S-1/A 1 y02145a5sv1za.htm AMENDMENT #5 TO FORM S-1 sv1za
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As filed with the Securities and Exchange Commission on September 23, 2009
Registration No. 333-151559
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
AMENDMENT NO. 5
TO
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
Mistras Group, Inc.
(Exact name of registrant as specified in its charter)
 
         
Delaware   8711   22-3341267
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
 
 
 
 
195 Clarksville Road
Princeton Junction, New Jersey 08550
(609) 716-4000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Sotirios J. Vahaviolos, Ph.D.
Chairman, President and Chief Executive Officer
195 Clarksville Road
Princeton Junction, New Jersey 08550
(609) 716-4000
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
 
 
 
With copies to:
 
     
Andrew C. Freedman, Esq.
Sheldon G. Nussbaum, Esq.
Fulbright & Jaworski L.L.P.
666 Fifth Avenue
New York, New York 10103
Telephone (212) 318-3000
Fax (212) 318-3400
  William J. Whelan, III, Esq.
Cravath, Swaine & Moore LLP
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Telephone (212) 474-1000
Fax (212) 474-3700
 
 
 
 
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
 
CALCULATION OF REGISTRATION FEE
 
                                         
            Proposed Maximum
    Proposed Aggregate
    Amount of
Title of Each Class of
    Amount to be
    Offering Price Per
    Maximum Offering
    Registration Fee
Securities to be Registered     Registered(1)     Share     Price     (2) (3)
Common Stock, $.01 par value per share
      10,000,000       $ 16.00       $ 160,000,000       $ 8,928.00  
                                         
(1) Includes shares that the underwriters have the option to purchase to cover over-allotments, if any.
 
(2) Calculated pursuant to rule 457(a) under the Securities Act of 1933.
 
(3) $9,625.50 previously paid.
 
 
 
 
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 


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The information in this prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 
SUBJECT TO COMPLETION, DATED September 23, 2009
 
8,700,000 Shares
 
(MISTRAS GROUP LOGO)
Mistras Group, Inc.
 
Common Stock
 
This is an initial public offering of Mistras Group, Inc. common stock.
 
Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock is expected to be between $14.00 and $16.00 per share. We have been approved to apply for listing of our common stock on the New York Stock Exchange under the symbol “MG”.
 
We are selling 6,700,000 shares of common stock and the selling stockholders are selling 2,000,000 shares of common stock. The underwriters have an option to purchase a maximum of 1,300,000 additional shares of common stock from certain of the selling stockholders to cover over-allotments of shares. We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders.
 
Investing in our common stock involves risks. See “Risk Factors” on page 14.
 
 
                                 
 
          Underwriting
             
    Price to
    Discounts and
    Proceeds to Mistras
    Proceeds to Selling
 
    Public     Commissions     Group, Inc.     Stockholders  
 
 
Per Share
  $                $                $                $             
Total
  $       $       $       $    
 
 
 
Delivery of the shares of common stock will be made on or about          , 2009.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
Joint Book-Running Managers
 
J.P. Morgan Credit Suisse BofA Merrill Lynch
 
 
 
 
Robert W. Baird & Co.
 
The date of this prospectus is          , 2009.


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(COVER)
A world of ndt solutions software and products services international A leading global provider of proprietary technology-enabled non-destructive testing (ndt) inspection solutions that ensures the integrity of industrial and public infrastructure


 

 
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You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.
 
Industry and market data
 
This prospectus includes market and industry data and forecasts that we obtained from internal research, publicly available information and industry publications and surveys. Industry publications and surveys generally state that the information contained therein has been obtained from sources believed to be reliable. Unless otherwise noted, statements as to our market position relative to our competitors are approximated and based on the above-mentioned third-party data and internal analysis and estimates as of the date of this prospectus. Although we believe the industry and market data and statements as to market position to be reliable as of the date of this prospectus, we have not independently verified this information and it could prove inaccurate. Industry and market data could be wrong because of the method by which sources obtained their data and because information cannot always be verified with certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. In addition, we do not know all of the assumptions regarding general economic conditions or growth that were used in preparing the forecasts from sources cited herein.
 
Dealer prospectus delivery obligation
 
Until          , 2009 (25 days after the commencement of the offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.
 


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Prospectus summary
 
This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that may be important to you. You should read this entire prospectus carefully, including the risks discussed under “Risk Factors” and the financial statements and related notes included elsewhere in this prospectus before making an investment decision. In this prospectus, our fiscal years, which end on May 31, are identified according to the calendar year in which they end (e.g., the fiscal year ended May 31, 2009 is referred to as “fiscal 2009”), and unless otherwise specified or the context otherwise requires, “Mistras,” “we,” “us” and “our” refer to Mistras Group, Inc. and its consolidated subsidiaries and their predecessors.
 
Our business
 
We are a leading global provider of technology-enabled asset protection solutions used to evaluate the structural integrity of critical energy, industrial and public infrastructure. We combine industry-leading products and technologies, expertise in mechanical integrity (MI) and non-destructive testing (NDT) services and proprietary data analysis software to deliver a comprehensive portfolio of customized solutions, ranging from routine inspections to complex, plant-wide asset integrity assessments and management. These mission critical solutions enhance our customers’ ability to extend the useful life of their assets, increase productivity, minimize repair costs, comply with governmental safety and environmental regulations, manage risk and avoid catastrophic disasters. Given the role our services play in ensuring the safe and efficient operation of infrastructure, we have historically provided a majority of our services to our customers on a regular, recurring basis. We serve a global customer base of companies with asset-intensive infrastructure, including companies in the oil and gas, fossil and nuclear power, public infrastructure, chemicals, aerospace and defense, transportation, primary metals and metalworking, pharmaceuticals and food processing industries. As of August 1, 2009, we had approximately 2,000 employees, including 29 Ph.D.’s and more than 100 other degreed engineers and highly-skilled, certified technicians, in 68 offices across 15 countries. We have established long-term relationships as a critical solutions provider to many leading companies, including American Electric Power, Bayer, Bechtel, BP, Chevron, Dow Chemical, Duke Energy, DuPont, Embraer, ExxonMobil, First Energy, General Electric, Pfizer, Rio Tinto Alcan, Rolls Royce, Shell, The Boeing Company and Valero, and to various federal, state and local governmental infrastructure and defense authorities, including the departments of transportation of several states. The following chart represents revenues we generated in certain of our end markets for fiscal 2009.


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Mistras revenues by end market
(fiscal 2009)
 
(PERFORMANCE GRAPH)
 
Our asset protection solutions have evolved over time as we have combined the disciplines of NDT, MI services and data analysis software to provide value to our customers. The foundation of our business is NDT, which is the examination of assets without impacting the future usefulness or impairing the integrity of these assets. The ability to inspect infrastructure assets and not interfere with their operating performance makes NDT a highly attractive alternative to many traditional intrusive inspection techniques, which may require dismantling equipment or shutting down a plant, refinery, mill or site. Our MI services are a systematic engineering-based approach to developing best practices for ensuring the on-going integrity and safety of equipment and industrial facilities. MI services involve conducting an inventory of infrastructure assets, developing and implementing inspection and maintenance procedures, training personnel in executing these procedures and managing inspections, testing and assessments of customer assets. By assisting customers in implementing MI programs we enable them to identify gaps between existing and desired practices, find and track deficiencies and degradations to be corrected and establish quality assurance standards for fabrication, engineering and installation of infrastructure assets. We believe our MI services improve plant safety and reliability and regulatory compliance, and in so doing reduce maintenance costs. Our solutions also incorporate comprehensive data analysis from our proprietary asset protection software to provide customers with detailed, integrated and cost-effective solutions that rate the risks of alternative maintenance approaches and recommend actions in accordance with consensus industry codes and standards.
 
As a global asset protection leader, we provide a comprehensive range of solutions that includes traditional outsourced NDT inspection services, advanced asset protection solutions, such as MI services, and a proprietary portfolio of both hardware and software products and systems for capturing and analyzing inspection data in real-time. Our solutions are targeted to optimize the safety and operational performance of infrastructure-intensive industries during the design, fabrication, maintenance, inspection and retirement phases of the asset’s life. Since inception,


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we have increased our capabilities and the size of our customer base through the development of applied technologies and managed support services, organic growth and the successful and seamless integration of acquired companies. These acquisitions have provided us with additional products, technologies, resources and customers that have enhanced our sustainable competitive advantages over our competition.
 
We generated revenues of $209.1 million, $152.3 million and $122.2 million and adjusted EBITDA of $31.1 million, $28.1 million and $19.2 million for fiscal 2009, 2008 and 2007, respectively. For fiscal 2009, we generated over 80% of our revenues from our Services segment.
 
Our industry
 
Asset protection is a large and rapidly growing industry that consists of NDT inspection, MI services and inspection data warehousing and analysis. NDT plays a crucial role in assuring the operational and structural integrity of critical infrastructure without compromising the usefulness of the tested materials or equipment. The evolution of NDT services, in combination with broader industry trends and regulatory requirements, has made NDT an integral and increasingly outsourced part of many asset-intensive industries. Well-publicized industrial and public infrastructure failures and accidents have also raised the level of awareness of regulators, as well as owners and operators, of the benefits that asset protection can provide.
 
We believe the following key dynamics drive the growth of the asset protection industry:
 
•  Extending the Useful Life of Aging Infrastructure. The prohibitive cost and challenge of building new infrastructure has resulted in the significant aging of existing infrastructure and caused companies to seek ways to extend the useful life of existing assets. Because aging infrastructure requires relatively higher levels of maintenance and repair, as well as more frequent, extensive and ongoing testing, companies and public authorities are increasing spending to ensure the operational and structural integrity of existing infrastructure.
 
•  Outsourcing of Non-Core Activities and Technical Resource Constraints.  While some of our customers have historically performed NDT services in-house, the increasing sophistication and automation of NDT programs, together with a decreasing supply of skilled professionals and stricter governmental regulations, has led many companies and public authorities to outsource NDT to providers that have the necessary technical product portfolio, engineering expertise, technical workforce and proven track record of results-oriented performance to effectively meet their increasing requirements.
 
•  Increasing Asset and Capacity Utilization. Due to high energy prices, high repair and replacement costs and the limited construction of new infrastructure, existing infrastructure in some of our target markets is being used at higher capacities, causing increased stress and fatigue that accelerate deterioration. In order to sustain high capacity utilization rates, customers are increasingly using asset protection solutions to efficiently ensure the integrity and safety of their assets. Implementation of asset protection solutions can lead to increased productivity as a result of reduced maintenance-related downtime.
 
•  Increasing Corrosion from Low-Quality Inputs. High commodities prices and increasing energy demands have led to the use of lower grade inputs and feedstock, such as low-grade coal or petroleum, in the refinery and power generation processes. These lower grade inputs can rapidly corrode the infrastructure they come into contact with, which in turn increases the


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need for asset protection solutions to identify such corrosion and enable infrastructure owners to proactively combat the problems caused by such corrosion.
 
•  Increasing Use of Advanced Materials. Customers in our target markets are increasingly utilizing advanced materials and other unique technologies in the manufacturing and construction of new infrastructure and aerospace applications. As a result, they require advanced testing, assessment and maintenance technologies to protect these assets. We believe that demand for NDT solutions will increase as companies and public authorities continue to use these advanced materials, not only during the operating phase of the lifecycle of their assets, but also during the design and construction phases by incorporating technologies such as embedded sensors.
 
•  Meeting Safety Regulations. Owners and operators of infrastructure assets increasingly face strict government regulations and safety requirements. Failure to meet these standards can result in significant financial liabilities, increased scrutiny by the Occupational Safety & Health Administration (OSHA) and other regulators, higher insurance premiums and tarnished corporate brand value. As a result, these owners and operators are seeking highly reliable asset protection suppliers with a proven track record of providing asset protection services, products and systems to assist them in meeting these increasingly stringent regulations.
 
•  Expanding Addressable End-Markets. Advances in NDT sensor technology and asset protection software systems, and the continued emergence of new technologies, are creating increased demand for asset protection solutions in applications where existing techniques were previously ineffective. Further, we expect increased demand in relatively new markets, such as the pharmaceutical and food processing industries, where infrastructure is only now aging to a point where significant maintenance is required.
 
•  Expanding Addressable Geographies. We believe that a substantial driver of incremental demand will come from international markets, as companies and governments in these markets build and maintain infrastructure and applications that require the use of asset protection solutions.
 
Our competitive strengths
 
We believe the following competitive strengths contribute to our being a leading provider of asset protection solutions and will allow us to further capitalize on growth opportunities in our industry:
 
•  Single Source Provider for Asset Protection Solutions Worldwide. We believe we are the only company with a comprehensive portfolio of proprietary and integrated asset protection solutions, including services, products and systems worldwide, which positions us to be the leading single source provider for a customer’s asset protection requirements. In addition, collaboration between our services teams and product design engineers generates enhancements to our services, products and systems, which provide a source of competitive advantage compared to companies that provide only NDT services or NDT products.
 
•  Long-Standing Trusted Provider to a Diversified and Growing Customer Base. By providing critical and reliable NDT services, products and systems for more than 30 years and expanding our asset protection solutions, we have become a trusted partner to a large and growing customer base across numerous infrastructure-intensive industries globally. Seven of our top 10 customers by fiscal 2009 revenues have used our solutions for at least 10 years. We leverage


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our strong relationships to sell additional solutions to our existing customers while also attracting new customers. As asset protection is increasingly recognized by our customers as a strategic advantage, we believe our reputation and history of successful execution are key competitive differentiators.
 
•  Repository of Customer-Specific Inspection Data. Our enterprise software solutions enable us to capture and store our customers’ testing and inspection data in a centralized database. As a result, we have accumulated large amounts of proprietary information that allows us to provide our customers with value-added services, such as benchmarking, predictive maintenance, inspection scheduling, data analytics and regulatory compliance. We believe our ability to provide these customized products and services, along with the high cost of switching to an alternative vendor, provide us with significant competitive advantages.
 
•  Proprietary Products, Software and Technology Packages.  We have developed systems that have become the cornerstone of several unique NDT applications. These proprietary products allow us to efficiently and effectively provide unique solutions to our customers’ complex applications, resulting in a significant competitive advantage. In addition to the proprietary products and systems that we sell to customers on a stand-alone basis, we also develop a range of proprietary sensors, instruments, systems and software used exclusively by our Services segment.
 
•  Deep Domain Knowledge and Extensive Industry Experience. We are an industry leader in developing advanced asset protection solutions, including acoustic emission (AE) testing for non-intrusive on-line monitoring of storage tanks and pressure vessels, bridges and transformers, portable corrosion mapping, ultrasonic testing (UT) systems, on-line plant asset integrity management with sensor fusion, enterprise software solutions for plant-wide and fleet-wide inspection data archiving and management, advanced and thick composites inspection and ultrasonic phased array inspection of thick wall boilers. In addition, many of the members of our team have been instrumental in developing the testing standards followed by international standards-setting bodies, such as the American Society of Non-Destructive Testing and comparable associations in other countries.
 
•  Collaborating with Our Customers. Our asset protection solutions have historically been designed in response to our customers’ unique performance specifications and are supported by our proprietary technologies. Our sales and engineering teams work closely with our customers’ research and design staff during the design phase of our products in order to incorporate our products into specified infrastructure projects. As a result, we believe that our close, collaborative relationships with our customers provide us a significant competitive advantage.
 
•  Experienced Management Team. Our management team has a track record of leadership in NDT, averaging over 20 years experience in the industry. These individuals also have extensive experience in growing businesses organically and in acquiring and integrating companies, which we believe is important to facilitate future growth in the fragmented asset protection industry.


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Our growth strategy
 
Our growth strategy emphasizes the following key elements:
 
•  Continue to Develop Technology-Enabled Asset Protection Services, Products and Systems. We intend to maintain and enhance our technological leadership by continuing to invest in the internal development of new services, products and systems. Our highly trained team of Ph.D.’s, engineers and highly-skilled, certified technicians have been instrumental in developing numerous significant NDT standards, and we believe their knowledge base will enable us to innovate a wide range of new asset protection solutions more rapidly than our competition.
 
•  Increase Revenues from Our Existing Customers. Many of our customers are multinational corporations with asset protection requirements from multiple divisions at multiple locations across the globe. Currently, we capture a relatively small portion of their overall expenditures on these solutions. We believe our superior services, products and systems, combined with the trend of outsourcing asset protection solutions to a small number of trusted service providers, positions us to significantly expand both the number of divisions and locations that we serve as well as the types of solutions we provide.
 
•  Add New Customers in Existing Target Markets. Our current customer base represents a small fraction of the total number of companies in our target markets. Our scale, scope of products and services and expertise in creating technology-enabled solutions have allowed us to build a reputation for high quality and has increased customer awareness about us and our asset protection solutions. We intend to continue to leverage our competitive strengths to win new business as customers in our existing target markets continue to seek a single source and trusted provider of advanced asset protection solutions.
 
•  Expand Our Customer Base into New End Markets. We believe we have significant opportunities to rapidly expand our customer base in relatively new end markets, including the maritime shipping, wind turbine and other alternative energy and natural gas transportation industries and the market for public infrastructure, such as highways and bridges. The expansion of our addressable markets is being driven by the increased recognition and adoption of asset protection services, products and systems and new NDT technologies enabling further applications to address additional end-market needs and aging infrastructure.
 
•  Continue to Capitalize on Acquisitions. We intend to continue employing a disciplined acquisition strategy to broaden, complement and enhance our product and service offerings, add new customers and certified personnel, expand our sales channels, supplement our internal development efforts and accelerate our expected growth. We believe the market for asset protection solutions is highly fragmented with a large number of potential acquisition opportunities. We have a proven ability to integrate complementary businesses, as demonstrated by the success of our past acquisitions. We believe we have improved the operational performance and profitability of our acquired businesses by successfully integrating and selling our suite of comprehensive asset protection solutions to the customers of these acquired businesses.


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Summary risks
 
Before you invest in our stock, you should carefully consider all the information in this prospectus, including matters set forth under the heading “Risk Factors.” We believe that the following are some of the major risks and uncertainties that may affect us:
 
•  our business currently depends on certain significant customers and any reduction in business with these customers would harm our future operating results;
 
•  an accident or incident involving our asset protection solutions could expose us to claims, harm our reputation and adversely affect our ability to compete for business;
 
•  an ability to attract, develop and retain a sufficient number of trained engineers, scientists and other highly skilled workers as well as members of senior management;
 
•  strengths and actions of our competitors;
 
•  our current dependence on customers in the oil and gas industry;
 
•  the timing, size and integration success of potential future acquisitions;
 
•  catastrophic events, including natural disasters that could disrupt our business or the business of our customers, which could significantly harm our operations, financial results and cash flow; and
 
•  the current economic downturn.
 
Recent Developments
 
Although our results of operations for the first quarter of fiscal 2010, are not currently available, the following preliminary and unaudited information reflects our expectations with respect to such results based on currently available information.
 
For the first quarter of fiscal 2010, we expect our revenues to increase approximately 16% to 22% to approximately $54.5 million to $57.0 million, as compared to revenues of $47.0 million for the first quarter of fiscal 2009. We expect our income from operations to be approximately $2.0 million to $3.0 million, as compared to our income from operations of $3.7 million during the same period in fiscal 2009.
 
The expected increase in net sales for the first quarter of fiscal 2010 as compared to the first quarter of fiscal 2009 is primarily the result of continued growth in our Services segment, where we obtained a new customer and benefited from several small acquisitions. These increases were offset by approximately $1.7 million in unfavorable foreign exchange variances and a decrease in our Products and Systems revenues as compared to the same quarter last year, due to the impact of the economic downturn. We expect our overall growth and revenue mix trends to continue in the near term.
 
In the first quarter of fiscal 2010, we estimate that we generated a higher percentage of revenues from our Services segment, which negatively impacted our operating income because our Services segment has a lower gross profit margin than our other segments. Also, demand for our solutions is usually lower in our first fiscal quarter because it is a peak operating period for some of our largest end markets, which tend to order our solutions for their non-peak periods. Our estimated operating income also was reduced by an additional provision of


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$0.8 million for a large receivable from a customer in bankruptcy, based on the reorganization plan filed by this customer in September 2009, which makes any recovery unlikely. In addition, fees related to our annual audit and Sarbanes-Oxley implementation increased by approximately $0.2 million compared to the first quarter of fiscal 2009. Offsetting these items was an approximately $0.3 million favorable adjustment from the final settlement of a class-action law suit.
 
These preliminary estimates are not a comprehensive statement of our financial results for the first quarter of fiscal 2010, are based upon management estimates as of the date of this prospectus, have not been reviewed by our independent registered public accounting firm and are subject to adjustments including those as a result of subsequent events which occur after the date of this prospectus. Our consolidated financial statements for the first quarter of fiscal 2010 will not be available until after this offering is completed, and so will not be available to you prior to your investing in this offering. The final financial results for the first quarter of fiscal 2010 may vary from our expectations and may be materially different from the preliminary estimates we are providing above due to completion of quarterly close and review procedures, final adjustments and other developments that may arise between now and the time the financial results for these periods are finalized. These preliminary estimates are not necessarily indicative of our operating results for a full year or any future period and should be read together with “Risk factors,” “Forward-looking statements,” “Management’s discussion and analysis of financial condition and results of operations,” “Summary historical consolidated financial data,” “Selected historical consolidated financial information” and our consolidated financial statements and the related notes thereto, all included elsewhere in this prospectus.
 
Corporate information
 
We were founded by former AT&T Bell Laboratories researchers in 1978 and operated as Physical Acoustics Corporation until December 29, 1994, when we reorganized and began operating as Mistras Holdings Corp., a Delaware corporation. In February 2007, we changed our name to Mistras Group, Inc. Since inception, we have increased our asset protection services, products and systems offerings through a combination of organic growth and the successful integration of acquired companies.
 
Our principal executive offices are located at 195 Clarksville Road, Princeton Junction, NJ 08550, and our telephone number at that address is (609) 716-4000. Our website is located at www.mistrasgroup.com. Information on, or accessible through, our website is not a part of, and is not incorporated into, this prospectus.
 
Our trademarks include Mistrastm, Physical Acoustics Corporationtm, PCMS®, Controlled Vibrations Inc.tm, NOESIStm, AEwintm, AEwinPosttm, UTwintm, UTIAtm, LSTtm, Vibra-Metricstm, TANKPACtm, MONPACtm, VPACtm, POWERPACtm and Sensor Highwaytm. Other trademarks or service marks appearing in this prospectus are the property of their respective holders.


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The offering
 
Common stock offered by
 
  Us 6,700,000 shares of common stock
 
  Selling stockholders 2,000,000 shares of common stock
 
     Total 8,700,000 shares of common stock
 
Option to purchase additional shares offered by the selling stockholders Certain of the selling stockholders have granted the underwriters a 30-day option to purchase from them up to an aggregate of 1,300,000 additional shares of our common stock. We will not receive any proceeds from the sale of shares by the selling stockholders.
 
Common stock to be outstanding after the offering 26,458,778 shares of common stock
 
Use of proceeds We estimate that the net proceeds to us from this offering will be approximately $89.8 million, based on our assumed initial offering price of $15.00, which is the midpoint of the range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We plan to use these net proceeds for general corporate purposes, including working capital and possible acquisitions. In addition, we currently expect that we will use a portion of these net proceeds to repay all of the indebtedness outstanding under our credit agreement with Bank of America, N.A., JPMorgan Chase Bank, N.A., TD Bank, N.A. and Capital One, N.A. As of August 31, 2009, we had $65.8 million of total indebtedness outstanding under this agreement, and had $14.2 million of availability under the $55.0 million revolving credit facility portion of this agreement. We will not receive any proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”
 
Dividend policy We currently have no plans to pay dividends on our common stock.
 
Risk factors You should carefully read and consider the information set forth under “Risk Factors,” together with all of the other information set forth in this prospectus, before deciding to invest in shares of our common stock.
 
Listing We have been approved to apply for listing of our common stock on the New York Stock Exchange under the symbol “MG”.
 
Except as otherwise indicated or the context otherwise requires, throughout this prospectus the number of shares of common stock shown to be outstanding after this offering and other share-related information is based on the number of shares outstanding as of May 31, 2009, and:
 
•  reflects a 13-for-1 stock split, effected on September 22, 2009;
 
•  reflects the conversion of all outstanding shares of our preferred stock into an aggregate of 6,758,778 shares of common stock upon the completion of this offering;


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•  excludes 939,900 shares of common stock issuable upon the exercise of stock options outstanding as of May 31, 2009, at a weighted average exercise price of $6.81 per share; and
 
•  excludes 2,286,318 shares of common stock reserved for future awards under the 2009 Long-Term Incentive Plan.
 
The following table sets forth the number of shares of common stock to be sold by the directors and executive officers who are selling such shares in this offering. For more information on persons selling shares of common stock in this offering, please see “Principal and Selling Stockholders.”
 
         
 
    Shares being sold
 
    in this offering  
    Number  
 
 
Directors and Executive Officers
       
Sotirios J. Vahaviolos
    234,000  
Chairman, President, Chief Executive Officer and Director
       
Mark F. Carlos
    49,725  
Group Executive Vice President, Products and Systems
       
Phillip T. Cole
    55,250  
Group Executive Vice President, International
       
Michael J. Lange
    200,000  
Group Executive Vice President, Services, and Director
       
 
 
 
Our executive officers, directors and each person, or group of affiliated persons, known by us to beneficially own more than five percent of our voting securities, taken together as a group, will own approximately 46% of our outstanding common stock after this offering. For information on the number of shares of common stock to be received by these individuals or groups upon the conversion of our preferred stock at the completion of this offering, please see “Certain Relationships and Related Transactions—Conversion of All Preferred Stock upon Completion of this Offering.”


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Summary historical consolidated financial data
 
The following table sets forth our summary historical consolidated financial information and other data. The historical statement of operations and cash flow data for fiscal 2009, 2008 and 2007 and the historical balance sheet data as of May 31, 2009 are derived from, and should be read in conjunction with, our audited consolidated financial statements and related notes appearing elsewhere in this prospectus.
 
The information contained in this table should also be read in conjunction with “Use of Proceeds,” “Capitalization,” “Selected Historical Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes thereto, all included elsewhere in this prospectus.
 
                         
 
    Fiscal  
(in thousands, except share and per share data)   2009     2008     2007  
 
 
Statement of Operations Data:
                       
Revenues
  $ 209,133     $ 152,268     $ 122,241  
Cost of revenues
    131,167       90,590       75,702  
Depreciation
    8,700       6,847       4,666  
     
     
Gross profit
    69,266       54,831       41,873  
Selling, general and administrative expenses
    47,150       32,943       26,408  
Research and engineering expenses
    1,255       954       703  
Depreciation and amortization
    3,936       4,576       4,025  
Legal settlement
    2,100              
     
     
Income from operations
    14,825       16,358       10,737  
Other expenses:
                       
Interest expense
    4,614       3,531       4,482  
Loss on extinguishment of long-term debt
                460  
     
     
Income before provision for income taxes and minority interest
    10,211       12,827       5,795  
Provision for income taxes
    4,558       5,380       208  
     
     
Income before minority interest
    5,653       7,447       5,587  
Minority interest, net of taxes
    (187 )     (8 )     (199 )
     
     
Net income
    5,466       7,439       5,388  
Accretion of preferred stock
    (27,114 )     (32,872 )     (3,520 )
     
     
Net (loss) income available to common stockholders
  $ (21,648 )   $ (25,433 )   $ 1,868  
     
     
Weighted average number of common shares outstanding:
                       
Basic
    13,000,000       13,000,000       12,887,524  
Diluted
    13,000,000       13,000,000       13,101,439  
(Loss) earnings per common share:
                       
Basic
  $ (1.67 )   $ (1.96 )   $ 0.14  
Diluted
    (1.67 )     (1.96 )     0.14  
Pro forma diluted earnings per common share(1)
    0.27       0.37       0.27  
Other Financial Data:
                       
Net cash provided by operating activities
  $ 12,661     $ 12,851     $ 14,006  
Net cash used in investing activities
    (15,888 )     (19,446 )     (4,259 )
Net cash provided by (used in) financing activities
    4,912       6,320       (8,122 )
EBITDA(2)
    27,274       27,773       18,769  
Adjusted EBITDA(2)
    31,122       28,091       19,229  
 
 
 


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    As of May 31, 2009  
    Actual     As adjusted(3)  
 
Balance Sheet Data:
               
Cash and cash equivalents
  $ 5,668       43,606  
Total assets
    151,274       148,439  
Total long-term debt, including current portion(4)
    66,251       14,427  
Obligations under capital leases, including current portion
    14,525       14,525  
Convertible redeemable preferred stock
    90,983        
Total stockholders’ (deficit) equity
    (47,912 )     129,998  
 
 
 
(1) Pro forma diluted earnings per common share gives effect to the assumed conversion of our preferred stock for all periods presented. It is computed by dividing net income by the pro forma number of weighted average shares outstanding used in the calculation of diluted (loss) earnings per share, but after assuming conversion of our preferred stock and exercise of any dilutive stock options. The calculation for this, as well as our basic and diluted (loss) earnings per common share, follows:
 
                         
 
    Fiscal  
(in thousands, except share and per share data)   2009     2008     2007  
 
 
Pro forma diluted earnings per common share:
                       
Numerator:
                       
Net income
  $ 5,466     $ 7,439     $ 5,388  
     
     
Denominator:
                       
Weighted average number of common shares outstanding
    13,000,000       13,000,000       12,887,524  
Common stock equivalents of outstanding stock options
    555,815       344,760       213,915  
Common stock equivalents of conversion of preferred shares
    6,758,778       6,758,778       6,549,777  
     
     
Total shares
    20,314,593       20,103,538       19,651,216  
     
     
Pro forma diluted earnings per common share
  $ 0.27     $ 0.37     $ 0.27  
 
 
 
                         
 
    Fiscal  
(in thousands, except share and per share data)   2009     2008     2007  
 
 
Basic (loss) earnings per common share:
                       
Numerator:
                       
Net (loss) income available to common stockholders
  $ (21,648 )   $ (25,433 )   $ 1,868  
     
     
Denominator:
                       
Weighted average number of common shares outstanding
    13,000,000       13,000,000       12,887,524  
     
     
Basic (loss) earnings per common share
  $ (1.67 )   $ (1.96 )   $ 0.14  
     
     
Diluted (loss) earnings per common share:*
                       
Numerator
                       
Net (loss) income available to common stockholders
  $ (21,648 )   $ (25,433 )   $ 1,868  
     
     
Denominator:
                       
Weighted average number of common shares outstanding
    13,000,000       13,000,000       12,887,524  
Common stock equivalents of outstanding stock options
                213,915  
     
     
Total shares
    13,000,000       13,000,000       13,101,439  
     
     
Diluted (loss) earnings per common share
  $ (1.67 )   $ (1.96 )   $ 0.14  
 
 
* Excludes certain stock options and preferred shares which would be anti-dilutive
 
 
(2) EBITDA and adjusted EBITDA are performance measures used by management that are not calculated in accordance with U.S. generally accepted accounting principles (GAAP). EBITDA is defined in this prospectus as net income plus: interest expense, provision for income taxes and depreciation and amortization. Adjusted EBITDA is defined in this prospectus as net income plus: interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense and certain one-time and generally non-recurring items (which items are described in the next paragraph and the reconciliation table below).

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Our management uses EBITDA and adjusted EBITDA as measures of operating performance to assist in comparing performance from period to period on a consistent basis, as measures for planning and forecasting overall expectations and for evaluating actual results against such expectations and as performance evaluation metrics off which to base executive and employee incentive compensation programs.
 
We believe investors and other external users of our financial statements benefit from the presentation of EBITDA and adjusted EBITDA in evaluating our operating performance because they provide an additional tool to compare our operating performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our core operations. For instance, EBITDA and adjusted EBITDA generally exclude interest expense, taxes and depreciation, amortization and non-cash stock compensation, each of which can vary substantially from company to company depending upon accounting methods and the book value and age of assets, capital structure, capital investment cycles and the method by which assets were acquired. Similarly, our adjusted EBITDA (and not our EBITDA) for fiscal 2009 excludes the impact of a one-time payment we made to settle a lawsuit and the writeoff of $1.6 million in accounts receivable we expected to collect from a customer that declared bankruptcy in fiscal 2009. These items were excluded because management believes these events were highly unique to us in fiscal 2009. Our adjusted EBITDA for fiscal 2009 and 2008 also excludes the impact of stock compensation expenses, because these expenses actually did not involve us paying or agreeing to pay any cash.
 
