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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, 1998.
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, 1998 closing sale price of the common stock as
reported by the NASDAQ National Market System) held by non-affiliates as
of August 26, 1998 was approximately $53,034,509.
The number of shares of the registrant's common stock outstanding as of
August 26, 1998 was 9,642,638 shares.
Documents Incorporated by Reference
Certain sections of the registrant's definitive proxy statement relating
to the registrant's 1998 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
Page
----
Item 1. Business 1
Item 2.Properties 13
Item 3. Legal Proceedings 13
Item 4.Submission of Matters to a Vote of Security Holders 13
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
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 22
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 23
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"), Mayflower Vapor Seal Corporation
("Mayflower") and General Service Corporation and affiliated companies,
Maintenance Services, Inc. and Mainserv-Allentech, Inc. (collectively, "GSC"),
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 subsidiary, Colt Construction Company ("Colt"), the Company
provides maintenance and construction services for industrial process plants
and refineries. Colt specialize in performing "turnarounds", which involve
complex, time-sensitive maintenance of the critical operating units of a
refinery and other in-plant maintenance. The Company's turnaround services
performed by its subsidiary, Midwest Industrial Contractors, Inc.
("Midwest"),(operations were discontinued during the year See Note 3 to
Consolidated Financial Statements).
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. The Midwest operations were discontinued
during fiscal year 1998. 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.
In June 1997, the Company acquired (the "GSC Acquisition") General Service
Corporation and affiliated companies. GSC 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.
On December 16, 1997, the Company and ITEQ, Inc. ("ITEQ") entered into a
Plan and Agreement of Merger whereby ITEQ agreed to acquire the Company.
On January 19, 1998 the Company and ITEQ mutually agreed to terminate the
Plan and Agreement of Merger, due to unanticipated difficulties in connection
with the expected integration of personnel from divergent corporate cultures.
During the third quarter of fiscal year 1998, the Company adopted a plan for
restructuring of operations to reduce costs, eliminate duplication of
facilities and improve efficiencies. The plan included closing fabrication
shops in Newark, Delaware and Rancocas, New Jersey and moving these operations
to a more efficient and geographically centered facility in Bristol,
Pennsylvania. Additionally, the Company closed a fabrication shop at Elkston,
Maryland. The production from the Maryland facility, which was principally
elevated water tanks, will be provided by the Company's Newnan, Georgia plant.
(The facilities located in Delaware, New Jersey, Pennsylvania and Maryland
were all leased facilities.) The Company sold real estate that was not being
utilized in Mississauga, Canada, and the Company also discontinued certain
product lines that were no longer profitable. During the third quarter of
fiscal year 1998 the board of directors approved a plan whereby the Company
would discontinue the operations of Midwest, which included maintenance
services for refineries in the FCCU turnaround, process heater and related
refractory construction markets. The Company will in an orderly manner
discontinue to operate in the markets that Midwest has historically
participated. 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.
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 used primarily by the
refining and storage segments of the petroleum industry. The petrochemical
industry also uses 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 three most recent years, there has been a very limited increase in
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 have 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. which 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.
Specialty Tanks
The Company designs, fabricates and field erects new refrigerated liquefied
gas storage tanks for the storage of ammonia, butane, carbon dioxide, ethane,
methane, nitrogen, oxygen, propane and other low temperature products.
These tanks are utilized by the chemical, petrochemical and industrial gas
industries.
Manufacturing
The Company operates five "state-of-the-art" facilities located in Oklahoma,
California, Georgia and Pennsylvania. The Company owns and operates a
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 fabrication facilities in California. 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.
The Georgia facility, which was acquired in the "Brown" acquisition, is
184,350 square feet of buildings owned by the Company. This facility supports
the fabrication of elevated tanks, pressurized storage spheres and
refrigerated liquefied gas storage tanks. See "Business - Aboveground
Storage Tank Operations - Elevated Tanks - Specialty Tanks". The two
Pennsylvania facilities contain 91,824 square feet of real estate, which
is leased. The Company owns the equipment which is used for the fabrication
of 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
170 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
17 years. From 1981 to 1998, crude oil refining capacity dropped from a
peak of approximately 18.6 million barrels per day in 1981, to approximately
15.6 million barrels per day by the end of 1997, 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, reduced domestic crude oil resources in certain geographical areas,
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 three 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 a
substantial number of 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.
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 liquiefied 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
degrees 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.
Hydrocarbon Process Services
The Company's principal refinery services include turnarounds for the
complete refinery with integrated process units, and complete construction
and maintenance services. The Company performs unit turnarounds involving
maintenance of crude distillation units, catalytic reformer units, delayed
coker units, alkylation units, reformers, 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.
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.
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.
General Construction Services
As part of the Company's efforts to be more independent of the petroleum
industry it has expanded its construction services capabilities into other
industries. The Company generated increased revenues during the latest
fiscal year from construction projects outside the petroleum and municipal
water industries, which has been their traditional markets. The Company
was awarded two projects during the fiscal year for general construction.
One project involved moving a food processing plant and expanding the
capacity of that plant. The other significant project involved the general
construction of a plant to manufacture computer grade silicon.
Other Business Matters
Customers and Marketing
The Company derives a significant portion of its revenues from performing
construction and maintenance services for the major integrated oil companies.
The Company also performs services for independent petroleum refining and
marketing companies, architectural and engineering firms, food industry,
general construction 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 had one customer accounting for more than 10% of revenues in two
of the last three years. During fiscal 1998, Pacific Northwest Sugar
Company and during fiscal 1996, ARCO USA accounted for more than 10% of the
Company's revenues in each of those years. The Company sold its products and
services to approximately 587 customers during fiscal 1998.
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. The Company
has established alliance relationships with six major oil companies. These
relationships place the Company in an advantageous position to our
competition. The alliances, in general, designate the Company as a sole
source provider for certain maintenance and construction projects.
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, 1998, the Company had an estimated backlog of work under
contracts believed to be firm of approximately $75.3 million, as compared
with an estimated backlog of approximately $69.1 million as of May 31, 1997.
