addition to the interstate highway
system, making it economical to transport heavy loads of raw material and
fabricated steel. This facility is qualified to perform services on
equipment that requires ASME Codes. Many state agencies and insurance
carriers require that certain equipment be ASME coded. Many of the
Company's competitors are not ASME code qualified, forcing them to
subcontract portions of a project, giving the Company an advantage on this
type of work.
The Company leases two manufacturing facilities in California and owns a
manufacturing facility in Georgia. See "Business - Aboveground Storage
Tank Operations - Elevated Tanks" for a description of the facility in
Georgia. The Company rents the real estate and owns the equipment in the
two leased facilities in California which is used for fabricating new tanks
and tank components.
Hydrocarbon Process Operations
The Company provides specialized maintenance and construction services to
the domestic petroleum refining industry and, to a lesser extent, to the
gas processing and petrochemical industries. The Company specializes in
routine and supplemental plant maintenance, turnarounds and capital
construction services, which involve complex, time-sensitive maintenance of
the critical operating units of a refinery. The Company concentrates on
performing these services for the more structurally complex components in a
refinery. See "Hydrocarbon Process Operations - Hydrocarbon Process
Components".
Hydrocarbon Process Market Overview
The domestic petroleum refining industry presently consists of approximately
163 operating refineries. To ensure the operability, environmental compliance,
efficiency and safety of their plants, refiners must maintain, repair or
replace process equipment, operating machinery and piping systems on a
regular basis. Major maintenance and capital projects require the shutdown
of an operating unit, or in some cases, the entire refinery. In addition to
routine maintenance, numerous repair and capital improvement projects are
undertaken during a turnaround. Depending on the type, utilization rate,
and operating efficiency of a refinery, turnarounds of a refinery unit
typically occur at scheduled intervals ranging from six months to four years.
The U.S. refinery industry has undergone significant changes in the last 16
years. From 1981 to 1997, crude oil refining capacity dropped from a peak
of approximately 18.6 million barrels per day in 1981, to approximately
15.3 million barrels per day by the end of 1996, due primarily to the
closure of many inefficient refineries. The closings were the result of
increased international competition, reduced demand for domestic petroleum
products, which resulted in declining product prices during the first part
of this period, and the inability of some refineries to cost effectively
finance capital improvements required to produce cleaner burning fuels and
meet environmental regulations.
Since 1993, a combination of increased demand for petroleum products and a
stabilization in refining capacity has led to a substantial increase in
refinery utilization. In addition, an improvement in refining profitability
during the last two years has also provided an incentive for refiners to
maintain high levels of utilization at their facilities. The high utilization
rates have accelerated the physical deterioration of existing refineries,
intensifying the need for repair and maintenance services. In addition, due
to the high cost and environmental opposition associated with the construction
of new refineries, any increase in current refining capacity is likely to
involve refurbishing old refineries and expanding existing facilities, which
will require specialized construction services. Increased utilization rates
and increased refining profitability provide an incentive for refineries to
minimize the duration of maintenance turnarounds. In addition, increased
public awareness of environmental issues, potential liability for exposure to
hazardous working conditions, toxic materials, and environmental contamination,
have resulted in increased stringent regulations which dictate that refineries
clean, inspect and maintain process and storage facilities more frequently.
Further, refineries have been subject to increasing regulatory pressure to
upgrade their emission control systems.
These factors have encouraged refineries to increase their reliance on
outside contractors who can perform specialized turnaround services within
strict time constraints. The Company believes, for example, that
substantially all fluid catalytic cracking unit turnarounds are currently
performed by outside contractors. Additional specialized modifications to
many existing refineries may be required to produce cleaner burning,
reformulated gasolines and desulphurized diesel fuel based on amendments to
the Clean Air Act. See "Other Business Matters - Regulation." Management
believes that projects related to pollution control are contributing a
significant part of the Company's refinery-related revenues.
Hydrocarbon Process Components
The Company's principal refinery services are related to turnaround projects
at petroleum refineries. The size and complexity of a turnaround project
depends on the type of refinery unit being maintained or modified and the
nature of any necessary modifications. The following paragraphs describe
the major units involved in a typical refinery. The Company performs
turnaround services with respect to each of the units described below, all
of which must be maintained on a regular basis to ensure safe and efficient
refinery operations.
Crude Distillation Unit. In the refining process, hydrocarbon raw materials
(primarily crude oil) are heated to approximately 275 degrees Farenheit.
The crude is then treated to remove salt and then heated further, resulting
in partial vaporization. The vapors are then routed to a crude distillation
unit, where they are further heated. The hydrocarbon compounds that comprise
crude oil separate, or "fractionate", when subjected to high temperatures.
The crude distillation unit fractionates the hydrocarbons into several
intermediate products, several of which undergo further processing in various
downstream units, the most important of which are discussed below.
Fluid Catalytic Cracking Unit. Catalytic cracking greatly enhances the
efficiency of a refinery by converting a greater percentage of hydrocarbon
compounds to gasoline and other light distillates. The Fluid Catalytic
Cracking Unit ("FCCU") mixes straight-run heavy gas oil with a fine
powdered catalyst in the presence of extreme heat (650 degrees farenheit to
1,050 degrees farenheit). The larger hydrocarbon molecules "crack apart"
under such conditions, and can then be fractionated into light gases,
gasoline and light and heavy cycle oils. Spent catalyst is delivered to a
regenerator where carbon deposits are burned so the catalyst can be used
again.
Delayed Coker Unit. Delayed coking is a thermal cracking process in which
residual substances are heated to high temperatures and allowed time to
decompose into hydrocarbon vapors and a solid residue coke product. A full
range of light hydrocarbon gases, including hydrogen and olefins, are
produced by the coking reaction. These gases, in addition to gasoline
boiling range material ("naphtha") cracked products, are compressed and
cooled at sufficiently high pressure to condense the volatile light
hydrocarbons. The liquified petroleum gases are then routed to an Alkylation
Unit, which is described below. Coker gas oil is produced as a side product
from the coker fractionator with a vaporization temperature of approximately
900 degrees Farenheit. This oil is routed to the FCCU. Petroleum coke from
the Delayed Coker Unit is used for fuel, for electrodes and for special
purposes such as manufacturing graphite.
Catalytic Reformer Unit. The Catalytic Reformer Unit upgrades the octane
of the naphtha produced in the Delayed Coker Unit. The octane of the
naphtha is approximately 52, compared with the average refinery gasoline
pool octane of 87.9. Straight-run and cracked refinery naphthas boiling
between 160 degres Farenheit and 390 degrees Farenheit are catalytically
reformed to improve motor fuel properties. Prior to entering the Catalytic
Reformer Unit, naphtha is fractionated into light, medium and heavy naphtha
streams. The two lighter streams are selectively blended into gasoline and
military jet fuel. The heavy naphtha fraction is routed to a naphtha
hydro-treating unit prior to catalytic reforming. The principal product of
the reformer is reformat, a high octane gasoline blending stock.
Alkylation Unit. The Alkylation Unit is used to alkylate or chemically
combine isobutane with propylene and butylene to form high octane gasoline.
The process utilizes hydrofluoric acid or sulfuric acid as the alkylation
catalyst. The feedstock for the Alkylation Unit is produced by the FCCU
and the Delayed Coker Unit and contains saturated propane, isobutane, and
normal butane in addition to propylene and butylene. The feed stream also
contains significant amounts of hydrogen sulfide, which is extracted and
routed to a sulfur recovery unit. The reactor effluent is partially
vaporized through a heat exchanger to provide refrigeration for the
reactor-contractor. The vapors are compressed and then fractionated into
propane, isobutane and normal butane, and alkylate.
Butamer Unit. A Butamer Unit converts normal butane to isobutane. A
refinery needs a source of supplemental isobutane on a year-round basis to
balance the requirements of the Alkylation Unit. Most of the normal butane
produced in a refinery is blended into gasoline to increase vapor pressure.
During the summer months, when gasoline vapor pressure specifications are low,
the refinery generally has adequate or surplus supplies of normal butane.
During the winter months, when gasoline vapor pressure specifications are
high, a refinery buys normal butane from outside sources.
Process Heaters. A process heater is a large, specialized furnace used to
heat hydrocarbons to varying temperatures within each of the refining units
described above. Each of such units includes at least one heater, and
frequently includes several heaters.
Hydrocarbon Process Services
The Company's principal refinery services include turnarounds for the
complete refinery with integrated process units, the FCC Units within a
refinery, and complete construction and maintenance services.
Turnarounds
FCCU Turnarounds. The Company's principal refinery operations involve
turnarounds of FCCUs. FCCUs require a high level of maintenance because of
the extremely high temperatures inside the unit - in excess of 1000 degrees
Farenheit - and due to abrasive catalysts flow and their many internal
parts, which consist generally of stainless steel components and refractory
lined systems. Refractory is a heat and erosion resistant lining that
insulates the inner shell of the unit vessels. The main pieces of equipment
in an FCCU are the reactor, the regenerator and the flue gas handling system.
Most of the repair and revamp work during a turnaround is performed on this
equipment. Major revamp work is required to increase efficiencies of the FCCU
with changing technology and to reduce air pollution from the unit, as required
by constantly changing laws. In most cases, the mechanical work - involving
the disassembly and repair of the unit components - and the refractory work -
involving the installation of the refractory material onto the inside of
the units vessels - is performed by different contractors. The Company
provides all of these services. Total Unit Turnarounds. The Company also
performs total unit turnarounds involving maintenance of crude distillation
units, catalytic reformer units, delayed coker units, alkylation units,
reformers, FCCUs and butamer units. These services also involve the
maintenance and modification of heat exchangers, heaters, vessels and
piping.
Heat Exchanger Services
The Company provides heat exchanger service to the refining industry,
which involves the removal, testing, repairing and reinstallation of heat
exchangers. The Company owns specialized equipment to extract and reinstall
heat exchangers from both ground levels and aerial installations. In addition,
the Company owns retubing equipment, hydraulic bolt torquing equipment and
specialized transport carriers for moving these heat exchangers throughout
the facilities.
Process Heaters
The Company constructs new refinery process heaters and repairs and revamps
existing heaters. These units require skilled craftsmen and supervisors
and specialized construction techniques. Through associations with various
heater manufacturing companies, the Company also offers turnkey fabrication
and erection of process heaters. The Company has performed field erection
work for most of the major heater design companies in the U.S.
Other Support Services
Emergency Response Services. The Company also performs substantial repair
and revamp services in connection with refinery unit failures, fires,
explosions and other accidents. The Company believes that it has enhanced
its relationships with its customers by responding quickly to these types of
emergencies and by providing timely repair services, returning the affected
plants to normal operations without substantial delays.
Manufacturing. The Company owns and operates a 40,000 square foot fabrication
shop in Tulsa, Oklahoma and operates a 30,000 square foot facility in
Bellingham, Washington and a 12,000 square foot facility in Carson, California
that it uses to support its turnaround projects. At these facilities, the
Company constructs piping,heater coils and components, and FCCU equipment
installed during turnarounds. The Company also performs emergency fabrication
at these facilities when necessary to assist its customers. In many instances,
the facilities are operated 24 hours per day to assist a turnaround project.