Although EBITDA and adjusted EBITDA are widely used by investors and securities analysts in their evaluations of companies, you should not consider them either in isolation or as a substitute for analyzing our results as reported under U.S. generally accepted accounting principles (GAAP). EBITDA and adjusted EBITDA are generally limited as analytical tools because they exclude, among other things, the statement of operations impact of depreciation and amortization, interest expense and the provision for income taxes and therefore do not necessarily represent an accurate measure of profitability, particularly in situations where a company is highly leveraged or has a disadvantageous tax structure. As a result, EBITDA and adjusted EBITDA are of limited value in evaluating our operating performance because (i) we use a significant amount of capital assets and depreciation and amortization expense is a necessary element of our costs and ability to generate revenues; (ii) we have a significant amount of debt and interest expense is a necessary element of our costs and ability to generate revenues; and (iii) we generally incur significant U.S. federal, state and foreign income taxes each year and the provision for income taxes is a necessary element of our costs. EBITDA and adjusted EBITDA also do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments, changes in, or cash requirements for, our working capital needs and all non-cash income or expense items that are reflected in our statements of cash flows. Our adjusted EBITDA for fiscal 2009 excludes the impact of an actual cash expenditure for the settlement of a lawsuit and an amount we were unable to collect in fiscal 2009 due to the bankruptcy of a customer, and our adjusted EBITDA for fiscal 2009 and 2008 excludes the impact of stock compensation expenses that reduced our net income under GAAP. Furthermore, because EBITDA and adjusted EBITDA are not defined under GAAP, our definitions of EBITDA and adjusted EBITDA may differ from, and therefore may not be comparable to, similarly titled measures used by other companies, thereby limiting their usefulness as comparative measures. Because of these limitations, neither EBITDA nor adjusted EBITDA should be considered as the primary measure of our operating performance or as a measure of discretionary cash available to us to invest in the growth of our business. We strongly urge you to review the GAAP financial measures included in this prospectus, our consolidated financial statements, including the notes thereto, and the other financial information contained in this prospectus, and not to rely on any single financial measure to evaluate our business.
 
The following table provides a reconciliation of net income to EBITDA and adjusted EBITDA:
 
                         
 
    Fiscal  
(in thousands)   2009     2008     2007  
 
 
Net income
  $ 5,466     $ 7,439     $ 5,388  
Interest expense
    4,614       3,531       4,482  
Provision for income taxes
    4,558       5,380       208  
Depreciation and amortization
    12,636       11,423       8,691  
     
     
EBITDA
  $ 27,274     $ 27,773     $ 18,769  
Legal settlement
    2,100              
Large customer bankruptcy
    1,556              
Stock compensation expense
    192       318        
Loss on extinguishment of debt
                460  
     
     
Adjusted EBITDA
  $ 31,122     $ 28,091     $ 19,229  
 
 
 
(3) The As Adjusted column is unaudited and gives effect to:
 
•  the conversion of all outstanding shares of our preferred stock into shares of our common stock upon the completion of this offering and a 13-for-1 stock split of our common stock; and
 
•  the sale by us of 6,700,000 shares of our common stock in this offering at the initial public offering price of $15.00 per share (the midpoint of the range shown on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
 
(4) As of August 31, 2009, we had $65.8 million of total indebtedness outstanding under our current credit agreement, and had $14.2 million of availability under the $55.0 million revolving credit facility portion of this agreement.


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Risk factors
 
An investment in our common stock involves a high degree of risk. You should carefully read and consider the risks described below, together with the other information contained in this prospectus, including our financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before making an investment decision. If any of these risks actually occur, our business, financial condition, results of operations and future growth prospects may be adversely affected. As a result, the trading price of our common stock would likely decline, and you may lose all or part of your investment.
 
Risks related to our business
 
Our operating results could be adversely affected by a reduction in business with our significant customers.
 
We derive a significant amount of revenues from a few customers. For instance, various divisions or business units of one of our customers were responsible for 17.1%, 16.8% and 16.5% of our revenues for fiscal 2009, 2008 and 2007, respectively. Taken as a group, our top 10 customers were responsible for 35.8%, 35.2% and 38.6% of our revenues for fiscal 2009, 2008 and 2007, respectively. Generally, our customers do not have an obligation to make purchases from us and may stop ordering our products and services at any time without financial penalty. The loss of any of our significant customers, any substantial decline in sales to these customers or any significant change in the timing or volume of purchases by our customers could result in lower revenues and could harm our business, financial condition or results of operations.
 
An accident or incident involving our asset protection solutions could expose us to claims, harm our reputation and adversely affect our ability to compete for business and, as a result, harm our operating performance.
 
We are exposed to liabilities arising out of the solutions we provide. For instance, we furnish the results of our testing and inspections for use by our customers in their assessment of their assets, facilities, plants and other structures. Such results may be incorrect or incomplete, whether as a result of poorly designed inspections, malfunctioning testing equipment or our employees’ failure to adequately test or properly record data. For example, one of our clients claimed one of our x-ray inspection crews had improperly recorded inspection data about a portion of its infrastructure, requiring us to provide a new team to inspect that infrastructure over a period of three months at our expense. Further, if an accident or incident involving a structure we are testing or have tested occurs and causes personal injuries to our personnel or third parties, or property damage, such as the collapse of a bridge or an explosion in a plant or facility, and particularly if these injuries or damages could have been prevented by our customers had we provided them with correct or complete results, we may face significant claims by injured persons or related parties and claims relating to any property damage or loss. Even if our results are correct and complete, we may face claims for such injuries or damage simply because we tested the structure or facility in question. For instance, we recently inspected a subset of welds made in a liquid storage tank farm under construction for a customer in order to determine if the welds were being made in accordance with applicable regulations. The welds we tested were specified by the contractor that made them. Weeks after our inspections were completed a weld in a tank cracked, resulting in the spill of hazardous material. The


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customer made a claim on its insurer, which in turn made claims against us, among others, for the clean-up costs, which in this case are not significant. Though we believe we did not test the weld that failed, if we are unable to prove this fact we may decide to or be compelled by a court to pay some of the clean-up costs. Our insurance coverage may not be adequate to cover the damages from any such claims, forcing us to bear these uninsured damages directly, which could harm our operating results and may result in additional expenses and possible loss of revenues. An accident or incident for which we are found partially or fully responsible, even if fully insured, may also result in negative publicity, which would harm our reputation among our customers and the public, cause us to lose existing and future contracts or make it more difficult for us to compete effectively, thereby significantly harming our operating performance. Such an accident or incident might also make it more expensive or impossible for us to insure against similar events in the future. Even unsuccessful claims relating to accidents could result in substantial costs, including litigation expenses, and diversion of our management resources.
 
If we are unable to attract and retain a sufficient number of trained engineers, scientists and other highly-skilled technicians at competitive wages, our operational performance may be harmed and our costs may increase.
 
We believe that our success depends, in part, upon our ability to attract, develop and retain a sufficient number of trained engineers, scientists and other highly-skilled, certified technicians at competitive wages. The demand for such employees is currently high, and we project that it may increase substantially in the future. Accordingly, we have experienced increases in our labor costs, particularly in our Services segment, but also, to a lesser extent, in our International segment. Many of the companies with which we compete for experienced personnel have comparatively greater name recognition and resources. In addition, in making employment decisions, job candidates often consider the value of the stock options they are to receive in connection with their employment. Volatility in the future market price of our stock may, therefore, adversely affect our ability to attract or retain key employees. Furthermore, the requirement to expense stock options may discourage us from granting the size or type of stock option awards that job candidates require to join our company. The markets for our products and services also require us to field personnel trained and certified in accordance with standards set by domestic or international standard-setting bodies, such as the American Society of Non-Destructive Testing. Because of the limited supply of these certified technicians, we expend substantial resources maintaining in-house training and certification programs. If we fail to attract sufficient new personnel or fail to motivate and retain our current personnel, our ability to perform under existing contracts and orders or to pursue new business may be harmed, causing us to lose customers and revenues, and the costs of performing such contracts and orders may increase, which would likely reduce our margins.
 
If we lose members of our senior management team upon whom we are dependent, we may not be able to manage our operations and achieve our strategic objectives.
 
Our future success depends to a considerable degree upon the availability, contributions, vision, skills, experience and effort of our senior management team. We do not maintain “key person” insurance on any of our employees other than Dr. Sotirios J. Vahaviolos, our Chairman, President and Chief Executive Officer. We currently have no employment agreements with members of our senior management team other than with Dr. Vahaviolos. Although we may enter into employment agreements with certain executive officers after this offering, these agreements will likely not guarantee the services of the individual for a specified period of time. All of the future agreements with members of our senior management team are expected to provide that


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their employment is at-will and may be terminated by either us or the employee at any time and without notice. Although we do not have any reason to believe that we may lose the services of any of these persons in the foreseeable future, the loss of the services of any of these persons might impede our operations or the achievement of our strategic and financial objectives. The loss or interruption of the service of members of our senior management team could harm our business, financial condition and results of operations and could significantly reduce our ability to manage our operations and implement our strategy.
 
We operate in highly competitive markets and if we are unable to compete successfully, we could lose market share and revenues.
 
We face strong competition from NDT and a variety of niche asset protection providers, both larger and smaller than we are. Many of our competitors have greater financial resources than we do and could focus their substantial financial resources to develop a competing business model or develop products or services that are more attractive to potential customers than what we offer. Some of our competitors are business units of companies substantially larger than us and have the ability to combine asset protection solutions into an integrated offering to customers who already purchase other types of products or services from them. Our competitors may offer asset protection solutions at prices below or without cost in order to improve their competitive positions. Any of these competitive factors could make it more difficult for us to attract and retain customers, cause us to lower our prices in order to compete and reduce our market share and revenues, any of which could have a material adverse effect on our financial condition and results of operations.
 
Due to our dependency on customers in the oil and gas industry, we are susceptible to prolonged negative trends relating to this industry that could adversely affect our operating results.
 
Our customers in the oil and gas industry (including the petrochemical market) have accounted for a substantial portion of our historical revenues. Specifically, they accounted for approximately 58%, 50% and 52% of our revenues for fiscal 2009, 2008 and 2007, respectively. We continue to diversify our customer base into industries other than the oil and gas industry, but we may not be successful in doing so. If the oil and gas industry were to suffer a prolonged or significant downturn, our operating performance may be significantly harmed.
 
Our growth strategy includes acquisitions. We may not be able to identify suitable acquisition candidates or integrate acquired businesses successfully, which may inhibit our rate of growth, and any acquisitions that we do complete may expose us to a number of unanticipated operational and financial risks.
 
Our historical growth has depended, and our future growth is likely to continue to depend, to a certain extent, on our ability to make acquisitions and successfully integrate acquired businesses. We intend to continue to seek additional acquisition opportunities, both to expand into new markets and to enhance our position in existing markets globally. We may not be able to successfully identify suitable candidates, negotiate appropriate acquisition terms, obtain necessary financing on acceptable terms, complete proposed acquisitions, successfully integrate acquired businesses into our current operations or expand into new markets. Once integrated, acquired operations may not achieve levels of revenues, profitability or productivity comparable with those achieved by our current operations, or otherwise perform as expected.


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Some of the risks associated with our acquisition strategy include:
 
•  unexpected loss of key personnel and customers of the acquired company;
 
•  making the acquired company’s financial and accounting standards consistent with our standards;
 
•  assumption of liability for risks and exposures (including environmental-related costs), some of which we may not discover during our due diligence; and
 
•  potential disruption of our ongoing business and distraction of management.
 
Our ability to undertake acquisitions is limited by covenants in our credit agreement and our financial resources, including available cash and borrowing capacity. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of substantial additional indebtedness and other expenses, impairment expenses related to goodwill and impairment or amortization expenses related to other intangible assets, any of which could harm our financial condition and results of operations. Although management intends to evaluate the risks inherent in any particular transaction, there are no assurances that we will properly ascertain all such risks. Difficulties encountered with acquisitions may harm our business, financial condition and results of operations.
 
Catastrophic events, such as natural disasters, epidemics, war and acts of terrorism, could disrupt our business or the business of our customers, which could significantly harm our operations, financial results and cash flow.
 
Our operations and those of our customers are susceptible to the occurrence of catastrophic events outside our control, ranging from severe weather conditions to acts of war and terrorism. Any such events could cause a serious business disruption that reduces our customers’ ability to or interest in purchasing our asset protection solutions, and have in the past resulted in order cancellations and delays because customer equipment, facilities or operations have been damaged, or are not operational or available. For instance, order cancellations and delays due to Hurricane Ike adversely affected our revenues in fiscal 2009. Additionally, such events have resulted and may in the future result in substantial delays in the provision of solutions to our customers and the loss of valuable equipment. Any cancellations, delays or losses due to a catastrophic event may significantly reduce our revenues and harm our operating performance.
 
We face risks related to the current economic downturn.
 
The global economy is currently in a pronounced economic downturn. Global financial markets are continuing to experience disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, volatility in interest and currency exchange rates and overall uncertainty about economic stability. There may be further deterioration and volatility in the global economy, the global financial markets and consumer confidence. We are unable to predict the likely duration and severity of the current global economic downturn or disruptions in the financial markets. The downturn has already resulted in some of our customers canceling and delaying orders for our solutions, as well as some customers delaying payment for items billed, which reduced our gross margins and operating income in fiscal 2009. Some of our customers have also recently requested price concessions. In addition, current economic conditions have resulted in the reduced creditworthiness, inability to obtain sufficient financing, and bankruptcies of certain


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customers, increasing our exposure to bad debt. For instance, in fiscal 2009, one of our larger customers filed for bankruptcy due to a downturn in the chemical industry combined with its own highly leveraged position. If economic conditions deteriorate further, our business, financial condition and results of operations could be significantly harmed. Although we believe we have adequate liquidity and capital resources to fund our operations as planned, in light of current market conditions, our inability to access the capital markets on favorable terms, or at all, may harm our financial performance. The inability to obtain adequate financing from debt or capital sources could force us to self-fund strategic initiatives or even forgo certain opportunities, which in turn could potentially harm our performance.
 
We expect to continue expanding and investing in our sales and marketing, operations, engineering, research and development capabilities and financial and reporting systems and, as a result, may encounter difficulties in managing our growth, which could disrupt our operations.
 
We expect to experience significant growth in the number of our employees and the scope of our operations. To effectively manage our anticipated future growth, we must continue to implement and improve our managerial, operational, financial and reporting systems, expand our facilities and continue to recruit and train additional qualified personnel. We expect that all of these measures will require significant expenditures and will demand the attention of management. We may not be able to effectively manage the expansion of our operations or recruit and adequately train additional qualified personnel. Failure to manage our growth effectively could lead us to over or under-invest in technology and operations, result in weaknesses in our infrastructure, systems or controls, give rise to operational mistakes, loss of business opportunities, the loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of new solutions. If our management is unable to effectively manage our expected growth, our expenses may increase more than expected, our revenues could decline or may grow more slowly than expected and we may be unable to implement our business strategy.
 
The success of our businesses depends, in part, on our ability to develop new asset protection solutions and increase the functionality of our current offerings.
 
The market for asset protection solutions is impacted by technological change, uncertain product lifecycles, shifts in customer demands and evolving industry standards and regulations. We may not be able to successfully develop and market new asset protection solutions that comply with present or emerging industry regulations and technology standards. Also, new regulations or technology standards could increase our cost of doing business.
 
From time to time, our customers have requested greater functionality in our solutions. As part of our strategy to enhance our asset protection solutions and grow our business, we plan to continue making substantial investments in the research and development of new technologies. We believe our future success will depend, in part, on our ability to continue to design new, competitive asset protection solutions, enhance our current solutions and provide new, value-added services. Developing new solutions will require continued investment, and we may experience unforeseen technological or operational challenges. In addition, our asset protection software is complex and can be expensive to develop, and new software and software enhancements can require long development and testing periods. If we are unable to develop new asset protection solutions or enhancements to our current offerings, or if the market does not accept


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such solutions, we will likely lose opportunities to realize revenues and customers and our business and results of operations will be adversely affected.
 
If our software produces inaccurate information or is incompatible with the systems used by our customers and makes us unable to successfully provide our solutions, it could lead to a loss of revenues and customers.
 
Our software is complex and, accordingly, may contain undetected errors or failures. Software defects or inaccurate data may cause incorrect recording, reporting or display of information related to our asset protection solutions. Any such failures, defects and inaccurate data may prevent us from successfully providing our asset protection solutions, which would result in lost revenues. Software defects or inaccurate data may lead to customer dissatisfaction and our customers may seek to hold us liable for any damages incurred. As a result, we could lose customers, our reputation may be harmed and our financial condition and results of operations would be materially adversely affected.
 
We currently serve a commercial, industrial and governmental customer base that uses a wide variety of constantly changing hardware, software solutions and operating systems. Our asset protection solutions need to interface with these non-standard systems in order to gather and assess data. Our business depends on the following factors, among others:
 
•  our ability to integrate our technology with new and existing hardware and software systems;
 
•  our ability to anticipate and support new standards, especially Internet-based standards; and
 
•  our ability to integrate additional software modules under development with our existing technology and operational processes.
 
If we are unable to adequately address any of these factors, our results of operations and prospects for growth and profitability would be harmed.
 
If we fail to successfully educate current and potential customers regarding the benefits of our asset protection solutions or the market for these solutions otherwise fails to develop, our ability to grow our business could be adversely impacted.
 
Our future success depends on continued and growing commercial acceptance of our asset protection solutions and our ability to obtain additional contracts. We anticipate that revenues related to our asset protection solutions will constitute a substantial portion of our revenues for the foreseeable future. If we are unable to educate our potential customers about the advantages our solutions have over competing products and services, or our current customers stop purchasing our asset protection solutions, our operating results could be significantly harmed. In addition, because the asset protection solutions industry is rapidly evolving, we could lose insight into trends that may be emerging, which would further harm our competitive position by making it difficult to predict and respond to customer needs. If the market for our asset protection solutions does not continue to develop, our ability to grow our business would be limited and we might not be able to maintain profitability.


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Our results of operations could be harmed if our operating expenses do not correspond with the timing of our revenues.
 
Most of our operating expenses, such as employee compensation and property rental expense, are relatively fixed over the short-term. Moreover, our spending levels are based in part on our expectations regarding future revenues. As a result, if revenues for a particular quarter are below expectations, we would not be able to proportionately reduce operating expenses for that quarter without a substantial disruption to our business. This shortfall in revenues could adversely affect our operating results for that quarter and could cause the market price of our common stock to decline substantially.
 
The seasonal nature of our business reduces our revenues in our first and third fiscal quarters.
 
Our business is seasonal. Our first and third fiscal quarter revenues are typically lower than our revenues in the second and fourth fiscal quarters because demand for our asset protection solutions from the oil and gas as well as the fossil and nuclear power industries increases during their non-peak production periods. For instance, U.S. refineries’ non-peak periods are generally in our second fiscal quarter, when they are retooling to produce more heating oil for winter, and in our fourth fiscal quarter, when they are retooling to produce more gasoline for summer. As a result of these trends, we generally have reduced cash flows in our second and fourth fiscal quarters, which may require us to borrow under our credit agreement or otherwise, to discontinue planned operations, or to curtail our operations. We expect that the negative impact of seasonality on our first and third fiscal quarter revenues and second and fourth fiscal quarter cash flows will continue.
 
Growth in revenues from our Services segment or traditional NDT services relative to revenues from our Products and Systems and International segments, may reduce our overall gross profit margin.
 
Our gross profit margin on revenues from our Services segment has historically been lower than our gross profit margin on revenues from our other segments because our services have higher labor-related costs. For instance, the gross profit margin in our Services segment for fiscal 2009 was 28.9%, while our gross profit margin in our Products and Systems segment and in our International segment was 49.0% and 43.2%, respectively. Our overall gross profit margin was 33.1% during the same period. Moreover, our gross profit margin on traditional NDT services has historically been lower than our gross profit margin in our Services segment as a whole. As a result, we expect our overall gross profit margin will be lower in periods when revenues from our services, and particularly from traditional NDT services, has increased as a percentage of total revenues and will be higher in periods when revenues from our International or Products and Systems segments has increased as a percentage of total revenues. Fluctuations in our gross profit margin may affect our level of profitability in any period, which may negatively affect the price of our common stock.
 
We have identified two significant deficiencies in our internal controls over financial reporting.
 
In connection with the audit of our financial results for fiscal 2009, we and our independent registered accounting firm reported to our audit committee two significant deficiencies concerning the substantial number of our internal control processes that are still being formalized or are manual in nature and the design of certain controls related to the financial statement closing process. These processes, at times, require significant effort to execute and, therefore,


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generally may not provide a sustainable platform for an effective and efficient financial statement closing process. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting. If we are unable to remedy these significant deficiencies, or if we discover other significant deficiencies in the future, then we may not be able to provide reasonable assurance regarding the reliability of our financial statements, which could have an adverse effect on our business or operating results.
 
Our business is currently subject to governmental regulation, and may become subject to modified or new government regulation that may negatively impact our ability to market our asset protection solutions.
 
We incur substantial costs in complying with various government regulations and licensing requirements. For example, the transportation and overnight storage of radioactive materials used in providing certain of our asset protection solutions is subject to regulation under federal and state laws and licensing requirements. Our Services segment is currently licensed to handle radioactive materials by the U.S. Nuclear Regulatory Commission (NRC) and 18 state regulatory agencies. If we allegedly fail to comply with these regulations, we may be investigated and incur significant legal expenses associated with such investigations, and if we are found to have violated these regulations, we may be fined or lose one or more of our licenses to perform further projects. While we are investigated, we may be required to suspend work on the projects associated with our alleged noncompliance, resulting in loss of profits or customers, and damage to our reputation. For instance, in January, 2007, we were investigated due to an incident involving radiation exposure resulting from the misconduct of one of our employees. As a result, our customer required us to briefly suspend work on the associated project. We were found to have violated regulations governing the handling of radioactive materials, and as a result we incurred significant legal expenses. A more serious violation could result in lost profits and damage to our reputation. Many of our customers have strict requirements concerning safety or loss time occurrences. In the future, federal, state, provincial or local governmental agencies may seek to change current regulations or impose additional regulations on our business. Any modified or new government regulation applicable to our current or future asset protection solutions may negatively impact the marketing and provision of those solutions and increase our costs and the price of our solutions.
 
A significant stockholder controls the direction of our business. The concentrated ownership of our common stock may prevent you and other stockholders from influencing significant corporate decisions.
 
Dr. Sotirios J. Vahaviolos, our Chairman, President and Chief Executive Officer, will own approximately 43% of our outstanding common stock after this offering. As a result, Dr. Vahaviolos will have the ability to exert substantial influence over all matters requiring approval by our stockholders, including the election and removal of directors, amendments to our certificate of incorporation, and any proposed merger, consolidation or sale of all or substantially all of our assets and other corporate transactions. This concentration of ownership could be disadvantageous to other stockholders with differing interests from Dr. Vahaviolos.


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An inability to protect our intellectual property could negatively affect our business and results of operations.
 
Our ability to compete effectively depends in part upon the maintenance and protection of the intellectual property related to our asset protection solutions. Patent protection is unavailable for certain aspects of the technology and operational processes important to our business. Any patent held by us or to be issued to us, or any of our pending patent applications, could be unenforceable, challenged, invalidated or circumvented. Some of our trademarks that are not in use may become available to others. To date, we have relied principally on copyright, trademark and trade secrecy laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our intellectual property. However, we have not obtained confidentiality agreements from all of our customers and vendors, and although we have entered into confidentiality agreements with all of our employees in our Products and Systems segment and certain of our other employees involved in the development of our intellectual property, we cannot be certain that these agreements will be honored or enforceable. Some of our confidentiality agreements are not in writing, and some customers are subject to laws and regulations that require them to disclose information that we would otherwise seek to keep confidential. Although we do not transfer ownership of some of our more advanced asset protection products and systems and, instead, sell to our customers services using these products and systems, in part, in an effort to protect the intellectual property upon which they are based, this strategy may not be successful and our customers or third parties may reverse engineer or otherwise derive this intellectual property and use it without our authorization. Policing unauthorized use of our intellectual property is difficult and expensive. The steps that we have taken or may take might not prevent misappropriation of the intellectual property on which we rely. In addition, effective protection may be unavailable or limited in jurisdictions outside the United States, as the intellectual property laws of foreign countries sometimes offer less protection or have onerous filing requirements. From time to time, third parties may infringe our intellectual property rights. Litigation may be necessary to enforce or protect our rights or to determine the validity and scope of the rights of others. Any litigation could be unsuccessful, cause us to incur substantial costs, divert resources away from our daily operations and result in the impairment of our intellectual property. Failure to adequately enforce our rights could cause us to lose valuable rights in our intellectual property and may negatively affect our business.
 
We may be subject to damaging and disruptive intellectual property litigation related to allegations that our asset protection solutions infringe on the intellectual property of others, which could prevent us from offering those solutions.
 
Third-party patent applications and patents may be applicable to our asset protection solutions. As a result, third parties may in the future make infringement and other allegations that could subject us to intellectual property litigation relating to our solutions. Such litigation would be time consuming and expensive, divert attention and resources away from our daily operations, impede or prevent delivery of our solutions and require us to pay significant royalties, licensing fees and damages. In addition, parties making infringement and other claims may be able to obtain injunctive or other equitable relief that could effectively block our ability to provide our solutions and could cause us to pay substantial damages. In the event of a successful claim of infringement, we may need to seek one or more licenses from third parties in order to continue to offer the related solution, which may not be available at a reasonable cost, or at all. For example, in 2004 a competitor brought a patent infringement lawsuit against us based on our use of certain sensor technology in our inspection of a bridge. We incurred approximately $0.6


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million in expenses to defend against and settle this lawsuit, and to enter into a license to use this technology. Under this license agreement, we have paid the competitor immaterial amounts for fees and royalties for use of the technology, which we no longer use in our business.
 
We may require additional capital to support business growth, which might not be available.
 
We intend to continue making investments to support our business growth and may require additional funds to respond to business challenges or opportunities, including the need to develop new, or enhance our current, asset protection solutions, enhance our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our current stockholders, including investors in this offering, could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.
 
Our credit agreement contains financial and operating restrictions that may limit our access to credit. If we fail to comply with financial or other covenants in our credit agreement, we may be required to repay indebtedness to our existing lenders, which may harm our liquidity.
 
Provisions in our credit agreement with Bank of America, N.A., JPMorgan Chase Bank, N.A., TD Bank, N.A. and Capital One, N.A. impose restrictions on our ability to, among other things:
 
•  create liens;
•  make investments;
•  incur more debt;
•  merge or consolidate;
•  make dispositions of property;
•  pay dividends and make distributions;
•  enter into a new line of business;
•  enter into transactions with affiliates; and
•  enter into burdensome agreements.
 
Our credit agreement also contains financial covenants that require us to maintain compliance with specified financial ratios. As of May 31, 2009 we were not in compliance with certain covenants in our former credit agreement limiting our incurrence of certain indebtedness and requiring us to maintain a certain debt service coverage ratio, and we may not be able to comply with such covenants in the future. Although this prior noncompliance with these covenants was waived by our lenders, our failure to comply with these covenants in the future may result in the declaration of an event of default, which could prevent us from borrowing under our credit agreement. In addition to preventing additional borrowings under our credit agreement, an event of default, if not cured or waived, may result in the acceleration of the maturity of indebtedness outstanding under the agreement, which would require us to pay all


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amounts outstanding and, in addition, our lenders may require us to cash collateralize letters of credit issued thereunder. If an event of default occurs, we may not be able to cure it within any applicable cure period, if at all. If the maturity of our indebtedness is accelerated, we then may not have sufficient funds available for repayment or the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to us, or at all.
 
We may become subject to commercial disputes or product liability claims, that could harm our business by distracting our management from the operation of our business, by increasing our expenses and, if we do not prevail, by subjecting us to potential monetary damages and other remedies.
 
We face potential liability for, among other things, contract, negligence and product liability claims related to our provision of asset protection solutions. For instance, our customers may assert that we have failed to perform under our agreements with them, or our customers or third parties may claim damages arising out of misuse of our products, the malfunctioning of our products due to design or manufacturing flaws, or the use of our products with components or systems not manufactured or sold by us. We currently do not carry product liability insurance and we may not have sufficient resources to satisfy any liability resulting from product liability or other claims. Any of these claims or disputes could result in monetary damages and equitable or other remedies that could harm our financial position or operations. Even if we prevail in or settle these claims or disputes, they may distract our management from operating our business and the cost of defending or settling them could harm our operating results, financial position and cash flows.
 
We rely on a limited number of suppliers to provide us radioisotopes and a material interruption in supply could prevent or limit our ability to fill orders for our products.
 
We depend upon a limited number of third-party suppliers for the radioisotopes we use to provide certain advanced asset protection solutions. Our principal suppliers are Industrial Nuclear Company, QSA Global Inc. and Source Production & Equipment Co., Inc. We also utilize other commercial isotope manufacturers located in the United States and overseas. To date, we have been able to obtain the required radioisotopes for our asset protection solutions without any significant delays or interruptions. If we lose any of these suppliers, we may be required to find and enter into supply arrangements with one or more replacement suppliers. Obtaining alternative sources of supply could involve significant delays and other costs and these supply sources may not be available to us on reasonable terms or at all. Any disruption of supplies could delay delivery of our products that use radioisotopes, which could adversely affect our business and financial results and result in lost or deferred sales.
 
Our sales cycles can be lengthy, unpredictable and require significant employee time and financial resources with no assurances that we will realize revenues.
 
Our sales cycles are often long and unpredictable. Many of our current and potential customers have extended budgeting and procurement processes. We believe that they also tend to be risk averse and follow industry trends rather than be the first to purchase new products or services, which can extend the lead time for or prevent acceptance of new products or services. Accordingly, they may take longer to reach a decision to purchase our solutions. This extended sales process, which often lasts between three and six months, requires the dedication of significant time and financial resources, with no certainty of success or recovery of our related


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expenses. It is not unusual for our current and potential customers to go through the entire sales process and not make any purchases.
 
Any real or perceived internal or external electronic security breaches in connection with the use of our asset protection solutions could harm our reputation, inhibit market acceptance of our solutions and cause us to lose customers.
 
We and our customers use our asset protection solutions to compile and analyze sensitive or confidential customer-related information. In addition, some of our asset protection solutions allow us to remotely control equipment at commercial, institutional and industrial locations. Our asset protection solutions rely on the secure electronic transmission of proprietary data over the Internet or other networks. Well-publicized compromises of Internet security could have the effect of substantially reducing confidence in the Internet as a medium of data transmission. The occurrence or perception of security breaches in connection with our asset protection solutions or our customers’ concerns about Internet security or the security of our solutions, whether warranted or not, would likely harm our reputation or business, inhibit market acceptance of our asset protection solutions and cause us to lose customers, any of which would harm our financial condition and results of operations.
 
We may come into contact with sensitive consumer information or data when we perform installation, maintenance or testing functions for our customers. Even the perception that we have improperly handled sensitive, confidential information would have a negative effect on our business. If, in handling this information, we fail to comply with privacy or security laws, we could incur civil liability to government agencies, customers and individuals whose privacy is compromised. In addition, third parties may attempt to breach our security or inappropriately harm our asset protection solutions through computer viruses, electronic break-ins and other disruptions. If a breach is successful, confidential information may be improperly obtained, for which we may be subject to lawsuits and other liabilities.
 
Our international operations are subject to risks relating to non-U.S. operations.
 
In fiscal 2009, 2008 and 2007, we generated approximately 22%, 22% and 25% respectively, of our revenues outside the United States and we expect to increase our international presence over time. Our primary operations outside the United States are in Europe, Asia, Canada and South America. There are numerous risks inherent in doing business in international markets, including:
 
•  fluctuations in interest rates and currency exchange rates, including the relatively weak position of the U.S. dollar;
 
•  varying regional and geopolitical business conditions and demands;
 
•  compliance with applicable foreign regulations and licensing requirements, and U.S. regulation with respect to our business in other countries;
 
•  the cost and uncertainty of obtaining data and creating solutions that are relevant to particular geographic markets;
 
•  the need to provide sufficient levels of technical support in different locations;
 
•  the complexity of maintaining effective policies and procedures in locations around the world;


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•  the risks of divergent business expectations or difficulties in establishing joint ventures with foreign partners;
 
•  political instability and civil unrest;
 
•  restrictions or limitations on outsourcing contracts or services abroad;
 
•  restrictions or limitations on the repatriation of funds; and
 
•  potentially adverse tax consequences.
 
We are expanding our sales and marketing efforts in certain emerging markets, such as Brazil, Russia, India and China. Expanding our business into emerging markets may present additional risks beyond those associated with more developed international markets. For example, in China and Russia, we may encounter risks associated with the ongoing transition from state business ownership to privatization. In any emerging market, we may face the risks of working in cash-based economies, dealing with inconsistent government policies and encountering sudden currency revaluations.
 