Virtually all of the projects comprising this backlog are expected to be
completed within fiscal year 1999. 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 $60.1 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 $ 50,000. 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, 1998, the Company had approximately 283 non-field, full-time
employees. The Company also employed up to approximately 1,395 additional
persons on a project-by-project basis during fiscal 1998. In its refinery
turnaround operations, the Company employed up to approximately 795 persons
at its job sites during the most active periods of 1998. Approximately 434
of the employees of Matrix Service Mid-Continent, Inc., a subsidiary of the
Company, are covered by a collective bargaining agreement. 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 developed the RS 1000
Tank Mixer which controls sludge build-up in crude oil tanks through
resuspension. The RS 1000 Tank Mixer patent expires in August 2012. The
Company has applied for patents for two other products it has developed. The
Company has designed and developed the Flex-A-Swivel, a swivel joint for
floating roof drain systems.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 amountof 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
---- ---- ---------
Martin L. Rinehart 60 President & Chief Executive Officer
C. William Lee 58 Vice President-Finance,
Chief Financial Officer
Bradley S. Vetal 42 President, Matrix Service, Inc.
Bruce M. Lierman 38 President, Colt Construction Co., Inc.
Mark A. Brown 41 President, Brown Steel Contractors, Inc.
Connie J. Conger 45 Vice President-Accounting
Martin L. Rinehart is a founder of the Company and has served as its President
and Chief Executive Officer since February 27, 1998. From June 1992 to
February 1998, he served as Assistant to the President of Matrix Service,
Inc. Mr. Rinehart served as the Vice President-Operations of the Company from
its inception to June 1992. From 1980 until 1984, Mr. Rinehart served as
Executive Vice President of Tank Service, Inc. Mr. Rinehart succeeded Doyl
D. West, who served as President, Chief Executive Officer and Chairman of
the Board of the Company until his retirement in February, 1998. Mr. West
will continue to provide consulting services for the Company.
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.
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.
Mr. Lierman started his career with 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.
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.
Connie J. Conger joined the Company in 1980 as Controller and assumed the
duties of Vice President of Accounting in 1992. Ms. Conger completed her CPA
certification in 1994. Ms. Conger was previously Controller for seven years
for a Tulsa based architectural firm.
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. 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 and Bethlehem,
Pennsylvania. The aggregate lease payments for these leases during fiscal
1998 were approximately $607 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, 1998.
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
1998 1997
----------- ------------
High Low High Low
---- --- ---- ---
First Quarter $8.75 $6.63 $6.75 $5.00
Second Quarter 8.25 6.75 6.63 5.25
Third Quarter 9.63 5.69 7.81 5.50
Fourth Quarter 8.50 6.81 9.75 7.00
Fiscal Year
1999
-----------
High Low
---- ---
First Quarter (through August 26, 1998) $7.13 $5.50
As of August 26, 1998 there were approximately 94 holders of record of the
Common Stock. The Company believes that the number of 94 beneficial owners
of its Common Stock is substantially greater than 94.
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, 1998. The following
financial information included in the Statement of Operations reflects the
acquisition of GSC in 1998 and the disposal of Midwest for all years.
See the Notes to the Company's consolidated financial statements.
[CAPTION]
(in thousands, except per share data)
Matrix Service Company
--------------------------------------------------------------------------------
Years Ended
--------------------------------------------------------------------------------
May 31, 1998 May 31, 1997 May 31, 1996 May 31, 1995 May 31, 1994
------------ ------------ ------------ ------------ ------------
Statement of Operations Data:
Revenues $214,877 $166,650 $165,477 $140,903 $110,748
Gross profit 20,513 17,405 16,588 10,574 13,138
*Restructuring cost 6,018 0 0 0 0
Operating income 1,629 7,324 6,513 (256) 4,219
Income (loss) from continuing
operations before income taxes 986 6,997 6,245 (920) 4,598
Income (loss) from continuing
operations (727) 4,260 3,692 (295) 2,822
Net income (loss) (11,638) 2,984 2,449 (189) 2,717
Earnings (loss) per common share
- diluted (1.22) 0.31 0.26 (0.02) 0.29
Weighted average of common shares
- diluted 9,546 9,699 9,507 9,417 9,401
Matrix Service Company
--------------------------------------------------------------------------------
Years Ended
--------------------------------------------------------------------------------
Balance Sheet Data: May 31, 1998 May 31, 1997 May 31, 1996 May 31, 1995 May 31, 1994
------------ ------------ ------------ ------------ -----------
Working capital $ 41,084 $ 28,213 $ 26,370 $ 26,800 $ 20,070
Total assets 112,741 116,872 105,757 105,729 100,902
Long-term obligations 13,106 6,362 4,847 8,467 5,191
Deferred tax liability 4,948 4,757 5,088 4,698 4,145
Stockholders' equity 65,252 76,212 73,034 70,820 69,487
* During fiscal year 1998, the Company adopted a plan for restructuring of
operations to reduce costs, eliminate duplication of facilities and improve
efficiencies. The plan included closing fabrication shops in Newark, Delaware
and Rancocas, New Jersey and moving these operations to a more efficient and
geographically centered facility in Bristol, Pennslvania. Additionally, the
Company closed a fabrication shop at Elkston, Maryland. The production from
the Maryland facility, which was principally elevated water tanks, is being
provided by the Company's Newnan, Georgia plant.
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 for
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 June 1, 1991, San Luis, (iii) after December 30, 1992, Colt, (iv)
after June 10, 1993, Heath, (v) after April 1, 1994, Brown, and (vi) after
June 17, 1997, GSC.
