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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For quarterly period ended December 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 Number: 0-23335
MPW INDUSTRIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
Ohio 31-1567260
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
9711 Lancaster Road, S.E., Hebron, Ohio 43025
(Address of principal executive offices) (Zip code)
(740) 927-8790
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
- --------------------------------------------------------------------------------
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
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of the issuer's classes of common
stock, as of the latest practicable date.
As of January 31, 1999, 10,784,945 shares of the issuer's common stock, without
par value, were outstanding.
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MPW INDUSTRIAL SERVICES GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1998 (unaudited) and June 30, 1998............3
Consolidated Statements of Operations for the three and six months ended December 31,
1998 and 1997 (unaudited)....................................................................4
Consolidated Statements of Cash Flows for the six months ended December 31, 1998
and 1997 (unaudited).........................................................................5
Notes to Consolidated Financial Statements (unaudited).......................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................................................14
Item 2. Changes in Securities and Use of Proceeds...................................................14
Item 3. Defaults Upon Senior Securities.............................................................15
Item 4. Submission of Matters to a Vote of Security Holders.........................................15
Item 5. Other Information...........................................................................16
Item 6. Exhibits and Reports on Form 8-K............................................................16
SIGNATURES ............................................................................................17
EXHIBIT INDEX ............................................................................................18
</TABLE>
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PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
MPW INDUSTRIAL SERVICES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31, JUNE 30,
1998 1998
------------ --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 165 $ 507
Accounts receivable, net of allowances 31,907 19,386
Inventories 7,672 4,959
Deferred income taxes 1,446 1,439
Prepaid expenses 1,376 1,178
Other current assets 1,021 351
-------- -------
43,587 27,820
Property and equipment, net 35,159 28,593
Noncurrent assets:
Intangibles 45,082 15,514
Other assets 562 440
======== =======
Total assets $124,390 $72,367
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,329 $ 6,279
Accrued compensation and related taxes 3,213 3,729
Current maturities of noncurrent liabilities 467 2,615
Other accrued liabilities 6,564 3,768
-------- -------
19,573 16,391
Noncurrent liabilities:
Long-term debt 55,185 14,296
Deferred income taxes 1,447 1,192
Other 535 767
-------- -------
57,167 16,255
Minority interest 1,200 --
Shareholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued and -- --
outstanding
Common stock, no par value; 30,000,000 shares authorized; 10,784,945 and 10,496,647
shares issued and outstanding at December 31, 1998 and June 30, 1998, respectively 108 105
Additional paid-in capital 40,454 37,591
Retained earnings 5,888 2,025
-------- -------
46,450 39,721
======== =======
Total liabilities and shareholders' equity $124,390 $72,367
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<TABLE>
MPW INDUSTRIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues $ 38,414 $ 24,078 $ 68,251 $ 45,834
Costs and expenses:
Cost of services 25,689 16,237 45,647 30,508
Selling, general and administrative expenses 6,510 4,216 11,852 7,761
Depreciation and amortization 1,593 864 2,932 1,730
Deferred stock option compensation -- 3,255 -- 3,415
-------- -------- -------- --------
Total costs and expenses 33,792 24,572 60,431 43,414
-------- -------- -------- --------
Income (loss) from operations 4,622 (494) 7,820 2,420
Interest expense, net 780 216 1,269 551
Minority earnings -- 20 -- 119
-------- -------- -------- --------
Income (loss) before taxes 3,842 (730) 6,551 1,750
Provision (benefit) for income taxes 1,575 (1,418) 2,685 (1,269)
-------- -------- -------- --------
Net income $ 2,267 $ 688 $ 3,866 $ 3,019
======== ======== ======== ========
Pro forma information:
Historical income (loss) before taxes $ 3,842 $ (730) $ 6,551 $ 1,750
Pro forma taxes on income 1,575 (292) 2,685 700
-------- -------- -------- --------
Pro forma net income (loss) $ 2,267 $ (438) $ 3,866 $ 1,050
======== ======== ======== ========
Pro forma net income (loss) per share $ 0.21 $ (0.06) $ 0.36 $ 0.15
======== ======== ======== ========
Pro forma net income (loss) per share, assuming dilution $ 0.20 $ (0.06) $ 0.34 $ 0.14
======== ======== ======== ========
Weighted average common shares outstanding 10,757 7,531 10,683 6,866
Weighted average common shares outstanding, assuming dilution 11,452 7,531 11,389 7,550
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<TABLE>
MPW INDUSTRIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
----------------------
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 3,866 $ 3,019
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 2,262 1,585
Amortization 670 145
(Gain) loss on disposals of assets 74 (5)
Minority interest -- 119
Effect of exchange rate changes on cash (3) --
Deferred stock option compensation -- 3,415
Change in deferred income taxes 248 (363)
Changes in operating assets and liabilities:
Accounts receivable (7,744) (3,502)
Inventories (320) 167
Prepaid expenses and other assets (1,915) 98
Accounts payable 1,158 411
Other accrued liabilities (1,214) (2,223)
-------- --------
Net cash provided by (used in) operating activities (2,918) 2,866
CASH FLOW USED IN INVESTING ACTIVITIES:
Purchases of property and equipment (6,401) (2,538)
Purchase of businesses, net of acquired cash (24,658) (3,077)
Proceeds from the disposal of property and equipment 46 66
-------- --------
Net cash used in investing activities (31,013) (5,549)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 14 30,250
Proceeds from revolving credit facility 79,485 17,949
Payments on revolving credit facility (29,801) (24,484)
Proceeds from notes payable 6,804 3,000
Payments on notes payable (22,833) (9,297)
Payments on AAA Notes -- (13,400)
Payments on capital lease obligations (80) (27)
Proceeds from capital contributions -- 233
Distributions to shareholders -- (1,242)
-------- --------
Net cash provided by financing activities 33,589 2,982
-------- --------
Increase (decrease) in cash and cash equivalents (342) 299
Cash and cash equivalents at beginning of year 507 489
======== ========
Cash and cash equivalents at end of period $ 165 $ 788
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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MPW INDUSTRIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS MPW Industrial
Services Group, Inc. and its subsidiaries (the "Company") provide
technology-based services to both industrial and non-industrial facilities
including industrial cleaning and maintenance, facility management and support
services, filtration media and related engineering services, container cleaning,
process water purification, critical cleanroom cleaning and related services and
other specialized services. Such services are primarily provided at customer
facilities. The Company serves customers in numerous industries including
automotive, electric power, pulp and paper, chemical, steel, transportation,
semiconductor, microelectronics and pharmaceutical. The Company provides
services throughout the United States, Mexico and Canada.
During the three months ended December 31, 1998, the Company entered
into a new service line effective with its acquisitions of five technical
cleanroom cleaning and related services companies (see Note 2 below for further
information about the individual acquisitions). These five acquisitions were
made by a newly-created, wholly-owned subsidiary of the Company, Pentagon
Technologies Group, Inc. ("Pentagon").