We rely on certification of our NDT solutions by industry standards-setting bodies.
 
We currently have International Organization for Standardization (ISO) 9001-2000 certifications for each of Mistras Services, Physical Acoustics Corporation (PAC), Physical Acoustics Limited, and Envirocoustics S.A. and we have ISO 14001:2004 certification for Mistras Services and Physical Acoustics South America. Physical Acoustics South America also has a OHSAS 18001 certification. In addition, we currently have Nadcap (formerly National Aerospace and Defense Contractors Accreditation Program) certification for four of our locations in Auburn, Massachusetts; Springfield, Massachusetts; Heath, Ohio; and Kent, Washington. We continually review our NDT solutions for compliance with the requirements of industry specification standards and the Nadcap special processes quality requirements. However, if we fail to maintain our ISO or Nadcap certifications, our business may be harmed because our customers generally require that we have ISO and Nadcap certification before they purchase our NDT solutions.
 
Risks related to our common stock and this offering
 
We expect our quarterly revenues and operating results to fluctuate. If we fail to meet the expectations of market analysts or investors, the market price of our common stock could decline substantially.
 
Our quarterly operating results have fluctuated in the past and are expected to do so in the future. Accordingly, we believe that period-to-period comparisons of our results of operations may be misleading. You should not rely upon the results of one quarter as an indication of future performance. Our revenues and operating results may fall below the expectations of securities analysts or investors in any future period. Our failure to meet these expectations would likely cause the market price of our common stock to decline, perhaps substantially.
 
Our quarterly revenues and operating results may vary depending on a number of factors, including:
 
•  revenue volume during the period;
 
•  demand for and acceptance of our asset protection solutions;


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•  delays in the implementation and delivery of our asset protection solutions, which may impact the timing of our recognition of revenues;
 
•  delays or reductions in spending for asset protection solutions by our customers and potential customers;
 
•  the long lead time associated with securing new customer contracts;
 
•  the termination of existing customer contracts;
 
•  development of new relationships and maintenance and enhancement of existing relationships with customers and strategic partners;
 
•  changes in pricing for asset protection solutions;
 
•  effects of recent acquisitions;
 
•  fluctuations in currency exchange rates;
 
•  changes in the price or availability of materials used in our services; and
 
•  increased expenditures for sales and marketing, software development and other corporate activities.
 
We currently have no plans to pay dividends on our common stock.
 
We have not declared or paid any cash dividends on our common stock to date, and we do not anticipate declaring or paying any dividends on our common stock in the foreseeable future. We currently intend to retain all available funds and any future earnings for use in the development, operation and growth of our business. In addition, our credit agreement prohibits us from paying dividends and future loan agreements may also prohibit the payment of dividends. Any future determination relating to our dividend policy will be at the discretion of our board of directors and will depend on our results of operations, financial condition, capital requirements, business opportunities, contractual restrictions and other factors deemed relevant. To the extent we do not pay dividends on our common stock, investors must look solely to stock appreciation for a return on their investment.
 
There is no existing market for our common stock, and a trading market that will provide you with adequate liquidity may not develop. The price of our common stock may fluctuate significantly, and you could lose all or part of your investment.
 
Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest will lead to the development of an active and liquid trading market in our common stock on the New York Stock Exchange or otherwise. If an active and liquid trading market does not develop, you may have difficulty selling any of our common stock.
 
The initial public offering price for the shares will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the common stock on the New York Stock Exchange after the offering. The market price of our common stock may decline below the initial public offering price. The market price of our


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common stock may also be influenced by many factors, some of which are beyond our control, including:
 
•  our quarterly or annual earnings or those of other companies in our industry;
 
•  announcements by us or our competitors of significant contracts or acquisitions;
 
•  changes in accounting standards, policies, guidance, interpretations or principles;
 
•  general economic and stock market conditions;
 
•  the failure of securities analysts to cover our common stock after this offering or changes in financial estimates by analysts;
 
•  future sales of our common stock; and
 
•  the other factors described in this Risk Factors section.
 
The stock markets have generally experienced extreme price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including those in our industry. These changes frequently appear to occur without regard to the operating performance of these companies. The price of our common stock could fluctuate for reasons that have little or nothing to do with our company, and these fluctuations could materially reduce our stock price.
 
In the past, some companies that have had volatile market prices for their securities have been subject to class action or derivative lawsuits. The filing of a lawsuit against us, regardless of the outcome, could have a material adverse effect on our business, financial condition and results of operations, as it could result in substantial legal costs and a diversion of our management’s attention and resources.
 
Shares eligible for future sale may cause the market price for our common stock to decline even if our business is doing well.
 
Future sales by us or by our existing stockholders of substantial amounts of our common stock in the public market, or the perception that these sales may occur, could cause the market price of our common stock to decline. This could also impair our ability to raise additional capital in the future through the sale of our equity securities. Under our second amended and restated certificate of incorporation that will be in effect upon the completion of this offering, we are authorized to issue up to 200,000,000 shares of common stock, of which 26,458,778 shares of common stock will be outstanding following this offering. Of these shares, the 8,700,000 shares of common stock sold in this offering (or 10,000,000 shares, if the underwriters exercise their option to purchase additional shares from the selling stockholders in full) will be freely transferable without restriction or further registration under the Securities Act of 1933, as amended (Securities Act), by persons other than “affiliates,” as that term is defined in Rule 144 under the Securities Act. Additional shares of common stock will become freely tradeable immediately upon the termination of the lock-up agreements described below. Certain of our stockholders will be able to cause us to register common stock that they own under the Securities Act pursuant to registration rights that are described in “Certain Relationships and Related Transactions—Registration Rights.” We also intend to register all shares of common stock that we may issue under our 2007 Stock Option Plan and 2009 Long-Term Incentive Plan.


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Our executive officers and directors and certain of our stockholders have entered into lock-up agreements described under the caption “Underwriting,” pursuant to which they have agreed, subject to certain exceptions and extensions, not to sell or transfer, directly or indirectly, any shares of our common stock for a period of 180 days from the date of this prospectus or to exercise registration rights during such period with respect to such shares. However, after the lock-up period expires, or if the lock-up restrictions are waived by the representatives, such persons will be able to sell their shares and exercise registration rights to cause them to be registered. We cannot predict the size of future issuances of our common stock or the effect, if any, that future sales and issuances of shares of our common stock, or the perception of such sales or issuances, would have on the market price of our common stock.
 
We have not determined any specific use for a significant portion of the proceeds from this offering and we may use the proceeds in ways with which you may not agree.
 
Our management will have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. We currently expect that we will use a portion of these net proceeds to repay all of our credit facility. After repayment we expect to have availability under our secured revolving credit facility for future borrowings that we also may use at our discretion. The net proceeds may be used for corporate purposes that may not improve our financial condition and results of operations or increase our stock price.
 
Purchasers of common stock will experience immediate and substantial dilution.
 
Based on the initial public offering price of $15.00 per share (the midpoint of the price range shown on the cover page of this prospectus), purchasers of our common stock in this offering will experience an immediate and substantial dilution in the net tangible book value per share of common stock of $12.00 per share from the offering price. Investors purchasing common stock in this offering will contribute approximately 50% of the total amount invested by stockholders since inception, but will only own approximately 33% of the shares of common stock outstanding. In addition, following this offering we will also have a significant number of outstanding warrants and options to purchase our common stock, with the options having exercise prices significantly below the initial public offering price of our common stock. You will incur further dilution if outstanding options or warrants to purchase common stock are exercised. In addition, our second amended and restated certificate of incorporation that will be in effect upon the completion of this offering allows us to issue significant numbers of additional shares, including shares that may be issued under our 2009 Long-Term Incentive Plan, which could result in further dilution to purchasers of our common stock in this offering.
 
Provisions of our charter, bylaws and of Delaware law, as well as some of our employment arrangements, could discourage, delay or prevent a change of control of our company, which may adversely affect the market price of our common stock.
 
Certain provisions of our second amended and restated certificate of incorporation and amended and restated bylaws that will be in effect upon the completion of this offering could discourage, delay or prevent a merger, acquisition, or other change of control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium


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for your shares. These provisions also could limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. Stockholders who wish to participate in these transactions may not have the opportunity to do so. Furthermore, these provisions could prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions:
 
•  allow the authorized number of directors to be changed only by resolution of our board of directors;
 
•  require that vacancies on the board of directors, including newly created directorships, be filled only by a majority vote of directors then in office;
 
•  authorize our board of directors to issue, without stockholder approval, preferred stock that, if issued, could operate as a “poison pill” to dilute the stock ownership of a potential hostile acquiror to prevent an acquisition that is not approved by our board of directors;
 
•  require that stockholder actions must be effected at a duly called stockholder meeting by prohibiting stockholder action by written consent;
 
•  prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a plurality of stock to elect some directors; and
 
•  establish advance notice requirements for stockholder nominations to our board of directors or for stockholder proposals that can be acted on at stockholder meetings and limit the right to call special meetings of stockholders to the Chairman of the Board, the Chief Executive Officer, the board of directors acting pursuant to a resolution adopted by a majority of directors or the Secretary upon the written request of stockholders entitled to cast not less than 35% of all the votes entitled to be cast at such meeting.
 
Some of our employment arrangements and stock option agreements provide for severance payments and accelerated vesting of benefits, including accelerated vesting of restricted stock and options, upon a change of control. This offering will not constitute a change of control under such agreements. These provisions may discourage or prevent a change of control.
 
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may, unless certain criteria are met, prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a prescribed period of time.
 
Being a public company will increase our administrative workload and expenses.
 
As a public company with common stock listed on the New York Stock Exchange, we will need to comply with new laws, regulations and requirements, including certain provisions of the Sarbanes-Oxley Act of 2002, related regulations of the Securities and Exchange Commission (SEC) and the requirements of the New York Stock Exchange, which we are not required to comply with as a private company. Complying with these statutes, regulations and requirements will occupy a significant amount of time of our board of directors and management. The hiring of additional personnel to handle these responsibilities will increase our operating costs. We expect we will need to:
 
•  institute a more comprehensive compliance function;


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•  design, establish, evaluate and maintain a system of internal control over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board;
 
•  prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws;
 
•  establish new internal policies, such as those relating to disclosure controls and procedures and insider trading;
 
•  involve and retain to a greater degree outside counsel and accountants in the above activities; and
 
•  establish and maintain an investor relations function, including the provision of certain information on our website.
 
In addition, we expect that being a public company subject to these rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and qualified members of our board of directors, particularly to serve on our audit and compensation committees.
 
Our internal controls over financial reporting do not currently meet the standards required by Section 404 of the Sarbanes-Oxley Act, and failure to achieve and maintain effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.
 
Our internal controls over financial reporting do not currently meet the standards required by Section 404 of the Sarbanes-Oxley Act, standards that we will be required to meet in the course of preparing our 2011 annual report on Form 10-K. We do not currently have comprehensive documentation of our internal controls, nor do we document or test our compliance with these controls on a periodic basis in accordance with Section 404 of the Sarbanes-Oxley Act. Furthermore, we have not tested our internal controls in accordance with Section 404 and, due to our lack of documentation, such a test would not be possible to perform at this time.
 
We are in the early stages of addressing our internal controls procedures to satisfy the requirements of Section 404, which requires an annual management assessment of the effectiveness of our internal controls over financial reporting. If, as a public company, we are not able to timely or adequately implement the requirements of Section 404, our independent registered public accounting firm may not be able to attest to the adequacy of our internal controls over financial reporting. If we are unable to maintain adequate internal controls over financial reporting, we may be unable to report our financial information in a timely and reliable manner, may suffer adverse regulatory consequences or violations of applicable stock exchange listing rules and may breach the covenants under our credit facilities. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements, which could significantly harm our business.
 
In addition, we expect to incur incremental costs in order to improve our internal controls over financial reporting and comply with Section 404, including increased audit and legal fees and costs associated with hiring additional accounting and administrative staff.


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Forward-looking statements
 
This prospectus contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to us. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary” (including specifically the statements included under “Recent Developments”), “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” When used in this prospectus, the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “would,” and similar expressions identify forward-looking statements. Although we believe that our plans, intentions and expectations reflected in any forward-looking statements are reasonable, these plans, intentions or expectations are based on assumptions, are subject to risks and uncertainties and may not be achieved. Our actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained in this prospectus. Important factors that could cause actual results to differ materially from our forward-looking statements are set forth in this prospectus, including under the heading “Risk Factors.” Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this prospectus. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this prospectus. These statements include, among other things, statements relating to:
 
•  our expected total revenues and income from operations for the first quarter of fiscal 2010, as set forth in “Prospectus Summary—Recent Developments;”
 
•  our evaluation of the history and the dynamics supporting the demand and growth in the asset protection solutions market;
 
•  estimates of market sizes and anticipated uses of our asset protection solutions;
 
•  our business strategy and our underlying assumptions about data and trends in the markets for asset protection solutions;
 
•  our ability to market, commercialize and achieve market acceptance for our asset protection solutions;
 
•  our estimates regarding future revenues, expenses, capital requirements, liquidity, the sufficiency of our cash resources and our needs for additional financing;
 
•  our anticipated use of the proceeds of this offering;
 
•  our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; and
 
•  management’s goals, expectations and objectives and other similar expressions concerning matters that are not historical facts.
 
Actual events, results and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to identify all of these factors, they include, among others, the following:
 
•  loss of or reduction in business with a significant customer;


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•  an accident or incident involving our asset protection solutions;
 
•  our ability to attract and retain trained engineers, scientists and other highly skilled workers as well as members of senior management;
 
•  strengths and actions of our competitors;
 
•  our current dependence on customers in the oil and gas industry;
 
•  the timing, size and integration success of potential future acquisitions;
 
•  catastrophic events that cause disruptions to our business or the business of our customers; and
 
•  the current economic downturn.
 
Potential investors are urged to carefully consider these factors and the other factors described under “Risk Factors” in evaluating any forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. Except as required by applicable law, we undertake no obligation to publicly update any forward-looking statements or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.


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Use of proceeds
 
We estimate that our net proceeds from the sale of our common stock in this offering, based on the initial public offering price of $15.00 per share (the midpoint of the price range shown on the cover page of this prospectus), will be approximately $89.8 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
 
We plan to use these net proceeds for general corporate purposes, including working capital and possible acquisitions, although we have no present understandings, commitments or agreements to acquire any businesses or technologies. In addition, we currently expect that we will use a portion of these net proceeds to repay all of the indebtedness outstanding under our credit agreement with Bank of America, N.A., JPMorgan Chase Bank, N.A., TD Bank, N.A. and Capital One, N.A. Borrowings under this agreement currently bear interest at the LIBOR or base rate, at our option, plus an applicable margin ranging from 0% to 3.25% and a market disruption increase of between 0.0% and 1.0%, if the lenders determine it applicable. The applicable rate was approximately 3.00% as of August 31, 2009. Borrowings under this agreement mature on July 21, 2012. We used the proceeds from indebtedness incurred during the past year to repay the outstanding indebtedness of our prior credit agreement, to fund two acquisitions that closed after the end of fiscal 2009 and for other general working capital purposes. As of August 31, 2009, we had $65.8 million of total indebtedness outstanding under this agreement, and had $14.2 million of availability under the $55.0 million revolving credit facility portion of this agreement.
 
We will not receive any proceeds from the sale of shares by the selling stockholders.
 
We have not yet determined the amount of our remaining net proceeds to be used specifically for any of the foregoing purposes. Accordingly, management will have flexibility in applying our remaining net proceeds of this offering. Pending their use, we intend to invest our net proceeds from this offering in short-term, investment grade, interest-bearing instruments.
 
Dividend policy
 
We have never paid or declared any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings to fund the development and expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors deems relevant. The terms of our current credit agreement with Bank of America, N.A., JPMorgan Chase Bank, N.A., TD Bank, N.A. and Capital One, N.A, preclude us, and the terms of any future debt or credit facility may also preclude us, from paying cash dividends.


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Capitalization
 
The following table sets forth (1) our cash and cash equivalents and (2) our capitalization as of May 31, 2009:
 
•  on an actual basis;
 
•  on a pro forma basis to reflect the filing of a certificate of amendment to our amended and restated certificate of incorporation on September 22, 2009 to increase our authorized common stock from 2,000,000 to 35,000,000, a 13 -for- 1 stock split of our common stock and the conversion of all of our outstanding preferred stock into 6,758,778 shares of our common stock upon the completion of this offering, as if such transactions occurred on May 31, 2009; and
 
•  on a pro forma as adjusted basis to further reflect the sale of shares of common stock by us in this offering at the initial public offering price of $15.00 per share (the midpoint of the price range shown on the cover page of this prospectus) and the effectiveness of our second amended and restated certificate of incorporation that will be effective upon completion of this offering.
 
For purposes of the pro forma as adjusted column of the capitalization table below, we have assumed the net proceeds from this offering will be $89.8 million after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
 
In addition, the table excludes the following:
 
•  939,900 shares of common stock issuable upon the exercise of stock options outstanding as of May 31, 2009 at a weighted average exercise price of $6.81 per share; and
 
•  2,286,318 shares of common stock reserved for future awards under the 2009 Long-Term Incentive Plan.
 
This table should be read in conjunction with our audited consolidated financial statements, including the notes thereto, “Use of Proceeds,” “Selected Historical Consolidated Financial


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Information,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” all included elsewhere in this prospectus.
 
                         
 
    As of May 31, 2009  
                Pro forma
 
(dollars in thousands)   Actual     Pro forma     as adjusted  
 
 
Cash and cash equivalents
  $ 5,668       5,668       43,606  
     
     
Total long-term debt, including current portion(1)
  $ 66,251       66,251       14,427  
Obligations under capital leases, including current portion
    14,525       14,525       14,525  
     
     
Total debt
    80,776       80,776       28,952  
     
     
Convertible redeemable preferred stock
    90,983              
     
     
Stockholders’ (deficit) equity:
                       
Common stock; $0.01 par value per share (actual:
                       
2,000,000 shares authorized and 1,000,000 shares issued and outstanding; pro forma: 35,000,000 shares authorized and 19,758,778 shares issued and outstanding; pro forma as adjusted: 200,000,000 shares authorized and 26,458,778 shares issued and outstanding)
    10       15       82  
Additional paid-in capital
    1,037       92,015       178,875  
Accumulated deficit
    (47,376 )     (47,376 )     (47,376 )
Accumulated other comprehensive income
    (1,583 )     (1,583 )     (1,583 )
     
     
Total stockholders’ (deficit) equity
    (47,912 )     43,071       129,998  
     
     
Total capitalization
  $ 123,847       123,847       144,523  
 
 
 
(1) As of August 31, 2009, we had $65.8 million of total indebtedness outstanding under our current credit agreement, and had $14.2 million of availability under the $55.0 million revolving credit facility portion of this agreement.


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Dilution
 
If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock immediately after the completion of this offering. Dilution results from the fact that the per share offering price of the common stock is substantially in excess of the book value per share attributable to the existing stockholders for the presently outstanding stock.
 
As of May 31, 2009, our net tangible book deficit was approximately $98.5 million, or approximately $4.99 per share. Net tangible book deficit per share represents the amount of total tangible assets less our total liabilities, including our preferred stock, divided by the number of shares outstanding. On a pro forma basis, after giving effect to the conversion of 519,906 shares of our preferred stock into 6,758,778 shares of our common stock and a 13-for-1 stock split of our common stock, and excluding proceeds from this offering, our pro forma net tangible book deficit as of May 31, 2009 would have been approximately $7.5 million, or $(0.38) per share.
 
On a pro forma as adjusted basis, after giving further effect to the sale of 6,700,000 shares of common stock in this offering at the initial public offering price of $15.00 per share (the midpoint of the price range shown on the cover page of this prospectus) and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of May 31, 2009 would have been approximately $79.4 million, or $3.00 per share. This represents an immediate increase in pro forma net tangible book value from this offering of $3.38 per share to our existing stockholders and an immediate dilution of $12.00 per share to new investors purchasing common stock in this offering.
 
The following table illustrates this dilution to new investors on a per share basis:
 
                 
Assumed initial public offering price
              $ 15.00  
Pro forma net tangible book value per share as of May 31, 2009
  $ (0.38 )        
Increase in pro forma net tangible book value per share attributable to investors purchasing shares in this offering
    3.38          
     
     
Pro forma net tangible book value per share after this offering
    3.00          
     
     
Dilution in pro forma net tangible book value per share to investors in this offering
          $ 12.00  
 
 
 
The following table summarizes, as of May 31, 2009, the differences between the number of shares of common stock owned by existing stockholders and the number to be owned by new public investors, the aggregate cash consideration paid to us after deducting underwriting discounts and estimated offering expenses payable by us and the average price per share paid by our existing stockholders and to be paid by new public investors purchasing shares of


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common stock in this offering at the initial public offering price of $15.00 per share (the midpoint of the price range shown on the cover page of this prospectus).
 
                                         
 
    Shares
                   
    purchased(1)     Total consideration     Average price
 
    Number     Percent     Amount     Percent     per share  
 
 
Existing stockholders(1)
    19,758,778       75%     $ 92,030,000       50.6%     $ 4.66  
New public investors
    6,700,000       25%       89,762,074       49.4%       13.40  
     
     
Total
    26,458,778       100%     $ 181,792,074       100.0%          
 
 
 
(1) The number of shares disclosed for the existing stockholders includes shares being sold by the selling stockholders in this offering and includes the preferred shares converted to common stock at the time of the offering. The number of shares disclosed for the new investors does not include the shares being purchased by the new investors from the selling stockholders in this offering.
 
The discussion and tables above assume no exercise of the underwriters’ over-allotment option. If the underwriters exercise their over-allotment option in full, the number of shares of common stock held by new investors will increase to approximately 10,000,000 shares, or approximately 37.8% of the total number of shares of our common stock to be outstanding after this offering, our existing stockholders would own approximately 62.2% of the total number of shares of our common stock to be outstanding after this offering, the pro forma as adjusted net tangible book value per share of common stock would be approximately $97.5 million and the dilution in pro forma as adjusted net tangible book value per share of common stock to new investors would be $11.31.
 
In addition, the above discussion and tables assume no exercise of stock options.
 
As of May 31, 2009, we had outstanding options to purchase a total of 939,900 shares of common stock at a weighted average exercise price of $6.81 per share. If all of these outstanding options had been exercised as of May 31, 2009, our pro forma net tangible book value would have been $0.06 per share of common stock, pro forma as adjusted net tangible book value after this offering would be $3.24 per share of common stock and dilution in pro forma as adjusted net tangible book value to investors in this offering would be $11.76 per share of common stock.
 
In addition, if all of these outstanding options as of May 31, 2009 were exercised, on an as adjusted basis after deducting underwriting discounts and estimated offering expenses payable by us, (i) existing stockholders would have purchased 939,900 shares representing 3.5% of the total shares for approximately 6.4 million or approximately 4.9% of the total consideration paid, with an average price per share of $6.81 and (ii) 6,273,285 shares purchased by new stockholders in this offering would represent approximately 23.3% of total shares for approximately $94.1 million, or approximately 72% of the total consideration paid.


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Selected historical consolidated financial information
 
The following tables set forth our selected historical consolidated financial data for the periods indicated. The selected statement of operations and cash flow data for fiscal 2009, 2008 and 2007 and the selected balance sheet data as of May 31, 2009 and 2008 have been derived from our audited financial statements and related notes thereto included elsewhere in this prospectus. The statement of operations and cash flow data for fiscal 2006 and fiscal 2005 and the selected balance sheet data as of May 31, 2007, 2006 and 2005 have been derived from our audited financial statements not included in this prospectus. The information presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited and unaudited financial statements and the notes thereto included elsewhere in this prospectus.
 
                                         
 
    Fiscal  
(dollars in thousands, except per share data)   2009     2008     2007     2006     2005  
 
 
Statement of Operations Data:
                                       
Revenues
  $ 209,133     $ 152,268     $ 122,241     $ 93,741     $ 80,813  
Cost of revenues
    131,167       90,590       75,702       55,908       51,426  
Depreciation
    8,700       6,847       4,666       3,013       2,947  
     
     
Gross profit
    69,266       54,831       41,873       34,820       26,440  
Selling, general and administrative expenses
    47,150       32,943       26,408       24,748       20,994  
Research and engineering expenses
    1,255       954       703       660       1,029  
Depreciation and amortization
    3,936       4,576       4,025       4,165       3,988  
Legal settlement
    2,100                          
     
     
Income from operations
    14,825       16,358       10,737       5,247       429  
Interest expense
    4,614       3,531       4,482       4,225       4,589  
Loss on extinguishment of long-term debt
                460              
     
     
Income (loss) before provision for (benefit from) income taxes and minority interest
    10,211       12,827       5,795       1,022       (4,160 )
Provision for (benefits from) income taxes
    4,558       5,380       208       503       (71 )
     
     
Income (loss) before minority interest
    5,653       7,447       5,587       519       (4,089 )
Minority interest, net of taxes
    (187 )     (8 )     (199 )     (17 )     16  
     
     
Net income (loss)
    5,466       7,439       5,388       502       (4,073 )
Accretion of preferred stock
    (27,114 )     (32,872 )     (3,520 )     (2,922 )     (2,062 )
     
     
Net (loss) income available to common stockholders
  $ (21,648 )   $ (25,433 )   $ 1,868     $ (2,420 )   $ (6,135 )
     
     
Weighted average number of common shares outstanding
                                       
Basic
    13,000,000       13,000,000       12,887,524       12,702,495       12,552,501  
Diluted
    13,000,000       13,000,000       13,101,439       12,702,495       12,552,501  
(Loss) earnings per common share:
                                       
Basic
  $ (1.67 )   $ (1.96 )   $ 0.14     $ (0.19 )   $ (0.49 )
Diluted
    (1.67 )     (1.96 )     0.14       (0.19 )     (0.49 )
Pro forma diluted earnings (loss) per common share(1)
    0.27       0.37       0.27       0.03       (0.25 )
Other Financial Data:
                                       
Net cash provided by operating activities
  $ 12,661     $ 12,851     $ 14,006     $ 6,208     $ 3,024  
Net cash used in investing activities
    (15,888 )     (19,446 )     (4,259 )     (2,387 )     (3,193 )
Net cash provided by (used in) financing activities
    4,912       6,320       (8,122 )     (2,654 )     (183 )
EBITDA(2)
    27,274       27,773       18,769       12,408       7,380  
Adjusted EBITDA(2)
    31,122       28,091       19,229       12,408       7,380  
 
 
 


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    As of the end of fiscal  
(dollars in thousands)   2009     2008     2007     2006     2005  
 
 
Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 5,668     $ 3,555     $ 3,767     $ 1,976     $ 700  
Total assets
    151,274       119,822       79,885       74,425       71,149  
Total long-term debt, including current portion
    66,251       48,270       25,403       29,668       38,622  
Obligations under capital leases, including current portion
    14,525       11,842       9,970       8,275       7,283  
Convertible redeemable preferred stock
    90,983       63,869       30,995       26,575       15,623  
Total stockholders’ (deficit) equity
    (47,912 )     (24,475 )     903       (1,326 )     1,113  
 
 
 
(1) Pro forma diluted (loss) earnings per common share gives effect to the assumed conversion of our preferred stock for all periods presented. It is computed by dividing net income by the pro forma number of weighted average shares outstanding used in the calculation of diluted earnings (loss) per share, but after assuming conversion of our preferred stock and exercise of any diluted stock options. The calculation for this, as well as our basic and diluted (loss) earnings per common share, follows.
 
                                         
 
    Fiscal  
(in thousands, except share and per share data)   2009     2008     2007     2006     2005  
 
 
Basic (loss) earnings per
common share:
                                       
Numerator:
                                       
Net (loss) income available to common stockholders
  $ (21,648 )   $ (25,433 )   $ 1,868     $ (2,420 )   $ (6,135 )
     
     
Denominator:
                                       
Weighted average number of common shares outstanding
    13,000,000       13,000,000       12,887,524       12,702,495       12,552,501  
     
     
Basic (loss) earnings per common share
  $ (1.67 )   $ (1.96 )   $ 0.14     $ (0.19 )   $ (0.49 )
     
     
Diluted (loss) earning per
common share:*
                                       
Numerator
                                       
Net (loss) income available to common stockholders
  $ (21,648 )   $ (25,433 )   $ 1,868     $ (2,420 )   $ (6,135 )
     
     
Denominator:
                                       
Weighted average number of common shares outstanding
    13,000,000       13,000,000       12,887,524       12,702,495       12,552,501  
Common stock equivalents of outstanding stock options
                213,915              
     
     
Total shares
    13,000,000       13,000,000       13,101,439       12,702,495       12,552,501  
     
     
Diluted (loss) earnings per common share
  $ (1.67 )   $ (1.96 )   $ 0.14     $ (0.19 )   $ (0.49 )
 
 
*Inclusion of certain stock options and conversion of preferred shares would be anti-dilutive.
 
 

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    Fiscal  
(in thousands, except share and per share data)   2009     2008     2007     2006     2005  
 
 
Pro forma diluted earnings (loss) per common share:
                                       
Numerator:
                                       
Net income (loss)
  $ 5,466     $ 7,439     $ 5,388     $ 502     $ (4,073 )
     
     
Denominator:
                                       
Weighted average number of common shares outstanding
    13,000,000       13,000,000       12,887,524       12,702,495       12,552,501  
Common stock equivalents of outstanding stock options
    555,815       344,760       213,915       282,373        
Common stock equivalents of conversion of preferred shares
    6,758,778       6,758,778       6,549,777       5,460,871       3,883,113  
     
     
Total shares
    20,314,593       20,103,538       19,651,216       18,445,739       16,435,614  
     
     
Pro forma diluted earnings (loss) per common share
  $ 0.27     $ 0.37     $ 0.27     $ 0.03     $ (0.25 )
 
 
 
(2) EBITDA and adjusted EBITDA are performance measures used by management that are not calculated in accordance with U.S. generally accepted accounting principles (GAAP). EBITDA is defined in this prospectus as net income plus: interest expense, provision for income taxes and depreciation and amortization. Adjusted EBITDA is defined in this prospectus as net income plus: interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense and certain one-time and generally non-recurring items (which items are described in the next paragraph and the reconciliation table below).
 
Our management uses EBITDA and adjusted EBITDA as measures of operating performance to assist in comparing performance from period to period on a consistent basis, as measures for planning and forecasting overall expectations and for evaluating actual results against such expectations and as performance evaluation metrics off which to base executive and employee incentive compensation programs.
 
We believe investors and other external users of our financial statements benefit from the presentation of EBITDA and adjusted EBITDA in evaluating our operating performance because they provide an additional tool to compare our operating performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our core operations. For instance, EBITDA and adjusted EBITDA generally exclude interest expense, taxes and depreciation, amortization and non-cash stock compensation, each of which can vary substantially from company to company depending upon accounting methods and the book value and age of assets, capital structure, capital investment cycles and the method by which assets were acquired. Similarly, our adjusted EBITDA (and not our EBITDA) for fiscal 2009 excludes the impact of a one-time payment we made to settle a lawsuit and the writeoff of $1.6 million in accounts receivable we expected to collect from a customer that declared bankruptcy in fiscal 2009. These items were excluded because management believes these events were highly unique to us in fiscal 2009. Our adjusted EBITDA for fiscal 2009 and 2008 also excludes the impact of stock compensation expenses, because these expenses actually did not involve us paying or agreeing to pay any cash.
 
Although EBITDA and adjusted EBITDA are widely used by investors and securities analysts in their evaluations of companies, you should not consider them either in isolation or as a substitute for analyzing our results as reported under U.S. generally accepted accounting principles (GAAP). EBITDA and adjusted EBITDA are generally limited as analytical tools because they exclude, among other things, the statement of operations impact of depreciation and amortization, interest expense and the provision for income taxes and therefore do not necessarily represent an accurate measure of profitability, particularly in situations where a company is highly leveraged or has a disadvantageous tax structure. As a result, EBITDA and adjusted EBITDA are of limited value in evaluating our operating performance because (i) we use a significant amount of capital assets and depreciation and amortization expense is a necessary element of our costs and ability to generate revenues; (ii) we have a significant amount of debt and interest expense is a necessary element of our costs and ability to generate revenues; and (iii) we generally incur significant U.S. federal, state and foreign income taxes each year and the provision for income taxes is a necessary element of our costs. EBITDA and adjusted EBITDA also do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments, changes in, or cash requirements for, our working capital needs and all non-cash income or expense items that are reflected in our statements of cash flows. Our adjusted EBITDA for fiscal 2009 excludes the impact of an actual cash expenditure for the settlement of a lawsuit and an amount we were unable to collect in fiscal 2009 due to the bankruptcy of a customer, and our adjusted EBITDA for fiscal 2009 and 2008 excludes the impact of stock compensation expenses that reduced our net income under GAAP. Furthermore, because EBITDA and adjusted EBITDA are not defined under GAAP, our definitions of EBITDA and adjusted EBITDA may differ from, and therefore may not be comparable to, similarly titled measures used by other companies, thereby limiting their usefulness as comparative measures. Because of these limitations, neither EBITDA nor adjusted EBITDA should be considered as the primary measure of our operating performance or as a measure of discretionary cash available to us to invest in the growth of our business. We strongly urge you to review the GAAP financial measures included in this prospectus, our consolidated financial statements, including the notes thereto, and the other financial information contained in this prospectus, and not to rely on any single financial measure to evaluate our business.