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 the last three
fiscal years. For fiscal 1998, GSC was included for eleven and one half
months. All acquired companies, except GSC, were included for the full
year for fiscal 1997 and 1996. Amounts reported in this section have been
adjusted to reflect the exclusion of operations of Midwest which was
discontinued in fiscal year 1998. Revenue and net loss for Midwest were,
respectively $10.6 and $1.7 million for fiscal 1998, $16.5 and $1.3 million
for fiscal 1997 and $18.2 and $1.2 million for fiscal 1996. Incremental
revenues, gross profit and selling, general and administrative expenses
attributable to the results of operations of GSC, which were not included
in the prior years, are as follows:
(in millions)
Year ended
May 31, 1998
--------------
Revenues $25.1
Gross Profit 3.6
Selling, general &
administrative expenses 1.7
During the third quarter 1998, the Company adopted a plan to restructure
its operations. The Company recorded a charge of $6.0 million in connection
with the restructuring - See Note 4 to Consolidated Financial Statements.
The Company expects a continued demand for its services in the foreseeable
future. Management believes that the percentage growth of its revenues for
fiscal 1999 will be stronger than fiscal year 1998. 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 has expanded its construction services into
general industrial projects in an effort to decrease the seasonal effects of
refinery related project.
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 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, 1998 were positively affected by the inclusion of GSC for eleven
and one half months, and reflects the exclusion of Midwest for all years
presented.
Percentage of Revenues
Years ended May 31, | Period-to-Period Change
---------------------------------------------- |-------------------------------
| 1998 1997
| vs. vs.
1998 1997 1996 | 1997 1996
------ ------ ------ | ------ ------
|
Revenues 100.0% 100.0% 100.0% | 28.9% 0.7%
Cost of revenues 90.5 89.6 90.0 | 30.2 0.2
Gross profit 9.5 10.4 10.0 | 17.9 4.9
Selling, general and |
administrative expenses 5.7 5.8 5.7 | 26.5 2.7
Restructuring cost 2.8 - - | - -
Operating income 0.8 4.4 3.9 | (77.8) 12.5
Other income (expense) 0.3 0.2 0.2 | 96.6 22.0
Income from continuing operations |
before income tax expense 0.5 4.2 3.8 | (85.9) 12.0
Provision (benefit) for income taxes 0.8 1.6 1.5 | (37.5) -
Loss from discontinued operations 0.8 0.8 0.8 | 35.0 2.6
Loss on disposal of discontinued operations 4.3 - - | - N/A
|
Net income (loss) (5.4)% 1.8% 1.5% | (490.0)% 21.9%
====== ===== ===== ======= =====
Fiscal 1998 Compared to Fiscal 1997
Revenues for the year ended May 31, 1998 were $214.9 million as compared to
revenues of $166.7 million for the year ended May 31, 1997, representing
an increase of approximately $48.2 million or 28.9%. The increase was
primarily due to the acquisition of GSC as well as increased revenues from
the Company's services in industrial construction and refinery maintenance
markets.
Gross profit increased to $20.5 million for the year ended May 31, 1998 from
gross profit of $17.4 million for the year ended May 31, 1997, an increase of
approximately $3.1 million or 1.9%. Gross profit as a percentage of revenues
decreased to 9.5% in the 1998 period from 10.4% for the 1997 period. This
decrease in gross profit percentage was due to lower gross margin on certain
types of aboveground storage tanks.
Selling, general and administrative expenses increased to $12.2 million for
the year ended May 31, 1998 from expenses of $9.7 million for the year ended
May 31, 1997, an increase of $2.6 million or approximately 5.7%. The increase
was due to the acquisition of GSC. Selling, general and administrative
expenses as a percentage of revenues decreased to 5.7%for fiscal 1998 from
5.8% for fiscal 1997.
During fiscal 1998 the Company recorded a charge of $6.0 million. This charge
resulted from a plan adopted by the Company for restructuring of operations to
reduce costs, eliminate duplications of facilities and improve efficiencies -
See Note 4 to Consolidated Financial Statements.
Operating income from continuing operations before one time charges (See
Note 4 to Consolidated Financial Statements) increased to $4.5 million for
the year ended May 31, 1998 from $4.3 million for the year ended May 31, 1997,
an increase of $248 thousand or approximately 5.8%. The increase was due to
increased revenue.
Interest income increased to $262 thousand for the year ended May 31, 1998
from $151 thousand for the year ended May 31, 1997. This increase resulted
primarily from interest earned on temporarily invested funds. Interest
expense increased to $1.1 million for the year ended May 31, 1998 from $462
thousand of interest expense for the year ended May 31, 1997. The increase
in interest expense resulted primarily from increased borrowing under the
Company's revolving and term loan credit facility. The increased borrowings
from the Company's credit facilities were used primarily for the GSC
acquisition. Outstanding balances under this facility at May 31, 1998 was
$15.0 million as compared with $7.5 million outstanding at May 31, 1997.
Net income (loss) decreased to $(11.6) million for the 1998 period from $3.0
million for the 1997 period. The decrease was due to one time charges related
to restructuring as well as operating losses from discontinued operations and
the disposal of discontinued operations.
Income (loss) from continuing operations decreased to a loss of $727 thousand
for the year ended May 31, 1998 from income of $4.3 million for the year
ended May 31, 1997. This decrease resulted from non-recurring costs of $6.0
million - See Note 5 to Consolidated Financial Statements.
Fiscal 1997 Compared to Fiscal 1996
Revenues for the year ended May 31, 1997 were $166.7 million as compared to
revenues of $165.5 million for the year ended May 31, 1996, representing an
increase of approximately $1.2 million or 0.7%. The increase was primarily
due to increased revenues for the Company's services in elevated storage
tank markets and refinery services.
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 $817 thousand or 4.9%. Gross profit as a percentage of
revenues increased to 10.4% in the 1997 period from 10.0% for the 1996 period.
Selling, general and administrative expenses increased to $9.7 million for
the year ended May 31, 1997 from expenses of $9.4 million for the year ended
May 31, 1996, an increase of $257 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 related
operations. Selling, general and administrative expenses as a percentage
of revenues decreased to 5.7% for fiscal 1997 from 5.8% for fiscal 1996.
Operating income from continuing operations increased to $7.3 million for the
year ended May 31, 1997 from $6.5 million for the year ended May 31, 1996, an
increase of $811 thousand or approximately 12.5%. The increase was due to
improved gross profit margin and a decrease in amortization of intangible
assets. Interest income decreased to $151 thousand for the year ended May
31, 1997 from $386 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 $462 thousand for the year ended May 31, 1997
from $735 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.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled approximately $2.6 million
at May 31, 1998 and $1.9 million at May 31, 1997.