The accompanying unaudited consolidated financial statements include
the accounts of the Company and all of its wholly-owned subsidiaries, including
Aquatech Environmental, Inc. ("Aquatech"), which was 70% owned by the Company
until December 5, 1997, at which time the Company purchased the remaining
minority shareholders' interests of Aquatech, and it became wholly-owned. The
minority shareholders' interests in the equity and net income of Aquatech are
presented separately in the accompanying unaudited consolidated financial
statements for the three and six months ended December 31, 1997. All material
intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements presented
herein have been prepared by the Company and reflect all adjustments of a normal
recurring nature that are, in the opinion of management, necessary for a fair
presentation of financial results for the three and six months ended December
31, 1998 and 1997, in accordance with generally accepted accounting principles
for interim financial reporting and pursuant to Article 10 of Regulation S-X.
Certain footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. These interim consolidated
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended June 30, 1998 (the "Annual Report"). The
results of operations for the three and six months ended December 31, 1998 and
1997 are not necessarily indicative of the results for the full year (see Note 9
for further information regarding fluctuations in quarterly results).
INTANGIBLES Intangibles include costs in excess of net assets of
acquired businesses ("goodwill"), patents, covenants not-to-compete and customer
lists. Goodwill, resulting primarily from certain acquisitions accounted for
using the purchase method of accounting, is amortized on a straight-line basis
over periods not exceeding 25 years. The remaining intangibles are amortized on
a straight-line basis over periods ranging from 5 to 20 years.
MINORITY INTEREST Minority interest as of December 31, 1998 represents
certain equity interests in Pentagon that were issued in connection with certain
of its recent acquisitions. These equity interests are in the form of a
preferred stock of Pentagon. The amount presented in the balance sheet as of
December 31, 1998 represents the estimated value of the preferred stock, based
on 16% of the underlying equity of Pentagon. See Note 7.
USE OF ESTIMATES The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
accompanying consolidated financial statements. Actual results could differ from
those estimates.
RECLASSIFICATIONS Certain amounts presented as of June 30, 1998 have
been reclassified to conform to the December 31, 1998 presentation.
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NOTE 2. ACQUISITIONS
TANK MANAGEMENT Effective August 1, 1998, the Company purchased
substantially all of the assets of Tank Management, Inc. ("TMI") for an
aggregate consideration of $5,750,000. The consideration included the issuance
of 114,318 shares of common stock of the Company, representing an aggregate
value of $1,250,000. The purchase price may be increased upon the achievement of
certain new customer sales objectives for the TMI facility over the three-year
period following the date of acquisition. The acquisition has been accounted for
using the purchase method of accounting. The accompanying financial statements
include the results of operations of TMI from the effective acquisition date
through December 31, 1998.
GAUTHIER Effective August 1, 1998, the Company acquired all of the
outstanding stock of Gauthier Enterprises, Inc., a Michigan corporation
("Gauthier"), for an aggregate consideration of $3,000,000. The consideration
included the issuance of 89,236 shares of common stock of the Company,
representing an aggregate value of $1,000,000. The purchase price may be
increased by $3,000,000, or more or less, contingent upon the achievement of
certain revenue and operating objectives over the three-year period following
the date of acquisition. The acquisition has been accounted for using the
purchase method of accounting. The accompanying financial statements include the
results of operations of Gauthier from the effective acquisition date through
December 31, 1998.
SSI Effective November 1, 1998, the Company acquired all of the
outstanding stock of Support Systems, Inc., a New York corporation ("SSI"), for
an aggregate consideration of $6,011,000. The consideration included the
issuance of preferred stock of Pentagon, representing 2% of the equity of
Pentagon. The purchase price may be increased by $3,000,000, or more or less,
contingent upon the achievement of certain revenue and operating objectives over
the three-year period following the date of acquisition. The acquisition has
been accounted for using the purchase method of accounting. The accompanying
financial statements include the results of operations of SSI from the effective
acquisition date through December 31, 1998.
ENVIROSAFE Effective November 1, 1998, the Company acquired all of the
outstanding stock of Envirosafe Technical Cleaning, Inc., an Arizona corporation
("Envirosafe"), for an aggregate consideration of $2,500,000. The consideration
included the issuance of 57,266 shares of common stock of the Company,
representing an aggregate value of $500,000. The acquisition has been accounted
for using the purchase method of accounting. The accompanying financial
statements include the results of operations of Envirosafe from the effective
acquisition date through December 31, 1998.
TEC Effective November 1, 1998, the Company purchased substantially all
of the assets of Technological Environment Cleaning International Company
("TEC") for an aggregate consideration of $6,000,000. The consideration included
the issuance of preferred stock of Pentagon, representing 8% of the equity of
Pentagon. The acquisition has been accounted for using the purchase method of
accounting. The accompanying financial statements include the results of
operations of TEC from the effective acquisition date through December 31, 1998.
SURESCO Effective November 1, 1998, the Company purchased substantially
all of the assets of Suresco, Inc. ("Suresco") for an aggregate consideration of
$1,375,000. The consideration included the issuance of 11,478 shares of common
stock of the Company, representing an aggregate value of $100,000. The
consideration also included the issuance of preferred stock of Pentagon,
representing 2% of the equity of Pentagon. The acquisition has been accounted
for using the purchase method of accounting. The accompanying financial
statements include the results of operations of Suresco from the effective
acquisition date through December 31, 1998.
DRYDEN Effective December 31, 1998, the Company acquired all of the
outstanding stock of Dryden Engineering, Inc., a California corporation
("Dryden"), for an aggregate consideration of $3,325,000. The consideration
included the issuance of preferred stock of Pentagon, representing 4% of the
equity of Pentagon. The purchase price may be increased by $250,000 contingent
upon the achievement of certain operating objectives over the six-month period
following the date of acquisition. The acquisition has been accounted for using
the purchase method of accounting.
WTW Effective December 31, 1998, the Company purchased substantially
all of the assets of WTW Systems, Inc. ("WTW") for an aggregate cash
consideration of $1,265,000. The acquisition has been accounted for using the
purchase method of accounting.
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The terms of certain of the Company's other acquisition agreements also
provide for additional consideration to be paid based on the achievement of
certain objectives. Such additional consideration is paid in cash, common stock
of the Company, or a combination thereof, and is capitalized as goodwill. During
the six months ended December 31, 1998, the Company paid additional
consideration of $304,000. No common stock of the Company was issued in
connection with this consideration.
NOTE 3. INTANGIBLES
Intangibles are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ --------
1998 1998
------------ --------
(in thousands)
<S> <C> <C>
Goodwill $38,142 $15,115
Customer lists 5,242 --
Patents 1,334 --
Non-compete agreements 364 399
======= =======
$45,082 $15,514
======= =======
</TABLE>
Accumulated amortization of intangibles as of December 31, 1998 and
June 30, 1998 was $1,250,000 and $580,000, respectively.
NOTE 4. INCOME TAXES
Prior to October 31, 1997, the income of MPW Industrial Services, Inc.
("Industrial") was taxed under the provisions of Subchapter S of the Internal
Revenue Code of 1986, as amended, which provides that in lieu of corporate
income taxes, the shareholders of the S Corporation were taxed on their
proportionate share of Industrial's taxable income. Therefore, no provision or
liability for federal income tax has been included in historical financial
statements related to Industrial prior to October 31, 1997. The accompanying
financial statements do, however, include provisions for income taxes for
federal, state, provincial and local tax purposes for the other subsidiaries of
the Company that were subject to corporate income taxes prior to October 31,
1997.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax asset and liability as of December 31,
1998 are related to the use of accelerated depreciation rates on property and
equipment for tax purposes and the carryforward of tax adjustments related to
the termination of Industrial's S Corporation status.