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The following table provides a reconciliation of net income to EBITDA and adjusted EBITDA:
 
                                         
 
    Fiscal  
(in thousands)   2009     2008     2007     2006     2005  
 
 
Net income (loss)
  $ 5,466     $ 7,439     $ 5,388     $ 502     $ (4,073 )
Interest expense
    4,614       3,531       4,482       4,225       4,589  
Provision for income taxes
    4,558       5,380       208       503       (71 )
Depreciation and amortization
    12,636       11,423       8,691       7,178       6,935  
     
     
EBITDA
  $ 27,274     $ 27,773     $ 18,769     $ 12,408     $ 7,380  
Legal settlement
    2,100                          
Large customer bankruptcy
    1,556                          
Stock compensation expense
    192       318                    
Loss on extinguishment of debt
                460              
     
     
Adjusted EBITDA
  $ 31,122     $ 28,091     $ 19,229     $ 12,408     $ 7,380  
 
 


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Management’s discussion and analysis of financial
condition and results of operations
 
You should read the following discussion together with the financial statements and the notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. The cautionary statements made in this prospectus should be read as applying to all related forward-looking statements wherever they appear in this prospectus. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including but not limited to those we discuss under “Risk Factors” and “Forward-Looking Statements.”
 
Overview
 
We are a leading global provider of technology-enabled asset protection solutions used to evaluate the structural integrity of critical energy, industrial and public infrastructure. We combine industry-leading products and technologies, expertise in mechanical integrity (MI) and non-destructive testing (NDT) services and proprietary data analysis software to deliver a comprehensive portfolio of customized solutions, ranging from routine inspections to complex, plant-wide asset integrity assessments and management. These mission critical solutions enhance our customers’ ability to extend the useful life of their assets, increase productivity, minimize repair costs, comply with governmental safety and environmental regulations, manage risk and avoid catastrophic disasters. Given the role our services play in ensuring the safe and efficient operation of infrastructure, we have historically provided a majority of our services to our customers on a regular, recurring basis. We serve a global customer base of companies with asset-intensive infrastructure, including companies in the oil and gas, fossil and nuclear power, public infrastructure, chemicals, aerospace and defense, transportation, primary metals and metalworking, pharmaceuticals and food processing industries. During fiscal 2009, we provided our asset protection solutions to approximately 4,500 customers. As of August 1, 2009, we had approximately 2,000 employees, including 29 Ph.D.’s and more than 100 other degreed engineers and highly-skilled, certified technicians, in 68 offices across 15 countries. We have established long-term relationships as a critical solutions provider to many leading companies in our target markets. Our current principal market is the oil and gas industry, which accounted for approximately 58%, 50% and 52% of our revenues for fiscal 2009, 2008 and 2007, respectively.
 
During the last three fiscal years, we have focused on introducing our advanced asset protection solutions to our customers using proprietary, technology-enabled software and testing instruments, including those developed by our Products and Systems segment. During this period, the demand for outsourced asset protection solutions has, in general, increased, creating demand from which our entire industry has benefited. We have experienced compounded annual revenue growth (CAGR) of 30.7% over the last three fiscal years, including the impact of acquisitions and currency fluctuations. During the same period, revenues from our customers in the oil and gas market, historically our largest target market, had a CAGR of 39.0%. All of our other target markets, collectively, had a CAGR of 22.0%. We believe further growth can be realized in all of our target markets. Concurrent with this growth, we have worked to build our infrastructure to profitably absorb additional growth and have made a number of small acquisitions in an effort to leverage our fixed costs, grow our base of experienced personnel, expand our technical capabilities and increase our geographical reach.


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Since inception, we have increased our capabilities and the size of our customer base through the development of applied technologies and managed support services, organic growth and the successful and seamless integration of acquired companies. These acquisitions have provided us with additional products, technologies, resources and customers that have enhanced our sustainable competitive advantages over our competition.
 
The global economy is currently in a pronounced economic downturn. Global financial markets are continuing to experience disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, volatility in interest and currency exchange rates and overall uncertainty about economic stability. There may be further deterioration and volatility in the global economy and the global financial markets. Although this economic downturn has negatively impacted our revenues and profitability in fiscal 2009, and may negatively impact our future results if it continues, we believe it also has allowed us to selectively hire new talented individuals that otherwise might not have been available to us, to acquire and develop new technology in order to aggressively expand our proprietary portfolio of customized solutions, and to make acquisitions of complementary businesses at reasonable valuations. We believe we will be able to derive additional revenues from these strategic investments with favorable gross margins in future periods, which we believe would at least in part offset any further negative revenue impact we incur from the economic downturn during those periods. Also, although some of our customers have delayed turnaround projects and other large-scale inspection projects, they have historically seldom postponed such projects indefinitely, so we expect increased revenues if and when our customers request we complete these projects. However, due to the severity of the economic downturn, these projects instead may continue to be delayed.
 
Basis of presentation
 
Consolidated results of operations
 
Our three segments are:
 
•  Services. This segment provides asset protection solutions in North and Central America with the largest concentration in the United States.
 
•  Products and Systems. This segment designs, manufactures, sells, installs and services our asset protection products and systems, including equipment and instrumentation, predominantly in the United States.
 
•  International. This segment offers services, products and systems similar to those of our other segments to global markets, principally in Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by our Products and Systems segment.
 
General corporate services, including accounting, audit and contract management, are provided to the segments and are reported as intersegment transactions within corporate and eliminations. Sales to the International segment from the Products and Systems segment and subsequent sales by the International segment of the same items are recorded and reflected in the operating performance of both segments. Additionally, engineering charges and royalty fees charged to the Services and International segments by the Products and Systems segment are reflected in the operating performance of each segment. All such intersegment transactions are eliminated in corporate and eliminations.


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The accounting policies of the reportable segments are the same as those described in the summary of our significant accounting policies in Note 2 to our audited consolidated financial statements included elsewhere in this prospectus. Segment income from operations is determined based on internal performance measures used by the Chief Executive Officer, the chief operating decision maker, to assess the performance of each business in a given period and to make decisions as to resource allocations. In connection with that assessment, the Chief Executive Officer may exclude items such as charges for stock-based compensation and certain other acquisition-related charges and balances, technology and product development costs, certain gains and losses from dispositions, and litigation settlements or other charges. Certain general and administrative costs such as human resources, information technology and training are allocated to the segments. Segment income from operations also excludes interest and other financial charges and income taxes. Corporate and other assets are comprised principally of cash, deposits, property, plant and equipment, domestic deferred taxes, deferred charges and other assets. Corporate loss from operations consists of depreciation on the corporate office facilities and equipment, administrative charges related to corporate personnel and other charges that cannot be readily identified for allocation to a particular segment.
 
Statement of operations overview
 
The following describes certain line items in our statement of operations and some of the factors that affect our operating results.
 
Revenues
 
Our revenues are generated by sales of our services, products and systems. The majority of our revenues are derived under time-and-materials contracts for specified asset protection services on a project-by-project basis. The duration of our projects vary depending on their scope. Some of our projects last from a few weeks to a few months, but the more significant projects can last for more than a year and can require long-term deployment of substantial personnel, equipment and resources. The start date of our projects can be postponed or delayed and the duration of our projects can be shortened or increased due to a variety of factors beyond our control. In addition to the timing of these projects and the seasonality of our business, the amount and origination of our revenues often vary from period to period. A percentage of our revenues are usually attributable to recurring work from our existing customers. Although our top ten customers are responsible for a large percentage of our revenues, we generate our revenues from most of these customers by providing asset protection solutions to a number of their business locations. Decisions regarding the purchase of our solutions by these customers are made either on a corporate basis or on a location-by-location basis. Also included in our revenues are software license fees and product sales, as well as an estimate for any sales returns and customer allowances. Revenues under our time-and-materials services contracts are based on the hours of service we provide our customers at negotiated rates, plus any actual costs of materials and other direct expenses that we incur on the project, with little or no mark-up. Because these expenses, such as travel and lodging or subcontracted services, can change significantly from project to project, changes in our revenues may not be indicative of business trends.


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Cost of revenues
 
Our cost of revenues includes our direct compensation and related benefits to support our sales, together with reimbursable costs, materials consumed or used in manufacturing our products and certain overhead costs, such as non-billable time, equipment rentals, fringe benefits and repair and maintenance.
 
Depreciation included in gross profit
 
Our depreciation represents the expense charge for our capitalized assets. Depending on the nature of the original item capitalized, these depreciation expenses are reported in one of two places in our statement of operations. Depreciation used in determining gross profit is directly related to our revenues and primarily relates to depreciation of equipment used for the delivery of our asset protection solutions and to a lesser extent depreciation of manufacturing equipment. We also have other depreciation primarily related to our corporate headquarters which is included in deriving our income from operations as discussed below.
 
Gross profit
 
Our gross profit equals our revenues less our cost of revenues and attributed depreciation. Our gross profit, both in absolute dollars and as a percentage of revenues, can vary based on our volume, sales mix, actual manufacturing costs and our utilization of labor. As a result, gross profit may vary from quarter to quarter. For instance, our gross profit can decline during holiday periods when we incur labor costs without any corresponding revenues. Under our time-and-materials contracts, we negotiate hourly billing rates and charge our clients based on the actual time that we expend on a project. Our profit margins on time-and-materials contracts fluctuate based on actual labor and overhead costs that we directly charge or allocate to contracts compared to negotiated billing rates.
 
In recent years, there has been an increasing demand for asset protection solutions and, until recently, a limited supply of certified technicians. Accordingly, we have experienced increases in our cost of labor in our Services segment. The customers of our Services segment are aware of these supply constraints and generally have, to some extent, accepted corresponding price increases for our services. In the current economic environment, we are uncertain whether our ability to increase prices for our services will continue. In our Products and Systems segment, our ability to increase prices for any product or system to offset associated cost increases is based principally on the extent to which its incorporates our proprietary technology. We believe our efforts to develop and offer our customers value-added proprietary solutions instead of commodity-type products help us, in part, to resist margin erosion. Our International segment offers services, products and systems similar to those of our other segments, so our ability to increase prices in this segment as costs increase is determined by the same factors affecting the pricing of our other segments, and the relative mix of services, products and systems it provides in the applicable period.
 
Selling, general and administrative expenses
 
Our selling, general and administrative expenses are comprised primarily of expenses of our sales and marketing operations, field location administrative costs and our corporate headquarters related to our executive, general management, finance, accounting and administrative functions and legal fees and expenses. These costs can vary based on our volume of business or


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as expenses are incurred to support corporate activities and initiatives such as training. The largest single category is salaries and related costs. In the near term, we expect these expenses to increase as we support the growth of our business and expand our sales and marketing efforts, improve our information processes and systems and implement the financial reporting, compliance and other infrastructure required for a public company. We also expect that our selling, general and administrative expenses will decline as a percentage of our revenues, particularly over the long term.
 
Research and engineering
 
Research and engineering expense consists primarily of engineering salaries and personnel-related costs and the cost of products, materials and outside services used in our process and product development activities primarily in our Products and Systems segment. Other research and development is conducted in our Services segment by various billable personnel and our management on a collaborative basis. These costs are not separated and are included in cost of revenues. Specific development costs on software are capitalized and amortized in our depreciation and amortization included in our income from operations. From time-to-time, we receive minor grants or contracts for paid research which are recorded in our revenues with the related costs included in cost of revenues. We expect to continue our investment in research and engineering activities and anticipate that our associated expense will increase in absolute terms in the future as we hire additional personnel and increase research and engineering activity. However, as a percentage of revenues, we expect research and engineering expense to decline over time.
 
Depreciation and amortization included in income from operations
 
Our depreciation and amortization used in deriving our income from operations represents the expense charge for our capitalized assets, and primarily relates to buildings and improvements, including our corporate headquarters, office furniture, equipment, and intangibles acquired as part of our acquisitions of other businesses. These intangible assets include, but are not limited to, non-competition agreements, customer lists and trade names. To the extent we ascribe value to identifiable intangible assets that have finite lives, we amortize those values over the estimated useful lives of those assets. Such amortization expense, although non-cash in the period expensed, directly impacts our results of operations. It is difficult to predict with any precision the amount of expense we may record relating to acquired intangible assets. Because many of the intangible assets we acquire are short-lived intangible assets, we would expect to see higher amortization expense in the first 12 to 18 months after an acquisition has been consummated.
 
Income from operations
 
Our income from operations is our gross profit less our selling, general and administrative expenses, research and engineering and depreciation and amortization included in income from operations. We refer to our income from operations as a percentage of our revenues as our operating margin.


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Interest expense
 
Our interest expense consists primarily of interest paid to our lenders under our credit agreement. Also included is the interest incurred on our capital leases and on subordinated notes issued as part of our acquisitions. We adjust the interest differential on our interest rate swap quarterly to reflect the difference from our current borrowing rate to the notional amount of our interest rate swap contracts.
 
Income taxes
 
Income tax expense varies as a function of income before income tax expense and permanent non-tax deductible expenses, such as certain amounts of meals and entertainment expense, valuation allowance requirements and other permanent differences. Prior to fiscal 2007, we had net operating loss carryforwards (NOLs) for federal and state purposes, but as a result of our pre-tax income in fiscal 2007, we used a majority of these NOLs. As of May 31, 2009 we had $2.6 million of NOLs available to offset state taxable income in future years. These state NOLs will expire, if not utilized, at varying dates beginning in 2011 depending on the laws of each state and we have provided a valuation allowance of $0.2 million. Our effective income tax rate will be subject to many variables, including the absolute amount and future geographic distribution of our pre-tax income. We also plan to continue our acquisition strategy, and, as such, we anticipate that there will be variability in our effective tax rate from quarter to quarter and year to year, especially to the extent that our permanent differences increase or decrease. As a result of any of these factors, our future effective income tax rate may fluctuate significantly over the next few years.
 
Minority interest, net of taxes
 
The minority interest represents the ownership interests of other stockholders in our international subsidiaries, where 100% ownership is not permitted or de minimis local ownership is helpful for business purposes. For fiscal 2007, this amount primarily consisted of the net income of Envirocoustics A.B.E.E., which we first consolidated in fiscal 2006. We acquired this entity on April 25, 2007.


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Consolidated results of operations
 
Fiscal 2009, 2008 and 2007
 
Our revenues, gross profit, income from operations and net income for fiscal 2009, 2008 and 2007 were as follows:
 
                         
 
    Fiscal  
(dollars in thousands)   2009     2008     2007  
 
 
Revenues
  $ 209,133     $ 152,268     $ 122,241  
     
     
Gross profit
    69,266       54,831       41,873  
     
     
Gross margin %
    33.1%       36.0%       34.3%  
     
     
Income from operations
  $ 14,825     $ 16,358     $ 10,737  
     
     
Operating margin as percentage of revenues
    7.1%       10.7%       8.8%  
     
     
Interest expense
    4,614       3,531       4,482  
     
     
Loss on extinguishment of long-term debt
                460  
     
     
Income before provision for income taxes and minority interest
    10,211       12,827       5,795  
Provision for income taxes
    4,558       5,380       208  
     
     
Income before minority interest
    5,653       7,447       5,587  
Minority interest, net of taxes
    (187 )     (8 )     (199 )
     
     
Net income
  $ 5,466     $ 7,439     $ 5,388  
     
     
Net income as percentage of revenues
    2.6%       4.9%       4.4%  
 
 
 
Fiscal 2009 compared to fiscal 2008
 
Revenues. Revenues increased $56.9 million, or 37.3%, for fiscal 2009 compared to fiscal 2008 as a result of growth in all our segments. For fiscal 2009 and fiscal 2008, we estimate that our organic, as compared to acquisition-driven, growth rate was approximately 16% and 17%, respectively. In fiscal 2009, we estimate that all of our segments had organic growth, and that the Services and International segments had double digit organic growth rates. This organic growth was the result of continued demand for our asset protection solutions, including growth from new and existing customers, and did not result from any unusually large one-time projects. In fiscal 2009, we estimate that growth from acquisitions was approximately 23% compared to 6% in fiscal 2008, primarily because we acquired 5 NDT companies in fiscal 2009 and 7 NDT companies in 2008, increasing our capabilities and adding to our base of qualified technicians.
 
In the second half of fiscal 2009 we believe the economic downturn resulted in greater than usual reductions or delays in capital spending by our customers. Several anticipated regular maintenance projects as well as projects requiring intensive work during a temporary asset shutdown, or “turnaround” projects, were either reduced in scope or have been delayed until fiscal 2010 or later.


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Despite the economic downturn, we experienced growth in many of our target markets in fiscal 2009 as compared to fiscal 2008. The largest dollar increase was attributable to customers in the oil and gas market, which accounted for approximately 58% of our total revenues. This growth was achieved globally on several new and existing projects. Overall this market provided 57.6% and 49.8% of our total revenues for fiscal 2009 and 2008, respectively. As of May 31, 2009, we serviced approximately 20% of the U.S. refineries and 36% of refineries producing 100,000 or more barrels per day. The remainder of the growth in our revenues was broadly distributed among customers in our other target markets, with the largest increases in this period attributable to customers in the chemical market, where we obtained a new long-term service contract, and in the industrial and manufacturing sector where we obtained new customers through our acquisitions. The most significant decrease in fiscal 2009 was in the electronics and transportation industries, but these industries together accounted for less than 2.0% of our total revenues in fiscal 2009. Our top ten customers represented 35.8% of our revenues for fiscal 2009 compared to 35.2% in fiscal 2008. One of these top ten customers filed for bankruptcy in January 2009. Our revenues from this customer were $6.4 million for fiscal 2009. Although we have increased our allowance for doubtful accounts receivable attributable to this long-term customer by approximately $1.6 million as a result of this bankruptcy, we continue to work for this customer under the protection of the bankruptcy court.
 
Gross profit. Our gross profit increased $14.4 million, or 26.3%, in fiscal 2009 compared to fiscal 2008. As a percentage of revenues, our gross profit was 33.1% and 36.0% in fiscal 2009 and fiscal 2008, respectively. The non-depreciation portion of our cost of revenues as a percentage of revenues increased to 62.7% in fiscal 2009 from 59.5% in fiscal 2008. Depreciation expense included in determining gross profit for fiscal years 2009 and 2008 was $8.7 million, or 4.2% of revenues, and $6.8 million, or 4.5% of revenues, respectively.
 
Despite the 37.3% increase in our fiscal 2009 revenues, our gross profit as a percentage of revenues declined to 33.1% in fiscal 2009 from 36.0% in fiscal 2008. Some of this decline resulted from our sales mix, since our Services segment generated the largest portion of the revenue increase and our gross margins on revenues from our Services segment are generally lower than that of our other segments. A large portion of this cost can be attributed to the economic downturn, because when our customers delay or reschedule projects, this delays our recognition of revenues from those projects while we continue to incur labor expenses. We also incurred the cost to hire and train employees in order to develop several new specialties within our asset protection solutions, or “centers of excellence”, including centers for industrial tube and off-shore oil rig platform riser inspections and new pipeline construction. In addition, our business was disrupted during September 2008 by Hurricane Ike and in our third fiscal quarter by strikes threatened by employees of several of our customers, which were subsequently resolved. As we anticipated, several of our recently acquired businesses had lower margins than we normally achieve and we would expect that these margins will improve as we fully integrate these acquired businesses into our business model. Our payroll costs, including workers’ compensation insurance, also increased during fiscal 2009, but unlike in fiscal 2008, we did not benefit from a $1.0 million adjustment, resulting from favorable claims experienced.
 
Income from operations. Our income from operations of $14.8 million for fiscal 2009 decreased $1.5 million, or 9.4%, compared to fiscal 2008. As a percentage of revenues, our income from operations was 7.1% in fiscal 2009, compared to 10.7% in fiscal 2008. In fiscal 2009, we increased our allowance for doubtful accounts by approximately $1.6 million to provide for estimated losses in connection with a large customer bankruptcy and incurred $2.1 million in


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expenses in connection with a lawsuit settlement. Without these charges, our fiscal 2009 income from operations would have been approximately 9% of revenues.
 
The percentage of total operating income for fiscal 2009 contributed by our segments was Services: 92.3%; Products and Systems: 11.2%; International: 27.6%; and Corporate and Eliminations: (31.1%). For fiscal 2008, the operating income contributed by our segments was: Services: 89.6%; Products and Systems: 16.6%; International: 14.7%; and Corporate and Eliminations: (20.9%).
 
As a percentage of revenues, selling, general and administrative expenses for fiscal 2009 were 22.5% compared to 21.6% for fiscal 2008. Our selling, general and administrative expenses for fiscal 2009 increased $14.2 million, or 43.1%, over fiscal 2008, primarily due to the cost of additional infrastructure to support our growth, including several new locations obtained through our acquisitions. Our recent acquisitions accounted for approximately $6.0 million of this increase. In addition, the $1.6 million increase in our allowance for doubtful accounts due to the bankruptcy of our customer was included in this expense category. Other increases in our selling, general and administrative expenses included higher compensation and benefit expenses over the previous year attributed to normal salary increases as well as our investment in additional management and corporate staff. A significant portion of these increases (as well as other increases in cost of revenues) supported our development of additional centers of excellence. Our professional fees were also higher as we incurred more expense in connection with the preparations necessary to operate as a publicly traded company. Depreciation and amortization included in the determination of income from operations for fiscal 2009 and fiscal 2008 was $3.9 million, or 1.9% of revenues, and $4.6 million, or 3.0% of revenues, respectively.
 
Interest expense. Interest expense was $4.6 million and $3.5 million for fiscal 2009 and fiscal 2008, respectively. The $1.1 million increase in fiscal 2009 interest expense was primarily due to increased borrowing for our acquisitions and purchases of equipment, as well as working capital requirements. For both years, we incurred additional expense related to the market rate adjustments to our interest rate swaps, as the fixed rate on these swaps was higher than market rates during both annual periods. The total interest expense adjustments for these swap arrangements for fiscal 2009 and fiscal 2008 was approximately $0.2 million and $0.6 million, respectively. On July 1, 2008, we borrowed $20.0 million to replenish our revolving line of credit and finance several acquisitions and on January 7, 2009, we increased our revolver by $5.0 million for a total of $20.0 million.
 
Minority Interest, net of taxes. The increase in fiscal 2009 of $0.2 million in the minority interest is related to the increased profit, primarily from Diapac, our subsidiary in Russia. For fiscal 2007, this amount primarily consisted of the net income of Envirocoustics A.B.E.E., which we first consolidated in fiscal 2006. We acquired this entity on April 25, 2007.
 
Income taxes. Our effective income tax rate was 44.6% for fiscal 2009 compared to 41.9% for fiscal 2008. The increase was primarily due to the impact of higher state taxes and US taxes on our foreign profits, net of other adjustments.
 
Net income. Our net income for fiscal 2009 of $5.5 million, or 2.6% of our revenues, was $2.0 million lower than our net income for fiscal 2008, which was $7.4 million, or 4.9% of revenues. This decrease in net income was primarily the result of the combination of higher revenues and higher costs of revenues as a percentage of revenues, and other operating costs such as the additional $1.6 million allowance for doubtful accounts and higher interest expense, depreciation and provision for income taxes. The $1.6 million increase in our allowance for


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doubtful accounts and $2.1 million incurred in connection with the lawsuit settlement, both of which we consider generally non-recurring or unusual, caused our net income to be lower by approximately 1% on an after-tax basis. Our net income in fiscal 2008 also benefited from a $1.0 million pre-tax adjustment.
 
Fiscal 2008 compared to fiscal 2007
 
Revenues. Revenues increased $30.0 million, or 24.6%, for fiscal 2008 compared to fiscal 2007 as a result of growth in all our segments. In fiscal 2008, the largest increase in our revenues was attributable to customers in the oil and gas market, which accounted for approximately 50% of our total revenues. The remainder of the growth in our revenues was broadly distributed among customers in our other target markets, with the largest increases attributable to growth in revenues from customers in the fossil and nuclear power and chemicals markets and other process industries. In fiscal 2008, we completed a significant number of projects for existing customers in the public infrastructure market. However, there was a small decrease in revenues from customers in this market in fiscal 2008 because we completed a significant new bridge project in fiscal 2007. The increase in fiscal 2008 revenues was largely driven by our Services segment, which represented $25.2 million of the total increase, and resulted primarily from an increase in the overall customer demand for asset protection solutions, and revenues contributed from acquired businesses.
 
Gross profit. Our gross profit for fiscal 2008 increased $13.0 million, or 30.9%, over fiscal 2007. As a percentage of revenues, our gross profit was 36.0% and 34.3% in fiscal 2008 and fiscal 2007, respectively. In dollar terms, the increase in our gross profit during our 2008 fiscal year was primarily the result of increased revenues and our raising prices to keep pace with escalating labor rates, partially offset by increased depreciation expense due to purchases of field test equipment and additional fleet vehicles to support our revenue growth. Our gross profit in fiscal 2008 also benefitted by 0.7% as we reduced our estimated accrual for workers compensation claims due to favorable claim experience. As a percentage of revenues, depreciation expense included in gross profit for fiscal 2008 and fiscal 2007 was 4.5% and 3.8%, respectively.
 
Income from operations. Our income from operations of $16.4 million in fiscal 2008 increased $5.6 million, or 52.4%, compared to fiscal 2007. As a percentage of revenues, for fiscal 2008, our income from operations was 10.7%, compared to 8.8% for fiscal 2007. This increase was a result of increased revenues and gross profit, offset by increases in selling, general and administrative expenses and depreciation and amortization. Our selling, general and administrative expenses included in the determination of income from operations for fiscal 2008 increased $6.5 million, or 24.7%, over fiscal 2007 due to additional infrastructure costs for several new locations obtained through acquisitions, increases to our international staff and increased audit costs. As a percentage of revenues, our selling, general and administrative expenses in fiscal 2008 and fiscal 2007 were 21.6%.
 
Interest expense. Interest expense was $3.5 million and $4.5 million during fiscal 2008 and 2007, respectively. In fiscal 2007, we paid $1.2 million of conditional interest in connection with a bank refinancing, which accounted for most of the $1.0 million decrease in interest expense. The decrease in interest expense was also due to lower market rates of interest in fiscal 2008, offset by the additional expense for an adjustment to our interest rate swaps during this period because the fixed rate on these swaps was higher than market rates during the period. In the


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last quarter of fiscal 2008 our interest also began to increase as a result of financing our acquisitions.
 
Loss on extinguishment of long-term debt. The $0.5 million loss on the extinguishment of debt during fiscal 2007 related to the write-off of certain capitalized financing costs related to the refinancing of our debt through a new credit arrangement.
 
Income taxes. Our effective income tax rate was 41.9% for fiscal 2008. For fiscal 2007, we had an effective rate of 3.6%. This increase was primarily as a result of releasing the deferred tax valuation allowances during fiscal 2007 and the higher international tax rates on the income of certain of our subsidiaries that we do not consolidate for tax purposes.
 
Net income. Our net income for fiscal 2008 of $7.4 million, or 4.9% of our revenues, was $2.1 million greater than our net income for fiscal 2007, which was $5.4 million, or 4.4% of revenues. This 38.1% increase in net income was primarily as a result of the impact of higher revenues net of higher cost of revenues and operating costs on a percentage basis, lower interest expense and a higher provision for income taxes.
 
Segment data
 
Selected consolidated financial information by segment for fiscal 2009, 2008 and 2007 was as follows:
 
                         
 
    Fiscal  
(dollars in thousands)   2009     2008     2007  
 
 
Revenues(1)
                       
Services
  $ 167,543     $ 116,027     $ 90,867  
Products and Systems
    17,310       16,675       14,916  
International
    29,165       23,727       20,935  
Corporate and eliminations
    (4,885 )     (4,161 )     (4,477 )
     
     
    $ 209,133     $ 152,268     $ 122,241  
 
 
 
(1) Revenues by operating segment includes intercompany transactions, which are eliminated in corporate and eliminations.
 
                         
 
    Fiscal  
(dollars in thousands)   2009     2008     2007  
 
 
Gross profit
                       
Services
  $ 48,480     $ 36,301     $ 26,436  
Products and Systems
    8,476       8,829       7,377  
International
    12,602       9,932       8,634  
Corporate and eliminations
    (292 )     (231 )     (574 )
     
     
    $ 69,266     $ 54,831     $ 41,873  
 
 
 


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    Fiscal  
(dollars in thousands)   2009     2008     2007  
 
 
Income from operations
                       
Services
  $ 13,681     $ 14,649     $ 8,299  
Products and Systems
    1,664       2,723       2,640  
International
    4,091       2,408       2,146  
Corporate and eliminations
    (4,611 )     (3,422 )     (2,348 )
     
     
    $ 14,825     $ 16,358     $ 10,737  
 
 
 
                         
 
    Fiscal  
(dollars in thousands)   2009     2008     2007  
 
 
Depreciation and amortization
                       
Services
  $ 10,603     $ 9,529     $ 7,101  
Products and Systems
    1,038       1,017       926  
International
    900       861       760  
Corporate and eliminations
    95       16       (96 )
     
     
    $ 12,636     $ 11,423     $ 8,691  
 
 
 
Segment results for fiscal 2009, 2008 and 2007
 
Segment discussions that follow provide supplemental information regarding the significant factors contributing to the changes in results for each of our business segments.
 
Services segment
 
Revenues. Over the last three years, the largest increase in our total revenues was from our Services segment. Our segment revenues had a CAGR of 36.9% during this period with annual increases in fiscal 2009, 2008 and 2007 of $51.5, $25.2 and $25.4 million, respectively. As a percentage of prior year segment revenues, these increases represent 44.4%, 27.7% and 38.9%. Our organic growth in this segment has averaged approximately 23% a year over this three-year period. In fiscal 2009, the organic growth in our Services segment was estimated to be approximately 16%. On average, over the past three fiscal years, customers in the oil and gas industry accounted for 58.9% of the business of our Services segment and in fiscal 2009 customers in the oil and gas industry accounted for 62.2% of the segment revenues, primarily due to a new project that we obtained with an existing customer. The three-year CAGR from this target market has been 41.1%. We also have double digit CAGRs in most of our other target markets due to strong demand, the addition of new customers and revenues from existing customers. We continue to increase our revenues by providing existing customers different types of asset protection solutions.
 
In fiscal 2009, our Services revenues increased $51.5 million, or 44.4%, compared to fiscal 2008. We estimate $33.6 million of these revenues are from acquisitions compared to $7.3 million in the prior year. The balance of the growth came from several new projects as well as from other overall growth in the segment. We did experience some slowing in our revenue growth because

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of the economic downturn, especially in our third and fourth fiscal quarters. We attribute this to an uncertain economy, a customer bankruptcy, and threatened strikes by employees of several customer refineries that were subsequently resolved. In addition, many of our customers postponed holiday turnaround projects and other large-scale projects until later this calendar year or next; therefore, unlike most prior years, we did not have many large scale turnarounds in fiscal 2009. Our customers have historically seldom postponed these types of projects indefinitely, so we expect our revenues may be increased in future periods when our customers ask us to complete projects that they postponed in fiscal 2009. In addition, in September 2008 our operations in the Gulf Coast region were disrupted by Hurricane Ike.
 
In fiscal 2008, our Services revenues increased $25.2 million, or 27.7%, compared to fiscal 2007. The increase was largely driven by an increase in the overall customer demand for our asset protection solutions, including a large project, and to a lesser extent, revenues from businesses we acquired. We estimate that our organic growth rate in our Services segment revenues in fiscal 2008 was approximately 20%.
 
Our top ten customers accounted for approximately 44%, 45% and 50% of our Services segment revenues during fiscal 2009, 2008 and 2007, respectively. As previously noted, one of our top ten customers in this segment had filed for bankruptcy in January 2009. Revenues from this customer represented 3.8% of revenues in our Services segment for fiscal 2009, and we believe our relationship with this customer will continue.
 