Refractory. The Company also owns and operates a 15,000 square foot shop,
located at the Tulsa, Oklahoma facility used for performing refractory
installation. The shop, which supports the Company's mechanical turnaround
services, contains specialized equipment and is operated by the Company's
refractory department.
ASME Code Stamp Services. The Company is qualified to perform services on
equipment that contains American Society of Mechanical Engineer Code Stamps
("ASME codes"). Many state agencies and insurance companies require that
qualified ASME code installers perform services on ASME coded equipment.
Many of the Company's competitors are not ASME code qualified, which forces
them to subcontract portions of a project involving work with coded equipment.
Daily and Routine Supplemental Maintenance. The Company provides supplemental
and routine daily maintenance services for operating refineries. Daily work
crews at the refineries range in size from 120 to over 165 per refinery.
The Company provides a wide range of supplemental services including equipment
operations and complete daily maintenance services and repairs. Moreover,
the pressure to reduce the overall cost of maintaining the refineries has
initiated a trend of restructuring the daily and routine maintenance forces.
Refineries are seeking outside supplemental maintenance forces with proven
programs for increasing unit and equipment reliability, and a history of
performing work safely. The Company has entered into two multi-year
maintenance agreements. The Company believes there is a substantial market
for a quality maintenance workforce that places an emphasis on safety and
that can forge partnerships with refinery personnel to reduce maintenance
expenses.
Other Business Matters
Customers and Marketing
The Company derives most of its revenues from performing services for the
major integrated oil companies. The Company also performs services for
independent petroleum refining and marketing companies, architectural and
engineering firms and for several major petrochemical companies. In
addition, the Company builds water tanks for private and municipal water
facilities. The Company is typically engaged by the manager of the facility
at which the work is being performed, although on occasion the Company
contracts with one of its customers to perform services at several facilities.
The Company did not have any one customer accounting for more than 10% of
revenues in 1997 and 1995. During fiscal 1996, ARCO USA accounted for more
than 10% of the Company's revenues. The Company sold its products and
services to approximately 311 customers during fiscal 1997.
The Company markets its services and products primarily through its marketing
personnel, senior professional staff and its management. The marketing
personnel concentrate on developing new customers and assist management and
staff with existing customers. The Company generally is required to bid
competitively for work on a project-by-project basis. Projects are typically
awarded after a bidding process spanning two weeks to four months, and are
generally awarded based on price considerations, work quality, safety and
efficiency. The Company bids for projects on both a fixed price basis and
on a detailed time and materials basis. During 1997 the Company entered
into an alliance contract with a major oil company to be the sole supplier
of tank repair and maintenance services for this customer. The Company has
had discussions with other customers for maintenance alliances.
Competition
The AST and refinery service industries are highly fragmented and
competition is intense within these industries. Competition is based on,
among other factors, work quality and timeliness of performance, safety and
efficiency, availability of personnel and equipment, and price. The
Company believes that its expertise and its reputation for providing timely
services allow it to compete effectively. Although many companies that are
substantially larger than the Company have entered the market from time to
time in competition with the Company, the Company believes that the level
of expertise necessary to perform complicated, on-site maintenance and
construction operations presents an entry barrier to these companies and
other competitors with less experience than the Company.
Backlog
At May 31, 1997, the Company had an estimated backlog of work under
contracts believed to be firm of approximately $ 69.1 million, as compared
with an estimated backlog of approximately $71.9 million as of May 31,
1996. Virtually all of the projects comprising this backlog are expected
to be completed within fiscal year 1998. Because many of the Company's
contracts are performed within short time periods after receipt of an
order, the Company does not believe that the level of its backlog is a
meaningful indicator of its sales activity.
Insurance
The Company maintains worker's compensation insurance, general liability
insurance and auto liability insurance in the primary amount of $2.0
million, and an umbrella policy with coverage limits of $ 20.0 million in
the aggregate. The Company also maintains policies to cover its equipment
and other property with coverage limits of $59.9 million and policies for
care, custody and control with coverage limits of $2.7 million in the
aggregate. Most of the Company's policies provide for coverage on an
occurrence basis, not a "claims made" basis. The Company's liability
policies are subject to certain deductibles, none of which is higher than
$100,000. The Company maintains a performance and payment bonding line of
$45.0 million. The Company also maintains key-man insurance policies
covering certain of its executive officers, and professional liability
insurance.
Many of the Company's contracts require it to indemnify its customers for
injury, damage or loss arising in connection with their projects, and
provide for warranties of materials and workmanship. There can be no
assurance that the Company's insurance coverage will protect it against
the incurrence of loss as a result of such contractual obligations.
Employees
At May 31, 1997, the Company had approximately 272 non-field, full-time
employees. The Company also employed up to approximately 1,174 additional
persons on a project-by-project basis during fiscal 1997. In its refinery
turnaround operations, the Company employed up to approximately 830 persons
at its job sites during the most active periods of 1997. Approximately 361
of the employees of Matrix Service Mid-Continent, Inc., a subsidiary of the
Company, are covered by a collective bargaining agreement. In addition,
substantially all of the temporary employees of Midwest are employed under
collective bargaining agreements. The Company believes that its relations
with its employees are good, and has not experienced any significant strikes
or work stoppages.
Patents and Proprietary Technology
The Company holds two issued U.S. patents, which cover its Flex-A-Seal and
Flex-A-Span roof seal products. The Company's Flex-A-Seal patent is held
jointly with an English company, which markets the Flex-A-Seal products in
the United Kingdom. The Flex-A-Seal patent expires in August 2000 and the
Flex-A-Span patent expires in August 2008. The Company also holds the
patents for Flex-A-Seal and Flex-A-Span in Holland and in Canada. The
Company holds a U.S. patent which covers its ThermoStor, a diffuser system
that receives, stores and dispenses both chilled and warm water in and from
the same storage tank. The ThermoStor patent expires in March 2010. The
Company also holds a patent for a Floating Deck Support Apparatus for
aluminum roofs. This patent expires on January 24, 2001. The Company has
applied for patents for two other products it has developed. The Company
has developed the RS 1000 Tank Mixer which controls sludge build-up in crude
oil tanks through resuspension. Also the Company has designed the Firesafe
which is an environmentally safe alternative to underground storage tanks
that meets the stringent requirements of UFC 77-203 (d)(2), NFPA 30, EPA and
Underwriter's Laboratories. While the Company believes that the protection
of its patents is important to its business, it does not believe that these
patents are essential to the success of the Company.
Regulation
Various environmental protection laws have been enacted and amended during
the past 20 years in response to public concern over the environment. The
operations of the Company and its customers are subject to these evolving
laws and the related regulations, which are enforced by the EPA and various
other federal, state and local environmental, safety and health agencies
and authorities. Although the Company believes that its operations are in
material compliance with such laws and regulations, there can be no
assurance that significant costs and liabilities will not be incurred due
to increasingly stringent environmental restrictions and limitations.
Historically, however, the cost of measures taken to comply with these laws
has not had a material adverse effect on the financial condition of the
Company. In fact, the proliferation of such laws has led to an increase in
the demand for some of the Company's products and services. A discussion
of the principal environmental laws affecting the Company and its customers
is set forth below.
Air Emissions Requirements. The EPA and many state governments have
adopted legislation and regulations subjecting many owners and operators of
storage vessels and tanks to strict emission standards. The regulations
prohibit the storage of certain volatile organic liquids ("VOLs") in
open-top tanks and require tanks which store VOLs to be equipped with primary
and/or secondary roof seals mounted under a fixed or floating roof. Related
regulations also impose continuing seal inspection and agency notification
requirements on tank owners and prescribe certain seal requirements. Under
the latest EPA regulations, for example, floating roofs on certain large
tanks constructed or modified after July 1984 must be equipped with one of
three alternative continuous seals mounted between the inside wall of the
tank and the edge of the floating roof. These seals include a foam or
liquid-filled seal mounted in contact with the stored petroleum product; a
combination of two seals mounted one above the other, the lower of which
may be vapor mounted; and a mechanical shoe seal, composed of a metal sheet
held vertically against the inside wall of the tank by springs and
connected by braces to the floating roof. The EPA is in the process of
developing further regulations regarding seals and floating roofs.
Though Company facilities themselves are generally not subject to such
requirements, these and other similar regulations have resulted in the
implementation of ongoing tank maintenance and inspection programs by
many owners and operators of ASTs. These programs also generally result
in additional tank repairs, maintenance and modifications which provide a
market for the Company's services.
Amendments to the federal Clean Air Act adopted in 1990 require, among
other things, that refineries produce cleaner burning gasoline for sale
in certain large cities where the incidence of volatile organic compounds
in the atmosphere exceeds prescribed levels leading to ozone depletion.
Refineries are undergoing extensive modifications to develop and produce
acceptable reformulated fuels that satisfy the Clean Air Act Amendments.
Such modifications are anticipated to cost refineries several billion dollars,
and require the use of specialized construction services such as those provided
by the Company. A significant number of refineries have completed changes to
produce "reformulated fuels", principally refineries serving specific areas
of the U.S.; however, there are a substantial number of refineries that have
not made the change.
Water Protection Regulations. Protection of groundwater and other water
resources from spills and leakage of hydrocarbons and hazardous substances
from storage tanks and pipelines has become a subject of increasing legislative
and regulatory attention, including releases from ASTs. Under federal Clean
Water Pollution Control Act regulations, owners of most ASTs are required to
prepare spill prevention, control and countermeasure ("SPCC") plans detailing
steps that have been taken to prevent and respond to spills and to provide
secondary containment for the AST to prevent contamination of soil and
groundwater. These plans are also subject to review by the EPA, which has
authority to inspect covered ASTs to determine compliance with SPCC
requirements. Various states have also enacted groundwater legislation that
has materially affected owners and operators of petroleum storage tanks.
The adoption of such laws has prompted many companies to install double
bottoms on their storage tanks to lessen the chance that their facilities
will discharge or release regulated chemicals. State statutes regarding
protection of water resources have also induced many petroleum companies
to excavate product pipelines located in or near marketing terminals, to
elevate the pipelines aboveground and to install leak detection systems
under the pipelines. These laws and regulations have generally led to an
increase in the demand for some of the Company's products and services.
In the event hydrocarbons are spilled or leaked into groundwater or surface
water from an AST that the Company has constructed or repaired, the Company
could be subject to lawsuits involving such spill or leak. To date, the
Company has not suffered a material loss resulting from such litigation.
Hazardous Waste Regulations. The Resource Conservation and Recovery Act of
1976 ("RCRA") provides a comprehensive framework for the regulation of
generators and transporters of hazardous waste, as well as persons engaged
in the treatment, storage and disposal of hazardous waste. Under state and
federal regulations, many generators of hazardous waste are required to
comply with a number of requirements, including the identification of such
wastes, strict labeling and storage standards, and preparation of a manifest
before the waste is shipped off site. Moreover, facilities that treat, store
or dispose of hazardous waste must obtain a RCRA permit from the EPA, or
equivalent state agency, and must comply with certain operating, financial
responsibility and site closure requirements.