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 $30.0 million. The Company may borrow up to $20.0 million
under a revolving credit agreement based on the level of the Company's
eligible receivables. The agreement provides for interest at a Prime Rate
or a LIBOR based option, and matures on October 31, 1999. At May 31, 1998,
the outstanding advances under the revolver totaled $5.5 million. The
interest rate for this facility at May 31, 1998 was 6.8%. The credit facility
also provides for a term loan up to $10.0 million. On March 2, 1998, a
term loan of $10.0 million was made to the Company. The term loan is due on
February 28, 2003 and is to be repaid in 60 equal payments beginning in
March 1998 at an interest rate based upon the Prime Rate or a LIBOR Option.
At May 31, 1998 the balance outstanding on this facility was $9.5 million.
In conjunction with this note on March 1, 1998, the Company entered into an
Interest Rate Swap Agreement with a commercial bank, effectively providing a
fixed interest rate of 7.5% for the five year period of the term loan.
Operations of the Company provided $2.2 million of cash for the year ended
May 31, 1998 as compared with providing $6.2 million of cash for the year
ended May 31, 1997, representing a decrease of approximately $4.0 million.
The decrease was due primarily to a reduction in accounts payables and
accrued liabilities.
Capital expenditures during the year ended May 31, 1998 totaled approximately
$2.6 million. Of this amount, approximately $604 thousand was used to
purchase trucks for field operations, and approximately $1.2 million was used
to purchase welding, construction, and fabrication equipment. The Company has
invested approximately $392 thousand in furniture and fixtures during the
year, which includes approximately $263 thousand invested in computer
equipment for operations and automated drafting. The Company has currently
budgeted approximately $5.2 million for capital expenditures for fiscal 1999.
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
New Accounting Standards
Earnings Per Share. In 1997, the Financial Accounting Standards Board
(FASB) issued Statement No. 128, Earnings Per Share. Statement No 128
replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants
and convertible securities. Diluted earnings per share is very similar to
the previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the Statement No. 128 requirements.
Comprehensive Income. In June 1997, the FASB issued Statement No. 130,
Reporting Comprehensive Income. Statement No. 130 establishes new rules for
the reporting and display of comprehensive income and its components.
Comprehensive income is net income, plus certain other items that are
recorded directly to stockholders' equity. The only such item currently
applicable to the Company is foreign currency translation adjustments. The
Statement, which is not required to be adopted by the Company until fiscal
1999, is not expected to materially change the Company's financial reporting
or disclosures.
Segments. In June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information. The Statement changes the
way public companies report segment information in annual financial statements
and also requires companies to report selected segment information in interim
financial reports to shareholders. As the Company operates in one industry
segment, this Statement will not change the Company's financial reporting or
disclosures.
Derivatives and Hedging. In June 1998, the FASB issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999 (fiscal 2001
for the Company). Because of the company's minimal use of derivatives,
management does not anticipate that the adoption of the Statement will have
a significant effect on earnings or the financial position of the Company.
Year 2000 Impact
The Year 2000 issue creates a significant problem with business automation
for businesses, government agencies, and all computer users. A significant
number of applications in use today use two digit years and can fail between
now and January 1, 2000.
State of Readiness. The Company is sensitive to the growing concern
associated with the inception of the new millennium and its impact on the
business marketplace. In an effort to retain its ability to provide on-going
quality products and services to its customers, the Company is actively
pursuing Year 2000 compliance for all of its computer systems.
Assessment. The Company is in the process of finalizing its inventory and
assessment efforts, which includes comprehensive review of its business
systems. The Company anticipates completion of this task no later than
September 30, 1998. The assessment focuses on the identification of
automated business areas and electronic processes.
Based on assessment results, the Company has determined that it will be
required to modify, upgrade or replace only a limited number of its systems
so that its business areas will function properly with respect to dates in
the year 2000 and thereafter.
The Company estimates the impact of Year 2000 issues on non-IT Systems to be
less than 1% and will have no material impact on the operations of the
business. Non-IT Systems include systems with embedded technology containing
programmed instructions running via processor chips.
Project Timetable. The Company believes that with the planned modifications to
existing software and conversions to new software, the Year 2000 issue will
not pose significant operation problems for its computer systems.
The Company has minimal third party interface systems; however, communications
have been initiated with significant suppliers and large customers to
determine the extent to which the Company's systems are vulnerable to those
third parties' failure to remediate their own Year 2000 issues.
The Company estimates that it has completed approximately 75% of the
inventory and assessment activities. Of the systems identified, 20% have been
remediated, and 10% solutions implemented into the production environment.
The Company expects that the remaining systems will be upgraded, tested and
implemented by the second quarter of 1999, which is prior to any anticipated
impact on its operating systems.
Anticipated Cost. The anticipated costs of the Year 2000 project has been
estimated at $200 thousand, of which approximately 40% will be capitalized.
The remaining 60% will be expensed as incurred and is not expected to have
a material effect on the results of operations. Any non-compliant hardware
is dated and would ordinarily be scheduled for replacement.
Contingency Plans. Despite the best planning and execution efforts, the Company
is working from the premise that some issues will not be uncovered, and that
some issues that are uncovered will not be successfully resolved. In an effort
to manage and mitigate this risk exposure, the Company is developing a risk
management and contingency plan for its critical operations. The Company
anticipates completion of this task no later than November 30, 1998.
In addition to the upgrade strategy, the Company has recently completed a
requirements study for the selection and implementation of a new
enterprise-wide management information system. The scope of this project
has been maintained separately and independent of the Year 2000 efforts.
The project is designed to be a full replacement for the financial and
operational systems, and is scheduled for implementation in mid-1999.
If the existing "upgrade" strategy fails, this project could be escalated
to mitigate any material business disruptions.