Gross profit. During this three-year period, gross profit as a percentage of revenues in our Services segment has been 28.9%, 31.3% and 29.1% for fiscal 2009, 2008 and 2007, respectively. Cost of our Services has been 66.7%, 63.7% and 66.8% during the same periods. Depreciation included in the determination of gross profit has been 4.3%, 5.0% and 4.1%. We continued to invest in additional field test equipment and fleet vehicles, which generate depreciation expense, to support our growth and reduce other operating costs, such as repairs and maintenance.
 
Our gross profit for fiscal 2009 was $48.5 million, or $12.2 million greater than the prior year. The percentage decrease in gross profit in fiscal 2009 was caused by higher amounts of non-billable time that represented either development of new centers of excellence and training or represented lost billing opportunities related to the economic downturn. Several of our customers extended holiday shut-downs or delayed scheduled work, requiring us to pay our employees without any corresponding revenues. As we expected, several of our recently acquired businesses that are highly seasonal had lower margins than those normally achieved under our business model. Finally, Hurricane Ike negatively impacted our margins in the Gulf Coast as we lost revenues and incurred higher costs related to non-productive labor. In fiscal 2009, our depreciation increased $1.4 million or 24.8% and represents both new assets acquired and increased depreciation from our acquired businesses.
 
In fiscal 2008, our gross profit in our Services segment increased by $9.9 million to $36.3 million from $26.4 million in the previous fiscal year. As a percentage of segment revenues, our gross profit increased to 31.3% from 29.1% in fiscal 2007. Contributing to the increase were increased revenues, higher sales prices and a reduction in workers’ compensation costs due to favorable claim experience. The adjustment for our workers’ compensation costs recorded in our fourth fiscal quarter improved our fiscal 2008 segment gross profit by 1.0%. The impact of these positive factors was reduced by increased personnel costs, an unusually large mid-year project that yielded minimal gross profit and additional depreciation. Depreciation expense of


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$5.8 million, or 5.0%, of segment revenues in fiscal 2008, increased from $3.8 million, or 4.1%, of segment revenues in fiscal 2007, due to continued investment.
 
The increased depreciation expense in fiscal 2008 over fiscal 2007 of $2.0 million was primarily a full year charge for assets purchased in 2007 which incurred only a partial year depreciation expense in 2007. In addition, part of the increase was attributed to assets acquired through our acquisitions.
 
Income from operations. As a percentage of segment revenues, our income from operations was 8.2%, 12.6% and 9.1% in fiscal 2009, 2008 and 2007, respectively.
 
Our segment income from operations was $13.7 million, $14.6 million and $8.3 million for fiscal 2009, 2008 and 2007, respectively. Selling, general and administrative expenses in our Services segment for fiscal 2009, 2008 and 2007 were 17.5%, 15.5% and 16.3% of segment revenues, respectively.
 
In fiscal 2009, our higher cost of revenues, along with the additional $1.6 million allowance for doubtful accounts for a customer bankruptcy and a $2.1 million legal settlement, were the primary causes of the decrease in operating margin. Selling, general and administrative expenses in our Services segment for fiscal 2009 compared to fiscal 2008 increased $11.4 million, or 63.6%. In addition to a $2.0 million increase in our allowance for doubtful accounts, major increases in these expenses included approximately $6.0 million related to higher operating costs (primarily payroll expense and a corresponding increase in occupancy costs for rents and utilities) supporting our acquisitions. In addition, we hired new management and other personnel, and invested in new training, safety and quality programs to support new customer offerings and infrastructure, and we estimate this additional compensation and other expense accounted for another $1.5 million of the increase. Other expense increases for travel, lab support, supplies and other miscellaneous increases comprised the balance or $1.9 million of the net increase. Depreciation and amortization expense used in determining income from operations was $3.3 million, or 2.0% of revenues and $3.7 million, or 3.2% of revenues for fiscal 2009 and fiscal 2008, respectively.
 
In fiscal 2008, these expenses increased by $3.1 million, or 21.2%. Over $2.4 million related to higher operating costs (primarily payroll expense) supporting our acquisitions. The remainder included increased bonus payments to our managers for improved performance.
 
Products and Systems segment
 
Revenues. The Products and Systems segment also experienced growth in their revenues in the last three years. Revenues were $17.3 million, $16.7 million and $14.9 million for fiscal 2009, 2008 and 2007, respectively. In fiscal 2009, 2008 and 2007, the segment revenue growth was 3.8%, 11.8% and 11.9%, respectively, a CAGR of 9.1% overall. The largest customer for this segment is our International segment, which remarkets our products, or, to a lesser extent, uses the products in their field testing and engineering services. Other larger markets representing 20-29% of segment revenues have been other test and research laboratories and industrial companies, including aerospace companies. In addition, our oil and gas and fossil and nuclear power markets account for a similar amount of business on an annual basis.
 
In fiscal 2009, our Products and Systems revenues increased $0.6 million compared to fiscal 2008 due to increases across many of our product lines, including our acoustic emission and vibration systems, as well as on-line monitoring systems. In addition, shipments to our North America, or


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NAFTA, customers’ international subsidiaries increased $1.6 million compared to the same period last year because of increased demand, primarily for our AE products and systems. Offsetting these increases in revenues was a $1.1 million decrease in revenues from direct sales to third-party international customers as compared to fiscal 2008, when the segment had a large system sale to such a customer. In this segment we had no concentration risk from any single customer since our largest customer represents less than 4.0% of our segment revenues.
 
The $1.8 million increase in our fiscal 2008 segment revenues resulted primarily from approximately $1.4 million in sales from new product introductions, including a line of handheld testing equipment and acoustic emission sensing devices. The remainder of the increase was attributable to approximately $0.4 million in product sales to our international customers.
 
Gross profit. Our segment gross profit for fiscal 2009, 2008 and 2007 was $8.5 million, $8.8 million and $7.4 million, respectively. Our segment gross profit as a percentage of revenues for the same three years was 49.0%, 52.9% and 49.5%, respectively. Depreciation expense used in determining gross profit for fiscal 2009, fiscal 2008 and fiscal 2007 was $0.8 million, or 4.9% of revenues, $0.7 million, or 4.3% of revenues, and $0.7 million, or 4.8% of revenues, respectively. The gross profit in this segment can fluctuate depending on volume and product mix. For example, our ultrasonic NDT solutions require more product engineering and large components are fabricated at a lower margin.
 
For the majority of fiscal 2009, our segment gross margin was higher than the previous year. However, segment revenues in the fourth quarter of the year were 11.6% below the same quarter in fiscal 2008 due to the economic downturn, which reduced our margins for all of fiscal 2009. This was primarily due to our customers delaying or canceling sales orders, though requests for proposals from our customers remained at reasonable levels throughout the quarter.
 
In fiscal 2008, our gross margin in this segment benefited from engineering billed to our international subsidiary required on our sensor highway systems, which was a new product introduced that year on a large infrastructure project. This increase was partly offset due to a higher than average cost of revenues associated with the delay of a large order while we continued to incur our fixed costs.
 
Income from operations. Our segment income from operations for fiscal 2009, 2008 and 2007 was $1.7 million, $2.7 million and $2.6 million, respectively. As a percentage of segment revenues, our operating income was 9.6%, 16.3% and 17.7% in fiscal 2009, 2008 and 2007, respectively. In fiscal 2009, as a percentage of segment revenues, our segment income from operations decreased because of the items noted above in the discussion of our segment gross profit for fiscal 2009. We believe that with the recent addition of our Group Executive Vice President of Marketing and Sales and other hires, as well as new opportunities in public infrastructure and on-line monitoring, this trend will improve.
 
Segment selling, general and administrative expenses, which after gross profit, are the largest determinant of our income from operations in fiscal 2009, 2008 and 2007, were $5.4 million, or 31.0% of revenues, $4.8 million, or 29.0% of revenues, and $3.8 million, or 25.7% of revenues, respectively. The largest increase in these costs, particularly in the last two fiscal years, can be attributed to increases in our sales force to better capture market opportunities in our target markets. Due to the time required for technical training of new sales personnel, we believe the financial benefit of these new hires have not yet matched our investment. Similarly, our research and engineering expenses have increased as a result of new hires, and were $1.3 million,


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$0.9 million and $0.7 million in fiscal 2009, 2008 and 2007, respectively. As a percentage of our Products and Systems segment sales, these costs have represented 7.3%, 5.7% and 4.7% for the three years, respectively.
 
International segment
 
Revenues. Our International segment revenues for fiscal 2009, 2008 and 2007 have been $29.2 million, $23.7 million and $20.9 million, respectively, and are subject to currency fluctuations. For the last three fiscal years, the segment revenues, including currency fluctuations, had a CAGR of 18.2%, with annual increases of 22.9%, 13.3% and 18.4% during fiscal 2009, 2008 and 2007, respectively. We estimate the organic segment growth during the past three years to be approximately 27% (2009), 6% (2008) and 11% (2007). Revenues from customers in the oil and gas and chemicals markets have historically comprised over 50% of our segment revenues. Most of this business is centered in major oil refineries in Russia and Brazil. Other revenues are more widely distributed including industrial, manufacturing and other testing companies, research centers and universities.
 
Our International segment contributed $5.4 million to our revenue growth for fiscal 2009 compared to fiscal 2008. For fiscal 2009, we estimate the organic segment growth was approximately 27% and acquisition segment growth was approximately 9%. Currency fluctuations compared to fiscal year 2008 resulted in 12.1% less segment revenues. The overall decrease caused by the strengthening of the dollar was $2.9 million, most of this variance occurring in the last half of the year. As with our other segments, we estimate that our organic segment growth slowed in the third and fourth fiscal quarters, but was still approximately 7% in our fourth fiscal quarter. $2.2 million of our growth was from a new project for a refinery in Russia and $1.2 million was from the United Kingdom and The Netherlands, where a portion of the growth was attributable to an acquisition of a company specializing in tank inspections. All of our other foreign locations in this segment also had positive growth of revenues.
 
During fiscal 2008 and fiscal 2007, the U.S. dollar was generally weaker compared to most of the currencies of countries in which our international subsidiaries operate. As a result, the translation of the amounts of non-dollar-denominated transactions into dollars resulted in increases to all line items in our statement of operations, which account for a portion of the increases as noted below.
 
In fiscal 2008, revenues in our International segment increased $2.8 million, or 13.3%, over our segment revenues in fiscal 2007, primarily as a result of a $1.4 million increase in revenues associated with our operations in the United Kingdom and The Netherlands and a $1.4 million increase in revenues from our South American operations. Approximately $1.6 million of the increase in segment revenues in fiscal 2008 were attributable to the weaker U.S. dollar. The remainder of the increase was due in part to the sale of our new sensor highway products in the United Kingdom and The Netherlands as well as increased business in the oil and gas markets in South America. We had minor decreases in segment revenues attributable to customers in Russia and France, but these were offset by translation gains caused by the exchange rate.
 
Gross profit. Our segment gross profit margin was 43.2%, 41.9% and 41.2% in fiscal 2009, fiscal 2008 and fiscal 2007, respectively. Although fairly consistent on an annual basis, quarterly results can vary based on sales mix, seasonality, currency and other factors. In the second half of fiscal


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2009, our segment gross margin was 37.3%, which included a 2.4% customer sales allowance. For the entire year, our gross profit in this segment was $12.6 million.
 
In fiscal 2008, the gross profit in our International segment was $9.9 million, or 41.9% of segment revenues, compared to $8.6 million, or 41.2% of segment revenues, in fiscal 2007. Although our segment gross profit in fiscal 2008 increased over fiscal 2007, the amount of the increase was offset by additional costs related to project delays incurred to support customization of new products introduced for a bridge monitoring project. In addition, our overall gross profit margin was impacted by the increase as a percentage of total revenues of revenues attributable to customers in South America where we performed traditional NDT services with a lower gross profit margin.
 
Income from operations. Our income from operations from our International segment for fiscal 2009, 2008 and 2007 was $4.1 million, $2.4 million and $2.1 million, respectively. As a percentage of segment revenues, our income from operations was 14.0%, 10.1% and 10.3% in fiscal 2009, 2008 and 2007, respectively. Our segment selling, general and administrative expenses, the largest factor in determining income from operations for fiscal 2009, 2008 and 2007 were $8.0 million, or 27.6% of segment revenues, $6.8 million, or 28.6% of segment revenues, and $5.9 million, or 28.0% of segment revenues, respectively. In fiscal 2009, currency fluctuation was more impactful than in previous years because our segment expenses were approximately $1.0 million lower than the local currency equivalent. The overall increase from fiscal 2008 is attributable to new segment expenses related to an acquisition made in Holland and additional hires and training costs in our South American operation. Foreign currency transaction gains and losses included in income from operations were $0.2 million in fiscal 2009 and were not significant in fiscal 2008.
 
Corporate and eliminations
 
The elimination in revenues and cost of revenues primarily relates to the accounting elimination of revenues from sales of our Products and Systems segment to the International segment. The other major item in the corporate and eliminations grouping are the general and administrative costs not allocated to the other segments. These costs primarily include those for non-segment management, accounting and auditing, acquisition transactional costs and stock compensation expense and certain other costs. As a percentage of our total revenues, these costs have generally remained constant over the last three fiscal years, consisting of 2.1%, 2.2% and 1.6% of total revenues for fiscal 2009, 2008 and 2007, respectively. The increase in operating expenses in 2009 and 2008 primarily related to higher compensation and additional staff, audit and accounting fees and other general increases in expense at our corporate offices.


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Quarterly results of operations
 
The following table sets forth our unaudited quarterly statements of operations data and operations data as a percent of revenues for the eight fiscal quarters ended May 31, 2009. The unaudited quarterly information, in our opinion, reflects all adjustments, consisting of normal accruals, necessary for a fair statement of the data for each of those quarters. This data should be read in conjunction with the financial statements and the related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for any future period.
 
                                                                 
 
Fiscal quarter ending
  May 31
    February 28,
    November 30,
    August 31,
    May 31
    February 29,
    November 30,
    August 31,
 
(dollars in thousands)   2009(1)     2009(1)     2008(2)     2008     2008(3)     2008     2007     2007  
 
 
Revenues
  $ 55,860     $ 47,001     $ 59,275     $ 46,997     $ 48,023     $ 37,167     $ 37,218     $ 29,860  
Cost of revenues
    35,358       31,607       35,676       28,526       26,885       24,527       21,917       17,261  
Depreciation
    2,490       2,290       2,061       1,859       2,108       1,661       1,569       1,509  
     
     
Gross profit
    18,012       13,104       21,538       16,612       19,030       10,979       13,732       11,090  
Selling, general and administrative expenses
    12,640       12,110       11,325       11,075       9,240       8,182       7,956       7,565  
Research and engineering
    345       317       309       284       263       228       243       220  
Depreciation and amortization
    819       891       798       1,428       1,487       1,057       1,001       1,031  
Legal settlement
    (40 )     89       1,915       136                          
     
     
Income from operations
    4,248       (303 )     7,191       3,689       8,040       1,512       4,532       2,274  
     
     
Net income (loss)
  $ 1,502     $ (788 )   $ 3,235     $ 1,517     $ 4,291     $ 540     $ 1,934     $ 674  
 
 
 
(1) In the fiscal quarters ended February 28, 2009 and May 31, 2009, we estimated the bad debt expense related to a large customer who filed bankruptcy. The expense provision made was $1.2 million and $0.4 million in these quarters, respectively. There is another $0.7 million which we believe will be collectible.
 
(2) In the fiscal quarter ended November 30, 2008, we first estimated the legal expense associated with a class action lawsuit. This item has been settled and payments made to the class in June 2009.
 
(3) In the fiscal quarter ended May 31, 2008, we adjusted our estimate for losses and expenses under our workers’ compensation policies as a result of favorable loss experience. This adjustment resulted in a favorable impact on the quarter’s gross profit and operating income of approximately $1.0 million and represents 2.1% of revenues.
 
Liquidity and capital resources
 
Overview
 
We have primarily funded our operations through the issuance of preferred stock in a series of financings, bank borrowings, capital lease financing transactions and cash provided from operations. We have used these proceeds to fund our operations, develop our technology, expand our sales and marketing efforts to new markets and acquire small companies or assets, primarily to add certified technicians and enhance our capabilities and geographic reach. We believe that our existing cash and cash equivalents, our anticipated cash flows from operating activities, borrowings under our credit agreement and the net proceeds from this offering will be sufficient to meet our anticipated cash needs over the next 12 months.


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Cash flows table
 
The following table summarizes our cash flows for fiscal 2009, 2008 and 2007:
 
                         
 
Fiscal year
                 
(dollars in thousands)   2009     2008     2007  
 
 
Net cash provided by (used in):
                       
Operating activities
  $ 12,661     $ 12,851     $ 14,006  
Investing activities
    (15,888 )     (19,446 )     (4,259 )
Financing activities
    4,912       6,320       (8,122 )
Effect of exchange rate changes on cash
    428       63       166  
     
     
Net change in cash and cash equivalents
  $ 2,113     $ (212 )   $ 1,791  
 
 
 
Cash flows from operating activities
 
Cash provided by our operating activities primarily consists of net income adjusted for certain non-cash items, including depreciation and amortization, deferred taxes and bad debt expense and the effect of changes in working capital and other activities.
 
Cash provided by our operating activities in fiscal 2009 was $12.7 million and consisted of $5.5 million of net income plus $15.4 million of non-cash items, consisting primarily of depreciation and amortization of $12.6 million and provision for doubtful accounts of $2.1 million, less $8.2 million of net cash used for working capital purposes and other activities. Cash used for working capital and other activities in fiscal 2009 primarily reflected a $8.8 million increase in accounts receivable attributable to our increase in revenues, a $1.1 million increase in prepaid expenses and other current assets due to an increase in estimated tax payments and a decrease in accounts payable of $2.2 million due primarily to the timing of payments to vendors. These were partially offset by a $6.0 million increase in accrued expenses and other current liabilities due to a $2.1 million accrual in connection with our fiscal 2009 legal settlement and the overall growth in our operations.
 
Cash provided by our operating activities in fiscal 2008 was $12.9 million and consisted of $7.4 million of net income plus $13.0 million of non-cash items, consisting primarily of depreciation and amortization of $11.4 million, less $7.6 million of net cash used for working capital purposes and other activities. Cash used for working capital and other activities in fiscal 2008 primarily reflected a $9.2 million increase in accounts receivable and a $1.8 million increase in inventories attributable to our seasonal increase in revenues and a $1.0 million increase in other expenses related to the preparation and filing of our S-1 registration statement in connection with this offering. These increases were partially offset by a $6.3 million increase in accounts payable and accrued expenses as our operations continued to grow, and a $0.1 million increase in our income taxes payable due to our increased profitability.
 
Cash provided by operating activities in fiscal 2007 was $14.0 million and consisted of $5.4 million of net income plus $8.9 million of non-cash items, consisting primarily of $8.7 million of depreciation and amortization, less $0.3 million of cash used to support changes in operating assets and liabilities. In addition to depreciation and amortization, the adjustments to cash included a non-cash credit of $1.3 million due to the release of the deferred tax valuation allowance. The $0.3 million in net cash used to support operating assets and liabilities primarily reflected a $2.3 million net increase in our accounts receivable offset by increases in our


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accounts payable and accrued expenses as our operations continued to grow. Cash was also provided by a $1.2 million increase in income taxes payable due to our improved profitability. A total of $0.9 million of cash was used for a variety of items, including purchases of inventories and other assets.
 
Cash flows from investing activities
 
Cash used in investing activities for fiscal 2009 was $15.9 million of which $10.5 million was used to acquire four services businesses and one international business. In connection with the acquisitions, we also incurred $9.3 million of seller notes payable and related obligations. Additionally, in fiscal 2009 we acquired $12.9 million in property and equipment, of which $5.4 million were cash purchases and $7.5 million were acquired through capital leases.
 
For fiscal 2008, cash used in investing activities was $19.4 million, of which $15.5 million was used to acquire seven services businesses and $3.7 million in property and equipment. In connection with the acquisitions, we also incurred $12.9 million of seller notes payable and related obligations. In addition, $5.0 million of property and equipment was acquired through capital lease obligations.
 
Cash used in investing activities was $4.3 million for fiscal 2007. Cash purchases for property and equipment for fiscal 2007 was $2.6 million. Cash spent for acquisitions in fiscal 2007 was $2.0 million. All of these expenditures support our growth or specific customer projects and opportunities.
 
Cash flows from financing activities
 
For fiscal 2009, cash provided from financing activities was $4.9 million, which included $20.0 million in borrowings from long-term debt to finance five acquisitions and net borrowings of $2.4 million from our revolving credit facility to fund operations. During fiscal 2009 we made $12.3 million and $4.8 million in principal repayments on our long-term debt and capital leases, respectively. During fiscal 2009, we refinanced our existing term loan and revolver with a new credit facility comprised of a $25.0 million term loan and $55.0 million revolver, a portion of which ($2.0 million U.S. dollar equivalent) will be available to be borrowed in Canadian dollars. The proceeds were used to repay the outstanding indebtedness of our prior credit agreement and to fund two acquisitions that closed after the end of fiscal 2009.
 
For fiscal 2008 cash provided from financing activities was $6.3 million. In fiscal 2008, we used our revolving credit facility to borrow $13.1 million to finance a portion of the purchase prices of the seven acquisitions noted above. During fiscal 2008, we also paid obligations under our capital leases and bank debt of $3.6 million and $3.2 million, respectively. Subsequent to year end, we amended our credit agreement to provide for an additional $20.0 million term loan facility from our lenders that we used to repay the borrowing under our revolving credit facility.
 
Cash flows used in financing activities in fiscal 2007 were $8.1 million and consisted primarily of net repayments to our banks and other note holders of $5.3 million and another $2.4 million repayment of capital lease obligations. On October 31, 2006, as subsequently amended and restated on April 23, 2007 and further amended on December 14, 2007, May 30, 2007 and July 1, 2008, we entered into our credit agreement, which initially provided for a $15.0 million revolving credit facility and a $25.0 million term loan facility. The proceeds from the senior credit facility were used to repay the outstanding indebtedness under our prior credit and term loans.


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Effect of exchange rate on changes in cash
 
For fiscal 2009, 2008 and 2007, exchange rate changes increased our cash by $0.4 million, $0.1 million and $0.2 million, respectively.
 
Cash balance and credit facility borrowings
 
As of May 31, 2009 we had $5.7 million in cash and $4.5 million available to us under our former secured revolving credit facility. At May 31, 2009, our former credit agreement provided for two term loans in the amount of $25.0 million (“2007 term loan”) and $20.0 million (“2008 term loan”) and a $20 million secured revolving credit facility (“revolver”). The aggregate principal amount owed under the term loans and the revolving credit facility was $36.3 million and $15.5 million, respectively, as of May 31, 2009. Borrowings under this credit agreement accrued interest at either the prime rate (3.25% at May 31, 2009) or the LIBOR rate (0.32% at May 31, 2009), plus an applicable margin of 1.5% to 2.3% as defined in the agreement. The outstanding principal and accrued interest under the 2007 term loan and the revolver were to mature on October 31, 2012. The 2008 term loan was to mature on June 27, 2014.
 
As of May 31, 2009 we were not in compliance with the following two covenants in our former credit agreement: (1) the requirement that we maintain a minimum debt service coverage ratio, as described below, of at least 1.10 to 1.00, and (2) the requirement that we not create, incur, assume or allow to exist more than a total of $10 million of any indebtedness in respect of capital leases, synthetic lease obligations (as defined in our former credit agreement) and purchase money obligations for certain fixed or capital assets (“limited indebtedness”). On July 22, 2009 our former credit agreement was amended, effective as of May 31, 2009, to decrease the minimum debt service coverage ratio to 1.05 to 1.00, and effective as of August 31, 2007, to increase the maximum limited indebtedness to $22 million, so that we were treated as being in compliance with these two covenants during all reporting periods after August 31, 2007.
 
On July 22, 2009, in connection with the refinancing of our former credit facility, we entered into our current credit agreement with Bank of America, N.A., JPMorgan Chase Bank, N.A., TD Bank, N.A. and Capital One, N.A., which provided for a $25.0 million term loan and a $55.0 million secured revolving credit facility. Borrowings under our credit agreement currently bear interest at the LIBOR or base rate, at our option, plus an applicable margin ranging from 0% to 3.25% and a market disruption increase of between 0.0% and 1.0%, if the lenders determine it applicable. The outstanding principal and accrued interest under the term loan matures on July 21, 2012. Borrowings made under the revolving credit facility are payable at the same time. There is a provision in our credit facility that requires us to repay 25% of the immediately preceding fiscal year’s “free cash flow” if our ratio of “funded debt” to EBITDA, as defined in our credit agreement, is less than a fixed amount on or before October 1 each year. “Free cash flow” means the sum of EBITDA, as defined in our credit agreement, minus all taxes paid or payable in cash, minus cash interest paid, minus all capital expenditures made in cash, minus all scheduled and non-scheduled principal payments on funded debt made in the period and plus or minus changes in working capital. “Funded debt” means all outstanding liabilities for borrowed money and other interest-bearing liabilities. We do not expect to be required to make payments under this provision.
 
Our credit agreement also contains financial and other covenants limiting our ability to, among other things, create liens, make investments and certain capital expenditures, incur more


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indebtedness, merge or consolidate, acquire other companies, make dispositions of property, pay dividends and make distributions to stockholders, enter into a new line of business, enter into transactions with affiliates and enter into burdensome agreements.
 
Our credit agreement also contains financial covenants that require us to maintain the following:
 
•  a minimum EBITDA, as defined in our credit agreement, of $37.5 million in fiscal 2010, $40 million in fiscal 2011 and $45 million in fiscal 2012;
 
•  a minimum debt service coverage ratio, or the ratio of: (A) EBITDA, as defined in our credit agreement, less cash taxes, dividends, cash distributions, withdrawals and other distributions paid or made, to (B) the sum of: (i) the current portion of long-term liabilities, including any conditional payments due under any earn-out agreements deemed due and owing, (ii) the current portion of capitalized lease obligations, and (iii) interest expense on all obligations repaid, in each case, during the preceding 12 months, of at least 1.10 to 1.0 in fiscal 2010, at least 1.15 to 1.0 in fiscal 2011, at least 1.20 to 1.0 in fiscal 2012; and,
 
•  a funded debt leverage ratio, or the ratio of: (A) all outstanding liabilities for borrowed money and other interest-bearing liabilities, including current and long term liabilities, other than the capitalized lease on our headquarters, to (B) EBITDA, as defined in our credit agreement, not exceeding: 3.0 to 1.0 during the first and second quarters of fiscal 2010, 2.5 to 1.0 in the third and fourth quarters of fiscal 2010 and in the first quarter of fiscal 2011, or 2.25 to 1.0 in the second quarter of fiscal 2011 and thereafter.
 
EBITDA, as defined in our credit agreement, means, for any period: (A) our net income less (B) our income (or plus loss) from discontinued operations and extraordinary items, plus (C) income tax expenses, plus (D) interest expense, plus (E) depreciation, deletion and amortization (including non-cash loss on retirement of assets), plus (F) stock option expense, less (G) cash expense related to stock options, plus (H) certain amounts as a result of our completion of acquisitions after the date of our credit agreement, plus (I) up to $2.1 million for amounts we expended settling a specific lawsuit, plus (J) amounts expended by us in connection with this offering, plus (K) amounts expended by us in connection with negotiating and closing the initial borrowings under our credit agreement, all as adjusted for certain historical expenses, accounting adjustments and other non-cash charges, subject to the approval of certain of our lenders.
 
Future sources of cash
 
We expect our future sources of cash to include cash flow from operations, cash borrowed under our revolving credit facility and cash borrowed from leasing companies to purchase equipment and fleet service vehicles. Our revolving credit facility is available for cash advances required for working capital and letters of credit to support our operations. To meet our short- and long-term liquidity requirements, we expect primarily to rely on cash generated from our operating activities. We are currently funding our acquisitions through our available cash, borrowings under our revolving credit facility and seller notes.
 
Future uses of cash
 
We expect our future uses of cash will primarily be for acquisitions, international expansion, purchases or manufacture of field testing equipment to support growth, additional investments


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in technology and software products and the replacement of existing assets and equipment used in our operations. We often make purchases to support new sources of revenues, particularly in our Services segment, but generally only do so with a high degree of certainty about related customer orders and pricing. In addition, we have a certain amount of replacement equipment, including our fleet vehicles. We historically spend approximately 5% to 6% of our total revenues on capital expenditures, excluding acquisitions, and will fund this through a combination of cash and lease financing. Our cash capital expenditures, excluding acquisitions, for fiscal 2009, 2008 and 2007 were 2.6%, 2.4% and 2.1% of revenues, respectively.
 
Our anticipated acquisitions may also require capital. In some cases, additional equipment will be needed to upgrade the capabilities of these acquired companies. We believe that after this offering, our future acquisition and capital spending will increase as we aggressively pursue growth opportunities. Other investments in infrastructure, training and software may also be required to match our growth, but we plan to continue using a disciplined approach to building our business. In addition, we will use cash to fund our operating leases, capital leases and long-term debt repayment and various other obligations, including the commitments discussed in the table below, as they arise.
 
We will also use cash to support our working capital requirements for our operations, particularly in the event of further growth and due to the impacts of seasonality on our business. Our future working capital requirements will depend on many factors, including the rate of our revenue growth, our introduction of new solutions and enhancements to existing solutions and our expansion of sales and marketing and product development activities. To the extent that our cash and cash equivalents, cash flows from operating activities and net proceeds of this offering are insufficient to fund our future activities, we may need to raise additional funds through bank credit arrangements or public or private equity or debt financings. We also may need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies or products that will complement our existing operations. In the event additional funding is required, we may not be able to obtain bank credit arrangements or effect an equity or debt financing on terms acceptable to us or at all.
 
We may also use cash in connection with legal proceedings and claims which arise in the ordinary course of business. We paid approximately $1.8 million in fiscal 2010 related to our fiscal 2009 legal settlement.
 
Contractual obligations
 
We generally do not enter into long-term minimum purchase commitments. Our principal commitments, in addition to those related to our long-term debt discussed below, consist of obligations under facility leases for office space and equipment leases.


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The following table summarizes our outstanding contractual obligations as of May 31, 2009 and has been adjusted to reflect the revised principal payments under our new debt facility entered into on July 22, 2009:
 
                                                         
 
    Payments due by period  
          Fiscal
    Fiscal
    Fiscal
    Fiscal
    Fiscal
    Beyond
 
(in thousands)   Total     2010     2011     2012     2013     2014     fiscal 2015  
 
 
Long-term debt
  $ 66,251     $ 11,181     $ 12,288     $ 11,501     $ 30,425     $ 184     $ 672  
Capital lease obligations(1)
    16,269       5,773       4,661       3,078       1,495       963       299  
Operating lease obligations
    6,736       2,113       1,605       1,153       958       637       270  
     
     
Total
  $ 89,256     $ 19,067     $ 18,554     $ 15,732     $ 32,878     $ 1,784     $ 1,241  
 
 
 
(1) Includes estimated cash interest to be paid over the remaining terms of the leases.
 
In addition to the above, we have certain contingent payments possibly payable in connection with our acquisitions.
 

Off-balance sheet arrangements
 
During fiscal 2009, 2008 and 2007, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
 
Effects of inflation and changing prices
 
Our results of operations and financial condition have not been significantly affected by inflation and changing prices.
 
Quantitative and qualitative disclosures about market risk
 
Interest rate sensitivity
 
We had cash and cash equivalents of $5.7 million at May 31, 2009. These amounts are held for working capital purposes and were invested primarily in deposits, money market funds and short-term, interest-bearing, investment-grade securities. In addition, some of the net proceeds of this offering may be invested in short-term, interest-bearing, investment-grade securities pending their application. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income. If overall interest rates had fallen by 10% in fiscal 2009, our interest income would not have been materially affected.
 
We had $36.3 million of debt outstanding under our term loan facility at May 31, 2009. Although the interest rate on our term loan facility is variable and adjusts periodically, it is currently based on the 30-day LIBOR rate (0.32% at May 31, 2009). If the LIBOR rate fluctuated


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by 10% for the year ending May 31, 2009, interest expense in fiscal 2009 would have fluctuated by approximately $38,000.
 
We use interest rate swaps to manage our floating interest rate exposure. In 2007, we entered into two interest rate swap contracts whereby we would receive or pay an amount equal to the difference between a fixed rate and the quoted 90-day LIBOR rate on a quarterly basis. At May 31, 2009, the following outlines the significant terms of the contracts and the amount we will pay above our contractual rates.
 