In 1990, the EPA issued its Toxicity Characteristic Leaching Procedure
("TCLP") regulations. Under the TCLP regulations, which have been amended
from time to time, wastes containing prescribed levels of any one of
several identified substances, including organic materials found in
refinery wastes and waste-waters (such as benzene), will be characterized
as "hazardous" for RCRA purposes. As a result, some owners and operators
of facilities that produce hazardous wastes are being required to make
modifications to their facilities or operations in order to remain outside
the regulatory framework or to come into compliance with the Subtitle C
requirements. Many petroleum refining, production, transportation and
marketing facilities are choosing to replace existing surface impoundments
with storage tanks and to equip certain of the remaining impoundments with
secondary containment systems and double liners. Accordingly, the Company
believes that the promulgation of the TCLP regulations are having a
positive impact on its tank construction and modification business.
Amendments to RCRA require the EPA to promulgate regulations banning the
land disposal of hazardous wastes, unless the wastes meet certain treatment
standards or the particular land disposal method meets certain waste
containment criteria. Regulations governing disposal of wastes identified
as hazardous under the TCLP, for example, could require water drained from
the bottom of many petroleum storage tanks to be piped from the tanks to a
separate facility for treatment prior to disposal. Because the TCLP
regulations can, therefore, provide an incentive for owners of petroleum
storage tanks to reduce the amount of water seepage in the tanks, the
Company believes that the regulations have and will continue to positively
influence sales of its Flex-A-Seal roof seals, which materially reduce the
amount of water seepage into tanks.
CERCLA. The Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA"), also known as "Superfund", authorizes
the EPA to identify and clean up sites contaminated with hazardous
substances and to recover the costs of such activities, as well as damages
to natural resources, from certain classes of persons specified as liable
under the statute. Such persons include the owner or operator of a site
and companies that disposed or arranged for the disposal of hazardous
substances at a site. Under CERCLA, private parties which incurred
remedial costs may also seek recovery from statutorily responsible persons.
Liabilities imposed by CERCLA can be joint and several where multiple
parties are involved. Many states have adopted their own statutes and
regulations to govern investigation and cleanup of, and liability for,
sites contaminated with hazardous substances or petroleum products.
Although the liabilities imposed by CERCLA (and other environmental
legislation) are more directly related to the activities of the Company's
clients, they could under certain circumstances give rise to liability on
the part of the Company if the Company's efforts in completing client
assignments were considered arrangements related to the transport or
disposal of hazardous substances belonging to such clients. In the opinion
of management, however, it is unlikely that the Company's activities will
result in any liability under either CERCLA or other environmental regulations
in an amount which will have a material adverse effect on the Company's
operations or financial condition, and management is not aware of any current
liability of the Company based on such a theory.
Oil Pollution Act. The Oil Pollution Act of 1990 ("OPA") established a new
liability and compensation scheme for oil spills from onshore and offshore
facilities. Section 4113 of the OPA directed the President to conduct a
study to determine whether liners or other secondary means of containment
should be used to prevent leaking or to aid in leak detection at onshore
facilities used for storage of oil. The Company believes that its business
would be positively affected by any regulations eventually promulgated by
EPA that required liners and/or secondary containment be used to minimize
leakage from ASTs. While the regulation has not, to date, been enacted, the
industry designs secondary containment in all new tanks being built and, in
general, secondary containment is installed in existing tanks when they are
taken out of service for other reasons, in anticipation of this regulation.
Health and Safety Regulations. The operations of the Company are subject
to the requirements of the Occupational Safety and Health Act ("OSHA") and
comparable state laws. Regulations promulgated under OSHA by the
Department of Labor require employers of persons in the refining and
petrochemical industries, including independent contractors, to implement
work practices, medical surveillance systems, and personnel protection
programs in order to protect employees from workplace hazards and exposure
to hazardous chemicals. In addition, in response to recent accidents in the
refining and petrochemical industries, new legislation and regulations
including OSHA's Process Safety Management Standard ("PSM") requiring
stricter safety requirements have been enacted. Under PSM, employers and
contractors must ensure that their employees are trained in and follow all
facility work practices and safety rules and are informed of known potential
hazards. The Company has established comprehensive programs for complying
with health and safety regulations. While the Company believes that it
operates safely and prudently, there can be no assurance that accidents will
not occur or that the Company will not incur substantial liability in
connection with the operation of its business.
The State of California has promulgated particularly stringent laws and
regulations regarding health and safety and environmental protection. The
Company's operations in California are subject to strict oversight under
these laws and regulations and the failure to comply with these laws and
regulations could have a negative impact on the Company.
Executive Officers of the Company
The executive officers of the Company and their ages and positions are
listed below.
Name Age Position
- ------------------ ----- -------------------------------------------------
Doyl D. West 55 Chairman, President & Chief Executive Officer
C. William Lee 57 Vice President-Finance, Chief Financial Officer
Bradley S. Vetal 41 President, Matrix Service, Inc.
Martin L. Rinehart 59 Assistant to President, Matrix Service, Inc.
Robert B. Wagoner 54 Vice President-Engineering, Matrix Service,Inc.
James D. Baker 49 President, Midwest Industrial Contractors, Inc.
Tim S. Selby 49 President, San Luis Tank Piping Construction, Inc.
Bruce M. Lierman 37 President, Colt Construction Co., Inc.
Robert A. Heath 50 President, Heath Engineering, Ltd.
Sample D. Brown 62 Chief Executive Officer, Brown Steel
Contractors, Inc.
Mark A. Brown 40 President, Brown Steel Contractors, Inc.
Doyl D. West is a founder of the Company and has served as a director since
the Company's inception in 1984. Mr. West served as President of the
Company from 1984 to November 1992. Mr. West reassumed the duties of
President and Chief Executive Officer in September 1994. Prior to founding
the Company, Mr. West served in various capacities with Tank Service, Inc.,
most recently as President. Tank Service, Inc. was engaged in repair and
maintenance of the tankage in refineries and marketing and pipeline terminals.
C. William Lee is a founder of the Company and has served as its Vice
President-Finance and as a director since the Company's inception. Prior
to 1984, Mr. Lee served as Vice President-Finance and Secretary/Treasurer
of Tank Service, Inc.
Bradley S. Vetal has been with the Company since January 1987 and has
served as President of Matrix Service, Inc. since June 1, 1992. From June
1991 through May 1992, he served as Vice President of Eastern Operations of
Matrix Service Mid-Continent, Inc. From January 1987 to June 1991, Mr.
Vetal served in various capacities within Matrix. Effective June 1, 1996
Mr. Vetal assumed a newly created position of Vice President-Tank Division
of Matrix Service Company. This position is responsible for all AST
operations.
Martin L. Rinehart is a founder of the Company and served as the Vice
President-Operations of the Company from its inception to June 1992. Since
June 1992, he has served as Assistant to the President of Matrix Service,
Inc. From 1980 until 1984, Mr. Rinehart served as Executive Vice President
of Tank Service, Inc.
Robert B. Wagoner has served as Matrix Service, Inc.'s Vice President-
Engineering since 1985. From 1979 to 1984, Mr. Wagoner served as
Vice President-Operations and Manager of Operations Services for Tank
Service, Inc.
James D. Baker served as President of Midwest Industrial Contractors
since June 1, 1995. From 1993 to June 1995, Mr. Baker has served as
Manager of Engineering and Estimating for Midwest. From 1988 to 1993,
Mr. Baker served as Manager of Capital Construction and Maintenance-
Turnaround Planning for Sun Refining & Marketing Company. Prior to
working for Sun, Mr. Baker worked for Edecon, Inc. and Refractory
Construction, Inc. as an engineer and estimator involved in maintenance
and capital work for the petrochemical industry. Mr. Baker holds a BSME
degree from Lawrence Institute of Technology.
Tim Selby is a founder of San Luis Tank Piping Construction, Inc. and has
served as its President since 1975. Mr. Selby graduated from Fresno State
University in 1970 with a degree in Business Administration.
Bruce M. Lierman has served as President of Colt Construction Company since
March 1997. Mr. Lierman held numerous positions with Colt since its formation
in 1984. His diversified experience within Colt includes developing and
managing turnaround, construction and maintenance work groups for the
company. After attending Washington State University, Mr. Lierman went
to work for Crown Zellerbach Corporation of Portland, Oregon in January 1982.
From June 1983 to September 1985, Mr. Lierman worked for the family owned
electrical construction business, Lierman Electric.
Robert A. Heath has served as President of Heath Engineering, Ltd. since
1976. He graduated in 1971 from Queen's University in Kingston, Ontario
Canada with a degree of Bachelor Science in Electrical Engineering. Upon
graduation, Mr. Heath worked with his father, William Heath in management
of William R. Heath Company. When his father retired, Mr. Heath became
President and started Heath Engineering Ltd. He has been registered with
the Association of Professional Engineers since July 19, 1973.
Sample D. Brown has served as Chief Executive Officer of Brown Steel
Contractors, Inc. since 1992. After graduating from Auburn University in
1956, Mr. Brown joined the company and has served in various management
positions, including President and Chairman of the Board. Mr. Brown is a
son of Mr. & Mrs. E.W. Brown, Sr., the co-founders of Brown Steel.
Mark A. Brown has served as President of Brown Steel Contractors, Inc.
since 1992. After graduating from Auburn University in 1979, Mr. Brown
joined the company and has served in various management capacities in all
phases of company operations. Mr. Brown is a grandson of the original
company founders, and the son of Sample D. Brown.
Item 2. Properties
The executive offices of the Company are located in a 20,400 square foot
facility owned by the Company and located in Tulsa, Oklahoma. A 3,000
square foot warehouse and engineering testing shop is located on the
premises and is also owned by the Company. The Company also owns a 13,500
square foot facility in Tulsa where its Midwest operations are headquartered,
a 40,000 square foot fabrication shop and 25,000 square feet of warehouse and
maintenance shop space adjacent to Midwest's executive offices. The
Company owns a 64,000 square foot facility located on 13 acres of land
leased from the Tulsa Port of Catoosa which is used for the fabrication of
tanks and tank parts. The Company also owns a 22,000 square foot facility
located on 14 acres of land in Tulsa, Oklahoma for Tulsa regional operations,
a 13,300 square foot facility in Temperance, Michigan for the Michigan
regional operations and a 8,800 square foot facility in Houston, Texas for
Houston regional operations. The Company owns 143,300 square foot and
41,000 square foot facilities, located on 6.5 acres and 31.8 acres,
respectively, in Newnan, Georgia which are used for the fabrication of
elevated tanks. The Company owns a 30,000 square foot facility located on
5.0 acres of land in Bellingham, Washington. Also, the Company owns a 1,806
square foot facility located in Sarnia, Ontario, Canada. The Company leases
offices in Anaheim, Bay Point, Carson and Paso Robles, California and
Bristol, Pennsylvania. The aggregate lease payments for these leases during
fiscal 1997 were approximately $592 thousand. The Company believes that its
facilities are adequate for its current operations.
Item 3. Legal Proceedings
The Company and its subsidiaries are named defendants in several lawsuits
arising in the ordinary course of their business. While the outcome of
lawsuits cannot be predicted with certainty, management does not expect
these lawsuits to have a material adverse impact on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the Company's fiscal year ended May 31, 1997.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
Price Range of Common Stock
The Common Stock has traded on the National Market System of the National
Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ")
System since the Company's initial public offering on September 26, 1990.