While the Company believes its efforts are adequate to address its Year 2000
issues, there can be no guarantee that all Year 2000 issues will be anticipated
and corrected and that the systems of other companies on which the Company's
systems and operations rely will be converted on a timely basis; failure of
all significant Year 2000 issues to be corrected could have a material
adverse effect on the Company.
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 some 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 F-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 1998,
and is hereby incorporated by reference; if the definitive proxy statement
for the 1998 annual stockholders' meeting is not filed with the Securities
and Exchange Commission within 120 days of the end of the Company's 1998
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 1998 and is hereby incorporated by reference; if the definitive
proxy statement for the 1998 annual stockholders' meeting is not filed with
the Securities and Exchange Commission within 120 days of the end of the
Company's 1998 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 1998 and is hereby incorporated by reference; if the definitive
proxy statement for the 1998 annual stockholders' meeting is not filed with
the Securities and Exchange Commission within 120 days of the end of the
Company's 1998 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 1998, and is
hereby incorporated by reference; if the definitive proxy statement for the
1998 annual stockholders' meeting is not filed with the Securities
and Exchange Commission within 120 days of the end of the Company's 1998
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, 1998 and 1997. 2
Consolidated Statements of Operations for the years ended
May 31, 1998, 1997 and 1996. 4
Consolidated Statements of Changes in Stockholders" Equity
for the 5 years ended May 31, 1998, 1997 and 1996. 6
Consolidated Statements of Cash Flows for the years ended
May 31, 1998, 1997 and 1996. 7
Notes to Consolidated Financial Statements 9
Quarterly Financial Data (Unaudited)
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, as amended. Form S-8
(File No. 333-56945) filed June 12, 1998 is hereby incorporated by reference.
Exhibit 10.1 to the Company's Registration Statement.
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).
List of Exhibits
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 March 7, 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.
List of Exhibits
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 28, 1998 By: /s/Martin L. Rinehart
-------------------------------
Martin L. Rinehart, 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/ Martin L. Rinehart Martin L. Rinehart
----------------------- President and Director
Martin L. Rinehart (Principal Executive Officer) August 28, 1998
/s/C. William Lee C. William Lee
----------------------- Chief Executive Officer
C. William Lee and Director
(Principal Financial and
Accounting Officer) August 28, 1998
/s/Hugh E. Bradley Director August 28, 1998
-----------------------
Hugh E. Bradley
/s/Robert L. Curry Director August 28, 1998
-----------------------
Robert L. Curry
/s/William P. Wood Director August 28, 1998
-----------------------
William P. Wood
/s/John S. Zink Director August 28, 1998
-----------------------
John S. Zink
Matrix Service Company
Notes to Consolidated Financial Statements
Matrix Service Company
Consolidated Financial Statements
Years ended May 31, 1998, 1997 and 1996
with Report of Independent Auditors
Contents
Report of Independent Auditors 1
Audited Consolidated Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Operations 4
Consolidated Statements of Changes in Stockholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 9
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 as of May 31, 1998 and 1997, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows
for each of the three years in the period ended May 31, 1998. 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 at May 31, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended May 31, 1998, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Tulsa, Oklahoma
August 14, 1998
1,000
[DESCRIPTION] Consolidated Balance Sheets
Matrix Service Company
Consolidated Balance Sheets
May 31
1998 1997
------------------------
(In Thousands)
Assets
Current assets:
Cash and cash equivalents $2,606 $1,877
Accounts receivable 37,165 37,745
Costs and estimated earnings in
excess of billings on
uncompleted contracts 15,340 11,349
Inventories 6,352 4,989
Income tax receivable 5,279 317
Deferred income taxes 3,252 1,021
Prepaid expenses 524 456
------------------------
Total current assets 70,518 57,754
Property, plant and equipment, at cost:
Land and buildings 16,481 15,097
Construction equipment 24,092 24,444
Transportation equipment 6,108 5,504
Furniture and fixtures 3,315 3,164
Construction in progress 973 2,614
------------------------
50,969 50,823
Accumulated depreciation 22,533 20,861
------------------------
28,436 29,962
Goodwill, net of accumulated
amortization of $1,595 and
$4,894 in 1998 and 1997,
respectively 13,217 28,721
Other assets 570 435
-------------------------
Total assets $112,741 $116,872
=========================
May 31
1998 1997
------------------------------
(In Thousands)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 12,250 $12,738
Billings on uncompleted contracts
in excess of costs and estimated earnings 7,612 6,325
Accrued insurance 2,369 3,308
Earnout payable 884 2,400
Other accrued expenses 4,214 3,275
Current portion of long-term debt 2,105 1,495
----------------------
Total current liabilities 29,434 29,541
Long-term debt 13,106 6,362
Deferred income taxes 4,949 4,757
Stockholders' equity:
Common stock - $.01 par value; 15,000,000
shares authorized; 9,600,232 and 9,491,153
shares issued in 1998 and 1997, respectively 96 95
Additional paid-in capital 51,458 50,903
Retained earnings 14,221 26,269
Cumulative translation adjustment (523) (145)
---------------------
65,252 77,122
Less treasury stock, at cost - 115,228 shares
in 1997 - 910
---------------------
Total stockholders' equity 65,252 76,212
---------------------
Total liabilities and stockholders' equity $112,741 $116,872
=====================
See accompanying notes.