                                                 
 
                Variable
    Fixed
             
          Notional
    interest
    interest
    Fair value  
Contract date   Term     amount     rate     rate     2009     2008  
 
          (in thousands)                 (in thousands)  
 
November 20, 2006
    4 years     $ 8,000       LIBOR       5.17%     $ (517 )   $ (321 )
November 30, 2006
    3 years       8,000       LIBOR       5.05%       (199 )     (234 )
     
     
            $ 16,000                     $ (716 )   $ (555 )
 
 
 
Foreign currency risk
 
We have foreign currency exposure related to our operations in foreign locations. This foreign currency exposure, particularly the Euro, British Pound Sterling, Brazilian Real, Russian Ruble, Japanese Yen, Canadian Dollar and the Indian Rupee, arises primarily from the translation of our foreign subsidiaries’ financial statements into U.S. dollars. For example, a portion of our annual sales and operating costs are denominated in British pound sterling and we have exposure related to sales and operating costs increasing or decreasing based on changes in currency exchange rates. If the U.S. dollar increases in value against these foreign currencies, the value in U.S. dollars of the assets and liabilities originally recorded in these foreign currencies will decrease. Conversely, if the U.S. dollar decreases in value against these foreign currencies, the value in U.S. dollars of the assets and liabilities originally recorded in these foreign currencies will increase. Thus, increases and decreases in the value of the U.S. dollar relative to these foreign currencies have a direct impact on the value in U.S. dollars of our foreign currency denominated assets and liabilities, even if the value of these items has not changed in their original currency. We do not currently enter into forward exchange contracts to hedge exposures denominated in foreign currencies. A 10% change in the average U.S. dollar exchange rates for fiscal 2009 would cause a change in consolidated operating income of approximately $0.4 million. We may consider entering into hedging or forward exchange contracts in the future.
 
Fair value of financial instruments
 
We do not have material exposure to market risk with respect to investments, as our investments consist primarily of highly liquid investments purchased with a remaining maturity of three months or less. We do not use derivative financial instruments for speculative or trading purposes; however, this does not preclude our adoption of specific hedging strategies in the future.


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Critical accounting estimates
 
The preparation of financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Our more significant estimates include: the valuation of goodwill and intangible assets; the impairment of long-lived assets, allowances for doubtful accounts; foreign currency translation; derivative financial instruments; reserves for self-insured workers compensation and health benefits; and deferred income tax valuation allowances. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates under different assumptions or conditions. There have been no material changes to these estimates for the periods presented in this prospectus.
 
We believe that of our significant accounting policies, which are described below and in Note 2 to our audited consolidated financial statements included in this prospectus, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
 
Accounts receivable
 
Accounts receivable are stated net of an allowance for doubtful accounts and sales allowances. Outstanding accounts receivable balances are reviewed periodically, and allowances are provided at such time as management believes it is probable that such balances will not be collected within a reasonable period of time. We extend credit to our customers based upon credit evaluations in the normal course of business, primarily with 30-day terms. Bad debts are provided on the allowance method based on historical experience and management’s evaluation of outstanding accounts receivable. Accounts are written off when they are deemed uncollectible. The allowance for doubtful accounts was $3.3 million and $1.3 million as of May 31, 2009 and 2008, respectively. The May 31, 2009 allowance includes approximately $1.6 million related to pre-petition accounts receivable of a large customer that filed a bankruptcy petition under Chapter 11 during fiscal 2009. This represents 67% of the customer’s outstanding pre-petition accounts receivable as of May 31, 2009. The outstanding pre-petition accounts receivable with this customer not included in our allowance as of May 31, 2009 was approximately $0.8 million. We currently do not believe there are any other outcomes with regard to our assumptions that are reasonably likely to occur that would have a material impact on our fiscal 2009 and 2008 financial statements.
 
Foreign currency translation
 
The financial position and results of operations of our foreign subsidiaries are measured using the local currency as the functional currency. There are a total of eight foreign subsidiaries operating in a currency other than the U.S. dollar. Assets and liabilities of the foreign subsidiaries are translated into the U.S. dollar at the exchange rates in effect at the balance sheet date. Income and expenses are translated at the average exchange rate during the year. Translation gains and losses not included in earnings are reported in accumulated other comprehensive income within stockholders’ equity. Foreign currency transaction gains and losses are included in net income (loss), and were $0.2 million in fiscal 2009 and not significant in fiscal 2008 and


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2007. We are at risk for changes in foreign currencies relative to the U.S. dollar. See “Quantitative and qualitative disclosures about market risk—Foreign currency risk.” We currently do not believe there are other outcomes that are reasonably likely to occur with regard to our translation process that would have a material impact on our fiscal 2009 and 2008 financial statements.
 
Long-lived assets outside of the U.S. totaled $11.1 million and $3.0 million as of May 31, 2009 and 2008, respectively.
 
Goodwill and intangible assets
 
Goodwill represents the excess of the purchase price over the fair market value of net assets of the acquired business at the date of acquisition. We test for impairment annually in our fiscal fourth quarter using a two-step process. The first step identifies potential impairment by comparing the fair value of our reporting units to their carrying value. If the fair value is less than the carrying value, the second step measures the amount of impairment, if any. The impairment loss is the amount by which the carrying amount of goodwill exceeds the implied fair value of that goodwill. The reporting units are determined in accordance with SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information and SFAS No. 142 Goodwill and Other Intangibles. We have concluded that our reporting units are the Services Segment and Physical Acoustics LTD., a division within the International Segment. The fair value of the reporting unit is determined using an income approach valuation model, specifically discounted cash flows. Our discounted cash flow analysis incorporates the following key assumptions: growth projections, our weighted average costs of capital, future capital expenditures and tax rates. There have been no significant changes in the assumptions and methodologies used for valuing goodwill since the prior year. There was $38.6 million and $28.6 million of goodwill at May 31, 2009 and 2008, respectively. The fair value of our reporting units materially exceeds the carrying value for fiscal 2009 and 2008. Accordingly, there have been no impairments of goodwill. None of the reporting units were at risk for impairment in fiscal 2009. A material negative change in our key assumptions would need to occur for our step one tests to indicate an impairment. Intangible assets are recorded at cost. Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives.
 
Impairment of long-lived assets
 
We review the recoverability of our long-lived assets on a periodic basis in order to identify business conditions that may indicate a possible impairment. Business conditions that indicate a possible impairment, among others, include decreases in market prices of long-lived assets, an adverse change in our business that could affect the value of long-lived assets and a projection of operating cash flow losses associated with the use of long-lived assets. We have evaluated the business conditions that may indicate a potential impairment and concluded that our asset groups are not at risk for impairment in fiscal 2009 and 2008. A material negative change in business conditions would need to occur for our assessment to indicate impairment. When indicators of impairment are present, the assessment for potential impairment is based primarily on our ability to recover the carrying value of our long-lived assets from expected future undiscounted cash flows. Our analysis includes the future cash flows (based on our internal projections) directly associated with our asset groups, excludes interest charges, is based on all available evidence regarding the use of the asset groups and covers the remaining useful life of the asset groups. Our asset groups are determined in accordance with SFAS No. 144 Accounting


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for the Impairment or Disposal of Long-Lived Assets and include the divisions within our Services, Products and Systems and International Segments. Corporate long-lived assets are not independent of the cash flows of other assets and liabilities of other asset groups. Accordingly, the analysis of our corporate asset group includes the assets and liabilities of the consolidated entity. If the total expected future undiscounted cash flows are less than the carrying amount of the assets, a loss is recognized for the difference between fair value (computed based upon the expected future discounted cash flows) and the carrying value of the assets. Our long lived assets are comprised primarily of property, plant and equipment. We had $33.6 million and $26.5 million in net property, plant and equipment as of May 31, 2009 and 2008, respectively, and did not record any impairment charges in the two fiscal years ended on those dates.
 
Derivative financial instruments
 
We recognize our derivatives as either assets or liabilities, and measure those instruments at fair value and recognize the changes in fair value of the derivative in net income or other comprehensive income, as appropriate. We hedge a portion of our variable rate interest payments on debt using interest rate swap contracts to convert variable payments into fixed payments. We do not apply hedge accounting to our interest rate swap contracts. Changes in the fair value of these instruments are reported as a component of interest expense. Derivative liabilities were $0.7 million and $0.6 million at May 31, 2009 and 2008, respectively. We are at risk for changes in interest rates. See “Quantitative and qualitative disclosures about market risk — Interest rate sensitivity.” We currently do not believe there are other outcomes that are reasonably likely to occur with regard to our derivative financial instruments that would have a material impact on our fiscal 2009 and 2008 financial statements.
 
Income taxes
 
Income taxes are accounted for under the asset and liability method. This process requires that we estimate our income taxes in each of the jurisdictions in which we operate and estimate actual current tax payable and related tax expense together with assessing temporary differences resulting from differing treatment of certain items, such as depreciation, for tax and accounting purposes. Deferred income tax assets and liabilities are recognized based on the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided if it is more likely than not that some or all of the deferred income tax assets will not be realized. We consider all available evidence, both positive and negative, to determine whether, based on the weight of the evidence, a valuation allowance is needed. Evidence used includes information about our current financial position and our results of operations for the current and preceding years, as well as all currently available information about future years, including our anticipated future performance, the reversal of deferred tax liabilities and tax planning strategies. As of May 31, 2009, we had net deferred income taxes of $0.4 million. We believe that it is more likely than not that we will have sufficient future taxable income to allow us to realize the benefits of the net deferred tax assets. We currently do not believe there are other outcomes that are reasonably likely to occur with regard to income taxes that would have a material impact on our fiscal 2009 and 2008 financial statements.


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Recent accounting pronouncements
 
SFAS No. 141R. In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R) which replaces SFAS 141, Business Combinations (SFAS 141). SFAS 141R applies to all business combinations, including combinations among mutual entities and combinations by contract alone. SFAS 141R requires that all business combinations will be accounted for by applying the acquisition method. This standard will significantly change the accounting for business combinations both during the period of the acquisition and in subsequent periods. Among the more significant changes in the accounting for acquisitions are the following:
 
•  In-process research and development (IPR&D) will be accounted for as an asset, with the cost recognized as research and development is realized or abandoned. IPR&D is presently expensed at the time of the acquisition.
 
•  Assets acquired or liabilities assumed in a business combination that arise from a contingency will be measured at fair value at acquisition date if the fair value can be determined during the measurement period.
 
•  Decreases in valuation allowances on acquired deferred tax assets will be recognized in operations. Such changes were considered to be subsequent changes in consideration and were recorded as decreases in goodwill.
 
•  Transaction costs will generally be expensed. Certain such costs are presently treated as costs of the acquisition.
 
SFAS 141R is effective for business combinations consummated in periods beginning on or after December 15, 2008. Early application is prohibited. We will adopt SFAS 141R on June 1, 2009 and the effects will depend on future acquisitions. In the fourth quarter of fiscal year 2009, we expensed $150 of direct costs related to business combinations that were in process but not completed by the effective date of SFAS 141R.
 
SFAS No. 160. In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS 160), an amendment of ARB No. 51, which will change the accounting and reporting related to noncontrolling interests. SFAS 160, which is effective for fiscal years and interim periods beginning on or after December 15, 2008, requires that ownership interests in the subsidiaries held by parties other than the parent be presented in the consolidated balance sheet with equity and the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated income statement. Additionally, the statement requires that changes in a parent’s ownership interest in a subsidiary be accounted for as an equity transaction. We will adopt SFAS 160 on June 1, 2009 and, accordingly, minority interest in the accompanying consolidated balance sheets will be reclassified to equity. Earnings attributable to minority interests will be included in net income although such earnings will continue to be deducted to measure earnings per share.
 
SFAS No. 161. In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 is intended to help investors better understand how derivative instruments and hedging activities affect an entity’s financial position, financial performance and cash flows through enhanced disclosure requirements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with earlier adoption encouraged. We will adopt SFAS 161 on June 1, 2009.


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SFAS No. 165. In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued and is effective for interim and annual periods ending after June 15, 2009. We do not anticipate the adoption of SFAS 165 on June 1, 2009 will have a material effect on our results of operations, financial position or cash flows.
 
SFAS No. 167. In June 2009, the FASB issued SFAS No. 167, Amendment to FASB Interpretation No. 46(R) (“SFAS 167”) which amends Interpretation 46(R) to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. SFAS 167 is effective for interim and annual reporting periods that begin after November 15, 2009. We do not expect adoption of SFAS 167 in fiscal year 2010 to have a material effect on our results of operations, financial position or cash flows as we do not have any variable interest entities.


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Business
 
Our business
 
We are a leading global provider of technology-enabled asset protection solutions used to evaluate the structural integrity of critical energy, industrial and public infrastructure. We combine industry-leading products and technologies, expertise in mechanical integrity (MI) and non-destructive testing (NDT) services and proprietary data analysis software to deliver a comprehensive portfolio of customized solutions, ranging from routine inspections to complex, plant-wide asset integrity assessments and management. These mission critical solutions enhance our customers’ ability to extend the useful life of their assets, increase productivity, minimize repair costs, comply with governmental safety and environmental regulations, manage risk and avoid catastrophic disasters. Given the role our services play in ensuring the safe and efficient operation of infrastructure, we have historically provided a majority of our services to our customers on a regular, recurring basis. We serve a global customer base of companies with asset-intensive infrastructure, including companies in the oil and gas, fossil and nuclear power, public infrastructure, chemicals, aerospace and defense, transportation, primary metals and metalworking, pharmaceuticals and food processing industries. As of August 1, 2009, we had approximately 2,000 employees, including 29 Ph.D.’s and more than 100 other degreed engineers and highly-skilled, certified technicians, in 68 offices across 15 countries. We have established long-term relationships as a critical solutions provider to many of the leading companies in our target markets. The following chart represents revenues we generated in certain of our end markets for fiscal 2009.
 
Mistras revenues by end market
(fiscal 2009)
(PERFORMANCE GRAPH)
 
Our asset protection solutions have evolved over time as we have combined the disciplines of NDT, MI services and data analysis software to provide value to our customers. The foundation


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of our business is NDT, which is the examination of assets without impacting the future usefulness or impairing the integrity of these assets. The ability to inspect infrastructure assets and not interfere with their operating performance makes NDT a highly attractive alternative to many traditional intrusive inspection techniques, which may require dismantling equipment or shutting down a plant, refinery, mill or site. Our MI services are a systematic engineering-based approach to developing best practices for ensuring the on-going integrity and safety of equipment and industrial facilities. MI services involve conducting an inventory of infrastructure assets, developing and implementing inspection and maintenance procedures, training personnel in executing these procedures and managing inspections, testing and assessments of customer assets. By assisting customers in implementing MI programs we enable them to identify gaps between existing and desired practices, find and track deficiencies and degradations to be corrected and establish quality assurance standards for fabrication, engineering and installation of infrastructure assets. We believe our MI services improve plant safety and reliability and regulatory compliance, and in so doing reduce maintenance costs. Our solutions also incorporate comprehensive data analysis from our proprietary asset protection software to provide customers with detailed, integrated and cost-effective solutions that rate the risks of alternative maintenance approaches and recommend actions in accordance with consensus industry codes and standards.
 
As a global asset protection leader, we provide a comprehensive range of solutions that includes:
 
•  traditional outsourced NDT services conducted by our technicians, mechanical integrity assessments, above-ground storage tank inspection and American Petroleum Institute visual inspections and predictive maintenance program development;
 
•  advanced asset protection solutions, in most cases involving proprietary AE, digital radiography, infrared, wireless and/or automated ultrasonic sensors, which are operated by our highly trained technicians;
 
•  a proprietary and customized portfolio of software products for testing and analyzing data captured in real-time by our technicians and sensors, including advanced features such as pattern recognition and neural networks;
 
•  enterprise software and relational databases to store and analyze inspection data comparing to prior operations and testing of similar assets, industrial standards and specific risk conditions, such as use with highly flammable or corrosive materials, and developing asset integrity management plans based on risk-based inspection that specify an optimal schedule for the testing, maintenance and retirement of assets; and
 
•  on-line monitoring systems that provide for secure web-based remote or on-site asset inspection, real-time reports about and analysis of plant or enterprise-wide structural integrity data, comparison of integrity data to our library of historical inspection data and analysis to better assess structural integrity and provide alerts for and prioritize future inspections and maintenance.
 
We offer our customers either a customized package of services, products and systems or our enterprise software and other niche products on a stand-alone basis. For example, customers can purchase most of our sensors and accompanying software to integrate with their own systems, or they can purchase a complete turn-key solution, including our installation, monitoring and assessment services. Importantly, however, we do not sell certain of our advanced and


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proprietary software and other products as stand-alone offerings; instead, we embed them in our comprehensive service offerings to protect our investment in intellectual property while providing a substantial source of recurring revenues.
 
We generated revenues of $209.1 million, $152.3 million and $122.2 million and adjusted EBITDA of $31.1 million, $28.1 million and $19.2 million for fiscal 2009, 2008 and 2007, respectively. For fiscal 2009, we generated over 80% of our revenues from our Services segment. Our revenues are diversified, with our top 10 customers accounting for 35.8%, 35.2% and 38.6% of our revenues during fiscal 2009, 2008 and 2007, respectively. We provide our asset protection solutions to multiple divisions, locations and business units of major refineries across the globe. Our largest such customer accounted for 17.1%, 16.8% and 16.5% of our revenues for fiscal 2009, 2008 and 2007, respectively. No other customer accounted for more than 5.0% of our revenues during fiscal 2009, 2008 or 2007.
 
Asset protection industry overview
 
Asset protection is a large and rapidly growing industry that consists of NDT inspection, MI services and inspection data warehousing and analysis. NDT plays a crucial role in assuring the operational and structural integrity of critical infrastructure without compromising the usefulness of the tested materials or equipment. The evolution of NDT services, in combination with broader industry trends, including increased asset utilization and aging of infrastructure, the desire by companies to extend the useful life of their existing infrastructure, new construction projects, enhanced government regulation and the shortage of certified NDT professionals have made NDT an integral and increasingly outsourced part of many asset-intensive industries. Well-publicized industrial and public infrastructure failures and accidents have also raised the level of awareness of regulators, as well as owners and operators, of the benefits that asset protection can provide.
 
Historically, NDT solutions predominantly used qualitative testing methods aimed primarily at detecting defects in the tested materials. This methodology, which we categorize as “traditional NDT,” is typically labor intensive and, as a result, considerably dependent upon the availability and skill level of the engineers and scientists performing the inspection services. The traditional NDT market is highly fragmented, with a significant number of small vendors providing inspection services to divisions of companies or local governments situated in close proximity to the vendor’s field inspection engineers and scientists. Today, we believe that customers are increasingly looking for a single vendor capable of providing a wider spectrum of asset protection solutions for their global infrastructure. This shift in underlying demand, which began in the early 1990s, has contributed to a transition from traditional NDT solutions to more advanced solutions that employ automated digital sensor technologies and accompanying enterprise software, allowing for the effective capture, storage, analysis and reporting of inspection and engineering results electronically and in digital formats. These advanced techniques, taken together with advances in wired and wireless communication and information technologies, have further enabled the development of remote monitoring systems, asset-management and predictive maintenance capabilities and other data analytics and management. We believe that as advanced asset protection solutions continue to gain acceptance among asset-intensive organizations, only those vendors offering broad, complete and integrated solutions, scalable operations and a global footprint will have a distinct competitive advantage. Moreover, we believe that vendors that are able to effectively deliver both advanced solutions and data analytics, by virtue of their ownership of customers’ data, develop a


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significant barrier to entry for competitors, and so develop the capability to create significant recurring revenues.
 
We believe the following represent key dynamics driving the growth of the asset protection industry:
 
•  Extending the Useful Life of Aging Infrastructure. The prohibitive cost and challenge of building new infrastructure has resulted in the significant aging of existing infrastructure and caused companies to seek ways to extend the useful life of existing assets. For example, due to the significant cost associated with constructing new refineries, stringent environmental regulations which have increased the costs of managing them and difficulty in finding suitable locations on which to build them, no new refineries have been constructed in the United States since 1976. Because aging infrastructure requires relatively higher levels of maintenance and repair in comparison to new infrastructure, as well as more frequent, extensive and ongoing testing, companies and public authorities are increasing spending to ensure the operational and structural integrity of existing infrastructure.
 
•  Outsourcing of Non-Core Activities and Technical Resource Constraints. While some of our customers have historically performed NDT services in-house, the increasing sophistication and automation of NDT programs, together with a decreasing supply of skilled professionals and stricter governmental regulations, has led many companies and public authorities to outsource NDT to providers that have the necessary technical product portfolio, engineering expertise, technical workforce and proven track record of results-oriented performance to effectively meet their increasing requirements.
 
•  Increasing Asset and Capacity Utilization. Due to high energy prices, high repair and replacement costs and the limited construction of new infrastructure, existing infrastructure in some of our target markets is being used at higher capacities, causing increased stress and fatigue that accelerate deterioration. These higher prices and costs also motivate our customers to complete repairs, maintenance, replacements and upgrades more quickly. For example, increasing demand for refined petroleum products, combined with high plant utilization rates routinely in excess of 85%, is driving refineries to upgrade facilities to make them more efficient and expand capacity. In order to sustain high capacity utilization rates, customers are increasingly using asset protection solutions to efficiently ensure the integrity and safety of their assets. Implementation of asset protection solutions can also lead to increased productivity as a result of reduced maintenance-related downtime.
 
•  Increasing Corrosion from Low-Quality Inputs. High commodities prices and increasing energy demands have led to the use of lower grade inputs and feedstock, such as low-grade coal or petroleum, in the refinery and power generation processes. These lower grade inputs can rapidly corrode the infrastructure they come into contact with, which in turn increases the need for asset protection solutions to identify such corrosion and enable infrastructure owners to proactively combat the problems caused by such corrosion.
 
•  Increasing Use of Advanced Materials. Customers in our target markets are increasingly utilizing advanced materials, such as composites, and other unique technologies in the manufacturing and construction of new infrastructure and aerospace applications. As a result, they require advanced testing, assessment and maintenance technologies to protect these assets, since many of these advanced materials cannot be tested using traditional NDT techniques. We believe that demand for NDT solutions will increase as companies and public authorities continue to use these advanced materials, not only during the operating phase of


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the lifecycle of their assets, but also during the design and construction phases by incorporating technologies such as embedded sensors.
 
•  Meeting Safety Regulations. Owners and operators of infrastructure assets increasingly face strict government regulations and safety requirements. Failure to meet these standards can result in significant financial liabilities, increased scrutiny by OSHA and other regulators, higher insurance premiums and tarnished corporate brand value. The numerous failings in equipment, maintenance and inspection that led to the Texas City refinery explosion in 2005 created significant damage to the reputation of refineries and led OSHA to strengthen process safety enforcement standards. As a result, these owners and operators are seeking highly reliable asset protection suppliers with a proven track record of providing asset protection services, products and systems to assist them in meeting these increasingly stringent regulations.
 
•  Expanding Addressable End-Markets. Advances in NDT sensor technology and asset protection software systems, and the continued emergence of new technologies, are creating increased demand for asset protection solutions in applications where existing techniques were previously ineffective. Further, we expect increased demand in relatively new markets, such as the pharmaceutical and food processing industries, where infrastructure is only now aging to a point where significant maintenance is required.
 
•  Expanding Addressable Geographies. We believe that a substantial driver of incremental demand will come from international markets, including Asia, Europe and Latin America. Specifically, as companies and governments in these markets build and maintain infrastructure and applications that require the use of asset protection solutions, we believe demand for our solutions will increase.
 
We believe that the market available to us will continue to grow rapidly as a result of macro-market trends, including aging infrastructure, use of more advanced materials, such as composites, and the increasing outsourcing of asset protection solutions by companies who historically performed these services using internal resources.
 
Our target markets
 
We focus our sales, marketing and product development efforts on a range of infrastructure-intensive industries and governmental authorities. With our portfolio of asset protection services, products and systems, we can effectively serve our customer base throughout the lifecycle of their assets, beginning at the design stage, through the construction and maintenance phase and, as necessary, through the decommissioning of their infrastructure.
 
Our target markets include:
 
Oil and gas
 
According to the United States Energy Information Administration (EIA), in 2008 coal, oil and gas supplied approximately 80% of global primary energy demand. In addition, there were 700 crude oil refineries in the world, with 153 of them in the United States. High energy prices are driving consistently high utilization rates at these facilities. With aging infrastructure and growing capacity constraints, asset protection continues to grow as an indispensable tool in maintenance planning, quality control and prevention of catastrophic failure in refineries and petrochemical plants. Recent high oil and fossil fuel input prices have placed additional pressure


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on industry participants to increase capacity, focus on production efficiency and cost reductions and shorten shut-down time or “turnarounds.” Asset protection solutions are used for both off-stream inspections, or inspection when the tested infrastructure is shut-down, and increasingly, on-stream inspections, or inspection when the tested infrastructure is operating at normal levels. While we expect off-stream inspection of vessels and piping during a plant shut-down or turnaround to remain a routine practice by companies in these industries, we expect the areas of greatest future growth to occur as a result of on-stream inspections and monitoring of facilities, such as offshore platforms, transport systems and oil and gas transmission lines, because of the substantial opportunity costs of shutting them down. On-stream inspection enables companies to avoid the costs associated with shutdowns during testing while enabling the economic and safety advantages of advanced planning or predictive maintenance.
 
Traditional power generation and transmission
 
Asset protection in the power industry has traditionally been associated with the inspection of high-energy, critical steam piping, boilers, rotating equipment, utility aerial man-lift devices, large transformer testing and various other applications for nuclear and fossil-fuel based power plants. We believe that in recent years the use of asset protection solutions have grown rapidly in this industry due to the aging of critical power generation and transmission infrastructure. For instance, the average age of a nuclear power plant in the United States is over 30 years. Furthermore, global demand for power generation and transmission has grown rapidly and is expected to continue, primarily as a result of the energy needs of emerging economies such as China and India. The chart below is from the U.S. Government Energy Information Administration and their estimate of this growth by kilowatt hours.
 
(BAR CHART)
 
•  Nuclear. For the year ended December 31, 2007, U.S. commercial nuclear reactors operated at a capacity utilization rate of approximately 92%. We believe that the need to sustain these high utilization rates, while also maintaining a high degree of safety, will result in increased spending on testing, on-line monitoring and maintenance of these assets. Industrial Information Resources projected that maintenance spending on the North American reactor fleet will exceed $800 million in 2008. The current U.S. administration is proposing a reduction of CO2 emissions to 1990 levels by 2020, with a further 80% reduction by 2050. Meeting these aggressive goals while gradually increasing the overall energy supply requires that all non-emitting technologies must be advanced. A December 2008 Electric Power Research Institute (EPRI) study called the PRISM analysis defines a possible technology mix within the electricity


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sector that would help achieve a comparable goal. In it, nuclear generation rises 20% from current levels by 2020 and nearly 200% by 2050.
 
Globally, there were 436 nuclear reactors in operation as of June 30, 2009 with 48 additional reactors under construction. A majority of these reactors are more than 15 years old. As of August 2009, there are currently 104 sites licensed by the U.S. Nuclear Regulatory Commission, and since 2007, there have been 22 applications for additional sites. We believe it will be increasingly important to provide asset protection solutions to the global nuclear power industry in order to prevent potentially catastrophic events and help the nuclear industry optimize availability and safety of their assets.
 
•  Fossil. The fossil fuel power generation market consists of facilities that burn coal, natural gas or oil to produce electricity. These facilities operate at high capacity levels and can incur productivity loss if a shutdown is required. As a result, there is a significant demand for continual testing and maintenance of these facilities and their assets. In addition, to meet growing electricity demand, fossil power generation companies are increasing capital spending for capacity expansions and new facility construction. In 2009, the EIA reported that there are over 80 fossil power stations proposed for construction in the United States.
 
•  Wind. Wind power has reached critical mass, with wind installations in the United States alone increasing by 8.5MW, or 50%, in 2008. It is estimated that growth in 2009 will continue to accelerate. There is significant demand for on-line condition monitoring for wind turbines, because their three critical components, or the main bearing, gearbox and generator, need to be fully operational at all times for a turbine to work efficiently and safely. Failure of a gearbox on a single wind turbine rated at 1.5MW can cost up to $350,000 to replace, which justifies the use of preventative maintenance monitoring and services for units both in and out of warranty. Our asset protection solutions are also being used in the research, design and development of the composite based wind turbine blades to improve their structural integrity and efficiency and are being applied to inspect the structural integrity of the tower and base.
 
Other Process Industries
 
The process industries, or industries in which raw materials are treated or prepared in a series of stages, include chemicals, pharmaceuticals, food processing and paper and pulp. Three process industries that we focus our efforts on are described below.
 
•  Chemicals. As with oil and gas processing facilities, chemical processing facilities require significant spending on maintenance and monitoring. The average cost of plant construction for chemical assets has increased substantially, which we believe creates a more concentrated focus on asset protection solutions to limit further capital costs. Additionally, growing chemical end-markets continue to put strain on existing plants. Given their aging infrastructure, growing capacity constraints and increasing capital costs, we believe asset protection solutions continue to grow in importance in maintenance planning, quality and cost control and prevention of catastrophic failure in the chemicals industry.
 
•  Pharmaceuticals and food processing. Although the pharmaceuticals and food processing industries have historically not employed asset protection solutions as much as other industries, we believe that in the future these industries will increasingly use asset protection solutions throughout their manufacturing and other processes. Because these industries use equipment, structures, facilities and other infrastructure similar to those of many of our other target markets, and these assets have reached an age where structural failures are becoming a


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significant risk we are seeing an increasing demand from those companies looking to protect their existing investments and avoid costly maintenance repairs and revenue losses due to process or manufacturing line shutdowns. In addition, advanced NDT is more effective than traditional NDT solutions when testing the principal alloys and materials used in these industries’ infrastructure assets.
 
Public infrastructure
 
We believe that high profile infrastructure catastrophes, such as the collapse of the I-35W bridge in Minneapolis, have caused public authorities to more actively seek ways to prevent similar events from occurring. Public authorities tasked with the construction of new, and maintenance of existing, public infrastructure, including bridges and highways, increasingly use asset protection solutions to test and inspect these assets. Importantly, these authorities now employ asset protection solutions throughout the life of these assets, from their original design and construction, with the use of embedded sensing devices to enable on-line monitoring, through ongoing maintenance requirements.
 
Aerospace and defense
 
The operational safety, reliability, structural integrity and maintenance of aircraft and associated products is critical to the aerospace and defense industries. Industry participants increasingly use asset protection solutions to perform inspections upon delivery, and also periodically employ asset protection solutions during the operational service of aircraft, using advanced ultrasonic immersion systems or digital radiography in order to precisely detect structural defects. Industry participants also use asset protection solutions for the inspection of advanced composites found in new classes of aircraft, ultrasonic fatigue testing of complete aircraft structures, corrosion detection and on-board monitoring of landing gear and other critical components. We expect increased demand for our solutions from the aerospace industry to result from wider use of advanced composites and distributed on-line sensor networks and other embedded analytical applications built into the structure of assets to enable real-time performance monitoring and condition-based maintenance.
 
Transportation
 
The use of asset protection solutions within the transportation industry is primarily focused in the automotive and rail segments. Within the automotive segment, manufacturers use asset protection solutions throughout the entire design and development process, including the inspection of raw material inputs, during in-process manufacturing and, finally, during end-product testing and analysis. Although asset protection technologies have been utilized in the automobile industry for a number of decades, we believe growth in the segment will increase as automobile manufacturers begin to outsource their asset protection requirements and take advantage of new technologies that enable them to more thoroughly inspect their products throughout the manufacturing process, reduce costs and shorten time to market. Within the rail segment, asset protection solutions are used primarily to test rails and passenger and tank cars.
 
Primary metals and metalworking
 
The quality control requirements driven by the low defect tolerance within automated, robotic intensive metalwork industries, such as screw machining, serve as key drivers for the recent


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growth of NDT technologies, such as ultrasonics and radiography. We expect that increasingly stringent quality control requirements and competitive forces will drive the demand for more costly finishing and polishing which, in turn, will promote greater use of NDT throughout the production lifecycle.
 
Our competitive strengths
 
We believe the following competitive strengths contribute to our being a leading provider of asset protection solutions and will allow us to further capitalize on growth opportunities in our industry:
 
•  Single Source Provider for Asset Protection Solutions Worldwide. We believe we are the only company with a comprehensive portfolio of proprietary and integrated asset protection solutions, including services, products and systems worldwide, which positions us to be the leading single source provider for a customer’s asset protection requirements. Through our network of 68 offices and independent representatives in 15 countries around the world, we offer an extensive portfolio of solutions that enables our customers to consolidate all their inspection requirements and the associated data storage and analytics on a single system that spans the customers’ entire enterprise. This allows our customers to more effectively manage their asset portfolio, plan asset maintenance based on predictive analytics rather than simple scheduled routines and track their assets globally, thereby enhancing asset productivity and utilization while minimizing the administrative costs of having multiple vendors. In addition, collaboration between our services teams and product design engineers generates enhancements to our services, products and systems, which provide a source of competitive advantage compared to companies that provide only NDT services or NDT products.
 