The pro forma income taxes presented in the Consolidated Statements of
Operations for the three and six months ended December 31, 1997 represent the
estimated income taxes that would have been reported had Industrial been subject
to federal and state income taxes for that period.
NOTE 5. LONG-TERM DEBT
Effective November 2, 1998, the Company entered into a new credit
agreement with its principal banks (the "Credit Facility") to replace the
previous credit agreement (the "Previous Credit Agreement"). The Previous Credit
Agreement, as amended, provided the Company with $50,000,000 of available
credit, of which $35,000,000 was available in the form of term notes. The Credit
Facility provides the Company with $75,000,000 of revolving credit availability
for a three-year period, subject to extension by the banks each year on the
anniversary of the agreement. Under the terms of the Credit Facility, the entire
$75,000,000 is available for general corporate purposes, including working
capital, capital expenditures and acquisitions. Borrowing under the Credit
Facility currently bears interest at the prime rate or, at the Company's option,
the Eurodollar market rate plus 1.625%. The interest rate is subject to change
based on interest rate formulas tied to the ratio of consolidated funded debt to
earnings before interest, taxes, depreciation and amortization. Availability of
borrowing is subject to the maintenance of a minimum level of net worth, certain
levels of interest coverage and maintenance of a certain ratio of funded debt to
earnings before interest, taxes, depreciation and amortization. As of
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December 31, 1998, $54,242,000 had been drawn against the Credit Facility. The
Company also pays a commitment fee for unused portions of the Credit Facility of
0.35%.
NOTE 6. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), Earnings per Share,
effective for periods ending after December 15, 1997. SFAS No. 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 similar to the previously reported
fully diluted earnings per share. All earnings per share amounts for all periods
have been presented to conform to the SFAS No. 128 requirements.
The following table sets forth the computation of pro forma basic and
diluted earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- ------------------
1998 1997 1998 1997
------- ------ ------ ------
<S> <C> <C> <C> <C>
Numerator for basic earnings per share - pro
forma net income (loss) $ 2,267 $ (438) $3,866 $1,050
Effect of assumed exercise of equity
interest in Pentagon (Note 7) 7 -- 7 --
------- ------ ------ ------
Numerator for diluted earnings per share -
pro forma net income (loss) after assumed
conversions $ 2,260 $ (438) $3,859 $1,050
======= ====== ====== ======
Denominator for basic earnings per share -
weighted average common shares 10,757 7,531 10,683 6,866
Effect of dilutive securities:
Dilutive employee stock options 668 -- 679 684
Preferred stock of Pentagon (Note 7) 27 -- 27 --
------- ------ ------ ------
Dilutive potential common shares 695 -- 706 684
Denominator for diluted earnings per share -
adjusted weighted average common shares and
assumed conversions 11,452 7,531 11,389 7,550
------- ------ ------ ------
Pro forma net income (loss) per share $0.21 $(0.06) $0.36 $0.15
------- ------ ------ ------
Pro forma net income (loss) per share,
assuming dilution $0.20 $(0.06) $0.34 $0.14
======= ====== ====== ======
</TABLE>
NOTE 7. EQUITY INTERESTS IN PENTAGON
Preferred stock of Pentagon was issued in connection with certain of
its recent acquisitions. The Pentagon Series A Preferred Stock pays dividends
only when and if declared by the Board of Directors of Pentagon and is
convertible into shares of Common Stock of Pentagon immediately prior to an
initial public offering of, or sale of all or substantially all the stock or
assets of, Pentagon. The shares of preferred stock may be sold or transferred to
a third party only subject to a right of first refusal on the part of Pentagon.
The holders of preferred stock have the right, commencing three years after
issuance of the preferred stock, to sell shares of preferred stock to Pentagon
or the Company at a purchase price based on the earnings before interest, taxes,
depreciation and amortization times a multiple based on certain trading
multiples of the Company or an assumed multiple of Pentagon. The amount of
preferred stock of Pentagon to be purchased by the Company or Pentagon will be
determined by the Board of Directors annually. The purchase price will be paid
in common stock of the Company, or at the option of the Company, in cash.
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In addition to preferred stock, Pentagon has issued a common stock
option to its Chief Executive Officer representing a 9% equity interest in
Pentagon upon exercise.
NOTE 8. SUBSEQUENT EVENTS
In January 1999, the Company acquired substantially all of the assets
of Biocon, a division of Performance Solutions-Biocon, LLC. The purchase price,
paid through a combination of cash and preferred stock of Pentagon, represented
an aggregate of approximately $2,125,000.
In February 1999, the Company acquired substantially all of the assets
of Mid-Ohio Industrial Services, Inc. ("Mid-Ohio"). The purchase price, paid in
cash, represented an aggregate of approximately $2,600,000.
NOTE 9. FLUCTUATIONS IN QUARTERLY RESULTS
The Company's revenues and results of operations tend to vary
seasonally as a result of a number of factors over which the Company has no
control, including its customers' budgetary constraints, the timing and duration
of its customers' planned maintenance activities and shutdowns, changes in its
competitors' pricing policies and general economic conditions. Also, certain
operating and fixed costs remain relatively constant throughout the fiscal year,
which when offset by differing levels of revenues may result in fluctuations in
quarterly operating results. Because of these factors, the Company typically
generates the least amount of revenues in the third quarter, higher revenues in
the second quarter and the greatest amount of revenues in the first and fourth
quarters. Although the Company believes that the historical trend in quarterly
revenue for the first and fourth quarters are generally higher than the second
and third quarters, there can be no assurance that this will occur in future
periods. Accordingly, quarterly or other interim results should not be
considered indicative of results to be expected for any quarter or for the full
year.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Except for historical information, certain statements in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") are forward looking. These forward looking statements are
based on current expectations that are subject to a number of uncertainties and
risks, and actual results may differ materially. The uncertainties and risks
include, but are not limited to, competitive and other market factors, customer
purchasing behavior, general economic conditions and other facets of the
Company's business operations as well as other risk factors identified in
"Investment Considerations" in the Company's Annual Report. The Company
undertakes no obligation and does not intend to update, revise or otherwise
publicly release the result of any revisions to these forward looking statements
that may be made to reflect future events or circumstances.
The following information should be read in conjunction with the
Unaudited Consolidated Financial Statements and Notes included herein. The
following information should also be read in conjunction with the Audited
Consolidated Financial Statements and Notes and MD&A for the year ended June 30,
1998 as contained in the Company's Annual Report.
OVERVIEW
In fiscal 1998, the Company completed the acquisitions of four
companies, ESI International, the Vinewood Companies, Straightline Optical
Service and Maintenance Concepts (collectively, the "fiscal 1998 acquisitions").
During the six months ended December 31, 1998 ("six month fiscal 1999 period"),
the Company completed the acquisitions of eight companies, TMI, Gauthier, SSI,
Envirosafe, TEC, Suresco, Dryden and WTW (collectively, the "fiscal 1999
acquisitions"). See Note 2 to the Consolidated Financial Statements.
Collectively, the fiscal 1999 and 1998 acquisitions contributed $10.2 million
and $17.3 million of revenues in the three months ended December 31, 1998
("fiscal 1999 quarter") and the six month fiscal 1999 period, respectively.