1,000
[DESCRIPTION] Consolidated Statements of Operations
Matrix Service Company
Consolidated Statements of Operations
Year ended May 31
1998 1997 1996
--------------------------------
(In thousands, except share and per share amounts)
Revenues $214,877 $166,651 $165,477
Cost of revenues 194,364 149,246 148,889
-------------------------------------
Gross profit 20,513 17,405 16,588
Selling, general and
administrative expenses 12,224 9,664 9,407
Goodwill and noncompete amortization 642 417 668
Restructuring costs 6,018 - -
-------------------------------------
Operating income 1,629 7,324 6,513
Other income (expense):
Interest expense (1,095) (462) (735)
Interest income 262 151 386
Other 190 (16) 81
-------------------------------------
Income from continuing operations
before income taxes 986 6,997 6,245
Provision (benefit) for federal,
state and foreign income taxes:
Current 1,858 3,093 2,287
Deferred (145) (356) 266
-------------------------------------
1,713 2,737 2,553
-------------------------------------
Income (loss) from continuing
operations (727) 4,260 3,692
Loss from discontinued operations (1,722) (1,276) (1,243)
Loss from disposal of discontinued
operations (9,189) - -
Net income (loss) $(11,638) $2,984 $2,449
=====================================
Basic earnings (loss) per
common share
Income (loss) from continuing
operations $(.08) $.46 $.40
Loss from discontinued operations (.18) (.14) (.14)
Loss from disposal of discontinued
operations (.96) - -
----------------------------------
Net income (loss) per common share $(1.22) $.32 $.26
==================================
Matrix Service Company
Consolidated Statements of Operations (continued)
Year ended May 31
1998 1997 1996
-------------------------------------
(In thousands, except share and
per share amounts)
Diluted earnings (loss) per common share
Income (loss) from continuing operations $(.08) $.44 $.39
Loss from discontinued operations (.18) (.13) (.13)
Loss from disposal of discontinued
operations (.96) - -
Net income (loss) per common share $(1.22) $.31 $.26
Weighted average common shares
outstanding:
Basic 9,545,979 9,330,246 9,291,630
Diluted 9,545,979 9,698,659 9,507,425
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, 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)
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)
Translation adjustment - - - - (38) (38)
Net income - - 2,984 - - 2,984
-----------------------------------------------------------
Balances, May 31, 1997 95 50,903 26,269 (910) (145) 76,212
Exercise of stock
options (224,307 shares) 1 555 (410) 910 - 1,056
Translation adjustment - - - - (378) (378)
Net loss - - (11,638) - - (11,638)
-----------------------------------------------------------
Balances, May 31, 1998 $96 $51,458 $14,221 $- $(523) $65,252
See accompanying notes.
[MULTIPLIER] 1,000
[DESCRIPTION] Consolidated Statements of Cash Flows
Matrix Service Company
Consolidated Statements of Cash Flows
Year ended May 31
1998 1997 1996
-------------------------------------
(In thousands)
Operating activities
Net income (loss) $(11,638) $2,984 $2,449
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 5,368 5,365 5,851
Deferred income tax provision
(benefit) (2,039) (356) 266
(Gain) loss on sale of equipment 467 (70) 248
Noncash write-off of discontinued 14,555 - -
operations
Noncash write-off of restructuring costs 4,983 - -
Changes in operating assets and
liabilities increasing (decreasing)
cash, net of effects of acquisitions:
Accounts receivable 5,166 (8,540) (2,257)
Costs and estimated earnings
in excess of billings on
uncompleted contracts (2,858) 773 (2,540)
Inventories (138) (840) 566
Prepaid expenses (77) (277) 247
Accounts payable (3,486) 3,281 (1,746)
Billings on uncompleted
contracts in excess of costs
and estimated earnings 473 1,972 40
Accrued expenses (2,484) 1,203 3,632
Income taxes receivable/payable (4,544) 699 2,846
Other (797) (15) 11
---------------------------------------
Net cash provided by operating activities 2,951 6,179 9,613
Investing activities
Acquisition of property, plant and equipment (2,577) (5,802) (3,410)
Acquisitions and investment in foreign joint
venture, net of cash acquired (5,068) (2,353) (1,931)
Return of investment in foreign joint venture - 200 -
Proceeds from other investing activities 652 155 116
--------------------------------------
Net cash used in investing activities (6,993) (7,800) (5,225)
Matrix Service Company
Consolidated Statements of Cash Flows (continued)
Year ended May 31
1998 1997 1996
-------------------------------------
(In thousands)
Financing activities
Issuance of common stock $1,056 $256 $32
Advances under bank credit agreement 11,750 7,000 7,500
Repayments of bank credit agreement (4,200) (4,000) (9,500)
Repayment of other notes (3,652) (1,089) (1,089)
Repayment of acquisition note (459) (529) (1,409)
Issuance of acquisition note 250 - -
Issuance of equipment lease - 22 50
Issuance of equipment notes 40 - -
Repayments of equipment notes - (23) (54)
Net cash provided by (used in)
financing activities 4,785 1,637 (4,470)
Effect of exchange rate changes on cash (14) (38) 5
Net increase (decrease) in cash and cash
equivalents 729 (22) (77)
Cash and cash equivalents, beginning of year 1,877 1,899 1,976
---------------------------------
Cash and cash equivalents, end of year $2,606 $1,877 $1,899
=================================
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Income taxes $1,064 $1,706 $1,777
Interest 1,275 545 823
See accompanying notes.
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"),
General Services Corporation ("GSC"), Heath Engineering Ltd. ("Heath"), and
Brown Steel Contractors, Inc. ("Brown"). GSC was purchased in the current
period, see Note 3, and Midwest was discontinued, see Note 4. Intercompany
transactions and balances have been eliminated in consolidation.
The Company operates primarily in the United States and has operations
in Canada and Mexico through Heath and San Luis. The Company's 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.
1. Summary of Significant Accounting Policies (continued)
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 3 to 5 years, respectively, using the
straight-line method.
Income Taxes
Deferred income taxes are computed using the liability method whereby
deferred tax assets and liabilities are recognized based on temporary
differences between financial statement and tax bases of assets and
liabilities using presently enacted tax rates.
Earnings per Common Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share." Statement
128 replaced the previously reported primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. Basic
earnings per common share is calculated based on the weighted average shares
outstanding during the period. Diluted earnings per share includes in average
shares outstanding employee stock options which are dilutive (-0-, 368,413
and 215,795 shares in 1998, 1997 and 1996, respectively). All earnings per
share amounts for all periods have been presented, and where necessary,
restated to conform to the Statement 128 requirements.
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.
1. Summary of Significant Accounting Policies (continued)
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. Acquisition
On June 17, 1997, the Company acquired all of the outstanding common stock of
General Services Corporation and its affiliated companies, Maintenance
Services, Inc., Allentech, Inc., and Environmental Protection Services
(collectively "GSC") for up to $7.8 million, subject to certain adjustments.