The trading symbol for the Common Stock is "MTRX". The following table sets
forth the high and low closing sale prices for the Common Stock on the
National Market System as reported by NASDAQ for the periods indicated:
Fiscal Year Fiscal Year
1997 1996
----------- -----------
High Low High Low
---- ---- ---- ---
First Quarter................. $6.75 $5.00 $4.63 $3.00
Second Quarter................ 6.63 5.25 5.38 3.88
Third Quarter................. 7.81 5.50 4.88 4.00
Fourth Quarter................ 9.75 7.00 7.13 4.38
Fiscal Year
1998
------------
High Low
---- ----
First Quarter
through August 26, 1997) $8.75 $6.63
As of August 27, 1997 there were approximately 110 holders of record of the
Common Stock. The Company believes that the number of beneficial owners of
its Common Stock is substantially greater than 110.
Dividend Policy
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain earnings to finance the growth and development
of its business and does not anticipate paying cash dividends in the
foreseeable future. Any payment of cash dividends in the future will
depend upon the financial condition, capital requirements and earnings of
the Company as well as other factors the Board of Directors may deem
relevant. Certain of the Company's credit agreements restrict the
Company's ability to pay dividends.
Item 6. Selected Financial Data
The following table sets forth selected historical financial information
for the Company covering the five years ended May 31, 1997. See the Notes
to the Company's consolidated financial statements.
[CAPTION]
(In thousands, except per share data)
Matrix Service Company
-----------------------------------------------------------------------
Years Ended
Income Statement Data: May 31, 1997 May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993
-----------------------------------------------------------------------
Revenues.............................. $183,144 $183,725 $177,516 $133,480 $103,776
Gross profit.......................... 17,440 16,618 13,914 16,488 15,688
Operating income...................... 5,496 4,719 1,456 4,566 6,518
Income (loss) before income tax expens 5,114 4,398 (455)(1) 4,655 6,886
Net income (loss) .................... 2,984 2,449 (189) 2,717 4,060
Earnings (loss) per common and common
equivalent shares................. .31 .26 ( .02 ) .29 .42
Primary weighted average common and
common equivalent
shares outstanding............... 9,744 9,529 9,283 9,467 9,683
Matrix Service Company
-----------------------------------------------------------------------
May 31, 1997 May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993
Balance Sheet Data:
Working capital.................. $28,213 $26,370 $26,800 $20,070 $26,549
Total assets..................... 116,872 105,757 105,729 100,902 83,374
Long-term obligations............ 6,362 4,847 8,467 5,194 4,141
Deferred tax liability........... 4,757 5,088 4,698 4,145 899
Stockholders' equity ........... 76,212 73,034 70,820 69,487 66,400
(1) Includes a $1.4 million loss from the Company's investment in Al-Shafai
- -Midwest Constructors, Ltd., which is being liquidated. See "Item 7-
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
The Company was organized in October 1989 to become a holding company of
Matrix and Petrotank. The discussion and analysis presented below is of
the consolidated financial statements of these companies and the Company's
other subsidiaries since the date of acquisition, including (i) Tank
Supply, Inc., (ii) after October 3, 1990, Midwest, (iii) after June 1,
1991, San Luis, (iv) after December 30, 1992, Colt, (v) after June 10,
1993, Heath, (vi) after April 1, 1994, Brown, and (vii) after August 26,
1994, Mayflower.
The Company recognizes revenues from fixed price contracts using the
percentage of completion accounting method which measures progress on an
uncompleted contract based on the amount of costs incurred for such project
compared with the total amount of costs expected to be incurred through the
completion of the project. Revenues from cost-plus-fee contracts are
recognized on the basis of costs incurred plus the estimated fee earned.
The Company has experienced an increase in revenues during two of the last
three fiscal years. For fiscal 1995, Mayflower was included for nine
months. All acquired companies were included for the full year for fiscal
1997 and 1996. Incremental revenues, gross profit and selling, general
and administrative expenses attributable to the results of operations of
acquired companies not included in the prior year are as follows:
(in thousands)
Year ended
May 31, 1995
------------
Revenues $765
Gross Profit 44
Selling, general & administrative expenses 35
The Company expects a continued demand for its services in the foreseeable
future. Management believes that the percentage growth of its revenues for
fiscal 1998 will be stronger than fiscal year 1997. The limitation to growth
for the last three fiscal years was due to decreased demand for the Company's
services. Limitations on growth capacity also reflect the seasonal nature of
the Company's refinery turnaround activities, which creates pressure to expand
the supervisory staff during the turnaround seasons. The Company continues
to recruit, hire and train additional project engineers and project managers,
and the Company's ability to continue to grow will depend, in part, on its
ability to continue this process, and a stronger demand for the Company's
services.
The Company's quarterly results may tend to fluctuate from period to period,
due primarily to the timing of turnarounds performed by the Company.
Generally, the Company performs a substantial percentage of its turnaround
projects in two periods February through May and September through November.
Historically, these are the time periods when most refiners temporarily
shutdown certain operating units for maintenance, repair or modification
prior to changing their product mix in anticipation of a seasonal shift in
product demand. Consequently, the Company's second quarter ending November
30 and its fourth quarter ending May 31 will typically include greater
revenues from turnarounds than its first quarter or its third quarter.
Results of Operations
The following table presents, for the periods indicated, the percentage
relationship which certain items in the Company's statement of operations
bear to revenues, and the percentage increase or decrease in the dollar
amount of such items. The following data should be read in conjunction
with the financial statements of the Company and the notes thereto contained
elsewhere in this Form 10-K. Revenues for fiscal year ending May 31, 1995
were positively affected by the inclusion of Mayflower for nine months.
[CAPTION]
Percentage of Revenues |
Years ended May 31, | Period-to-Period Change
--------------------------------------------------------------
| 1997 1996
| vs. vs.
1997 1996 1995 | 1996 1995
---- ----- ----- | ----- -----
|
Revenues........................... 100.0 % 100.0 % 100.0 % | (0.3)% 3.5 %
|
Cost of revenues................... 90.5 91.0 92.2 | (0.8) 2.1
|
Gross profit....................... 9.5 9.0 7.8 | 5.0 19.4
|
Selling, general and administrative |
expenses....................... 6.0 5.9 6.2 | 2.7 (1.3)
|
Operating income................... 3.0 2.6 0.8 | 16.5 224.1
|
Interest income.................... 0.1 0.2 0.1 | (60.1) 175.8
|
Income before income tax |
expense........................ 2.8 2.4 (0.3) | 16.3 1067.0
|
Net income......................... 1.6 % 1.3 % (0.1) % | 21.8 % 1396.0 %
======= ======= ======= ======= ========
Fiscal 1997 Compared to Fiscal 1996
Revenues for the year ended May 31, 1997 were $183.1 million as compared to
revenues of $183.7 million for the year ended May 31, 1996, representing a
decrease of approximately $581 thousand or 0.3%. The decrease was primarily
due to decreased revenues for the Company's services in aboveground storage
tank markets primarily on the West and Gulf Coasts. The Company believes
that the decrease in activity on the West Coast was due primarily to
additional expenditures in the two prior years to comply with state
environmental regulations with a compliance date of January 1, 1996.
Gross profit increased to $17.4 million for the year ended May 31, 1997
from gross profit of $16.6 million for the year ended May 31, 1996, an
increase of approximately $822 thousand or 5.0%. Gross profit as a
percentage of revenues increased to 9.5% in the 1997 period from 9.0% for
the 1996 period. The Company continues to experience pricing pressure as a
result of intense competition in its established markets; however, the
demand for the Company's services for capital projects has improved during
the year. Customer inquiry levels and the available projects for repairs
and maintenance and new construction of AST's and refinery maintenance have
been improving during the year.
Selling, general and administrative expenses increased to $11.1 million for
the year ended May 31, 1997 from expenses of $10.8 million for the year
ended May 31, 1996, an increase of $296 thousand or approximately 2.7%. The
increase was due to an increase of certain administrative personnel and
facilities in line with the increased revenues at the Company's Colt and
Brown operations. Selling, general and administrative expenses as a
percentage of revenues increased to 6.0% for fiscal 1997 from 5.9% for
fiscal 1996.
Operating income increased to $5.5 million for the year ended May 31, 1997
from $4.7 million for the year ended May 31, 1996, an increase of $777
thousand or approximately 16.5%. The increase was due to improved gross
profit margin and a decrease in amortization of intangible assets.
Due to changes in the economic conditions in Saudi Arabia, there is a
shortage of work available of the nature performed by the foreign joint
venture Al Shafai-Midwest Constructors, Ltd. It is management's opinion
that those conditions will last for several years. The venture partners,
Saud Al Shafai and Sons Contractors and the Company, are in the process
of liquidating the joint venture. At May 31, 1995, the Company had reduced
its carrying value of the investment in this joint venture to the estimated
recovery amount upon completion of the liquidation. The Company recorded a
loss of $1.4 million for the year ended May 31, 1995. The Company had no
expenses related to the joint venture for the year ended May 31, 1997 and
1996.
Interest income decreased to $164 thousand for the year ended May 31, 1997
from $411 thousand for the year ended May 31, 1996. This decrease resulted
from interest earned on the refund of certain state and federal income taxes
received during the previous year. Interest expense decreased to $536
thousand for the year ended May 31, 1997 from $815 thousand of interest
expense for the year ended May 31, 1996. The decrease resulted primarily
from decreased borrowing under the Company's revolving credit facility.
Under this facility, a $4.9 million term loan was made to the Company on
October 5, 1994, and $2.4 million remains outstanding at May 31, 1997.
Net income increased to $3.0 million for the 1997 period from $2.4 million
for the 1996 period. The increase was due to improved gross profit margin,
and decreased amortization of intangible assets, as compared with the prior
year.
Fiscal 1996 Compared to Fiscal 1995
Revenues for the year ended May 31, 1996 were $183.7 million as compared to
revenues of $177.5 million for the year ended May 31, 1995, representing an
increase of approximately $6.2 million or 3.5%. The increase was primarily
due to increased revenues for the Company's services in both refinery
maintenance and aboveground storage tank markets.
Gross profit increased to $16.6 million for the year ended May 31, 1996 from
gross profit of $13.9 million for the year ended May 31, 1995, an increase
of approximately $2.7 million or 19.4%. Gross profit as a percentage of
revenues increased to 9.0% in the 1996 period from 7.8% for the 1995 period.
Selling, general and administrative expenses decreased to $10.8 million for
the year ended May 31, 1996 from expenses of $10.9 million for the year ended
May 31, 1995, a decrease of $143 thousand or approximately 1.3%. The
decrease was due to areduction of certain administrative personnel.
Selling, general andadministrative expenses as a percentage of revenues
decreased to 5.9% for fiscal 1996 from 6.2% for fiscal 1995.
Operating income increased to $4.7 million for the year ended May 31, 1996
from $1.5 million for the year ended May 31, 1995, an increase of $3.2
million or approximately 224.1%. The increase was due to increased
revenue, improved gross profit margin, and decreases in selling, general
and administrative expenses.
Due to changes in the economic conditions in Saudi Arabia, there is a
shortage of work available of the nature performed by the foreign joint
venture Al Shafai-Midwest Constructors, Ltd. It is management's opinion that
those conditions will last for several years. The venture partners, Saud
Al Shafai and Sons Contractors and the Company, are in the process of
liquidating the joint venture. At May 31, 1995, the Company had reduced its
carrying value of the investment in this joint venture to the estimated
recovery amount upon completion of the liquidation. The Company recorded a
loss of $1.4 million for the year ended May 31, 1995. The Company had no
expenses related to the joint venture for the year ended May 31, 1996.
