<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended August 31, 1999
---------------
or
( ) Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission File number 0-l87l6
MATRIX SERVICE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 73-1352l74
(State of incorporation) (I.R.S. Employer Identification No.)
l070l E. Ute St., Tulsa, Oklahoma 74ll6-l5l7
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (9l8) 838-8822
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act of
l934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
As of October 6, 1999, there were 9,642,638 shares of the Company's common
stock, $.0l par value per share, issued and 8,950,438 shares outstanding.
================================================================================
<PAGE>
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
--------------------- --------
ITEM 1. Financial Statements (Unaudited)
Consolidated Statements of Income for the Three Months
Ended August 31, 1999 and 1998 ..................... 1
Consolidated Balance Sheets August 31, 1999 and
May 31, 1999 ....................................... 2
Consolidated Statements of Cash Flow for the Three
Months Ended August 31, 1999 and 1998 .............. 4
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 8
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk......................................... N/A
PART II OTHER INFORMATION
-----------------
ITEM 1. Legal Proceedings...................................... N/A
ITEM 2. Changes in Securities.................................. N/A
ITEM 3. Defaults Upon Senior Securities........................ N/A
ITEM 4. Submission of Matters to a Vote of Security Holders.... N/A
ITEM 5. Other Information...................................... N/A
ITEM 6. Exhibits and Reports on Form 8-K....................... 13
Signatures ....................................................... 13
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
Matrix Service Company
Consolidated Statements of Income
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months
Ended
August 31
(unaudited)
--------------------------------------------
1999 1998
----------------- ------------------
<S> <C> <C>
Revenues $ 47,507 $ 51,158
Cost of revenues 41,741 46,169
----------------- ------------------
Gross profit 5,766 4,989
Selling, general and administrative expenses 3,544 3,332
Goodwill and non-compete amortization 88 163
----------------- ------------------
Operating income 2,134 1,494
Other income (expense):
Interest expense (111) (377)
Interest income 21 257
Other (39) 76
----------------- ------------------
Income before income tax expense 2,005 1,450
Provision for federal, state and
Foreign income tax expense -- 613
----------------- ------------------
Net income $ 2,005 $ 837
================= ==================
Earnings per share of common stock:
Basic $0.22 $0.09
Diluted $0.22 $0.09
Weighted average number of common shares:
Basic 8,945,587 9,524,685
Diluted 9,025,249 9,661,972
</TABLE>
See Notes to Consolidated Financial Statements
1
<PAGE>
Matrix Service Company
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
August 31, May 31,
--------------------------------------------
1999 1999
----------------- ------------------
<S> <C> <C>
ASSETS: (unaudited)
Current assets:
Cash and cash equivalents $ 824 $ 2,972
Accounts receivable, less allowances
(August 31 - $2,464 May 31 - $2,464) 27,085 34,390
Brown sales proceeds receivable 6,244 --
Costs and estimated earnings in excess
of billings on uncompleted contracts 8,239 8,541
Inventories 2,933 3,042
Assets held for disposal -- 8,556
Income tax receivable 103 104
Prepaid expenses 3,024 1,051
----------------- ------------------
Total current assets 48,452 58,656
Property, plant and equipment at cost:
Land and buildings 9,642 9,645
Construction equipment 15,675 15,562
Transportation equipment 6,212 6,144
Furniture and fixtures 2,438 2,449
Construction in progress 3,742 2,385
----------------- ------------------
37,709 36,185
Less accumulated depreciation 18,833 17,971
----------------- ------------------
Net property, plant and equipment 18,876 18,214
Goodwill, net of accumulated amortization of
$1,847 and $1,753 at August 31 and
May 31, respectively 11,061 11,122
Other assets 3,151 228
----------------- ------------------
Total assets $ 81,540 $ 88,220
================= ==================
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
Matrix Service Company
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
August 31, May 31,
--------------------------------------------
1999 1999
----------------- ------------------
<S> <C> <C>
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 3,370 $ 9,805
Billings on uncompleted contracts in
excess of costs and estimated earnings 7,988 7,356
Accrued insurance 4,674 4,541
Accrued environmental reserves 1,490 1,778
Earnout payable 727 727
Income taxes payable 300 307
Other accrued expenses 3,546 6,378
Current portion of long-term debt 2,090 2,092
----------------- ------------------
Total current liabilities 24,185 32,984
Long-term debt 5,676 5,521
Stockholders' equity:
Common stock 96 96
Additional paid-in capital 51,596 51,596
Retained earnings 3,539 1,567
Accumulated other comprehensive income (599) (555)
----------------- ------------------
54,632 52,704
Less: Treasury stock, at cost (2,953) (2,989)
----------------- ------------------
Total stockholders' equity 51,679 49,715