The purchase price consisted of $4.75 million in cash and a $250 thousand,
prime rate (currently 8.25%) promissory note payable in 12 equal 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. Under the provision of the contract the
stockholders have the right to elect 70% of the earnout amount upon change
of control of the Company. This transaction was accounted for as a purchase
and resulted in approximately $3.0 million of goodwill and non-competition
covenants.
Operations of GSC are included in the accompanying financial statements
from date of acquisition. Operations of GSC from June 1, 1997 to date of
acquisition and for fiscal years 1997 and 1996 were not significant to
the Company's reported results.
3. Discontinued Operations
During the third quarter of fiscal year 1998, the board of directors
approved a plan whereby the Company would discontinue the operations of
Midwest and discontinue to operate in the markets that Midwest has
historically participated. The Company is in the process of completing
all open contracts and disposing of all assets. The Company will abandon
this business entirely. The cost to terminate Midwest operations resulted
in a charge of $15.5 million, before income tax benefit of $6.3 million,
which includes the write-off of $14.6 million of goodwill. The operating
results of Midwest for the current and prior periods are reported as
discontinued operations.
3. Discontinued Operations (continued)
Summarized operating results of the discontinued operations are as follows:
1998 1997 1996
--------------------------------
(In Thousands)
Revenues $10,551 $16,493 $18,248
Operating loss 3,366 1,828 1,794
Benefit for income taxes 1,172 607 604
Loss from discontinued operations 1,722 1,276 1,243
4. Restructuring costs
During the third quarter of 1998, the Company adopted a plan to restructure
its operations to reduce costs, eliminate duplication of facilities and
improve efficiencies. The plan included closing fabrication shops in Newark,
Delaware and Rancocas, New Jersey and moving these operations to a more
efficient and geographically centered facility in Bristol, Pennsylvania.
Additionally, the Company closed a fabrication shop at Elkston, Maryland.
The production from the Maryland facility, which was principally elevated
water tanks, will be provided by the Company's Newnan, Georgia plant.
(The facilities located in Delaware, New Jersey, Pennsylvania and Maryland
were all leased facilities.) The Company is selling real estate that is not
being utilized in Mississauga, Canada, and is also discontinuing certain
product lines that are no longer profitable. As a result of these
restructuring activities, the Company recorded a charge of $6.0 million.
Included in this amount are costs for combining operations, eliminating
duplications, write-off of goodwill related to product lines discontinued,
and abandonment and disposal of nonproducing assets of $5.2 million,
severance and other benefit costs of $600 thousand and, other costs of $200
thousand.
5. Uncompleted Contracts
Contract terms of the Company's construction contracts 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:
5. Uncompleted Contracts (continued)
May 31
1998 1997
--------------------
(In Thousands)
Costs incurred and estimated earnings
recognized on uncompleted contracts $207,229 $109,770
Billings on uncompleted contracts 199,501 104,746
----------------------
$7,728 $5,024
Shown on balance sheet as:
Costs and estimated earnings in excess
of billings on uncompleted contracts $15,340 $11,349
Billings on uncompleted contracts in
excess of costs and estimated earnings 7,612 6,325
-----------------------
$7,728 $5,024
=======================
Approximately $4.0 million and $4.2 million of accounts receivable at May 31,
1998 and 1997, respectively, relate to billed retainages under contracts.
6. Long-Term Debt
Long-term debt consists of the following:
1998 1997
----------------------
(In Thousands)
Borrowings under bank credit facility:
Revolving note $5,500 $5,000
Term note 9,500 2,450
Other 211 407
--------------------
15,211 7,857
Less current portion 2,105 1,495
--------------------
$13,106 $6,362
====================
6. Long-Term Debt (continued)
On March 1, 1998, the Company and a commercial bank entered into an amendment
to a credit facility agreement originally established in 1994, whereby the
Company may borrow a total of $30 million. The amended agreement provides
for a $20 million revolving credit facility based on the level of the
Company's eligible receivables. The agreement provides for an interest rate
based on a prime or LIBOR option and matures on October 31, 1999. The
credit facility also provides for a $10 million term loan, due February 29,
2003, payable in 60 equal paymentsbeginning in March 1998. The interest
rates for the revolver and the term loan at May 31, 1998 were 6.8% and
7.5%, respectively. The agreement requires maintenance of certain
financial ratios, limits the amount of additional borrowings and prohibits
the payment of dividends. The credit facility is secured by all accounts
receivable, inventory, intangibles, and proceeds related thereto.
In conjunction with the term note, on March 1, 1998, the Company entered
into an interest rate swap agreement for an initial notional amount of $10
million with a commercial bank, effectively providing a fixed interest rate
of 7.5% for the five-year period on the term note. The Company pays 7.5%
interest and receives LIBOR plus 1 1/2%, calculated on the notional amount.
The notional amount was $9.7 million at May 31, 1998. Net receipts or
payments under the agreement are recognized as an adjustment to interest
expense. The swap agreement expires in 2003. If LIBOR decreases, interest
payments received and the market value of the swap position decrease.
The Company has outstanding letters of credit and letters of guarantee
totaling $3,513,008 which mature during 1998 and 1999.
Aggregate maturities of long-term debt for the years ending May 31 are as
follows (in thousands), for each fiscal year: 1999 - $2,105; 2000 - $7,589;
2001 - $2,021, 2002 - $2,000 and 2003 - $1,496.
The carrying value of debt approximates fair value.