•  Long-Standing Trusted Provider to a Diversified and Growing Customer Base. By providing critical and reliable NDT services, products and systems for more than 30 years and expanding our asset protection solutions, we have become a trusted partner to a large and growing customer base across numerous infrastructure-intensive industries globally. Our customers include some of the largest and most well-recognized firms in the oil and gas, chemical, fossil and nuclear power, aerospace and defense industries as well as the largest public authorities. Seven of our top 10 customers by fiscal 2009 revenues have used our solutions for at least 10 years. We leverage our strong relationships to sell additional solutions to our existing customers while also attracting new customers. As asset protection is increasingly recognized by our customers as a strategic advantage, we believe our reputation and history of successful execution are key competitive differentiators.
 
•  Repository of Customer-Specific Inspection Data. Our enterprise software solutions enable us to capture and store our customers’ testing and inspection data in a centralized database. As a result, we have accumulated large amounts of proprietary information that allows us to provide our customers with value-added services, such as benchmarking, predictive maintenance, inspection scheduling, data analytics and regulatory compliance. We believe our ability to provide these customized products and services, along with the high cost of switching to an alternative vendor, provide us with significant competitive advantages.
 
•  Proprietary Products, Software and Technology Packages. We have developed systems that have become the cornerstone of several unique NDT applications, such as those used for the testing of pressure vessels (the MONPAC technology package) or above-ground storage tanks (the TANKPAC technology package). These proprietary products allow us to efficiently and


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effectively provide unique solutions to our customers’ complex applications, resulting in a significant competitive advantage. In addition to the proprietary products and systems that we sell to customers on a stand-alone basis, we also develop a range of proprietary sensors, instruments, systems and software used exclusively by our Services segment.
 
•  Deep Domain Knowledge and Extensive Industry Experience. We are an industry leader in developing advanced asset protection solutions, including acoustic emission (AE) testing for non-intrusive on-line monitoring of storage tanks and pressure vessels, bridges and transformers, portable corrosion mapping, ultrasonic testing (UT) systems, on-line plant asset integrity management with sensor fusion, enterprise software solutions for plant-wide and fleet-wide inspection data archiving and management, advanced and thick composites inspection and ultrasonic phased array inspection of thick wall boilers. In addition, many of the members of our team have been instrumental in developing the testing standards followed by international standards-setting bodies, such as the American Society of Non-Destructive Testing and comparable associations in other countries. The scientists and engineers on our research and development team developed many of the advanced NDT technologies we use in our business, including portable corrosion mapping UT systems, enterprise software solutions for plant-wide and fleet-wide inspection data archiving and management, and non-intrusive above-ground tank testing.
 
•  Collaborating with Our Customers. Our asset protection solutions have historically been designed in response to our customers’ unique performance specifications and are supported by our proprietary technologies. Our sales and engineering teams work closely with our customers’ research and design staff during the design phase of our products in order to incorporate our products into specified infrastructure projects, as well as with facilities maintenance personnel to ensure that we are able to provide the asset protection solutions necessary to meet these customers’ changing demands. As a result, we believe that our close, collaborative relationships with our customers provide us a significant competitive advantage.
 
•  Experienced Management Team. Our management team has a track record of leadership in NDT, averaging over 20 years experience in the industry. These individuals also have extensive experience in growing businesses organically and in acquiring and integrating companies, which we believe is important to facilitate future growth in the fragmented asset protection industry. In addition, our senior managers are supported by highly experienced project managers who are responsible for delivering our solutions to customers.
 
Our growth strategy
 
Our growth strategy emphasizes the following key elements:
 
•  Continue to Develop Technology-Enabled Asset Protection Services, Products and Systems. We intend to maintain and enhance our technological leadership by continuing to invest in the internal development of new services, products and systems. Our highly trained team of Ph.D.’s, engineers and highly-skilled, certified technicians have been instrumental in developing numerous significant asset protection standards, and we believe their knowledge base will enable us to innovate a wide range of new asset protection solutions more rapidly than our competition.
 
•  Increase Revenues from Our Existing Customers. Many of our customers are multinational corporations with asset protection requirements from multiple divisions at multiple locations across the globe. Currently, we capture a relatively small portion of their overall expenditures


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on these solutions. We believe our superior services, products and systems, combined with the trend of outsourcing asset protection solutions to a small number of trusted service providers, positions us to significantly expand both the number of divisions and locations that we serve as well as the types of solutions we provide. We strive to be the preferred global partner for our customers and aim to become the single source provider for their asset protection solution requirements.
 
•  Add New Customers in Existing Target Markets. Our current customer base represents a small fraction of the total number of companies in our target markets with asset protection requirements. Our scale, scope of products and services and expertise in creating technology-enabled solutions have allowed us to build a reputation for high-quality and has increased customer awareness about us and our asset protection solutions. We intend to leverage our reputation and solutions offerings to win new customers within our existing target markets, especially as asset protection solutions are adopted internationally. We intend to continue to leverage our competitive strengths to win new business as customers in our existing target markets continue to seek a single source and trusted provider of advanced asset protection solutions.
 
•  Expand Our Customer Base into New End Markets. We believe we have significant opportunities to rapidly expand our customer base in relatively new end markets, including the maritime shipping, wind turbine and other alternative energy and natural gas transportation industries and the market for public infrastructure, such as highways and bridges. The expansion of our addressable markets is being driven by the increased recognition and adoption of asset protection services, products and systems, and new NDT technologies enabling further applications in industries such as healthcare and compressed and liquefied natural gas transportation, and the aging of infrastructure, such as construction and loading cranes and ports, to the point where visual inspection has proven inadequate and new asset protection solutions are required. We expect to continue to expand our global sales organization, grow our inspection data management and data mining services and find new high-value applications, such as embedding our sensor technology in assembly lines for electronics and distributed sensor networks for aerospace applications. As companies in these emerging end markets realize the benefits of our asset protection solutions, we expect to expand our leadership position by addressing customer needs and winning new business.
 
•  Continue to Capitalize on Acquisitions. We intend to continue employing a disciplined acquisition strategy to broaden, complement and enhance our product and service offerings, add new customers and certified personnel, expand our sales channels, supplement our internal development efforts and accelerate our expected growth. We believe the market for asset protection solutions is highly fragmented with a large number of potential acquisition opportunities. We have a proven ability to integrate complementary businesses, as demonstrated by the success of our past acquisitions, which have often contributed entirely new products and services that have added significantly to our revenues and profitability. In addition, we have begun to offer and sell our advanced asset protection solutions to customers of companies we acquired that had previously relied on traditional NDT solutions. Importantly, we believe we have improved the operational performance and profitability of our acquired businesses by successfully integrating and selling a comprehensive suite of solutions to the customers of these acquired businesses.


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Our solutions
 
We provide comprehensive asset protection solutions to a diverse customer base. We combine the strengths of our proprietary products, industry expertise, a suite of software solutions and our highly skilled and experienced technicians and engineers to deliver a broad set of inspection, engineering and information technology services that address the complex business challenges faced by our customers. Depending on the requirements of our customers, we can provide them our software and other products on a stand-alone basis or as a complete end-to-end solution consisting of sensor products, services and software. Importantly, as part of our solutions, we are increasingly providing on-line asset monitoring and management software enabling our customers to have real-time access to and assess the structural health of their infrastructure.
 
Our services
 
We provide a range of testing and inspection services to a diversified customer base across energy-related, industrial and public infrastructure industries. We either deploy our services directly at the customer’s location or through our own extensive network of field testing facilities. Our global footprint allows us to provide asset protection solutions through local offices in close proximity to our customers, permitting us to keep response time to a minimum, while maximizing our ability to develop meaningful, collaborative customer relationships. Examples of our comprehensive portfolio of services include: testing components of new construction as they are built or assembled, providing corrosion monitoring data to help customers determine whether to repair or retire infrastructure, providing material analysis to ensure the integrity of infrastructure components and supplying non-invasive on-stream techniques that enable our customers to pinpoint potential problem areas prior to failure. In addition, we also provide services to assist in the planning and scheduling of resources for repairs and maintenance activities. Our experienced inspection professionals perform these services, which are supported by our advanced proprietary software and hardware products.
 
Traditional NDT services
 
Our certified personnel provide a range of traditional inspection services. For example, our visual inspectors provide comprehensive assessments of the condition of our customers’ plant equipment during capital construction projects and maintenance shutdowns. Of the broad set of traditional NDT techniques that we provide, several lend themselves to integration with our other offerings and often serve as the initial entry point to more advanced customer engagements. For example, we provide a comprehensive program for the inspection of above-ground storage tanks designed to meet stringent industry standards for the inspection, repair, alteration and reconstruction of oil and petrochemical storage tanks. This program includes magnetic flux exclusion for the rapid detection of floor plate corrosion, advanced ultrasonic systems and leak detection of floor defects, remote ultrasonic crawlers for shell and roof inspections and trained, certified inspectors for visual inspection and documentation.
 
Advanced NDT services
 
In addition to traditional NDT services, we provide a broad range of proprietary advanced NDT services that we offer on a stand-alone basis or in combination with software solutions such as our proprietary enterprise plant condition monitoring software and systems (PCMS). We also provide on-line monitoring capabilities and other solutions that enable the delivery of accurate


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and real-time information to our customers. Our advanced NDT services require more complex equipment and more skilled inspection professionals to operate this equipment and interpret test results. Some of the technologies they use include:
 
     
•   Automated ultrasonic testing
  •   Wireless data acquisition
•   Guided ultrasonic long wave testing
  •   On-line plant asset integrity monitoring
•   Infrared thermography
  •   Risk-based inspection
•   Phased array ultrasonic testing
  •   Digital radiography
•   Acoustic emission testing
  •   Sensor fusion
 
 
 
Examples of our advanced NDT techniques include the following:
 
•  Automated Ultrasonic Phased Array Inspection. We primarily use this technique to inspect welded areas during large capital construction and maintenance projects to determine whether the welds can withstand anticipated operating conditions, such as high pressures or temperatures. This technique employs an automated mobile scanner to obtain structural ultrasonic inspection data from multiple angles and locations. The principal competing technique is radiographic inspection, which generally impedes or requires the construction or maintenance work to be halted during the inspection. By using ultrasonic phased array inspection, our customers can continue to weld while our inspections are taking place, which shortens downtime during maintenance projects and accelerates the completion of construction projects.
 
•  Guided Ultrasonic Long Wave Testing. We typically use this technique to locate corrosion or metal loss in large volumes of piping. It allows us to inspect a long continuous section of piping from one location and follow up with further inspections on problem areas, as compared to more costly and time-intensive methods which require inspections at multiple locations along the same section of pipe. It also allows us to inspect the entire pipe body, enabling us to identify a larger percentage of flaws as compared to traditional techniques that inspect only a small portion of pipe walls.
 
•  Advanced Infrared Inspection. We generally employ this technique in place of ultrasonic inspections of large operating systems, such as boilers in industrial power plants, which rely on scans of sample areas of the system to test their integrity rather than a scan of the entire system. Traditional infrared inspection locates unexpected temperature differences to alert inspection personnel to potential problems with insulation, process systems, electrical systems and proper operating parameters. Our proprietary advanced infrared system enables us to scan large areas using a robotic crawler and not only examine temperature differences but also precisely measure the thickness of objects or materials. Our proprietary infrared scanning system examines the entirety of the tested structure to supply more comprehensive inspection data to plant engineers, providing them a higher level of confidence when deciding whether to repair, replace or retire the structure.
 
•  Line Scanning Thermography (LST). LST in an inspection method that uses infrared thermal imaging developed to measure the thickness of boiler tubes. A unique characteristic of this system compared to other thermography methods is LST’s ability to develop an image almost instantly as it scans a boiler tube, while the other methods are significantly slower. Boiler tube inspections are traditionally inspected for loss of wall thickness using ultrasonic contact thickness gauges, which is a very tedious and time consuming method. The LST system can test a large area faster than other NDT methods and record the inspection with a digital image. Another application for which LST has shown promise is the inspection of composite materials


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for porosity, delaminations and non-visible impact damage. Inspection speed, sensitivity to defects, and the capability to store digital images are the key selling points of LST.
 
Mechanical Integrity services
 
We provide a broad range of MI services that enable our customers to meet stringent regulatory requirements. These services increase plant safety, minimize unscheduled downtime and allow our customers to plan for, repair and replace critical components and systems before failure occurs. Our services are designed to complement a comprehensive predictive and preventative inspection and maintenance program that we can provide for our customers in addition to the MI services. Customers of our MI services have, in many instances, also licensed our PCMS software, which allows for the storage and analysis of data captured by our testing and inspection products and services, and implemented this solution to complement our inspection services.
 
As a result of the information captured by PCMS and the our risk-based inspection (RBI) software module we are able to provide a professional service known as “Mechanical Integrity Gap Analysis” for process facilities. Our Mechanical Integrity Gap Analysis service offers insight into the level of plant readiness, how best to manage and monitor the integrity of process facility assets, and how to extend the useful lives of such assets. Our Mechanical Integrity Gap Analysis service also assists customers in benchmarking and managing their infrastructure through key performance indicators and metrics.
 
Our products and systems
 
Our software
 
Our software solutions are designed to meet the demands of our customers’ data analysis and asset integrity management requirements. Some of our key software solutions include:
 
PCMS Enterprise software: asset protection and reliability
 
Our PCMS application is an enterprise software system that allows for the storage and analysis of data as captured by our testing and inspection products and services. PCMS allows our customers to design and develop asset integrity management plans that include:
 
•  optimal systematic testing schedules for their infrastructure based on real-time data captured by our sensors;
 
•  alerts that notify customers when to perform special testing services on suspect areas, enabling them to identify and resolve flaws on a timely basis; and
 
•  schedules for the maintenance and retirement of assets.
 
These plans are based on information stored in PCMS, which include results based upon the rates of deterioration shown by existing test results, information based on our past experiences in the operation and testing of similar structures and standards and recommended practices of numerous industrial standards-setting bodies, such as the American Society of Mechanical Engineers, the American Petroleum Institute and the Occupational Safety and Health Administration. Using PCMS allows our customers to demonstrate compliance with these standards and practices, which typically helps them reduce their insurance premiums and ensure asset, product and employee safety. PCMS also offers significant advantages by allowing the information it


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develops and stores to be organized, linked and synchronized with enterprise software systems. We believe that as a result of its superior functionality, PCMS is one of the more widely used process condition management software systems in the world. For instance, we believe approximately 37% of U.S. refineries, by capacity, currently use PCMS.
 
In addition, our risk-based inspection (RBI) application enables PCMS users to test and analyze their assets operating conditions and other factors, such as operating temperature range and contact with highly flammable or corrosive products. This allows customers to classify or rank each asset according to the probability and consequences of its structural failure and schedule the appropriate frequency and types of testing for that asset. We believe our RBI program allows our customers to appropriately test their infrastructure in a more cost-effective manner while reducing their overall risk profile, which typically allows them to reduce their insurance premiums.
 
Application-based software
 
We provide a comprehensive portfolio of application-specific software products that covers a broad range of testing and analysis methods, including neural networks, pattern recognition, wavelet analysis and moment tensor analysis.
 
Some of the key software solutions we offer include:
 
•  Advanced Data Analysis Pattern Recognition & Neural Networks Software (NOESIS): An advanced data analysis and pattern recognition software package for AE applications. NOESIS enables our AE experts to develop automated remote monitoring systems for our customers.
 
•  AE Software Platform (AEwin and AEwinPost): Windows-based real time applications software for detection, processing and analysis of AE data. This software locates the general location of flaws on or in our customers’ structures.
 
•  Loose Parts Monitoring Software (LPMS): A software program for monitoring, detecting and evaluating metallic loose parts in nuclear reactor systems in accordance with strict industry standards. LPMS alerts the operator on the plant floor and central control room about potential loose parts, provides a user-friendly interface for operators to differentiate between noise and loose parts and identifies the location of the problem.
 
•  Automated UT and Imaging Analysis Software (UTwin and UTIA): A complete software platform for analyzing ultrasonic inspection data and visualizing and identifying the location and size of potential flaws.
 
Technology packages
 
In order to address some of the more common problems faced by our customers, we have developed a number of robust technology solutions. These packages generally allow more rapid and effective testing of infrastructure because they minimize the need for service professionals to customize and integrate asset protection solutions with the infrastructure and interpret test results. These packaged solutions use proprietary and specialized testing procedures and hardware, advanced pattern recognition, neural network software and databases to compare


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test results against our prior testing data or national and international structural integrity standards. Some of our widely used technology packages in some of our target markets are:
 
             
Technology
           
package   Type   Description   Benefits
 
TANKPAC
  AE On-line Tank Floor Inspection   Tests to monitor for emissions resulting from active corrosion of the tested infrastructure  
•   Ability to perform tests on-stream

•   Non-intrusive testing

•   Quickly identify tanks that need inspection and resolve associated problems

•   Leave good tanks operational and save the shutdown and cleaning costs
MONPAC
  AE Pressure Vessel Testing   An AE “expert system” that evaluates the condition of metal pressure systems and tanks  
•   Ability to perform tests on-stream

•   Rapid inspection capability

•   Global monitoring (100% inspection, including welds, repairs, base metal)

•   Reduction in inspection costs

•   Reduction in downtime resulting from improved information about plant condition
VPAC
  Loss Control for Valves in Process Plants   Estimates valve leakage based on measurements made using our inspection products  
•   Cost savings from detection of valve leaks

•   Cost savings are achieved in maintenance planning, troubleshooting plant operations and monitoring of losses for environmental purposes
POWERPAC
  AE On-line Power Transformer Monitoring   Through on-line monitoring, detects and locates partial discharge in power transformers by utilizing AE  
•   Non-intrusive testing

•   On-line testing identifies problems characterizing defects

•   Creates way to monitor problem transformers
 
 
 
Our other products
 
AE products
 
We are a leader in the design and manufacture of AE sensors, instruments and turn-key systems used for the monitoring and testing of materials, pressure components, processes and structures. Though we principally sell our products as a system, which includes a combination of sensors, an


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amplifier, signal processing electronics, knowledge-based software and decision and feedback electronics, we can also sell these as individual components to certain customers that have the in-house expertise to perform their own services. Our sensors “listen” to structures and materials to detect real-time AE activity and to determine the presence of structural flaws in the inspected materials. Such materials include pressure vessels, storage tanks, heat exchangers, piping, turbine blades and reactors.
 
In addition, we provide leak monitoring and detection systems used in diverse applications, including the detection and location of both gaseous and liquid leaks in valves, vessels, pipelines and tanks. AE leak monitoring and detection, when applied in a systematic preventive maintenance program, has proven to substantially reduce costs by eliminating the need for visual valve inspection and unscheduled down-time. In addition, EPA requirements regarding fugitive emissions helps drive the market for this leak detection equipment.
 
Our complete AE product line includes:
 
•  AE Sensors: We offer over 200 different types of proprietary sensors, including a dual function sensor that is a true accelerometer and an AE sensor that records low and high frequencies simultaneously in one sensor body.
 
•  Multi-channel AE Systems: Multi-sensor parallel processing systems capable of monitoring, detecting and locating defects in large structures, such as vessels, pipelines and platforms. These systems include our Sensor Highway II, which is designed for on-line remote monitoring of bridges and large transformers.
 
•  Hand-held Instruments: Portable AE systems easily adaptable to OEM applications.
 
•  Wireless AE Systems: Our wireless sensors can communicate with single base stations, or with base stations and other sensors in geographically dispersed “mesh” networks. Wireless capabilities are fully integrated into our Sensor Highway II and Asset Condition Monitoring units.
 
•  Intrinsically Safe Products: Certified sensors and AE systems to work in hazardous and potentially explosive environments such as the petrochemical industry.
 
UT technology
 
We design, manufacture and market ultrasonic equipment under our NDT Automation brand name. While AE technology detects flaws and pinpoints their location, our UT technology has the ability to size defects in three-dimensional geometric representations. We manufacture a complete line of UT scanners with automated or manual capabilities, and design and fabricate custom scanners as requested by customers.
 
Vibration sensors and systems
 
We design, manufacture and market a broad portfolio of vibration sensing products under our Vibra-Metrics brand name. These include accelerometers, on-line condition-based management systems, data delivery systems and a comprehensive assortment of ancillary support products. Our patented Sensor Highway monitoring systems offer fully automated, unattended remote data acquisition and alarm reporting for rotating mechanical equipment and machines, which enable us to provide real-time predictive maintenance data to our customers.


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On-line monitoring
 
Our on-line monitoring offerings combine all of our asset protection services, products and systems. We provide temporary, periodic and continuous monitoring of static infrastructures such as bridges, pipes, and transformers, as well as dynamic or rotating assets such as pumps, motors, gearboxes, steam and gas turbines. Temporary monitoring is typically used when there is a known defect or problem and the condition needs to be monitored until repaired or new equipment can be placed in service. Periodic monitoring, or “walk around” monitoring, is used as a preventative maintenance tool to take machine and device readings, on a periodic basis, to observe any change in the assets’ condition such as increased vibration or unusual heat buildup and dissipation. Continuous monitoring is applied “24/7” on critical assets to observe the earliest onset of a defect and track its progression to avoid catastrophic failure. Since 1988, we have provided these solutions to over eighty projects for a variety of industries and applications. Our monitoring systems can be accessed both on-site and remotely using state of the art wireless technology and can interface with customer data via the internet or other proprietary secured networks. These monitoring systems provide browser -based hierarchical displays of critical information and can include alarm and customer notification options using messaging and email services. By simultaneously using different sensing devices such as acoustic emission or sound, vibration, temperature, strain or corrosion gauges, often referred to as sensor fusion, we can monitor and correlate different sensor results to provide more accurate fault detection and location information while reducing or eliminating false alarms. The information can also be used to correct operational procedures that contributed to the failures.
 
We provide a range of custom outsourced monitoring services for customers that do not have the resources to monitor their assets or interpret sensor data. An example of a continuous monitoring engagement involving static infrastructure is our monitoring of aging bridges for factors of degradation. Wire breakage in suspension bridges is usually the result of corrosion fatigue which slowly degrades the integrity of the bridge. Since wire breakage events are occasional and unpredictable, the most effective way to track the extent of deterioration is by continuous monitoring. Another example is offshore drilling platforms, which often develop slight flaws in high stress locations that can quickly and unpredictably expand into catastrophic failures. In many circumstances, such flaws cannot be reliably detected using conventional inspection techniques. An example and prime candidate for our temporary on-line monitoring solutions is a pressure vessel, such as a tank, in which a crack has been identified, but that can still be safely operated. In such cases, we are engaged to monitor the vessel until the crack grows dangerous or until a planned maintenance or shutdown occurs.
 
An example of continuous monitoring of dynamic or rotating assets is our monitoring of wind turbines. Each wind turbine is made up of a main bearing, gearbox and generator that combines to form the drive train. A typical wind park engagement will include around 50 wind turbines, each requiring drive train monitoring for early detection of potential mechanical faults, which in turn will allow for scheduling of maintenance prior to the catastrophic failure of a component, and isolating it to avoid damage to the other components in the drive train. These components are difficult to replace since they are usually installed on towers over 250 feet high, and replacement components are costly and have long lead times.


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Customers
 
During fiscal 2009, we provided our asset protection solutions to approximately 4,500 different customers. The following table lists some of our larger customers by revenues for fiscal 2009, in each of our target markets.
 
             
Oil and gas,
      Composite and
   
including
  Nuclear and
  part testing,
   
petrochemical   fossil power   including aerospace   Chemicals
 
BP(1)
  American Electric Power   Avcorp Industries, Inc.   Air Products
Chevron
  Bechtel   Boeing   Aux Sable Liquid
Conoco
  Dominion   Danner Corporation   Products
ExxonMobil
  Entergy   Embraer   Bayer
Lyondell-Basell
  Exelon   Hitco   Dow Chemical
Petrobras
  Florida Power & Light   Kaiser Aluminum   DuPont
Shell
  General Electric   Rio Tinto   INEOS
Valero
  PP&L   Rolls Royce   PCS Nitrogen
 
 
 
             
        Pharmaceuticals
   
Primary metals
      and food
  Public
and metalworking   Transportation   processing   infrastructure
 
Doncasters
  Dana Corporation   Anheuser-Busch   Bechtel
Eaton Corporation
  Emergency One Inc.   ATS   Federal Highway Administration
Mid State Machine
  Harley Davidson   Monsanto   High Steel Structures
Small Parts Incorporated
  Sutphen Corporation   Pfizer   Parsons Engineering
Wollaston Alloys
      Pilgrim’s Pride    
 
 
 
(1) Various divisions or business units of BP were responsible for 17.1%, 16.8% and 16.5% of our revenues during fiscal 2009, 2008 and 2007, respectively. Predominantly all of these revenues are included in our Services segment.
 
During the last three fiscal years, we derived our revenues from providing our asset protection solutions to customers in the United States and over 60 countries around the world. Foreign countries where we provided asset protection solutions responsible for approximately 1% or more of our revenues in fiscal 2009, listed in descending order of revenues, were: Canada, France, Brazil, United Kingdom, Russia, The Netherlands, Japan, Serbia and China.
 
Competition
 
We operate in a highly competitive, but fragmented, market. Our primary competitors are divisions of large companies, and many of our other competitors are small companies, limited to a specific product or technology and focused on a niche market or geographic region. We believe that none of our competitors currently provides the full range of asset protection and NDT products, enterprise software and the traditional and advanced services solutions that we offer. Our major competitors with respect to NDT services include the Acuren division of Rockwood Service Corporation, SGS Group, the TCM division of Team, Inc. and APPLUS RTD, which is majority-owned by The Carlyle Group. Our major competitor with respect to our PCMS software is UltraPIPE, a division of Siemens, and to a lesser extent, Lloyd’s Register Capstone, Inc. Our major competitors with respect to our ultrasonic products are GE Inspection Technologies and Olympus NDT. In the traditional NDT market, we believe the principal competitive factors


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are project management, execution, price, reputation and quality. In the advanced NDT market, reputation, quality and size are more significant competitive factors than price. In light of several characteristics of the NDT industry and obstacles facing competitors, only a few of our existing competitors can compete with us on a global basis, and we believe few new companies are likely to enter the market. Some of the most significant of such characteristics and obstacles include: (1) having to acquire or develop advanced NDT services, products and systems technologies, which in our case occurred over many years of customer engagements and at significant internal research and development expense, (2) complex regulations and safety codes that require significant industry experience, (3) license requirements and evolved quality and safety programs, (4) costly and time-consuming certification processes, (5) capital requirements and (6) emphasis by large customers on size and critical mass, length of relationship and past service record.
 
Sales and marketing
 
We sell our asset protection solutions through all of our 68 offices worldwide. As of August 1, 2009, our world-wide sales and marketing team, together with our “center of excellence” managers, consisted of 63 employees. In addition, our project and laboratory managers as well as our management are trained on our solutions and often are the source of sales leads and customer contacts. Our direct sales and marketing teams work closely with our customers’ research and design personnel, reliability engineers and facilities maintenance engineers to demonstrate the benefits and capabilities of our asset protection solutions, refine our asset protection solutions based on changing customer needs and identify potential sales opportunities. We provide our asset protection solutions under well known, industry-recognized brand names including Physical Acoustics Corporation and Vibra-Metrics, as well as lesser-known regional, local or product specific brand names. We have started to promote the name Mistras using the tag line of “Delivering Asset Protection Solutions.” We divide our sales and marketing efforts into services sales, software and other products sales and marketing.
 
Services sales
 
In addition to our general and center of excellence managers and executives, our dedicated Services sales group employs 15 regional and business development managers and professionals, each of whom is responsible for educating our existing and potential customers about our asset protection solutions for a specific geographic region. The sales cycle for our more significant services engagements is typically three to six months. We generally provide our services under one- to three-year contracts, but none of our services contracts legally obligate our customers to purchase from us on a going-forward basis. Historically, a majority of our total services revenues have been recurring because of the length of certain of our client relationships and the number of our technicians who work for extended and predictable periods at our customer locations.
 
Products & systems sales
 
Our Products and Systems sales group employs 16 corporate level sales managers and professionals, each of whom is responsible for educating our existing and potential customers about our diverse portfolio of asset protection solutions in a geographic region. This team is supported by experts and scientists who work globally to provide design, installation and other sales support for more specialized niche applications, as well as customer support after purchase. The sales


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cycle for our software and other products is typically three to 12 months. We generally provide our software under one-year renewable license agreements.
 
International sales
 
Our International sales group employs 11 sales managers and professionals, each of whom is responsible for educating our existing and potential customers about our asset protection solutions in the geographical areas outside the United States other than China and South Korea. The sales cycle for our asset protection solutions and the agreements under which we provide them in these areas are substantially similar to those of our other segments.
 
Marketing
 
Our marketing group consists of four employees, and focuses primarily on supporting purchase decisions by our existing and potential customers’ facilities managers, design engineers and research and development personnel by providing them product demonstrations, product testing, displays, marketing collateral and training programs. In addition, we support our brands through a range of print advertising and dedicated websites. Our websites have been designed to be a readily available source of information about our asset protection solutions, assisting our sales, marketing and customer service activities on a 24-hour basis.
 
Manufacturing
 
Our hardware products are manufactured in our Princeton Junction, New Jersey facility. This is a modern manufacturing facility equipped with the latest surface mount manufacturing equipment and automated test equipment. Our Princeton Junction facility includes all the capabilities and personnel to fully produce all of our AE products, NDT Automation ultrasonic equipment and Vibra-Metrics vibration sensing products.
 
Intellectual property
 
Our success depends, in part, on our ability to maintain and protect our proprietary technology and to conduct our business without infringing on the proprietary rights of others. We utilize a combination of intellectual property safeguards, including patents, copyrights, trademarks and trade secrets, as well as employee and third-party confidentiality agreements, to protect our intellectual property.
 
As of August 1, 2009, in the United States we held nine patents, which will expire at various times between 2010 and 2023, and had no outstanding patent applications. Although we believe our existing patents have significant value, we currently do not principally rely on our patented technologies to provide our proprietary asset protection solutions. We periodically assess appropriate circumstances for seeking patent protection for those aspects of our technologies, designs, methodologies and processes that we believe provide significant competitive advantages. We have also licensed certain patent rights from third parties for new NDT technologies involving thermography and a method to measure wall thinning and geometric changes in boiler tubes. However, we do not significantly rely upon these licensed technologies in providing our asset protection solutions and the royalties we pay for these licenses are not material.


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As of August 1, 2009, the primary trademarks and service marks that we held in the United States included Mistras, Physical Acoustics Corporation (PAC), and Controlled Vibrations Inc. Other trademarks or service marks that we utilize in localized markets or product advertising include PCMS, NOESIS, AEwin, AEwinPost, UTwin, UTIA, LST, Vibra-Metrics, MONPAC, PERFPAC, TANKPAC, VPAC, POWERPAC, Sensor Highway, Quality Services Laboratories Inc. (QSL) and NDT Automation.
 
Many elements of our asset protection solutions involve proprietary know-how, technology or data that are not covered by patents or patent applications because they are not patentable, or patents covering them would be difficult to enforce, including technical processes, equipment designs, algorithms and procedures. We believe that this proprietary know-how, technology and data is the most important component of our intellectual property assets used in our asset protection solutions, and is a primary differentiator of our asset protection solutions from those of our competitors. We rely on various trade secret protection techniques and agreements with our customers, service providers and vendors to protect these assets. All of our employees in our Products and Systems segment and certain of our other employees involved in the development of our intellectual property have entered into confidentiality and proprietary information agreements with us. These agreements require our employees not to use or disclose our confidential information, to assign to us all of the inventions, designs and technologies they develop during the course of employment with us, and otherwise address intellectual property protection issues. We also seek confidentiality agreements from our customers and business partners before we disclose any sensitive aspects of our asset protection solutions technology or business strategies. We are not currently involved in any material intellectual property claims.
 
Research and development
 
Our research and development is principally conducted by 28 engineers and scientists at our Princeton Junction, New Jersey headquarters, and supplemented by other employees in the United States and throughout the world, including France, Greece, Japan, Russia and the United Kingdom, who have other primary responsibilities. Our total professional staff includes 29 employees who hold Ph.D.’s, and 67 employees who hold Level III certification, or the highest level of certification from the American Society of Non-Destructive Testing.
 