On December 1, 1997, the registration statement related to the
Company's initial public offering of its common stock (the "Offering") was
declared effective by the Securities and Exchange Commission and its stock began
trading on the NASDAQ national market system on December 2, 1997. During the
three month period ended December 31, 1997,
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numerous events occurred and certain transactions were recorded that were
directly related to the Offering and affect the comparability of the results of
operations for the Company for the three and six month periods ended December
31, 1998 to the same periods in the prior year. For purposes of this MD&A,
adjusted pro forma results of operations for the three and six months ended
December 31, 1997 are being utilized. Adjusted pro forma information for each of
the quarters in fiscal 1998 is described in the Company's Annual Report and its
Prospectus dated December 2, 1997, filed in connection with the Company's
Registration Statement on Form S-1 (File number 333-36887).
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, consolidated
statement of income data as a percentage of revenues for actual results for the
three and six months ended December 31, 1998 and adjusted pro forma results for
the same periods of the prior year:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ ------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of services 66.9 67.4 66.9 66.6
Selling, general and administrative expenses 16.9 17.6 17.4 17.1
Depreciation and amortization 4.1 3.6 4.3 3.7
----- ----- ----- -----
Total costs and expenses 88.0 88.6 88.5 87.3
----- ----- ----- -----
Income from operations 12.0 11.4 11.5 12.7
Interest expense, net 2.0 -- 1.9 --
----- ----- ----- -----
Income before taxes 10.0 11.4 9.6 12.7
Provision for income taxes 4.1 4.6 3.9 5.0
----- ----- ----- -----
Net income 5.9% 6.9% 5.7% 7.6%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1997
Basis of Presentation. Management's analysis of the fiscal 1999 quarter
compared to the three months ended December 31, 1997 ("fiscal 1998 quarter")
utilizes adjusted pro forma information for the fiscal 1998 quarter.
Revenues. Revenues increased by $14.3 million, or 59.5%, to $38.4
million for the fiscal 1999 quarter from $24.1 million for the fiscal 1998
quarter. This increase was primarily the result of the twelve acquisitions that
were completed since October 1, 1997, which contributed an aggregate of $10.2
million of revenues. The internal rate of growth in revenues in the fiscal 1999
quarter was 17.3%.
Cost of Services. Cost of services increased by $9.5 million, or 58.2%,
to $25.7 million for the fiscal 1999 quarter from $16.2 million for the fiscal
1998 quarter. Cost of services as a percentage of revenues decreased to 66.9%
for the fiscal 1999 quarter from 67.4% for the fiscal 1998 quarter. The decrease
in cost of services as a percentage of revenues is primarily due to improved
operating efficiency in the Company's filtration management service line.
Additionally, the Company's container cleaning service line became more cost
efficient by better utilization of its Chesterfield, MI facility.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $2.3 million, or 53.9%, to $6.5 million for
the fiscal 1999 quarter from $4.2 million for the fiscal 1998 quarter. Selling,
general and administrative expenses decreased as a percentage of revenues to
16.9% for the fiscal 1999 quarter from 17.6% for the fiscal 1998 quarter. The
increase in selling, general and administrative expenses is primarily due to the
overhead costs assumed in the twelve acquisitions noted above, costs associated
with the Company's status as a public company and other investments in the
Company's infrastructure to support overall growth.
Depreciation and Amortization. Depreciation and amortization increased
by $737,000, or 86.1%, to $1.6 million for the fiscal 1999 quarter from $856,000
for the fiscal 1998 quarter. Depreciation and amortization increased as a
percentage of revenues to 4.1% for the fiscal 1999 quarter from 3.6% for the
fiscal 1998 quarter. This increase is a result of
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<PAGE> 12
additional capital expenditures related to the Company's growth and additional
goodwill and other intangible assets arising out of the twelve acquisitions
noted above.
Income from Operations. Income from operations increased $1.9 million,
or 67.8%, to $4.6 million for the fiscal 1999 quarter from $2.8 million for the
fiscal 1998 quarter. Income from operations increased as a percentage of
revenues to 12.0% for the fiscal 1999 quarter from 11.4% for the fiscal 1998
quarter. The increase in income from operations and operating margin are due to
the factors discussed above.
Interest Expense, net. Immediately following the Offering, the Company
had no borrowings under the Previous Credit Agreement with its banks. For this
reason, interest expense has been eliminated in the adjusted pro forma
information for the fiscal 1998 quarter to give effect as if the repayment of
the Company's debt obligations from the proceeds of the Offering had occurred as
of the beginning of the period. Reported interest expense in the fiscal 1999
quarter is the result of new borrowings subsequent to the Offering, primarily
resulting from the twelve acquisitions noted above.
Provision for Income Taxes. Prior to October 31, 1997, Industrial was
an S Corporation for income tax purposes and did not record a provision for
federal and certain state income taxes. The provision for income taxes in the
adjusted pro forma information for the fiscal 1998 quarter reflects an effective
rate of 40%. The provision for income taxes for the fiscal 1999 quarter reflects
an effective rate of 41%.
Net Income and Net Income per Share. Net income increased $614,000, or
37.1%, to $2.3 million for the fiscal 1999 quarter from $1.7 million for the
fiscal 1998 quarter. Assuming dilution, net income per share increased to $0.20
for the fiscal 1999 quarter from $0.15 for the fiscal 1998 quarter. These
increases are due to the factors discussed above. Weighted average common shares
outstanding used in the calculation of net income per share for the fiscal 1998
quarter assumes that the Offering and repurchase of minority interests had
occurred at the beginning of the period.
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1997
Basis of Presentation. Management's analysis of the six month fiscal
1999 period compared to the six months ended December 31, 1997 ("six month
fiscal 1998 period") utilizes adjusted pro forma information for the six month
fiscal 1998 period.
Revenues. Revenues increased by $22.4 million, or 48.9%, to $68.3
million for the six month fiscal 1999 period from $45.8 million for the six
month fiscal 1998 period. This increase was primarily the result of the twelve
acquisitions that were completed since October 1, 1997, which contributed an
aggregate of $17.3 million of revenues. Despite the impact of the General Motors
strike, the internal rate of growth in revenues in the six month fiscal 1999
period was 11.2%.
Cost of Services. Cost of services increased by $15.1 million, or
49.6%, to $45.6 million for the six month fiscal 1999 period from $30.5 million
for the six month fiscal 1998 period. Cost of services as a percentage of
revenues increased to 66.9% for the six month fiscal 1999 period from 66.6% for
the six month fiscal 1998 period. The increase in cost of services as a
percentage of revenues is the result of the loss of revenues related to the
General Motors strike offset by the improved operating efficiencies at the
Company's filtration management and container cleaning service lines.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $4.0 million, or 51.6%, to $11.9 million
for the six month fiscal 1999 period from $7.8 million for the six month fiscal
1998 period. Selling, general and administrative expenses increased as a
percentage of revenues to 17.4% for the six month fiscal 1999 period from 17.1%
for the six month fiscal 1998 period. The increase in selling, general and
administrative expenses is primarily due to the overhead costs assumed in the
twelve acquisitions noted above, costs associated with the Company's status as a
public company and other investments in the Company's infrastructure to support
overall growth.