Interest income increased to $411 thousand for the year ended May 31, 1996
from $149 thousand for the year ended May 31, 1995. This increase resulted
from interest earned on the refund of certain state and federal income
taxes received during the year. Interest expense decreased to $815 thousand
for the year ended May 31, 1996 from $897 thousand of interest expense for
the year ended May 31, 1995. The decrease resulted primarily from decreased
borrowing under the Company's revolving credit facility and a term loan
established thereunder. Under this facility, a $4.9 million term loan was
made to the Company on October 5, 1994, and $3.5 million remains outstanding
at May 31, 1996.
Net income increased to $2.4 million for the 1996 period from a net loss income
of $189 thousand for the 1995 period. The increase was due to improved gross
profit margin, decreased selling, general and administrative expenses, and no
losses from investment in foreign joint venture as compared with the prior
year.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled approximately $1.9 million at
May 31, 1997 and 1996.
The Company has financed its operations recently with cash generated by
operations and advances under the Company's credit facility. The Company has
a credit facility with a commercial bank under which the Company may borrow
a total of $20.0 million. The Company may borrow up to $15.0 million under
a revolving credit agreement based on the level of the Company's eligible
receivables. The agreement provides for interest at the Prime Rate minus
one-half of one percent (1/2 of 1%), or a LIBOR based option, and matures
on October 31, 1999. At May 31, 1997, the outstanding advances under the
revolver totaled $5.0 million. The interest rate for this facility at
May 31, 1997 was: 1) Prime Option 8% on $2.0 million and 2) LIBOR Option
7.2% on $3.0 million. The credit facility also provides for a term loan
up to $5.0 million. On October 5, 1994, a term loan of $4.9 million was
made to the Company. The term loan is due on August 31, 1999 and is to be
repaid in 54 equal payments beginning in March 1995 at an interest rate
based upon the Prime Rate or a LIBOR Option. At May 31, 1997 the balance
outstanding on this facility was $2.45 million. The interest rate at May
31, 1997 was 1) Prime Option of 8.5% on $450 thousand and 2) LIBOR Option
of 7.8% on $2.0 million.
Operations of the Company provided $6.2 million of cash for the year ended
May 31, 1997 as compared with providing $9.6 million of cash for the year
ended May 31, 1996, representing a decrease of approximately $3.4 million.
The decrease was due to a decrease of $6.3 million from the collection of
accounts, a decrease of $1.9 million from prepaid expenses and inventory, a
decrease related to income taxes and other accrued liabilities of $5.5
million, and a decrease of $486 thousand from depreciation and
amortization. These decreases are net of increased net income of $535
thousand, a net increase of $5.2 million of costs and estimated earnings in
excess of billings on uncompleted contracts and billings on uncompleted
contracts in excess of costs and estimated earnings, and a $5.0 million
increase from accounts payable.
Capital expenditures during the year ended May 31, 1997 totaled approximately
$5.8 million. Of this amount, approximately $998 thousand was used to
purchase trucks for field operations, and approximately $1.9 million was
used to purchase welding, construction, and fabrication equipment. The
Company has expended $2.5 million on land and construction of a new facility
in the Northwest. The Company has invested approximately $426 thousand in
furniture and fixtures during the year, which includes approximately $319
thousand invested in computer equipment for operations and automated
drafting. The Company has currently budgeted approximately $5.6 million
for capital expenditures for fiscal 1998. The Company expects to be able
to finance these expenditures with working capital and borrowings under the
Company's credit facility.
The Company believes that its existing funds, amounts available from
borrowings under its existing credit facility, and cash generated by
operations will be sufficient to meet the Company's working capital needs
at least through fiscal 1998 and possibly thereafter unless significant
expansions of operations not now planned are undertaken, in which case the
Company would arrange additional financing as a part of any such expansion.
Other
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," which required impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company adopted Statement 121 in the first
quarter of 1997. The adoption of Statement 121 did not have a significant
impact on the Company's financial statements.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share," which is required to be adopted on December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact on
earnings per share for the year ended May 31, 1997 would have been an increase
of $0.01 per share for both basic and diluted shares.
Certain Factors Influencing Results and Accuracy of
Forward-Looking Statements
This Annual Report contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933. Discussions containing such
forward-looking statements may be found in the material set forth under
"Business" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," as well as within the Annual Report generally.
In addition, when used in this Annual Report, the words "believes",
"anticipates", "expects" and similar expressions are intended to identify
forward-looking statements.
In the normal course of its business, the Company, in an effort to help
keep it shareholders and the public informed about the Company's operations,
may from time to time issue certain statements, either in writing or orally,
that contain or may contain forward-looking information. Generally, these
statements relate to business plans or strategies, projected or anticipated
benefits or other consequences of such plans or strategies, or projections
involving anticipated revenues, earnings or other aspects of operating
results. Such forward-looking statements are subject to a number of risks
and uncertainties. As noted elsewhere in this Annual Report, all phases of
the Company's operations are subject to a number of uncertainties, risks and
other influences, many of which are beyond the control of the Company, and
any one of which, or a combination of which, could materially affect the
results of the Company's operations and whether forward-looking statements
made by the Company ultimately prove to be accurate.
The following discussion outlines certain factors that in the future could
affect the Company's consolidated results and cause them to differ materially
from those that may be set forth in any forward-looking statement made by or
on behalf of the Company. The Company cautions the reader, however, that
this list of risk factors may not be exhaustive.
Competition. The Company competes with numerous large and small companies,
some of which have greater financial and other resources than the Company.
Competition within both the aboveground storage tank and hydrocarbon
process services business is intense and is based on quality of service,
price, safety considerations and availability of personnel. See "Business-
Other Business Matters-Competition."
Market Factors. The Company is dependent on the petroleum storage operations
of the petroleum industry, and a downturn in that industry could negatively
affect its operations. The Company's hydrocarbon processing operations
focus primarily on the refining industry. The refining industry has undergone
significant changes in the past decade with respect to product composition,
costs of petroleum products, and refinery capacity and utilization. Although
the Company believes that these changes in the industry have positively
affected its business, changes could occur that decrease the industry's
dependence on the type of services the Company provides. See "Business-
Aboveground Storage Tank Operations-Hydrocarbon Process Services."
Availability of Supervisory Personnel. The Company employs in its operations
project supervisors with substantial experience and training. The growth of
the business will depend on, and may be restricted by, its ability to retain
these personnel and to recruit and train additional supervisory employees.
The competition to recruit qualified supervisor staff is intense.
Labor Markets. The operations of the Company are labor intensive. The
Company has employed up to 650 workers for a single project, and many of
the workers employed by the Company are represented by labor unions and
covered by collective bargaining agreements. Although the Company has to
date been able to employ sufficient labor to complete its projects, changes
in labor market conditions could restrict the availability of workers or
increase the cost of such labor, either of which could adversely affect the
Company. In addition, the operations of the Company could be adversely
affected by a strike or work stoppage. See "Business-Other Business
Matters-Employees."
Fluctuations in Quarterly Results. The operating results of hydrocarbon
process services may be subject to significant quarterly fluctuations,
affected primarily by the timing of planned maintenance projects at customers'
facilities. Generally, the Company's turnaround projects are undertaken in
two primary periods-February through May and September through November-
when refineries typically shut down certain operating units to make changes
to adjust to seasonal shifts in product demand. As a result, the Company's
quarterly operating results can fluctuate materially. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
the Company."
Environmental Regulation. The operations of the Company have been affected
positively by the promulgation of more stringent environmental laws and more
stringent enforcement of existing laws. Although the Company's future business
success is not dependent on increased environmental regulation, decreased
regulation and enforcement could adversely affect the demand for the services
provided by the Company. See "Business-AST Market and Regulatory Background-
Other Business Matters."
Potential Liability and Insurance. The operations of the Company involve the
use of heavy equipment and exposure to construction hazards, with attendant
significant risks of liability for personal injury and property damage.
While the Company believes that it operates safely and prudently, there can
be no assurance that accidents will not occur or that the Company will not
incur substantial liability in connection with the operation of its business.
In addition, recent accidents within the refining and petrochemical industries
may result in additional regulation of independent contractors serving those
industries. See "Business-Other Business Matters-Regulation." The Company
maintains workers compensation insurance, general liability insurance and
auto liability insurance, but such insurance is subject to coverage limits
of $2.0 million per accident or occurrence. The Company also maintains an
umbrella policy with coverage limits of $20.0 million in the aggregate.
Such insurance includes coverage for losses or liabilities relating to
environmental damage or pollution. Although the Company believes that it
conducts its operations prudently and that it minimizes its exposure to
such risks, the Company could be materially adversely affected by a claim
that was not covered or only partially covered by insurance. See
"Business-Other Business Matters-Insurance."
Item 8. Financial Statements and Supplementary Data
Reference is made to the financial statements, the report thereon, the notes
thereto and supplementary data commencing at page 1 of this Annual Report
on Form 10-K, which financial statements, report, notes and data are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not Applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
The information relating to the identification, business experience and
directorships of each director and nominee for director of the Company
required by Item 401 of Regulation S-K will be presented in the section
entitled "Election of Directors - Nominees" of the Company's definitive
proxy statement for the annual meeting of stockholders for fiscal 1997,
and is hereby incorporated by reference; if the definitive proxy statement
for the 1997 annual stockholders' meeting is not filed with the Securities
and Exchange Commission within 120 days of the end of the Company's 1997
fiscal year, the Company will amend this Annual Report and include such
information in the amendment. See Item 1. "Business - Executive Officers
of the Company" for information relating to the identification and business
experience of the Company's executive officers.
Item 11. Executive Compensation
The information relating to the compensation of directors and officers
required by Item 402 of Regulation S-K will be presented in the section
entitled "Election of Directors-Executive Compensation" of the Company's
definitive proxy statement for the annual meeting of stockholders for
fiscal 1997 and is hereby incorporated by reference; if the definitive proxy
statement for the 1997 annual stockholders' meeting is not filed with the
Securities and Exchange Commission within 120 days of the end of the
Company's 1997 fiscal year, the Company will amend this Annual Report and
include such information in the amendment.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information relating to security ownership required by Item 403 of
Regulation S-K will be presented in the sections entitled "Voting
Securities and Principal Stockholders" and "Election of Directors Nominees"
of the Company's definitive proxy statement for the annual meeting of
stockholders for fiscal 1997 and is hereby incorporated by reference; if
the definitive proxy statement for the 1997 annual stockholders' meeting is
not filed with the Securities and Exchange Commission within 120 days of the
end of the Company's 1997 fiscal year, the Company will amend this Annual
Report and include such information in the amendment.
Item 13. Certain Relationships and Related Transactions
The information relating to relationships and transactions required by Item
404 of Regulation S-K will be presented in the section entitled "Election
of Directors - Certain Transactions" of the Company's definitive proxy
statement for the annual meeting of stockholders for fiscal 1997, and is
hereby incorporated by reference; if the definitive proxy statement for the
1997 annual stockholders' meeting is not filed with the Securities and
Exchange Commission within 120 days of the end of the Company's 1997 fiscal
year, the Company will amend this Annual Report and include such information
in the amendment.
PART IV
Item 14.