We work with many of our customers on developing new products or applications for our technology. Research and development expenses are reflected on our consolidated statements of operations as research and engineering expenses. Our company-sponsored research and engineering expenses were approximately $1.3 million, $1.0 million, and $0.7 million for fiscal 2009, 2008 and 2007, respectively. While we have historically funded most of our research and development expenditures, we had customer-sponsored research and development revenues of approximately $0.6 million, $0.6 million and $0.8 million in fiscal 2009, 2008 and 2007, respectively. In addition, in February 2009 the National Institute of Standards and Technology (NIST) awarded us and our university partners a $6.9 million research award under their new Technology Innovation Program (TIP) for the development and research of advanced technologies to enable monitoring and inspection of the structural health of bridges, roadways and water systems.
 
Employees
 
Providing our asset protection solutions requires a highly skilled and technically proficient employee base. As of August 1, 2009, we had approximately 2,000 employees worldwide and approximately 1,750 of our employees were based within the United States, of which


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approximately 80% were hourly. Less than 10% of our employees in the United States are unionized. We believe that we have good relations with our employees.
 
Facilities
 
As of August 1, 2009, we operated 68 offices in 15 countries, with our corporate headquarters located in Princeton Junction, New Jersey.
 
The locations of our operating properties are set forth below by geographic region. As of August 1, 2009, we owned the properties located in Olds, Alberta; Monroe, North Carolina; Trainer, Pennsylvania; Houston and Pasadena, Texas; and Gillette, Wyoming; and we occupied the other properties under leases.
 
         
Geographic region   City and state or country    
 
United States
  Decatur, Alabama   Bloomfield, New Mexico
    Theodore, Alabama   Bohemia, New York
    Bakersfield, California   Monroe, North Carolina
    Benicia (near San Francisco), California   Heath, Ohio
    Signal Hill (near Los Angeles), California   Independence, Ohio
    Torrance, California   Lima, Ohio
    Denver, Colorado   Carnegie, Pennsylvania
    East Granby, Connecticut   Manchester, Pennsylvania
    Waterford, Connecticut   Trainer, Pennsylvania
    Newark, Delaware   Roebuck, South Carolina
    Chubbuck, Idaho   Granbury, Texas
    Burr Ridge, Illinois   Clear Lake, Texas
    Edwardsville, Illinois   Corpus Christi, Texas
    South Holland, Illinois   Houston, Texas (2 locations)
    Hobart, Indiana   Pasadena, Texas
    Noblesville, Indiana   Texas City, Texas
    Ashland, Kentucky   North Salt Lake, Utah
    Louisville, Kentucky   Hampton, Virginia
    Prairieville, Louisiana   Richmond, Virginia
    Baltimore, Maryland   Bellingham, Washington
    Auburn, Massachusetts   Kent, Washington
    Springfield, Massachusetts   Evanston, Wyoming
    Old Bridge, New Jersey   Gillette, Wyoming
    Princeton Junction, New Jersey    
Asia-Pacific
  Beijing, China    
    Thane, India    
    Tokyo, Japan    


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Geographic region   City and state or country    
 
Canada
  Grande Prairie, Alberta    
    Olds, Alberta    
    Red Deer, Alberta    
Europe
  Cambridge, England    
    Sucy-en-Brie (near Paris), France    
    Vitrolles, France    
    Hamburg, Germany    
    Athens, Greece    
    Rotterdam, The Netherlands    
    Moscow, Russia    
    Gothenburg, Sweden    
Middle East
  Manama, Kingdom of Bahrain    
South America
  Buenos Aires, Argentina    
    Bahia, Brazil    
    Macae, Brazil    
    São Paulo, Brazil    
    São Sebastiao, Brazil    
 
 
 
Environmental matters
 
We are subject to numerous environmental, legal and regulatory requirements related to our operations worldwide. In the United States, these laws and regulations include, among others: the Comprehensive Environmental Response, Compensation, and Liability Act, the Resources Conservation and Recovery Act, the Clean Air Act, the Federal Water Pollution Control Act, the Toxic Substances Control Act, the Atomic Energy Act, the Energy Reorganization Act of 1974, as amended, and applicable state regulations.
 
In addition to the federal laws and regulations, states and other countries where we do business often have numerous environmental, legal and regulatory requirements by which we must abide. We evaluate and address the environmental impact of our operations by assessing properties in order to avoid future liabilities and comply with environmental, legal and regulatory requirements. Thus far, we are not involved in specific environmental litigation and claims, including the remediation of properties we own or have operated, as well as efforts to meet or correct compliance-related matters. We do not expect costs related to environmental matters to have a material adverse effect on our consolidated cash flows, financial position or results of operations.
 
Legal proceedings
 
We are subject to periodic lawsuits, investigations and claims that arise in the ordinary course of business. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, results of operations, cash flows or financial condition. The costs of defense and amounts that may be recovered in such matters may be covered by insurance.

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Management
 
Executive officers and directors
 
The following table sets forth certain information concerning our executive officers, directors and director nominee as of August 1, 2009:
 
             
Name   Age   Position
 
Sotirios J. Vahaviolos(1)
    63     Chairman, President, Chief Executive Officer and Director
Paul Peterik(1)
    59     Chief Financial Officer and Secretary
Mark F. Carlos(1)
    58     Group Executive Vice President, Products and Systems
Phillip T. Cole(1)
    56     Group Executive Vice President, International
Michael J. Lange(1)
    49     Group Executive Vice President, Services, and Director
Ralph L. Genesi(1)
    54     Group Executive Vice President, Marketing and Sales
Elizabeth Burgess(2)
    44     Director
Daniel M. Dickinson(3)(4)
    48     Director
James J. Forese(2)
    73     Director
Richard H. Glanton(3)(4)(5)
    63     Director nominee
Manuel N. Stamatakis(2)(3)(4)
    62     Director
 
 
 
(1) Executive Officer
 
(2) Member of audit committee
 
(3) Member of compensation committee
 
(4) Member of nominating and corporate governance committee
 
(5) Mr. Glanton will be nominated and elected as a director effective upon completion of this offering.
 
Sotirios J. Vahaviolos has served as our Chairman, President and Chief Executive Officer since he founded Mistras in 1978 under the name Physical Acoustics Corp. Prior to joining Mistras, Dr. Vahaviolos worked at AT&T Bell Laboratories. Dr. Vahaviolos received a BS in Electrical Engineering and graduated first in his class from Fairleigh Dickinson University and received a Master of Science (EE), Masters in Philosophy and a Ph.D.(EE) from the Columbia University School of Engineering. During Dr. Vahaviolos’ career in NDT, he has been elected Fellow of The Institute of Electrical and Electronics Engineers, a member of The American Society for Nondestructive Testing (ASNT) where he served as its President from 1992-1993 and its Chairman from 1993-1994, a member of Acoustic Emission Working Group (AEWG) and an honorary life member of the International Committee for Nondestructive Testing. Additionally, he was the recipient of ASNT’s Gold Medal in 2001 and AEWG’s Gold Medal in 2005. He was also one of the six founders of NDT Academia International in 2008.
 
Paul “Pete” Peterik joined Mistras in May 2005 as our Chief Financial Officer and Secretary. Prior to joining Mistras, Mr. Peterik was the Chief Financial Officer of Integrated Leasing Corp., a leasing company serving the electronic payment processing industry, from August 2003 until the business was sold in January 2005. From November 2002 to August 2003, Mr. Peterik operated his own financial consulting business for start-up and mid-sized companies. From 1980 to 2002,


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Mr. Peterik was employed as chief financial officer or chief operating officer at various private and public companies. Mr. Peterik was employed with PricewaterhouseCoopers LLP for nine years from 1971 to 1980, where he attained the position of audit manager.
 
Mark F. Carlos is Group Executive Vice President responsible for Products and Systems. Mr. Carlos joined Mistras at its founding in 1978. Prior to joining Mistras, Mr. Carlos worked at AT&T Bell Laboratories. Mr. Carlos received a Masters in Business Administration from Rider University and a Masters in Electrical Engineering from Columbia University. Mr. Carlos is an elected Fellow of ASNT and AEWG, and currently serves as the Vice Chairman of the American Society for Testing and Materials’ NDT Standards Writing Committee E-3 and was the recipient of its prestigious Charles W. Briggs Award in 2007.
 
Phillip T. Cole is Group Executive Vice President, International, and Managing Director of Physical Acoustics Limited (PAL). Mr. Cole founded Dunegan UK in 1983, which was acquired by PAL in 1986. Mr. Cole obtained a master’s degree in physics and electronic engineering from Loughborough University. Mr. Cole began his career at TI Research in the U.K. where he focused on NDT electromagnetic-acoustic devices.
 
Michael J. Lange is Group Executive Vice President responsible for Services. He joined Mistras when it acquired Quality Services Laboratories in November 2000. He was elected a Director in 2003. Mr. Lange is a well recognized authority in Radiography and has held an ASNT Level III Certificate for almost 20 years. Mr. Lange received an Associate of Science degree in NDT from the Spartan School of Aeronautics in 1979.
 
Ralph L. Genesi is Group Executive Vice President, Marketing and Sales. He joined Mistras in March of 2009 with more than 25 years of executive management experience in marketing and sales as well as corporate profit and loss responsibility. Prior to joining Mistras, Mr. Genesi was President of Swantech, a division of the Curtiss Wright Corporation. Previous he was Vice President and General Manager for Siemens AG- Power Generation Information Technology Business responsible for energy trading, fleet operations & control solutions worldwide. He has also held positions as President-Americas Operations for Spectris Technologies Inc., a European holding company and Director, Global Market & Sales Development for Honeywell IAC. Mr. Genesi has an Electrical Engineering degree from Fairleigh Dickinson University.
 
Elizabeth Burgess has served as a Director since October 2005. Ms. Burgess is a senior partner and co-founder of Altus Capital Partners, a private equity fund launched in 2003, and served as a Vice President of its predecessor fund, Max Capital Partners, which she joined in 2000. She currently serves on the board of directors for several private companies that are part of the Altus Capital portfolio. Ms. Burgess received a B.S. from the State University of New York at Plattsburgh and an M.B.A. from Columbia University Graduate School of Business.
 
Daniel M. Dickinson has served as a Director since August 2003. Mr. Dickinson has been employed since 2001 by, and is currently a Managing Partner of, Thayer | Hidden Creek, a private investment firm located in Washington, D.C. Mr. Dickinson serves as a director and a member of the audit committee of Caterpillar, Inc. and as a director and a member of the audit, governance and compensation committee of IESI-BFC Ltd. as well as a director of several private companies. Mr. Dickinson received a J.D. and M.B.A. from the University of Chicago and a B.S. in Mechanical Engineering and Materials Science from Duke University.
 
James J. Forese has served as a Director since August 2003. Mr. Forese joined Thayer | Hidden Creek in July 2003 and currently serves as an Operating Partner and Chief Operating Officer.


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Prior to joining Thayer | Hidden Creek, Mr. Forese worked at IKON Office Solutions, most recently as the Chairman and Chief Executive Officer. Mr. Forese serves as non-executive Chairman of Spherion Corporation, a director and the audit committee chair of IESI-BFC Ltd. and a director of several private organizations. Mr. Forese served as a director, the audit committee chair and member of the compensation committee of Anheuser-Busch Companies Inc. Mr. Forese received a B.E.E. in Electrical Engineering from Rensselaer Polytechnic Institute and an M.B.A. from Massachusetts Institute of Technology.
 
Richard H. Glanton will become a member of our board of directors upon the completion of this offering. Mr. Glanton is Chief Executive Officer and Chairman of the Philadelphia Television Network, a privately-held media company. From May 2003 to May 2007, Mr. Glanton served as the Senior Vice President of Corporate Development for Exelon Corporation. From 1986 to 2003 he was a partner in the law firm of Reed Smith LLP in Philadelphia. Mr. Glanton currently is a director of Aqua America, Inc. and The CEO Group, Inc. and is a member of the Board of Trustees of Lincoln University. Mr. Glanton received a BA in English from West Georgia College and a J.D. from University of Virginia School of Law.
 
Manuel N. Stamatakis has served as a Director since 2002. Mr. Stamatakis is the Chairman and Chief Executive Officer of Capital Management Enterprises, Inc., a financial services and employee benefits consulting company headquartered in Valley Forge, Pennsylvania. Mr. Stamatakis currently serves as Chairman of the Board of Drexel University College of Medicine, the Philadelphia Shipyard Development Corporation, and the Pennsylvania Supreme Court Investment Advisory Board. Mr. Stamatakis received a Bachelors’ of Science in Industrial Engineering from the Pennsylvania State University in 1969 and received an honorary Doctorate of Business Administration from Drexel University.
 
Our executive officers are elected by, and serve at the discretion of, our board of directors. There are no family relationships among any of our directors or executive officers.
 
Board of directors
 
Board composition
 
Our board of directors currently consists of six members. Under our second amended and restated certificate of incorporation that will be in effect upon the completion of this offering, the authorized number of directors may be changed only by resolution of the board of directors. At each annual meeting of stockholders commencing with the meeting in 2010, the directors will be elected to serve until the earlier of their death, resignation or removal or until their successors have been elected and qualified.
 
Director independence
 
In June 2009, our board of directors undertook a review of the independence of the directors and considered whether any director has a relationship with us that precludes a determination of independence within the meaning of the rules of the New York Stock Exchange. As a result of this review, our board of directors determined that Ms. Burgess and Messrs. Dickinson, Forese, Glanton and Stamatakis, representing five of the six directors we will have upon completion of the offering, are “independent directors” as defined under the rules of the New York Stock Exchange, constituting a majority of independent directors of our board of directors as required by the rules of the New York Stock Exchange.


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Committees of the board of directors
 
Upon the completion of this offering, we will have an audit committee, a compensation committee and a nominating and corporate governance committee with the composition and responsibilities described below.
 
Audit committee
 
Our audit committee will be comprised of Messrs. Forese and Stamatakis and Ms. Burgess, each of whom is a non-employee member of our board of directors, with Mr. Forese serving as the initial chairperson of our audit committee. Our board of directors has determined that each member of our audit committee meets the requirements for independence and financial literacy, and that Mr. Forese qualifies as an audit committee financial expert, under the applicable requirements of the New York Stock Exchange and SEC rules and regulations. The audit committee will be responsible for, among other things:
 
•  selecting and hiring our independent auditors, and approving the audit and non-audit services to be performed by our independent auditors;
 
•  evaluating the qualifications, performance and independence of our independent auditors;
 
•  monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters;
 
•  reviewing the adequacy and effectiveness of our internal control policies and procedures;
 
•  discussing the scope and results of the audit with the independent auditors and reviewing with management and the independent auditors our interim and year-end operating results; and
 
•  preparing the audit committee report that the SEC requires in our annual proxy statement.
 
Compensation committee
 
Our compensation committee will be comprised of Messrs. Dickinson, Glanton and Stamatakis, each of whom is a non-employee member of our board of directors, with Mr. Dickinson serving as the initial chairperson of our compensation committee. Our board of directors has determined that each member of our compensation committee meets the requirements for independence under the current requirements of the New York Stock Exchange. The compensation committee will be responsible for, among other things:
 
•  reviewing and approving for our executive officers: annual base salaries, annual incentive bonuses, including the specific goals and amount, equity compensation, employment agreements, severance arrangements and change in control arrangements and any other benefits, compensation or arrangements;
 
•  reviewing the succession planning for our executive officers;
 
•  overseeing compensation goals and bonus and stock compensation criteria for our employees;
 
•  reviewing and recommending compensation programs for outside directors;
 
•  preparing the compensation discussion and analysis and compensation committee report that the SEC requires in our annual proxy statement; and


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•  administering, reviewing and making recommendations with respect to our equity compensation plans.
 
Nominating and governance committee
 
Our nominating and governance committee will be comprised of Messrs. Dickinson, Glanton and Stamatakis, each of whom is a non-employee member of our board of directors, with Mr. Stamatakis serving as the initial chairperson of our nominating and governance committee. Our board of directors has determined that each member of our nominating and governance committee satisfies the requirements for independence under the current rules of the New York Stock Exchange. The nominating and governance committee will be responsible for, among other things:
 
•  assisting our board of directors in identifying prospective director nominees and recommending nominees for each annual meeting of stockholders to the board of directors;
 
•  reviewing developments in corporate governance practices and developing and recommending governance principles applicable to our board of directors;
 
•  overseeing the evaluation of our board of directors and management;
 
•  recommending members for each board committee to our board of directors; and
 
•  reviewing and monitoring our code of ethics and actual and potential conflicts of interest of members of our board of directors and officers.
 
Code of ethics
 
In connection with this offering our board of directors will adopt a code of ethics for our principal executive and senior financial officers. The code will apply to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Upon the effectiveness of the registration statement of which this prospectus forms a part, the full text of our code of ethics will be posted on our website at www.mistrasgroup.com. We intend to disclose future amendments to certain provisions of our code of ethics, or waivers of such provisions, applicable to any principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions as required by law or regulation. The inclusion of our website address in this prospectus does not include or incorporate by reference the information on our website into this prospectus.
 
Compensation committee interlocks and insider participation
 
None of the members of our compensation committee is an officer or employee of our company. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.
 
Limitations on liability and indemnification matters
 
Our second amended and restated certificate of incorporation and amended and restated bylaws, each of which will be in effect upon the completion of this offering, contain provisions


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that limit the liability of our directors for monetary damages to the fullest extent permitted by Delaware law. Consequently, our directors will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duties as directors, except liability for:
 
•  any breach of the director’s duty of loyalty to us or our stockholders;
 
•  any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;
 
•  unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; or
 
•  any transaction from which the director derived an improper personal benefit.
 
Our amended and restated bylaws also provide that we are obligated to advance expenses incurred by a director or officer in advance of the final disposition of any action or proceeding, and permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in that capacity, regardless of whether we would otherwise be permitted to indemnify him or her under the provisions of Delaware law. We have entered, and expect to continue to enter, into agreements to indemnify our directors, executive officers and other employees as determined by our board of directors. With specified exceptions, these agreements provide for indemnification for related expenses including, among other things, attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. We believe that these bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. We also maintain directors’ and officers’ liability insurance.
 
The limitation of liability and indemnification provisions in our second amended and restated certificate of incorporation and amended and restated bylaws may discourage stockholders from bringing a lawsuit against our directors and officers for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, might benefit us and other stockholders. Further, a stockholder’s investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions. At present, there is no pending litigation or proceeding involving any of our directors, officers or employees for which indemnification is sought, and we are not aware of any threatened litigation that may result in claims for indemnification.
 
There is no currently pending material litigation or proceeding involving any of our directors or officers for which indemnification is sought.
 
Director compensation
 
We reimburse each member of our board of directors who is not an employee for reasonable travel and other expenses in connection with attending meetings of the board of directors or committees thereof. Our directors received no other compensation for their services as such in fiscal 2009.


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Executive compensation
 
Compensation discussion and analysis
 
Our current compensation program for our “named executive officers” (as defined under “—Summary Compensation Table for 2009”) was developed and implemented by our board of directors while we were a private company. Therefore, our current compensation program, and the process by which it was developed, is less formal than that which we plan to follow as a public company.
 
In connection with this offering, we will review our compensation philosophy and expect to adopt compensation policies and objectives that generally are more consistent with those of a public, rather than private, company. To this end, our compensation committee will undertake a review of director and executive officer compensation trends at comparable companies and provide recommendations to our board of directors with respect to compensation arrangements following the completion of this offering. We anticipate that individual performance objectives will be identified in the future. However, we cannot predict what the compensation committee’s recommendations or such objectives will be.
 
We currently have no employment agreements with our named executive officers other then Dr. Vahaviolos. We may enter into employment agreements with our other named executive officers on terms to be agreed between us and the executives after this offering. We have established the following primary objectives in negotiating these employment agreements:
 
•  attracting, retaining and motivating executive officers with the knowledge, skills and experience that are critical to our success;
 
•  ensuring that executive compensation is aligned with our corporate strategies and business objectives; and
 
•  promoting the achievement of key strategic and financial performance measures by linking cash incentives to the achievement of operating results.
 
After completion of this offering, our compensation committee will oversee our executive compensation program. For more information on our compensation committee after completion of the offering, see “Compensation Committee” above. Given the limited formal procedures we have employed as a private company, we expect that our approach to executive compensation as a public company, as developed and implemented by our compensation committee, will vary significantly from our historical practice. We expect that the compensation committee will meet periodically to make recommendations for base salaries, bonuses, stock option awards, long-term incentive awards and other compensation and benefits to be paid, granted or provided to our named executive officers. In making these recommendations, we expect that the compensation committee will consider (1) our historical and expected performance, (2) the alignment of individual performance with our operational objectives, (3) the anticipated level of difficulty in replacing our named executive officers with persons of comparable experience, skill and knowledge, and (4) the recommendations of any external advisors that it may engage.
 
Components of executive compensation for fiscal 2009
 
The principal components of our current executive compensation program are base salary and an annual performance bonus principally based on our revenues and EBITDA (and in the case of our named executive officers other than Dr. Vahaviolos and Mr. Peterik, on the financial


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performance of the group for which each such named executive officer is responsible). In addition, we maintain certain benefits and perquisites for our named executive officers, which are dependent, in part, on the country in which the named executive officer is located. Although each element of compensation described below is considered separately, our existing compensation committee takes into account the aggregate compensation package for each individual in its determination of each individual component of that package. The components of executive compensation have been as follows:
 
•  Base salary. Base salary is a fixed compensation amount paid during the course of the fiscal year. Each named executive officer’s base salary is reviewed on an annual basis by our existing compensation committee. Historically, we have not applied specific formulas to set base salary or to determine salary increases, nor have we sought to formally benchmark base salary against similarly situated companies. Generally, salary is determined by reference to the scope of each named executive officer’s responsibilities and is intended to provide a basic level of compensation for performing the job expected of him. We believe that each named executive officer’s base salary must be competitive in our industry and with the market generally with respect to the knowledge, skills and experience that are necessary for him to meet the requirements of his position.
 
•  Annual cash incentives. Annual cash incentives are intended to reward named executive officers for individual performance. The named executive officers have the potential to earn cash incentives up to a maximum of 100 percent of base salary. In fiscal 2009, the cash incentives were principally based on our revenues and EBITDA. We chose revenues as a metric in order to incentivize and reward revenue growth and EBITDA because we believe it is a useful measure of our profitability. The targets set by our compensation committee for fiscal 2009 were revenues of $200 million (after intercompany eliminations) and EBITDA of $35 million. In addition, the cash incentives for our named executive officers were based in part on other factors, such as new product introduction, customer base growth, customer retention, completion of acquisitions and successful integration of acquired companies or assets and, solely with respect to our named executive officers other than Dr. Vahaviolos and Mr. Peterik, on the performance of the group for which each is responsible, although we did not assign a target for any of these factors. Instead, with respect to these factors, we used our own experience and judgment to determine whether and to what extent each named executive officer’s cash incentives should be adjusted as a result of his or her performance with respect to such factors. Due to the economy and several non-recurring events we did not fully achieve our EBITDA and revenue targets and accordingly reduced bonus payments. The cash incentives paid to our named executive officers ranged from approximately 19% to 39% of our named executive officers’ base salaries. We did not adhere to a fixed formula for determining the aggregate cash incentives since the applicable targets for EBITDA were not met; nor did we assign a fixed weight to the other metrics on which such incentives were based.
 
•  Benefits and perquisites. Our named executive officers are eligible to receive the same benefits that are generally available to all employees. We provide a qualified matching contribution to each employee, including our named executive officers, who participates in our 401(k) plan. This matching policy provides that we match half of the first 6% of compensation that our named executive officers contribute to the plan. We also provide certain additional benefits to our named executive officers located outside the United States, including health and dental insurance and a car allowance, which we believe are consistent with those offered by other companies and specifically with those companies with which we compete for these employees. We did not provide any other personal benefits or pension,


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deferred compensation or other retirement benefits to our named executive officers in fiscal 2009.
 
Vahaviolos employment agreement
 
In September 2009, we entered into an employment agreement with Dr. Vahaviolos for the positions of executive chairman of the board and chief executive officer, which has an initial term of two years and is automatically renewable for successive one-year periods in the absence of an election by either party to terminate. The employment agreement provides for an initial annual base salary of $345,000, subject to annual review by the compensation committee. Dr. Vahaviolos is entitled to annual short-term incentive opportunities targeted at 75% of his annual base salary. Under his employment agreement, Dr. Vahaviolos was granted an option to purchase 1,950,000 shares of our common stock with an exercise price equal to $13.46 per share pursuant to our 2007 Stock Option Plan. The options are subject to a four-year vesting schedule, with 25% of the options vesting each upon the first, second, third and fourth anniversary of their issuance.
 
Under his employment agreement, Dr. Vahaviolos is entitled to receive payments and other benefits upon the termination of his employment. These payments and other benefits are described under “Potential payments upon termination of employment or a change of control.”
 
We currently have no employment agreements with our other named executive officers.
 
Equity benefit plans
 
2007 stock option plan
 
Our 2007 Stock Option Plan provides for the grant of nonstatutory and incentive stock options to our employees, directors, consultants and other persons who perform services for us. As of August 31, 2009, options to purchase 1,173,900 shares of common stock were outstanding and 3,185,000 shares of common stock were reserved for future grant under the 2007 Stock Option Plan. Following this offering, our board of directors does not intend to grant any further awards under the 2007 Stock Option Plan. Our board of directors has adopted the 2009 Long-Term Incentive Plan, under which we expect to make all future awards. All outstanding stock options granted under the 2007 Stock Option Plan will remain outstanding and subject to their respective terms and the terms of the 2007 Stock Option Plan.
 
2009 long-term incentive plan
 
Our board of directors and existing stockholders have adopted and approved the 2009 Long-Term Incentive Plan, or 2009 Plan. The 2009 Plan will become effective on the date of this prospectus and is a comprehensive incentive compensation plan under which we can grant equity-based and other incentive awards to officers, employees and directors of, and consultants and advisers to our company and our subsidiaries. The purpose of the 2009 Plan is to help us attract, motivate and retain such persons and thereby enhance shareholder value.
 
We have reserved up to 2,286,318 shares of our common stock for issuance under the 2009 Plan. Unissued shares covered by awards that terminate, shares that are forfeited, and shares withheld or surrendered for the payment of the exercise price or withholding obligations associated with an award will remain available for issuance under the 2009 Plan. The number of shares issuable under the 2009 Plan is subject to adjustment in the event of certain capital changes affecting


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outstanding shares of our common stock, such as the payment of a stock dividend, a spin-off or other form of recapitalization.
 
Awards under the 2009 Plan may be in the form of stock options, restricted stock and other forms of stock-based incentives, including stock appreciation rights and deferred stock rights.
 
•  Stock options represent the right to purchase shares of our common stock within a specified period of time for a specified price. The purchase price per share must be at least equal to the fair market value per share on the date the option is granted. Stock options may have a maximum term of ten years. Our compensation committee will have the flexibility to grant stock options that are intended to qualify as “incentive stock options” under Section 422 of the Internal Revenue Code.
 
•  Restricted stock awards consist of the issuance of shares of our common stock subject to certain vesting conditions and transfer restrictions that lapse based upon continuing service and/or the attainment of specified performance objectives. The holder of a restricted stock award may be given the right to vote and receive dividends on the shares covered by the award.
 
•  Stock appreciation rights entitle the holder to receive the appreciation in the fair market value of the shares of our common stock covered by the award between the date the award is granted and the date the award is exercised. In general, settlement of a stock appreciation right will be made in the form of shares of our common stock with a value equal to the amount of such appreciation.
 
•  Deferred stock awards represent the right to receive shares of our common stock in the future, subject to applicable vesting and other terms and conditions. Deferred stock awards are generally settled in shares of our common stock at the time the award vests, subject to any applicable deferral conditions as may be permitted or required under the award. The holder of a deferred stock award may not vote the shares covered by the award unless and until the award vests and the shares are issued. Dividend equivalents may or may not be payable with respect to shares covered by deferred stock award.
 
•  Performance units are awards with an initial value established by our compensation committee (or that is determined by reference to a valuation formula specified by the committee) at the time of the grant. In its discretion, the compensation committee will set performance goals that, depending on the extent to which they are met during a specified performance period, will determine the number and/or value of performance units that will be paid out to the participant. The compensation committee, in its sole discretion, may pay earned performance units in the form of cash, shares of our common stock or any combination thereof that has an aggregate fair market value equal to the value of the earned performance units at the close of the applicable performance period. The determination of the compensation committee with respect to the form and timing of payout of performance units will be set forth in the applicable award agreement. The committee may, on such terms and conditions as it may determine, provide a participant who holds performance units with dividends or dividend equivalents, payable in cash, shares of our common stock, other securities, other awards or other property.
 
The 2009 Plan also provides for stock bonus and other forms of stock-based awards and for cash incentive awards.


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The 2009 Plan will be administered by the compensation committee of our board of directors. Subject to the terms of the 2009 Plan, the compensation committee (or its designee) may select the persons who will receive awards, the types of awards to be granted, the purchase price (if any) to be paid for shares covered by the awards, and the vesting, forfeiture and other terms and conditions of the awards. In general, awards granted under the 2009 Plan will not be transferrable.
 
In the event of a change in control or sale event as described in the 2009 Plan, outstanding awards under the 2009 Plan may be converted into equivalent awards with respect to shares of an acquiring or successor company (or corporate parent), subject to substantially similar vesting and other terms and conditions, except that, if the individual is terminated other than for cause within two years after a sale event or change in control, the awards will vest in full. In general, if an outstanding award is not so converted, it will become fully vested and will be cashed out or otherwise entitled to participate in the change in control transaction or sale event based upon its then intrinsic value.
 
Unless sooner terminated by our board of directors, the 2009 Plan shall expire on the tenth anniversary of the date of its adoption. The board of directors may amend or terminate the 2009 Plan at any time, provided, however, that no such action may adversely affect outstanding awards without the holder’s consent. Amendments to the 2009 Plan will be subject to shareholder approval if and to the extent required in order to comply with applicable legal or stock exchange requirements.
 
The 2009 Plan is intended to constitute a plan described in Treasury Regulation Section 1.162-27(f)(1), pursuant to which the deduction limits under Section 162(m) of the Internal Revenue Code do not apply during the applicable reliance period, which would end upon the earliest of: (i) the expiration of the 2009 Plan, (ii) a material modification of the 2009 Plan, (iii) the issuance of all available stock and other compensation that has been allocated under the 2009 Plan, or (iv) the first stockholder meeting at which directors are to be elected that occurs after the close of the third calendar year in which we became publicly held.


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Summary compensation table for fiscal 2009(1)
 
The following table provides information regarding the compensation of our Chief Executive Officer, Chief Financial Officer and each of the next four most highly compensated executive officers in fiscal 2009. We refer to these executive officers as our “named executive officers.”
 
                                                 
 
                      Option
    All other
       
          Salary
    Bonus
    awards
    compensation
    Total
 
Name and principal position   Year     ($)     ($)     ($)     ($)     ($)  
 
 
Sotirios J. Vahaviolos
    2009     $ 312,716     $ 120,000     $     $ 36,594 (2)   $ 469,310  
Chairman, President and Chief Executive Officer
                                               
Paul “Pete” Peterik
    2009       219,527       74,000             28,586 (3)     322,113  
Chief Financial Officer and Secretary
                                               
Michael J. Lange
    2009       198,000       78,000             25,392 (4)     301,392  
Group Executive Vice President, Services
                                               
Mark F. Carlos
    2009       149,775       28,400             12,729 (5)     190,904  
Group Executive Vice President, Products and Systems
                                               
Phillip T. Cole
    2009       162,215       58,676             29,051 (6)     249,942  
Group Executive Vice President, International
                                               
Ralph L. Genesi
    2009       36,692       1,500       25,000 (8)     1,100 (7)     64,292  
Group Executive Vice President, Marketing and Sales
                                               
 
 
 
(1) Columns disclosing compensation under the headings “Stock Awards,” “Non-Equity Incentive Plan Compensation,” and “Change in Pension Value and Nonqualified Deferred Compensation Earnings” are not included because no compensation in these categories was awarded to, earned by or paid to our named executive officers in fiscal 2008.
 
(2) Includes matching contributions under our 401(k) Plan of $7,750 and vehicle allowances of $14,712.
 
(3) Includes matching contributions under our 401(k) Plan of $8,313 and vehicle allowances of $7,800.
 
(4) Includes matching contributions under our 401(k) Plan of $4,854 and vehicle allowances of $12,278.
 
(5) Includes matching contributions under our 401(k) Plan of $4,900 and vehicle allowances of $3,000.
 
(6) Includes contributions for retirement and health care insurance of $22,584 and vehicle allowances of $6,467.
 
(7) Includes vehicle allowances of $1,000.
 
(8) Represents the total compensation expense for fiscal 2009, calculated in accordance with SFAS No. 123R for the stock option grants received. The annual valuation assumptions used in determined such amounts are described elsewhere in this prospectus.


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Grants of plan-based awards
 
The fo