Depreciation and Amortization. Depreciation and amortization increased
by $1.2 million, or 72.8%, to $2.9 million for the six month fiscal 1999 period
from $1.7 million for the six month fiscal 1998 period. Depreciation and
amortization increased as a percentage of revenues to 4.3% for the six month
fiscal 1999 period from 3.7% for the six month fiscal 1998 period. This increase
is a result of additional capital expenditures related to the Company's growth
and additional goodwill and other intangible assets arising out of the twelve
acquisitions noted above.
Income from Operations. Income from operations increased $2.0 million,
or 34.5%, to $7.8 million for the six month fiscal 1999 period from $5.8 million
for the six month fiscal 1998 period. Income from operations decreased as a
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<PAGE> 13
percentage of revenues to 11.5% for the six month fiscal 1999 period from 12.7%
for the six month fiscal 1998 period. The increase in income from operations and
the decrease in operating margin are due to the factors discussed above.
Interest Expense, net. Immediately following the Offering, the Company
had no borrowings under the Previous Credit Agreement with its banks. For this
reason, interest expense has been eliminated in the adjusted pro forma
information for the six month fiscal 1998 period to give effect as if the
repayment of the Company's debt obligations from the proceeds of the Offering
had occurred as of the beginning of the period. Reported interest expense in the
six month fiscal 1999 period is the result of new borrowings subsequent to the
Offering, primarily resulting from the twelve acquisitions noted above.
Provision for Income Taxes. Prior to October 31, 1997, Industrial was
an S Corporation for income tax purposes and did not record a provision for
federal and certain state income taxes. The provision for income taxes in the
adjusted pro forma information for the six month fiscal 1998 period reflects an
effective rate of 40%. The provision for income taxes for the six month fiscal
1999 period reflects an effective rate of 41%.
Net Income and Net Income per Share. Net income increased $365,000, or
10.4%, to $3.9 million for the six month fiscal 1999 period from $3.5 million
for the six month fiscal 1998 period. Assuming dilution, net income per share
increased to $0.34 for the six month fiscal 1999 period from $0.33 for the six
month fiscal 1998 period. These increases are due to the factors discussed
above. Weighted average common shares outstanding used in the calculation of net
income per share for the six month fiscal 1998 period assumes that the Offering
and repurchase of minority interests had occurred at the beginning of the
period.
QUARTERLY RESULTS AND SEASONALITY
The Company's results of operations tend to vary seasonally, with the
least amount of revenues generated in the third quarter, higher revenues in the
second quarter and the greatest amount of revenues in the first and fourth
quarters. The Company's quarterly results of operations may fluctuate
significantly as a result of a number of factors over which the Company has no
control, including its customers' budgetary constraints, the timing and duration
of its customers' planned maintenance activities and shutdowns, changes in its
competitors pricing policies and general economic conditions. Also, certain
operating and fixed costs remain relatively constant throughout the fiscal year
that, when offset by differing levels of revenues, may result in fluctuations in
quarterly results.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had cash and cash equivalents of
$165,000 and working capital of $24.0 million. During the six month fiscal 1999
period, the Company used $2.9 million in operating activities and made capital
investments of $6.4 million.
In the six month fiscal 1999 period, the Company completed eight
acquisitions that required an aggregate of $24.6 million in cash and the
issuance of 272,298 shares of the Company's common stock.
Prior to November 2, 1998, the Company operated under the Previous
Credit Agreement with its principal banks, which, as amended, provided the
Company with $50.0 million of credit availability. Effective November 2, 1998,
the Company entered into the Credit Facility to replace the Previous Credit
Agreement. This Credit Facility provides the Company with $75.0 million of
revolving credit availability for a three-year period, subject to extension by
the banks each year on the anniversary of the agreement. Under the terms of the
Credit Facility, the entire $75.0 million is available for general corporate
purposes, including working capital, capital expenditures and acquisitions.
Borrowing under the Credit Facility is at rates, based on the prime or
Eurodollar rate, that the Company believes to be very favorable. Availability of
borrowing is subject to the maintenance of a minimum level of net worth, certain
levels of interest coverage and maintenance of a certain ratio of funded debt to
earnings before interest, taxes, depreciation and amortization that the Company
believes will not affect the availability of borrowings under the Credit
Facility. As of December 31, 1998, $54.2 million had been drawn on the Credit
Facility
In January 1999, the Company completed the acquisition of a sixth
cleanroom services company, Biocon, which provides technical services to
cleanroom environments. The purchase price, paid through a combination of cash
and
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<PAGE> 14
preferred stock of Pentagon, was an aggregate of approximately $2.1 million.
In February 1999, the Company completed the acquisition of Mid-Ohio which
provides industrial cleaning and maintenance services in southwest Ohio. The
purchase price, paid in cash, was an aggregate of approximately $2.6 million.
The Company intends to continue its strategy of complementing its
internal growth and to expand its service offerings through acquisitions. In the
six month fiscal 1999 period, the Company completed eight acquisitions that
utilized $24.6 million of cash, and following that period, the Company completed
two additional acquisitions, which utilized $4.7 million in cash. Subsequent to
these acquisitions, the total amount outstanding under the Credit Facility was
$58.9 million. Although the Company continues to explore acquisition
alternatives, the Company currently has no agreements in principle to purchase
any other companies that may require the utilization of borrowings under the
Credit Facility.
The Company believes that cash on hand as of December 31, 1998, cash
flow from operations and available borrowings under the Credit Facility will be
sufficient to fund its currently planned capital projects and operations for at
least the next 24 months. However, as a result of its anticipated growth, the
Company has, from time to time, explored the availability of raising additional
capital with its banks and other advisors. The Company believes that such
additional capital will be available to support its anticipated growth.
YEAR 2000 ISSUE
Many computer systems in use today were designed and developed using
two digits, rather than four, to specify the year. As a result, such systems
will recognize a date using "00" as the year 1900 rather than the year 2000.
This could cause many computer applications to fail completely or to create
erroneous results unless corrective measures are taken.
The Company recognizes the need to ensure its operations will not be
adversely impacted by year 2000 software failures. Major areas of potential
business impact have been identified and initial conversion efforts are
underway. The Company is also addressing this risk with its suppliers, dealers,
financial institutions and others with which it does business to coordinate year
2000 conversion. The Company's main operating and financial system became year
2000 compliant effective with the recent normal software upgrade completed in
December 1997. The cost of achieving year 2000 compliance for the remaining
systems is estimated to be less than $100,000 over the cost of normal software
upgrades and replacements and will be incurred through the end of the fourth
quarter of fiscal 1999, at which time the Company expects that all of its
financial and operating systems will be year 2000 compliant.
INFLATION
The effects of inflation on the Company's operations were not
significant during the periods presented in the Consolidated Financial
Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's exposures to market risk are not material.
PART II. -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Various legal actions arising in the ordinary course of business
are pending against the Company. None of the litigation pending
against the Company, individually or collectively, is expected to
have a material adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not Applicable.
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<PAGE> 15
(b) Not Applicable.
(c) On November 3, 1998, in connection with, and as
partial consideration for, the acquisition of
Envirosafe, the Company issued an aggregate of 57,266
shares of its common stock to the owners of
Envirosafe. The issuance of the shares of common
stock pursuant to the Envirosafe Agreement was
pursuant to Section 4(2) of the Securities Act of
1933, as amended (the "Act").