Exhibits, Financial Statement Schedules and Reports on Form 8-K
Page
(a) 1 and 2 Financial Statements of the Company ----
Report of Independent Auditors 1
Consolidated Balance Sheets as of May 31, 1997 and 1996 2
Consolidated Statements of Income for the years ended
May 31,1997, 1996 and 1995. 4
Consolidated Statements of Changes in Stockholders"
Equity for the years ended May 31, 1997, 1996 and 1995. 5
Consolidated Statements of Cash Flows for the years ended
May 31, 1997, 1996 and 1995. 6
Notes to Consolidated Financial Statements 8
Quarterly Financial Data (Unaudited) (see Exhibit 27)
All schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission
of the schedule.
3. List of Exhibits
2.1
Stock Purchase Agreement, dated February 22, 1994, by and among Matrix
Service Company and the shareholders of Georgia Steel Fabricators, Inc.
(Exhibit 2.1 to the Company's Current Report on Form 8-K (File No. 0-18716)
filed March 7, 1994, is hereby incorporated by reference).
3.1
Restated Certificate of Incorporation (Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (No. 33-36081), as amended, filed July
26, 1990 is hereby incorporated by reference).
3.2
Bylaws, as amended (Exhibit 3.2 to the Company's Registration Statement on
Form S-1 (No. 33-36081) as amended, filed July 26, 1990 is hereby
incorporated by reference).
4.1
Specimen Common Stock Certificate (Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (File No. 33-36081), as amended,
filed July 26, 1990 is hereby incorporated by reference).
+ 10.1
Matrix Service Company 1990 Incentive Stock Option Plan (Exhibit
10.14 to the Company's Registration Statement on Form S-1 (File No.33-36081),
as amended, filed July 26, 1990 is hereby incorporated by reference.
+ 10.2
Matrix Service Company 1991 Stock Option Plan (Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the fiscal year ended May 31, 1991
(File No. 0-18716) is hereby incorporated by reference).
10.3
Standard Industrial Lease, dated June 30, 1989, between Matrix Service, Inc.
and the Kinney Family Trust (Exhibit 10.16 to the Company's Registration
Statement on Form S-1 (No. 33-36081), as amended, filed July 26, 1990 is
hereby incorporated by reference).
10.4
Lease Agreement, dated May 30, 1991, between Tim S. Selby and
Stephanie W. Selby as Co-Trustees of the Selby Living Trust dated October
20, 1983, Tim S. Selby and Stephanie W. Selby, and Richard Chafin, Trustee
of the Selby Children's Trust 1 dated December 12, 1983 and San Luis Tank
Piping Construction Co., Inc. (Exhibit 10.9 to the Company's Registration
Statement on Form S-1 (File No. 33-48373) filed June 4, 1992 is hereby
incorporated by reference).
+ 10.5
Employment and Noncompetition Agreement, dated June 1, 1991, between West
Coast Industrial Coatings, Inc. and San Luis Tank Piping Construction Co.,
Inc., and Tim S. Selby (Exhibit 10.10 to the Company's Registration
Statement on Form S-1 (File No. 33-48373) filed June 4, 1992 is hereby
incorporated by reference).
10.6
Revolving Credit Agreement, dated August 30, 1994, by and among the Company
and its subsidiaries, and Liberty Bank & Trust Company of Tulsa, N.A.
(Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1995 (File No. 0-18716) is hereby incorporated by reference).
10.7
Security Agreement, dated August 30, 1994, by and among the Company and its
subsidiaries, and Liberty Bank & Trust Company of Tulsa, N.A. (Exhibit 10.12
to the Company's Annual Report on Form 10-K for the fiscal year ended May 31,
1995 (File No. 0-18716) is hereby incorporated by reference).
10.8
Promissory Note, dated December 30, 1992, by and between the Company, Colt
Acquisition Company and Colt Construction Company and Duncan Electric Company.
(Exhibit 10.17 to the Company's Annual Report on Form 10-K (File No. 0-18716),
filed August 27, 1993, is hereby incorporated by reference).
+ 10.9
Employment and Noncompetition Agreement dated February 22, 1994, between Brown
Steel Contractors, Inc. and Mark A. Brown (Exhibit 99.2 to the Company's
Current Report on Form 8-K, (File No. 0-18716), filed March7, 1994, is hereby
incorporated by reference).
+ 10.10
Employment and Noncompetition Agreement dated February 22, 1994, between
Brown Steel Contractors, Inc. and Sample D. Brown (Exhibit 99.3 to the
Company's Current Report on Form 8-K, (File No. 0-18716), filed March 7,
1994, is hereby incorporated by reference).
+ 10.11
Matrix Service Company 1995 Nonemployee Directors' Stock Option Plan
(Exhibit 4.3 to the Company's Registration Statement on Form S-8 (File
No. 333-2771), filed April 24, 1996 is hereby incorporated by reference).
* 10.12
Stock Purchase Agreement, dated June 17, 1997, by and among Matrix Service
Company and the shareholders of General Service Corporation.
* 10.13
First Amendment to Credit Agreement, dated June 19, 1997, by and
among the Company and its subsidiaries, and Liberty Bank & Trust Company of
Tulsa, N.A.
* 10.14
Security Agreement, dated June 19, 1997, by and among the Company and its
subsidiaries, and Liberty Bank & Trust Company of Tulsa, N.A.
* 10.15
Promissory Note (Revolving Note) dated June 19, 1997 by and between the
Company and its subsidiaries, and Liberty Bank & Trust Company of Tulsa,
N.A.
* 10.16
Promissory Note (Term Note, due August 31, 1999), by and between the Company
and its subsidiaries, and Liberty Bank & Trust Company of Tulsa, N.A.
* 10.17
Promissory Note (Term Note, due June 19, 2002), dated June 19, 1997 by and
between the Company and its subsidiaries, and Liberty Bank & Trust Company,
N.A.
* 11.1
Computation of Per Share Earnings.
* 21.1
Subsidiaries of Matrix Service Company.
* 23.1
Consent of Ernst & Young LLP.
* Filed herewith.
+ Management Contract or Compensatory Plan.
(b) Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Matrix Service Company has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Matrix Service Company
Date: August 29, 1997 By: /s/Doyl D. West
-----------------------
Doyl D. West, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signatures Title Date
---------- ----- ----
/s/Doyl D. West Doyl D. West August 29, 1997
- ------------------- President and Director
Doyl D. West (Principal Executive Officer)
/s/C. William Lee C. William Lee August 29, 1997
- ------------------- Chief Financial Officer
and Director
(Principal Financial and
Accounting Officer)
/s/Hugh E. Bradley Director August 29, 1997
- -------------------
Hugh E. Bradley
/s/Robert L. Curry Director August 29, 1997
- -------------------
Robert L. Curry
/s/William P. Wood Director August 29, 1997
- -------------------
William P. Wood
/s/John S. Zink Director August 29, 1997
- -------------------
John S. Zink
Matrix Service Company
Index to Consolidated Financial Statements
Item 14(a)
Page
------
Covered by Report of Independent Auditors
Report of Independent Auditors 1
Consolidated Balance Sheets 2
Consolidated Statements of Income 4
Consolidated Statements of Changes in
Stockholders'Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Report of Independent Auditors
The Stockholders and Board of Directors Matrix Service Company
We have audited the accompanying consolidated balance sheets of Matrix
Service Company and subsidiaries as of May 31, 1997 and 1996, and the
related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the three years in the period ended May 31, 1997.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Matrix Service Company and subsidiaries at May 31, 1997 and
1996, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended May 31, 1997, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Tulsa, Oklahoma
August 15, 1997
1,000
[DESCRIPTION] Consolidated Balance Sheets
Matrix Service Company
Consolidated Balance Sheets
May 31
1997 1996
---------------------
(in thousands)
Assets
Current assets:
Cash and cash equivalents $ 1,877 $ 1,899
Accounts receivable 37,745 29,205
Costs and estimated earnings in excess of
billings on uncompleted contracts 11,349 12,122
Inventories 4,989 4,149
Prepaid expenses 456 179
Deferred taxes 1,021 995
Income tax receivable 317 609
---------------------
Total current assets 57,754 49,158
Investment in undistributed equity of
foreign joint venture 174 374
Property, plant and equipment, at cost:
Land and buildings 15,097 14,528
Construction equipment 24,444 23,414
Transportation equipment 5,504 4,990
Furniture and fixtures 3,164 2,806
Construction in progress 2,614 189
---------------------
50,823 45,927
Accumulated depreciation 20,861 17,065
---------------------
29,962 28,862
Goodwill, net of accumulated amortization
of $4,894 and $4,114 in 1997 and 1996,
respectively 28,721 27,033
Other assets 261 330
----------------------
Total assets $116,872 $105,757
=====================
See accompanying notes.
[MULTIPLIER] 1,000
[DESCRIPTION] Consolidated Balance Sheets
Matrix Service Company
Consolidated Balance Sheets
May 31
1997 1996
-------- --------
(in thousands)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 12,307 $ 9,026
Billings on uncompleted contracts in
excess of costs and estimated earnings 6,325 4,353
Accrued insurance 3,308 3,004
Earnout payable 2,400 1,606
Other accrued expenses 3,275 3,170
Income taxes payable 431 -
Current portion of long-term debt 1,495 1,629
--------------------
Total current liabilities 29,541 22,788
Long-term debt 6,362 4,847
Deferred income taxes 4,757 5,088
Stockholders' equity:
Common stock - $.01 par value; 15,000,000
shares authorized; 9,491,153
shares issued in 1997 and 1996 95 95
Additional paid-in capital 50,903 50,927
Retained earnings 26,269 23,617
Cumulative translation adjustment (145) (107)
--------------------
77,122 74,532
Less treasury stock, at cost - 115,228
and 177,467 shares in 1997 and 1996,
respectively 910 1,498
--------------------
Total stockholders' equity 76,212 73,034
--------------------
Total liabilities and stockholders'equity $116,872 $105,757
====================
See accompanying notes.
1,000
[DESCRIPTION] Consolidated Statements of Income
Matrix Service Company
Consolidated Statements of Income
(In thousands, except share and per share amounts)
Year ended May 31
1997 1996 1995
-----------------------------
Revenues $183,144 $183,725 $177,516
Cost of revenues 165,704 167,107 163,602
-----------------------------
Gross profit 17,440 16,618 13,914
Selling, general and
administrative
expenses 11,080 10,784 10,927
Goodwill and noncompete
amortization 864 1,115 1,531
------------------------------
Operating income 5,496 4,719 1,456
Other income (expense):
Loss from investment in
foreign joint venture:
Equity in losses from
operations - - (349)
Impairment of investment - - (1,017)
Interest expense (536) (815) (897)
Interest income 164 411 149
Other (10) 83 203
------------------------------
Income (loss) before income
tax expense 5,114 4,398 (455)
Provision (benefit) for
federal, state and
foreign income taxes:
Current 2,486 1,683 (327)
Deferred (356) 266 61
------------------------------
2,130 1,949 (266)
------------------------------
Net income (loss) $ 2,984 $ 2,449 $ (189)
==============================
Net income (loss) per common
and common
equivalent share:
Primary $ .31 $ .26 $ (.02)
Fully diluted .30 .26 (.02)
Weighted average common and
common equivalent shares
outstanding:
Primary 9,744,338 9,529,481 9,283,442
Fully diluted 9,979,644 9,578,112 9,283,442
See accompanying notes.