7. Income Taxes
The components of the provision (benefit) for income taxes from continuing
operations are as follows:
1998 1997 1996
--------------------------
(In Thousands)
Current:
Federal $1,422 $2,432 $1,749
State 391 443 373
Foreign 45 218 165
---------------------------
1,858 3,093 2,287
Deferred:
Federal (69) (121) (21)
State (13) (180) 368
Foreign (63) (55) (81)
-----------------------------
(145) (356) 266
-----------------------------
$ 1,713 $2,737 $2,553
=============================
The difference between the expected tax rate and the effective tax rate
for continuing operations is indicated below:
1998 1997 1996
------------------------------
(In Thousands)
Expected provision for federal
income taxes at the statutory
rate $335 $2,378 $2,123
State income taxes, net of federal
benefit 49 345 308
Charges without tax benefit,
primarily goodwill amortization 1,329 14 122
-------------------------------
Provision for income taxes $1,713 $2,737 $2,553
===============================
7. Income Taxes (continued)
Significant components of the Company's deferred tax liabilities and assets
as of May 31, 1998 and 1997 are as follows:
1998 1997
------------------
(In Thousands)
Deferred tax liabilities:
Tax over book depreciation $4,878 $4,713
Other - net 71 44
------------------
Total deferred tax liabilities 4,949 4,757
Deferred tax assets:
Foreign insurance dividend 275 275
Vacation accrual 239 205
Noncompete amortization 472 423
Loss carryforward 1,377 -
Other - net 889 118
-------------------
Total deferred tax assets 3,252 1,021
-------------------
Net deferred tax liability $1,697 $3,736
===================
The Company has unused state job tax credit carryforwards of $267,000
at May 31, 1998.
8. 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.
The Company has also adopted a 1995 Nonemployee Directors' Stock Option
Plan (the "1995 Plan"). 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 803,211 and 681,279 at May 31, 1998 and 1997, respectively.
8. Stockholders' Equity (continued)
Pro forma information regarding net income and earnings per share is required
by Statement of Financial Accounting Standards No. 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 the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions: risk-free
interest rates of 5.44% to 6.62%; dividend yield of -0-%; volatility
factors of the expected market price of the Company's stock of .326 to
.690; and an expected life of the options of 2 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 characteristics
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 Statement's pro forma information from the options is as follows:
1998 1997 1996
--------------------------
(In Thousands)
Net income (loss) before stock options $(11,638) $2,984 $2,449
Compensation expense from stock options
1996 grant 123 231 78
1997 grant 75 38 -
1998 grant 164 - -
----------------------------
Net income (loss) $(12,000) $2,715 $2,371
Pro forma earnings (loss) per common share:
Basic $ (1.26) $ .29 $ .26
Diluted $ (1.26) $ .28 $ .25
8. Stockholders' Equity (continued)
The effect of compensation expense from stock options on 1996 pro forma
net income reflects the vesting of 1996 awards. 1997 pro forma net income
reflects the second year of vesting of the 1996 awards and the first year
of vesting of 1997 awards. 1998 pro forma net income reflects the third
year of vesting of the 1996 awards, the second year of vesting of 1997
awards and the first year of vesting of the 1998 awards.
The following summary reflects option transactions for the past three years:
Shares Option Price Per Share
---------------------------------------------
Shares under option:
Balance at May 31, 1995 1,432,205 $ .67 - $5.75
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 - 6.25
Canceled (47,313) 3.63 - 6.25
--------------------------------------------
Balance at May 31, 1997 1,525,004 $ .67 - 7.875
Granted 530,500 6.75 - 8.00
Exercised (224,307) .67 - 6.25
Canceled (170,540) 3.625 - 8.00
--------------------------------------------
Balance at May 31, 1998 1,660,657 $ .67 - $8.00
============================================
9. 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.
The Company is also the lessee under operating leases covering office
equipment. Future minimum lease payments are as follows (in thousands):
1999 - $549; 2000 - $455; 2001 - $428; 2002 - $284; 2003 - $47 and
thereafter - $115. Rental expense was $710,000, $516,000 and $646,000 for
the years ended May 31, 1998, 1997 and 1996, respectively. Rental expense
related to the Paso Robles lease was $157,000, $149,000 and $149,000 for
the years ended May 31, 1998, 1997 and 1996.
10. 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, 1998
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, 1998 and 1996. There were no sales to
one customer in excess of 10% of revenues for the year ended May 31, 1997.
11. Employee Benefit Plan
The Company sponsors a defined contribution 401(k) savings plan (the "Plan")
for all employees meeting length of service requirements. Participants may
contribute an amount up to 15% of pretax annual compensation as defined in
the Plan, subject to certain 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,
1998, 1997, and 1996. Beginning July 1, 1998, the Company will match
contributions at a rate of 25% of employee contributions, not to exceed 6%
of participating employee's salary.
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, 1998
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.
The Company is a defendant in various legal actions and is vigorously
defending against each of them. It is the opinion of management that none
of such legal actions will have a material effect on the Company's financial
position.
[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
1998 Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------
(In Thousands except per share amounts)
Revenues $48,218 $55,631 $54,431 $56,597
Gross profit 5,073 4,864 5,275 5,301
Income (loss) from continuing operations 1,252 1,086 (4,352) 1,287
Loss from discontinued operations (483) (132) (1,107) -
Loss from disposal of
discontinued operations - - (9,198) 9
Net income (loss) 769 953 (14,657) 1,297
Net income (loss) per common
share data:
Basic - continuing operations .14 .12 (.46) .13
- discontinued operations (.05) (.01) (.12) -
- disposal of discontinued
operations - - (.97) -
- net income (loss) .09 .11 (1.55) .13
Diluted - continuing operations .14 .12 (.46) .13
- discontinued operations (.05) (.01) (.12) -
- disposal of discontinued
operations - - (.97) -
- net income (loss) .09 .11 (1.55) .13
Matrix Service Company
Quarterly Financial Data (Unaudited) (continued)
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------
(In Thousands except per share amounts)
Revenues $36,554 $43,640 $39,202 $47,255
Gross profit 4,221 4,453 3,897 4,834
Income from continuing operations 1,069 1,205 847 1,139
Loss from discontinued operations (437) (251) (203) (385)
Net income 632 954 644 754
Net income (loss) per common
share data:
Basic - continuing operations .11 .13 .09 .13
- discontinued operations (.04) (.03) (.02) (.05)
- net income .07 .10 .07 .08
Diluted - continuing operations .11 .13 .09 .11
- discontinued operations (.04) (.03) (.02) (.04)
- net income .07 .10 .07 .07