On November 4, 1998, in connection with, and as
partial consideration for, the acquisition of
Suresco, the Company issued 11,478 shares of its
common stock to Suresco. The issuance of the shares
of common stock pursuant to the Suresco Agreement was
pursuant to Section 4(2) of the Act.
In connection with, and as partial consideration for,
the acquisitions of SSI, TEC and Suresco and Dryden,
Pentagon issued an aggregate of 300 shares of
preferred stock on November 3, 1998, November 4, 1998
and December 23, 1998, respectively, to shareholders
of such companies. The issuance of shares of
preferred stock was pursuant to Section 4(2) of the Act.
(d) Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held its annual meeting of the shareholders on
November 11, 1998.
(b) Each of the following nominees for election the Board of
Directors of the Company were elected by the shareholders
who were present or represented by proxy: Monte R. Black,
Ira O. Kane, Pete A. Klisares, Gerald Nilsson-Weiskott,
Robert E. Oyster, Timothy A. Walsh and Scott N. Whitlock.
(c) Of the 8,822,480 shares present in person or represented
by proxy at the meeting, the number of shares voted for
and the number of shares as to which the authority to vote
in the election was withheld, were as follows with respect
to each director nominee:
<TABLE>
<CAPTION>
VOTES FOR ELECTION OF AUTHORITY TO VOTE
NAME DIRECTOR WITHHELD
-------------------------- --------------------- -----------------
<S> <C> <C>
Monte R. Black 8,819,630 2,850
Ira O. Kane 8,819,630 2,850
Pete A. Klisares 8,818,630 3,850
Gerald Nilsson-Weiskott 8,818,430 4,050
Robert E. Oyster 8,819,830 2,650
Timothy A. Walsh 8,818,430 4,050
Scott N. Whitlock 8,819,830 2,650
</TABLE>
The shareholders were also asked to consider and vote upon
a proposal to approve the adoption of an amendment to the
Company's 1997 Stock Option Plan (the "1997 Plan") to
increase the aggregate number of shares of Common Stock
that may be sold upon the exercise of stock options
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<PAGE> 16
granted under the 1997 Plan from 700,000 to 1,200,000. Of
the 8,822,480 shares present in person or represented by
proxy at the meeting, 7,791,614 shares were voted for the
proposal, 981,205 shares were voted against the proposal
and 49,661 shares abstained from voting with respect to
the proposal.
(d) Not Applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3(a) Amended and Restated Articles of Incorporation of
the Company effective October 30, 1997 (filed as
Exhibit 3(a) to the Company's Registration
Statement on Form S-1 (File No. 333-36887), and
incorporated herein by reference).
3(b) Amended and Restated Code of Regulations of the
Company effective October 30, 1997 (filed as
Exhibit 3(b) to the Company's Registration
Statement on Form S-1 (File No. 333-36887), and
incorporated herein by reference).
4 Revolving Credit Loan Agreement, dated as of
November 2, 1998, among the Company and its
subsidiaries and affiliates, Bank One, NA and
National City Bank of Columbus (filed as Exhibit 4
to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998, and
incorporated herein by reference).
10 Amended and Restated 1997 Stock Option Plan of
the Company.
27 Financial Data Schedule.
(b) No reports on Form 8-K were filed during the period.
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<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on behalf by the
undersigned thereunto duly authorized.
MPW INDUSTRIAL SERVICES GROUP, INC.,
an Ohio corporation
Dated: February 16, 1999 By: /s/ Daniel P. Buettin
---------------------- --------------------------------
Daniel P. Buettin
Vice President and Chief Financial Officer
(on behalf of the Registrant and as
Principal Financial Officer)
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<PAGE> 18
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------ ----------------------
3(a) Amended and Restated Articles of Incorporation of the Company
effective October 30, 1997 (filed as Exhibit 3(a) to the
Company's Registration Statement on Form S-1 (File No.
333-36887), and incorporated herein by reference).
3(b) Amended and Restated Code of Regulations of the Company
effective October 30, 1997 (filed as Exhibit 3(b) to the
Company's Registration Statement on Form S-1 (File No.
333-36887), and incorporated herein by reference).
4 Revolving Credit Loan Agreement, dated as of November 2,
1998, among the Company and its subsidiaries and affiliates,
Bank One, NA and National City Bank of Columbus (filed as
Exhibit 4 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998, and incorporated herein
by reference).
10 Amended and Restated 1997 Stock Option Plan of the Company.
27 Financial Data Schedule.
Page 18
<PAGE> 1
EXHIBIT 10
MPW INDUSTRIAL SERVICES GROUP, INC.
AMENDED AND RESTATED 1997 STOCK OPTION PLAN
1. PURPOSE. The purpose of this Plan is to attract and retain
directors, officers and key employees and consultants for MPW Industrial
Services Group, Inc., an Ohio corporation (the "Corporation"), and its
Subsidiaries and to provide such persons with incentives and rewards for
superior performance.
2. DEFINITIONS. As used in this Plan,
"BOARD" means the Board of Directors of the Corporation.
"CODE" means the Internal Revenue Code of 1986, as amended
from time to time.
"COMMITTEE" means the committee described in Section 11(a) of
this Plan; provided, however, that until the Corporation shall have a class of
equity securities registered pursuant to Section 12 of the Exchange Act of 1934,
as amended, the "Committee" shall mean the Board, as defined herein.
"COMMON SHARES" means (i) shares of the common stock of the
Corporation, no par value, and (ii) any security into which Common Shares may be
converted by reason of any transaction or event of the type referred to in
Section 6 of this Plan.
"DATE OF GRANT" means the date specified by the Committee on
which a grant of Option Rights shall become effective, which shall not be
earlier than the date on which the Committee takes action with respect thereto.
"INCENTIVE STOCK OPTIONS" means Option Rights that are
intended to qualify as "incentive stock options" under Section 422 of the Code
or any successor provision.
"LESS-THAN-80-PERCENT SUBSIDIARY" means a Subsidiary with
respect to which the Corporation directly or indirectly owns or controls less
than 80 percent of the total combined voting or other decision-making power.
"MARKET VALUE PER SHARE" means, at any date, (i) the closing
sales price for the Common Shares on that date, if available, or, if there are
no sales on that date or if a closing sales price is not available, (ii) the
average of the "bid" and "asked" prices of the Common Shares on that date, in
each case as reported by the National Association of Securities Dealers
Automated Quotation System or any national securities exchange on which the
Common Shares are then traded, or, if (i) or (ii) are not available, the fair
market value of the Common Shares as determined by the Committee from time to
time.
<PAGE> 2
"NONEMPLOYEE DIRECTOR" means a member of the Board, who is not
also an employee of the Company or any of its subsidiaries on the date an Option
Right is granted to him or her pursuant to Section 4(b) of this Plan.
"OPTIONEE" means the person so designated in an agreement
evidencing an outstanding Option Right.
"OPTION PRICE" means the purchase price payable upon the
exercise of an Option Right.
"OPTION RIGHT" means the right to purchase Common Shares upon
exercise of an option granted pursuant to Section 4 of this Plan.
"PARTICIPANT" means a person who is selected by the Committee
to receive benefits under this Plan and who is at that time an officer,
including without limitation an officer who may also be a member of the Board,
any other key employee of, or a consultant to, the Corporation or any
Subsidiary, or who has agreed to commence serving in any such capacity or a
Nonemployee Director receiving an Option Right pursuant to Section 4(b) hereof.