[MULTIPLIER] 1,000
[DESCRIPTION] Consolidated Statements of Change in
Stockholders' Equity
Matrix Service Company
Consolidated Statements of Changes in Stockholders' Equity
Additional Cumulative
Common Paid-In Retained Treasury Translation
Stock Capital Earnings Stock Adjustment Total
- -------------------------------------------------------------------------------------------------
(In thousands)
Balances, May 31, 1994 95 49,364 21,712 (1,597) (87) 69,487
Treasury stock purchased
(50,000 shares) - - - (294) - (294)
Exercise of stock options
(7,235 shares) - - (59) 65 - 6
Tax effect of exercised
stock options - 1,824 - - - 1,824
Cumulative translation
adjustment - - - - (14) (14)
Net loss - - (189) - - (189)
- -------------------------------------------------------------------------------------------------
Balances, May 31, 1995 95 51,188 21,464 (1,826) (101) 70,820
Exercise of stock
options (36,408 shares) - - (296) 328 - 32
Tax effect of exercised
stock options - (261) - - - (261)
Cumulative translation
adjustment - - - - (6) (6)
Net income - - 2,449 - - 2,449
- -------------------------------------------------------------------------------------------------
Balances, May 31, 1996 $95 $50,927 $23,617 $(1,498) $(107) $73,034
Exercise of stock
options (62,239 shares) - - (332) 588 - 256
Tax effect of exercised
stock options - (24) - - - (24)
Cumulative translation
adjustment - - - - (38) (38)
Net income - - 2,984 - - 2,984
- -------------------------------------------------------------------------------------------------
Balances, May 31, 1997 $95 $50,903 $26,269 $ (910) $(145) $76,212
=================================================================================================
See accompanying notes.
[MULTIPLIER] 1,000
[DESCRIPTION] Consolidated Statements of Cash Flows
Matrix Service Company
Consolidated Statements of Cash Flows
Year ended May 31
1997 1996 1995
-------------------------
(In thousands)
Operating activities
Net income (loss) $2,984 $2,449 $ (189)
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization 5,365 5,851 6,019
Deferred income tax
provision (356) 266 61
(Gain)loss on sale of
equipment (70) 248 (17)
Loss on sale of marketable
securities - - 65
Loss from investment in
foreign joint venture - - 1,366
Changes in operating assets
and liabilities increasing
(decreasing) cash, net of
effects from acquisition
of subsidiaries:
Accounts receivable (8,540) (2,257) (2,703)
Costs and estimated
earnings in excess
of billings on
uncompleted contracts 773 (2,540) 353
Inventories (840) 566 (1,784)
Prepaid expenses (277) 247 211
Accounts payable 3,281 (1,746) 3,139
Billings on uncompleted
contracts in excess of
costs and estimated
earnings 1,972 40 (3,296)
Accrued expenses 1,203 3,632 (1,060)
Income taxes
receivable/payable 699 2,846 (1,626)
Other assets (15) 11 85
------------------------------
Net cash provided by
operating activities 6,179 9,613 624
Investing activities
Acquisition of property,
plant and equipment (5,802) (3,410) (5,182)
Acquisition of subsidiaries
and investment in foreign
joint venture, net of
cash acquired (2,353) (1,931) (724)
Proceeds from sale of
marketable securities - - 285
Return of investment in
foreign joint venture 200 - -
Proceeds from other investing
activities 155 116 100
-----------------------------
Net cash used in investing
activities (7,800) (5,225) (5,521)
[MULTIPLIER] 1,000
[DESCRIPTION] Consolidated Statements of Cash Flows
Matrix Service Company
Consolidated Statements of Cash Flows (continued)
Year ended May 31
1997 1996 1995
-----------------------------
(In thousands)
Financing activities
Issuance of common stock $ 256 $ 32 $ 6
Purchase of treasury stock - - (294)
Advances under bank credit
agreement 7,000 7,500 11,000
Repayments of bank credit
agreement (4,000) (9,500) (4,372)
Repayment of term note (1,089) (1,089) -
Repayment of acquisition notes (529) (1,409) (2,292)
Issuance of equipment lease 22 50 -
Repayments of mortgage and
equipment notes (23) (54) (109)
-----------------------------
Net cash provided by (used in)
financing activities 1,637 (4,470) 3,939
Cumulative translation
adjustment (38) 5 (14)
-----------------------------
Net decrease in cash and
cash equivalents (22) (77) (972)
Cash and cash equivalents,
beginning of year 1,899 1,976 2,948
-----------------------------
Cash and cash equivalents,
end of year $1,877 $1,899 $1,976
============================
Supplemental disclosure of
cash flow information
Cash paid during the
period for:
Income taxes $1,777 $1,355 $ 982
Interest $ 823 $ 962 $ 606
See accompanying notes.
[DESCRIPTION] Matrix Service Company
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
The consolidated financial statements present the accounts of Matrix
Service Company ("MSC") and its subsidiaries (collectively referred to
as "the Company"). Subsidiary companies include Matrix Service, Inc.,
("Matrix"), Midwest Industrial Contractors, Inc. ("Midwest"), Matrix Service
Mid-Continent, Petrotank Equipment, Inc. ("Petrotank"), Tank Supply, Inc.,
San Luis Tank Piping Construction Co., Inc. ("San Luis"), Colt Construction
Co. ("Colt"), Midwest International, Inc., Heath Engineering Ltd. ("Heath"),
Brown Steel Contractors, Inc. ("Brown") and Mayflower Vapor Seals Corp.
("Mayflower"). Intercompany transactions and balances have been eliminated in
consolidation. Mayflower was acquired on August 26, 1994 by MSC (see Note 3).
The Company operates primarily in the United States but has operations in
Canada and Mexico through Heath and San Luis. The Company's one industry
segment is maintenance, construction services and products for petroleum
refining and storage facilities and water storage tanks and systems for
municipalities and private industry.
Cash Equivalents
The Company includes as cash equivalents all investments with original
maturities of three months or less which are readily convertible into cash.
The carrying value of cash equivalents approximates fair value.
Inventories
Inventories consist primarily of raw materials and are stated at the lower
of cost or net realizable value. Cost is determined using the first-in,
first-out or average cost method.
Revenue Recognition
Revenues from fixed-price contracts are recognized on the percentage-of-
completion method measured by the percentage of costs incurred to date to
estimated total costs for each contract. Revenues from cost-plus-fee
contracts are recognized on the basis of costs incurred plus the estimated
fee earned. Anticipated losses on uncompleted contracts are recognized in
full when they become known. Losses from the investment in the undistributed
equity of the foreign joint venture were recognized in accordance with the
equity method of accounting in 1995.
Depreciation and Amortization
Depreciation is computed using the straight-line method over the estimated
useful lives of the depreciable assets. Goodwill and noncompete agreements
are being amortized over 40 and 5 years, respectively, using the straight-
line method.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109,
the deferred tax provision is determined under the liability method whereby
deferred tax assets and liabilities are recognized based on differences
between financial statement and tax bases of assets and liabilities using
presently enacted tax rates.
Net Income per Common and Common Equivalent Share
Primary net income per common and common equivalent share is computed using
the weighted average number of shares of common stock and common stock
equivalents. Common stock equivalents consist of stock options (calculated
using the treasury stock method). Fully diluted net income per common and
common equivalent share is computed using the higher of year-end or average
market price under the treasury stock method.
Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related
interpretations in accounting for its employee stock options because, as
discussed in Note 6, the alternative fair value accounting provided for under
FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
2. Uncompleted Contracts
Contract terms generally provide for progress billings based on completion of
certain phases of the work. The excess of costs incurred and estimated earnings
recognized for construction contracts over amounts billed on uncompleted
contracts is reported as a current asset and the excess of amounts billed
over costs incurred and estimated earnings recognized for construction
contracts on uncompleted contracts is reported as a current liability as
follows:
May 31
1997 1996
------------------
(In thousands)
Costs incurred and estimated
earnings recognized on
uncompleted contracts $104,746 $97,683
Billings on uncompleted
contracts 109,770 89,914
-------------------
$ 5,024 $ 7,769
===================
Shown on balance sheet as:
Costs and estimated earnings
in excess of billings on
uncompleted contracts $11,349 $12,122
Billings on uncompleted
contracts in excess of
costs and estimated
earnings 6,325 4,353
-------------------
$ 5,024 $ 7,769
===================
Approximately $4.2 million and $3.5 million of accounts receivable at
May 31, 1997 and 1996, respectively, relate to billed retainages
under contracts.
3. Acquisitions
Mayflower Vapor Seals
On August 26, 1994, the Company acquired certain assets of Mayflower Vapor
Seals Corp. for $660,000. The transaction was accounted for as a purchase
and resulted in approximately $442,000 of goodwill, which is being
amortizedon a straight-line basis over a 40-year period. The operations of
the newsubsidiary have been included in the accompanying financial statements
subsequent to August 26, 1994.
Pro forma results of operations for the year ended May 31, 1995, assuming
Mayflower transaction occurred on June 1, 1994, were not significantly
different from the results reported.
Noncash Investing Activities
At May 31, 1997, the Company has an earnout payable of $2.4 million for
distributions which will be made pursuant to contingent consideration
provisions of various business acquisition agreements. The earnout payable
represents final settlement of the earnout agreement.
4. Long-Term Debt
Long-term debt consists of the following:
1997 1996
----------------
(In thousands)
Notes payable to former shareholders of
Colt requires quarterly principal
payments of $132,315, interest at
the prime rate, commencing March 31, 1993 $ 397 $ 926
Borrowings under bank credit facility:
Revolving note payable 5,000 2,000
Term note payable 2,450 3,539
Other 10 11
------------------
7,857 6,476
Less current portion 1,495 1,629
------------------
$6,362 $4,847
In August 1994, the Company established a credit facility with a commercial
bank under which the Company may borrow a total of $20 million. The Company
may borrow up to $15 million under a revolving credit agreement based on
the level of the Company's eligible accounts receivable, which was
$31,769,000 at May 31, 1997. The agreement provides for interest at the
Prime Rate (8.5% at May 31, 1997) minus one-half of one percent, or a LIBOR
based option, (7.3% at May 31, 1997) and matures on October 31, 1999. The
agreement requires maintenance of certain financial ratios, limits the amount
of additional borrowings and prohibits the payment of dividends. Advances of
$5 million were outstanding under this agreement at May 31, 1997. The credit
facility also provides for a term loan up to $5 million. On October 5, 1994,
a term loan of $4.9 million was made to the Company. The term loan is due on
August 31, 1999 and is to be repaid in 54 equal payments beginning in March
1995 at an interest rate based upon the Prime Rate or LIBOR option. At May
31, 1997, the interest rates for this credit facililty were Prime Rate option
of 8.0% on $2.0 million and LIBOR option of 7.2% on $3.0 million. At May 31,
1997, the balance outstanding on the term loan was $2,450,000 at Prime Rate
option of 8.5% on $450 thousand and LIBOR option of 7.8% on $2.0 million.
The credit facility is secured by all accounts receivable, inventory,
intangibles, and proceeds related thereto.
The Company has outstanding letters of credit and letters of guarantee totaling
$3,337,718 which mature during 1997, 1998 and 1999.