"RELOAD OPTION RIGHTS" means additional Option Rights granted
automatically to an Optionee upon the exercise of Option Rights pursuant to
Section 4(f) of this Plan.
"RULE 16B-3" means Rule 16b-3 of the Securities and Exchange
Commission (or any successor rule to the same effect), as in effect from time to
time.
"SUBSIDIARY" means a corporation, partnership, joint venture,
unincorporated association or other entity in which the Corporation has a direct
or indirect ownership or other equity interest; provided, however, for purposes
of determining whether any person may be a Participant for purposes of any grant
of Incentive Stock Options, "Subsidiary" means any corporation in which the
Corporation owns or controls directly or indirectly more than 50 percent of the
total combined voting power represented by all classes of stock issued by such
corporation at the time of such grant.
3. SHARES AVAILABLE UNDER THE PLAN.
(a) Subject to adjustment as provided in Section 6 of this
Plan, the number of Common Shares issued or transferred upon the exercise of
Option Rights shall not in the aggregate exceed 1,200,000 Common Shares, which
may be Common Shares of original issuance or Common Shares held in treasury or a
combination thereof. If any award terminates, expires or is canceled with
respect to any Common Shares, new awards may thereafter be granted covering such
Common Shares.
(b) Upon the full or partial payment of any Option Price by
the transfer to the Corporation of Common Shares or upon satisfaction of tax
withholding provisions in connection with any such exercise or any other payment
made or benefit realized under this Plan by the transfer or relinquishment of
Common Shares, there shall be deemed to have been issued or transferred under
this plan only the net number of Common Shares actually issued or transferred by
the Corporation.
-2-
<PAGE> 3
4. OPTION RIGHTS.
(a) The Committee may from time to time authorize grants to
Participants of options to purchase Common Shares upon such terms and conditions
as the Committee may determine in accordance with the following provisions:
(i) Each grant shall specify the number of Common
Shares to which it pertains.
(ii) Each grant shall specify an Option Price per
Common Share, which in the case of Incentive Options, shall be equal to or
greater than the Market Value per Share on the Date of Grant and, in the case of
other options, shall not be less than eighty-five percent (85%) of the Market
Value per Share on the Date of Grant.
(iii) Each grant shall specify the form of
consideration to be paid in satisfaction of the Option Price and the manner of
payment of such consideration, which may include (A) cash in the form of
currency or check or other cash equivalent acceptable to the Corporation, (B)
nonforfeitable, unrestricted Common Shares, which are already owned by the
Optionee and have a value at the time of exercise that is equal to the Option
Price, (C) any other legal consideration, including, without limitation,
promissory notes, that the Committee may deem appropriate, including without
limitation any form of consideration authorized under Section 4(a)(iv) below, on
such basis as the Committee may determine in accordance with this Plan and (D)
any combination of the foregoing.
(iv) Any grant may provide for deferred payment of
the Option Price from the proceeds of sale through a bank or broker on the date
of exercise of some or all of the Common Shares to which the exercise relates.
(v) Any grant may provide for the automatic grant to
the Optionee of Reload Option Rights upon the exercise of Option Rights,
including Reload Option Rights, for Common Shares or any other noncash
consideration authorized under Sections 4(a)(iii) above.
(vi) Successive grants may be made to the same
Participant regardless of whether any Option Rights previously granted to such
Participant remain unexercised.
(vii) Each grant shall specify the period or periods
of continuous employment of the Optionee by the Corporation or any Subsidiary
that are necessary before the Option Rights or installments thereof shall become
exercisable, and any grant may provide for the earlier exercisability of such
rights in the event of retirement, death or disability of the Participant or a
change in control of the Corporation or other similar transaction or event.
(viii) Option Rights granted under this Plan may be
(A) options that are intended to qualify under particular provisions of the
Code, including without limitation Incentive Stock Options, (B) options that are
not intended to so qualify or (C) combinations of the foregoing.
-3-
<PAGE> 4
(ix) No Option Right granted under this Plan may be
exercised more than 10 years from the Date of Grant.
(x) Each grant shall be evidenced by an agreement,
which shall be executed on behalf of the Corporation by any officer thereof and
delivered to and accepted by the Optionee and shall contain such terms and
provisions as the Committee may determine consistent with this Plan.
(b) (i) Notwithstanding the above, each director who is a
Nonemployee Director is hereby granted, effective the close of business on the
first business day after (1) the date of the first annual meeting of
shareholders occurring after the date of this Plan at which he or she is elected
a Director, an option to purchase 2,000 Common Shares, and (2) the date of each
subsequent annual meeting of shareholders at which he or she is elected a
Director, an option to purchase 1,000 Common Shares.
(ii) All options granted pursuant to this Section
2(b)(i) hereof shall be non-statutory options not intended to qualify under
Section 422 of the Code and shall be evidenced by an agreement, which shall be
executed on behalf of the Corporation by any officer thereof and delivered to
and accepted by such Nonemployee Director, and which agreement shall be in the
form attached hereto as Exhibit A.
(iii) The Option Price per Common Share shall be
equal to 100% of the Market Value per Share as of the date such option is
granted, shall be exercisable in full one year following the date of grant and
shall expire ten years from the date of grant, unless terminated earlier in
accordance with the stock option agreement.
5. TRANSFERABILITY.
(a) No Option Right or other derivative security (as that term
is used in Rule 16b-3) awarded under this Plan shall be transferable by a
Participant other than by will or the laws of descent and distribution or, other
than with respect to an Incentive Stock Option, a qualified domestic relations
order, as defined in the Code. Option Rights shall be exercisable during a
Participant's lifetime only by the Participant or, in the event of the
Participant's legal incapacity, by his guardian or legal representative acting
in a fiduciary capacity on behalf of the Participant under state law and court
supervision. Notwithstanding the foregoing, the Committee, in its sole
discretion, may provide for transferability of particular awards under this Plan
so long as such provisions will not disqualify the exemption for other awards
under Rule 16b-3.
(b) Any award made under this Plan may provide that all or any
part of the Common Shares that are to be issued or transferred by the
Corporation upon the exercise of Option Rights shall be subject to further
restrictions upon transfer.
6. ADJUSTMENTS. The Committee may make or provide for such
adjustments in the (a) number of Common Shares covered by outstanding Option
Rights, (b) prices per share applicable to such Option Rights, and (c) kind of
shares (including shares of another issuer) covered thereby, as the Committee in
its sole discretion may in good faith determine to be equitably required in
order to prevent dilution or enlargement of the rights of Participants that
otherwise would result from
-4-
<PAGE> 5
(x) any stock dividend, stock split, combination of shares, recapitalization or
other change in the capital structure of the Corporation, (y) any merger,
consolidation, spin-off, spin-out, split-off, split-up, reorganization, partial
or complete liquidation or other distribution of assets, issuance of rights or
warrants to purchase securities or (z) any other corporate transaction or event
having an effect similar to any of the foregoing. In the event of any such
transaction or event, the Committee may provide in substitution for any or all
outstanding awards under this Plan such alternative consideration as it may in
good faith determine to be equitable under the circumstances and may require in
connection therewith the surrender of all awards so replaced. Moreover, the
Committee may on or after the Date of Grant provide in the agreement evidencing
any award under this Plan that the holder of the award may elect to receive an
equivalent award in respect of securities of the surviving entity of any merger,
consolidation or other transaction or event having a similar effect, or the
Committee may provide that the holder will automatically be entitled to receive
such an equivalent award. In any case, such substitution of securities shall not
require the consent of any person who is granted awards pursuant to this Plan.
7. FRACTIONAL SHARES. The Corporation shall not be required to
issue any fractional Common Shares pursuant to this Plan. The Committee may
provide for the elimination of fractions or for the settlement thereof in cash.
8. WITHHOLDING TAXES. To the extent that the Corporation is
required to withhold federal, state, local or foreign taxes in connection with
any payment made or benefit realized by a Participant or other person under this
Plan, and the amounts available to the Corporation for such withholding are
insufficient, it shall be a condition to the receipt of such payment or the
realization of such benefit that the Participant or such other person make
arrangements satisfactory to the Corporation for payment of the balance of such
taxes required to be withheld. At the discretion of the Committee, such
arrangements may include relinquishment of a portion of such benefit. The
Corporation and any Participant or such other person may also make similar
arrangements with respect to the payment of any taxes with respect to which
withholding is not required.
9. PARTICIPATION BY EMPLOYEES OF A LESS-THAN-80-PERCENT
SUBSIDIARY. As a condition to the effectiveness of any grant or award to be made
hereunder to a Participant who is an employee of a Less-Than-80-Percent
Subsidiary, regardless whether such Participant is also employed by the
Corporation or another Subsidiary, the Committee may require the
Less-Than-80-Percent Subsidiary to agree to transfer to the Participant (as, if
and when provided for under this Plan and any applicable agreement entered into
between the Participant and the Less-Than-80-Percent Subsidiary pursuant to this
Plan) the Common Shares that would otherwise be delivered by the Corporation
upon receipt by the Less-Than-80-Percent Subsidiary of any consideration then
otherwise payable by the Participant to the Corporation. Any such award may be
evidenced by an agreement between the Participant and the Less-Than-80-Percent
Subsidiary, in lieu of the Corporation, on terms consistent with this Plan and
approved by the Committee and the Less-Than-80-Percent Subsidiary. All Common
Shares so delivered by or to a Less-Than-80-Percent Subsidiary will be treated
as if they had been delivered by or to the Corporation for purposes of Section 3
of this Plan, and all references to the Corporation in this Plan shall be deemed
to refer to the Less-Than-80-Percent Subsidiary except with respect to the
definitions of the Board and the Committee and in other cases where the context
otherwise requires.
-5-
<PAGE> 6
10. CERTAIN TERMINATIONS OF EMPLOYMENT, HARDSHIP AND APPROVED
LEAVES OF ABSENCE. Notwithstanding any other provision of this Plan to the
contrary, in the event of termination of employment by reason of death,
disability, normal retirement, early retirement with the consent of the
Corporation, termination of employment to enter public service with the consent
of the Corporation or leave of absence approved by the Corporation, or in the
event of hardship or other special circumstances, of a Participant who holds an
Option Right that is not immediately and fully exercisable, the Committee may in
its sole discretion take any action that it deems to be equitable under the
circumstances or in the best interests of the Corporation, including without
limitation waiving or modifying any limitation or requirement with respect to
any award under this Plan.
11. ADMINISTRATION OF THE PLAN.
(a) This Plan shall be administered by the Compensation
Committee of the Board appointed from time to time by the Board of Directors of
the Corporation. The Committee shall be composed of not less than two members of
the Board, each of whom shall be a "disinterested person" within the meaning of
Rule 16b-3 and an "outside director" within the meaning of Section 162(m) of the
Code. A majority of the Committee shall constitute a quorum, and the acts of the
members of the Committee who are present at any meeting thereof at which a
quorum is present, or acts unanimously approved by the members of the Committee
in writing, shall be the acts of the Committee.
(b) The interpretation and construction by the Committee of
any provision of this Plan or of any agreement, notification or document
evidencing the grant of Option Rights, and any determination by the Committee
pursuant to any provision of this Plan or any such agreement, notification or
document, shall be final and conclusive. No member of the Committee shall be
liable for any such action taken or determination made in good faith.
12. AMENDMENTS AND OTHER MATTERS.
(a) This Plan may be amended from time to time by the
Committee, but except as expressly authorized by this Plan no such amendment
shall increase the maximum number of shares specified in Section 3(a) of this
Plan (except that adjustments authorized by Section 6 of this Plan shall not be
limited by this provision), or cause Rule 16b-3 to become inapplicable to this
Plan, without the further approval of the shareholders of the Corporation,
unless permitted by Rule 16b-3. Without limiting the generality of the
foregoing, the Committee may amend this Plan to eliminate provisions which are
no longer necessary as a result of changes in tax or securities laws or
regulations, or in the interpretation thereof.
(b) With the concurrence of the affected Optionee, the
Committee may cancel any agreement evidencing Option Rights or any other award
granted under this Plan. In the event of such cancellation, the Committee may
authorize the granting of new Option Rights or other awards hereunder, which may
or may not cover the same number of Common Shares that had been the subject of
the prior award, at such Option Price and subject to such other terms,
conditions and discretions as would have been applicable under this Plan had the
canceled Option Rights or other awards been granted.
-6-
<PAGE> 7
(c) The Committee may, in its sole discretion, accelerate the
time at which any Option Right may be exercised. The Committee also may permit
Participants to elect to defer the issuance of Common Shares pursuant to such
rules, procedures or programs as it may establish for purposes of this Plan. The
Committee also may provide that deferred settlements include the payment or
crediting of interest on the deferral amounts, or the payment or crediting of
dividend equivalents where the deferral amounts are denominated in Common
Shares.
(d) This Plan shall not confer upon any Participant any right
with respect to continuance of employment or other service with the Corporation
or any Subsidiary and shall not interfere in any way with any right that the
Corporation or any Subsidiary would otherwise have to terminate any
Participant's employment or other service at any time.
(e) To the extent that any provision of this Plan would
prevent any Option Right that was intended to qualify under particular
provisions of the Code from so qualifying, such provision of this Plan shall be
null and void with respect to such Option Right; provided, however, that such
provision shall remain in effect with respect to other Option Rights, and there
shall be no further effect on any provision of this Plan.
-7-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MPW
INDUSTRIAL SERVICES GROUP, INC. FORM 10-Q FOR THE SIX MONTHS ENDED DECEMBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 165
<SECURITIES> 0
<RECEIVABLES> 33,460
<ALLOWANCES> 1,553
<INVENTORY> 7,672
<CURRENT-ASSETS> 43,587
<PP&E> 66,258
<DEPRECIATION> 31,099
<TOTAL-ASSETS> 124,390
<CURRENT-LIABILITIES> 19,573
<BONDS> 55,185
0
0
<COMMON> 108
<OTHER-SE> 46,342
<TOTAL-LIABILITY-AND-EQUITY> 124,390
<SALES> 68,251
<TOTAL-REVENUES> 68,251
<CGS> 45,647
<TOTAL-COSTS> 45,647
<OTHER-EXPENSES> 14,784
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,269
<INCOME-PRETAX> 6,551
<INCOME-TAX> 2,685
<INCOME-CONTINUING> 3,866
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,866
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.34
</TABLE>