Aggregate maturities of long-term debt excluding the revolving note are as
follows (in thousands): 1998 - $1,495; 1999 - $1,090; 2000 - $272; and
2001 - $0.
The carrying value of debt approximates fair value.
5. Income Taxes
The components of the provision for income taxes are as follows:
1997 1996 1995
---------------------------
(In thousands)
Current:
Federal $1,825 $1,145 $ (83)
State 443 373 (10)
Foreign 218 165 (234)
----------------------------
2,486 1,683 (327)
Deferred:
Federal (121) (21) 48
State (180) 368 11
Foreign (55) (81) 2
----------------------------
(356) 266 61
----------------------------
$2,130 $1,949 $(266)
============================
The difference between the expected tax rate and the effective tax rate is
indicated below:
1997 1996 1995
-------------------------------
(In thousands)
Expected provision (benefit)
for federal Income taxes at
the statutory rate $1,739 $1,495 $(155)
State income taxes, net of
federal benefit 290 257 (8)
Charges without tax benefit,
primarily goodwill
amortization 225 246 246
Life insurance proceeds - - (255)
Other (124) (49) (94)
-------------------------------
Provision for income taxes $2,130 $1,949 $(266)
The Company incurred pretax losses from foreign operations of $1,449,000
in 1996.
Significant components of the Company's deferred tax liabilities and assets
as of May 31, 1997 and 1996 are as follows:
1997 1996
----------------
(In thousands)
Deferred tax liabilities:
Tax over book depreciation $4,713 $5,055
Other - net 44 33
-----------------
Total deferred tax liabilities 4,757 5,088
Deferred tax assets:
Foreign insurance dividend 275 287
Vacation accrual 205 203
Colt & Brown noncompete
amortization 423 483
Other - net 118 (22)
-----------------
Total deferred tax assets 1,021 995
-----------------
Net deferred tax liability $3,736 $4,093
==================
The Company had operating loss carryforwards at May 31, 1995 attributable
to foreign operations totaling $694,000 that were fully utilized during 1996.
The Company has unused state job tax credit carryforwards of $369,000 at
May 31, 1997.
6. Stockholders' Equity
The Company has adopted a 1990 Incentive Stock Option Plan (the "1990 Plan")
and a 1991 Incentive Stock Option Plan (the "1991 Plan") to provide additional
incentives for officers and other key employees of the Company to promote the
success of the business and to enhance the Company's ability to attract and
retain the services of qualified persons. The Company has adopted a 1995
Nonemployee Directors' Stock Option Plan (the "1995 Plan") to promote the
interests of the Company and its stockholders by helping to attract and
retain highly qualified independent directors and allowing them to develop a
sense of proprietorship and personal involvement in the development and
financial success of the Company. Under the 1990 and 1991 Plans, incentive
and nonqualified stock options may be granted to the Company's key employees
and nonqualified stock options may be granted to nonemployees who are elected
for the first time as directors of the Company after January 1, 1991. Options
generally become exercisable over a five-year period from the date of the
grant. Under the 1995 Plan, qualified stock options are granted annually to
nonemployee directors. Stock options granted under the 1995 Plan generally
become exercisable over a two-year period from the date of the grant. Under
each plan, options may be granted with durations of no more than ten years.
The option price per share may not be less than the fair market value of
the common stock at the time the option is granted. Shareholders have
authorized an aggregate of 1,250,000, 620,000, and 250,000 options to be
granted under the 1990, 1991, and 1995 Plans, respectively. Options
exercisable total 681,279 and 497,618 at May 31, 1997 and 1996, respectively.
Pro forma information regarding net income and earnings per share is required
by Statement 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at that date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rates of 5.70% to 6.62%; dividend yield of
0%; volatility factors of the expected market price of the Company's stock
of .376 to .690; and an expected life of the options of 3.5 to 5 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characeristics
significantly different from those of traded options, and because changes
in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
The effect on pro forma net income from the options is as follows:
1997 1996
------------------------
(in thousands)
Income before stock options $2,984 $2,449
Compensation expense from
stock options:
1996 grant 231 78
1997 grant 38 -
------------------------
Net income $2,715 $2,371
========================
Pro forma earnings per share:
Primary .28 .25
Fully diluted .27 .25
The effect of compensation expense from stock options on 1996 pro forma
net income reflects only the vesting of 1996 awards. However, 1997 pro
forma net income reflects the second year of vesting of the 1996 awards
and the first year of vesting of 1997 awards.
The following summary reflects option transactions for the past three
years:
Option Price
Shares Per Share
--------------------------------
Shares under option:
Balance at May 31, 1994 1,244,104 $ .67 - $11.25
Granted 1,390,525 3.63 11.25
Exercised (7,235) .67 - .80
Canceled (1,195,189) .80 - 11.25
--------------------------------
Balance at May 31, 1995 1,432,205 .67 - 11.25
Granted 391,500 3.63 - 6.25
Exercised (36,408) .67 - 3.63
Canceled (265,741) .80 - 5.75
--------------------------------
Balance at May 31, 1996 1,521,556 .67 - 6.25
Granted 113,000 5.88 - 7.875
Exercised (62,239) .67 - 6.250
Canceled (47,313) 3.63 - 6.25
--------------------------------
Balance at May 31, 1997 1,525,004 $ .67 - $ 7.875
================================
7. Commitments
The Company is the lessee under operating leases covering real estate in
Tulsa, Oklahoma; Bristol, Pennsylvania; Anaheim, California; Bay Point,
California; Paso Robles, California; Bellingham, Washington; and Carson,
California. The Paso Robles lessors are former stockholders of San Luis,
now a stockholder of the Company and parties related to him. In 1995 and
1994, the Bellingham lessors were former stockholders of Colt, who became
a stockholder of the Company and parties related to him. The Company is
also the lessee under operating leases covering office equipment. Future
minimum lease payments are as follows (in thousands): 1998 - $517; 1999 -
$372; 2000 - $279; 2001 - $239; 2002 - $89 and thereafter $154. Rental
expense was $516,000, $646,000 and $663,000 for the years ended May 31,
1997, 1996 and 1995, respectively. Rental expense related to the Paso Robles
lease was $149,000 for the year ended May 31, 1997 and 1996 and $120,000
for the years ended May 31, 1995. Rental expense related to the Bellingham
lease was $57,000 for the years ended May 31, 1997, 1996 and 1995.
8. Discontinued Foreign Operations
During 1993 the Company invested $662,000 to establish a joint venture
(Al Shafai - Midwest Constructors) with a Saudi Arabian company to perform
mechanical contracting services in the Kingdom of Saudi Arabia. Al Shafai-
Midwest Constructors is 49% owned by Midwest International, Inc. The
Company invested another $1,404,000 in the joint venture in 1994 and received
$46,000 from the joint venture in 1995. The Company's 49% share of the losses
was $349,000 and $200,000 for 1995 and 1994, respectively. Due to changes in
economic conditions in Saudi Arabia, the Company and the Saudi Arabian company
are in the process of liquidating the joint venture. The Company reduced the
carrying value of its investment in this joint venture by $1,017,000 in 1995
to the estimated recovery upon completion of the liquidation.
Effective February 29, 1996, the Company discontinued the operations of its
United Kingdom tank maintenance subsidiary. As a result, assets totaling
$426,000 were sold or written off. Remaining assets of $556,000 were
transferred to other Company locations for use in operations.
9. Other Financial Information
The Company provides specialized on-site maintenance and construction services
for petrochemical processing and petroleum refining and storage facilities.
The Company grants credit without requiring collateral to customers consisting
of the major integrated oil companies, independent refiners and marketers, and
petrochemical companies. Although this potentially exposes the Company to the
risks of depressed cycles in oil and petrochemical industries, the Company's
receivables at May 31, 1997 have not been adversely affected by such conditions
and historical losses have been minimal.
Sales to one customer accounted for approximately 11% of the Company's
revenues for the year ended May 31, 1996. There were no sales to one
customer in excess of 10% of for the years ended May 31, 1997 and 1995.
Depreciation expense for the years ended May 31, 1997, 1996 and 1995 was
$4.5 million, $4.7 million and $4.5 million, respectively. Amortization of
goodwill and noncompete for the years ended May 31 ,1997, 1996 and 1995 was
$864,000, $1.1 million and $1.5 million, respectively.
10. Employee Benefit Plan
On June 1, 1993, the Company established a defined contribution 401(k)
savings plan (the "Plan"). All employees meeting length of service
requirements are eligible to participate in the Plan. Participants may
contribute an amount up to 15% of pretax annual compensation as defined
in the Plan, subject to certain other limitations in accordance with
Section 401(k) of the Internal Revenue Code. The Company may match
contributions at a percentage determined by the Company, but not to exceed
100% of the elective deferral contributions made by participants during the
Plan year. The Company has made no matching contributions to the Plan for
the years ended May 31, 1997, 1996, and 1995.
11. New Accounting Standard
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," which requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company will adopt Statement 121 in the
first quarter of 1997. The adoption of Statement 121 did not have a
significant impact on the Company's financial statements.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share," which is required to be adopted on December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. The impact on earnings
per share for the year ended May 31, 1997 would have been an increase of
$.01 per share for both basic and diluted shares.
12. Contingent Liabilities
The Company is self-insured for worker's compensation, auto, and general
liability claims with stop loss protection at $250,000, $100,000, and
$50,000 per incident, respectively. Management estimates the reserve for
such claims based on knowledge of the circumstances surrounding the claims,
the nature of any injuries involved, historical experience, and estimates
of future costs provided by certain third parties. Accrued insurance at May
31, 1997 represents management's estimate of the Company's liability at that
date. Changes in the assumptions underlying the accrual could cause actual
results to differ from the amounts reported in the financial statements.
13. Subsequent Events
On June 17, 1997, Matrix Service Company acquired the stock of General
Service Corporation ("GSC") and it's affiliated companies, Maintenance
Services Inc., Allentech, and Environmental Protection Services, Inc. for
up to $7.8 million, subject to certain adjustments. The purchase price was
payable in cash of $4.8 million, a $250,000 note payable in 12 quarterly
installments. In addition, the stockholders of GSC are entitled to receive
in the future up to an additional $2.75 million in cash if GSC satisfies
certain earnings requirements. The transaction will be accounted for as a
purchase and is expected to result in the creation of approximately $2.9
million of goodwill and noncompetition covenants of which $2.3 million,
representing the goodwill, will be amortized over a 40-year period and the
remaining balance will be amortized over a three-year period. GSC is
engaged in the same line of business as Matrix Service Company.
[MULTIPLIER] 1,000
[DESCRIPTION] Quarterly Financial Data
Matrix Service Company
Quarterly Financial Data (Unaudited)
Summarized quarterly financial data are as follows:
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
----------------------------------------------------------------------
(In thousands except per share amounts)
Revenues $39,630 $48,212 $42,242 $53,060
Gross profit 3,965 4,638 4,018 4,819
Net income 632 954 644 754
Net income per share -
Primary .07 .10 .07 .08
Fully diluted .07 .10 .07 .08
1996
---------------------------
Revenues $43,162 $48,262 $39,951 $52,350
Gross profit 4,325 4,321 3,986 3,986
Net income 551 670 457 771
Net income per share -
Primary .06 .07 .05 .08
Fully diluted .06 .07 .05 .08