----------------- ------------------
Total liabilities and stockholders' equity $ 81,540 $ 88,220
================= ==================
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
Matrix Service Company
Consolidated Cash Flow Statements
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
(unaudited)
--------------------------------------------
1999 1998
----------------- ------------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 2,005 $ 837
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,080 1,244
Deferred income taxes - 242
(Gain) loss on sale of equipment 2 (46)
Changes in current assets and liabilities
increasing (decreasing) cash:
Accounts receivable 6,383 746
Costs and estimated earnings in excess
of billings on uncompleted contracts (750) 2,551
Inventories 966 (382)
Prepaid expenses (1,973) 254
Accounts payable (6,435) (2,487)
Billings on uncompleted contracts in
excess of costs and estimated earnings 632 364
Accrued expenses (2,621) (2,171)
Income taxes receivable/payable (6) 1,286
Other 3 42
----------------- ------------------
Net cash provided (used) by operating activities (714) 2,480
Cash flow from investing activities:
Capital expenditures (1,576) (613)
Proceeds from sale of equipment 3 67
----------------- ------------------
Net cash used in investing activities $ (1,573) $ (546)
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
Matrix Service Company
Consolidated Cash Flow Statements
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
(unaudited)
--------------------------------------------
1999 1998
----------------- ------------------
<S> <C> <C>
Cash flows from financing activities:
Repayment of acquisition payables $ (16) $ (16)
Repayment of equipment notes (6) (5)
Issuance of long-term debt 9,950 -
Repayments of long-term debt (9,775) (500)
Purchase of treasury stock - (985)
Issuance of stock 3 139
----------------- ------------------
Net cash provided (used) in financing 156 (1,367)
activities
Effect of exchange rate changes on cash (17) (62)
----------------- ------------------
Increase (Decrease) in cash and cash equivalents (2,148) 505
Cash and cash equivalents at beginning of period 2,972 2,606
----------------- ------------------
Cash and cash equivalents at end of period $ 824 $ 3,111
================= ==================
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Matrix Service
Company ("Matrix") and its subsidiaries, all of which are wholly owned. All
significant inter-company balances and transactions have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Rule 10-0l of Regulation S-X for interim financial statements
required to be filed with the Securities and Exchange Commission and do not
include all information and footnotes required by generally accepted accounting
principles for complete financial statements. However, the information
furnished reflects all adjustments, consisting only of normal recurring
adjustments that are, in the opinion of management, necessary for a fair
statement of the results for the interim periods.
The accompanying financial statements should be read in conjunction with the
audited financial statements for the year ended May 3l, 1999, included in
Matrix's Annual Report on Form 10-K for the year then ended. Matrix's business
is seasonal; therefore, results for any interim period may not necessarily be
indicative of future operating results.
6
<PAGE>
NOTE B - SEGMENT INFORMATION
Matrix operates primarily in the United States and has operations in Canada
and Venezuela. Matrix's industry segments are Aboveground Storage Tank (AST)
Services, Construction Services, Plant Services, Municipal Water Services, and
Fluid Catalytic Cracking Unit (FCCU) Services.
<TABLE>
<CAPTION>
Matrix Service Company
1st Quarter Results of Operations
($ Amounts in millions)
- ----------------------------------------------------------------------------------------------------------------------
Municipal
AST Construction Plant Water FCCU Combined
Services Services Services Services Services Total
- ----------------------------------------------------------------------------------------------------------------------
Three Months ended August 31, 1999
<S> <C> <C> <C> <C> <C> <C>
Gross revenues 27.1 1.5 8.9 10.9 0.0 48.4
Less: Inter-segment revenues (0.1) 0.0 (0.6) (0.2) 0.0 0.9
Consolidated revenues 27.0 1.5 8.3 10.7 0.0 47.5
Gross profit 4.5 (0.1) 0.9 0.6 (0.1) 5.8
Operating income (loss) 2.3 (0.5) 0.4 0.0 (0.1) 2.1
Income (loss) before income tax expense 2.2 (0.5) 0.4 0.0 (0.1) 2.0
Net income (loss) 2.2 (0.5) 0.4 0.0 (0.1) 2.0
Identifiable assets 51.5 5.2 4.9 19.9 0.0 81.5
Capital expenditures 1.1 0.2 0.3 0.0 0.0 1.6
Depreciation expense 0.7 0.1 0.1 0.1 0.0 1.0
Three Months ended August 31, 1998
Gross revenues 27.4 4.7 6.6 12.7 0.5 51.9
Less: Inter-segment revenues 0.0 0.0 (0.6) (0.1) 0.0 (0.7)
Consolidated revenues 27.4 4.7 6.0 12.6 0.5 51.2
Gross profit 4.0 0.5 0.7 (0.1) (0.1) 5.0
Operating income (loss) 2.1 0.3 0.1 (0.9) (0.1) 1.5
Income (loss) before income tax expense 2.0 0.3 0.1 (0.9) 0.0 1.5
Net income (loss) 1.1 0.2 0.1 (0.6) 0.0 0.8
Identifiable assets 62.3 8.5 6.8 30.3 0.0 107.9
Capital expenditures 0.3 0.1 0.1 0.1 0.0 0.6
Depreciation expense 0.6 0.1 0.1 0.3 0.0 1.1
</TABLE>
NOTE C - REPORTING ACCUMULATED OTHER COMPREHENSIVE LOSS
For the quarter ended August 31, 1999, total comprehensive loss was $44
thousand as compared to $280 thousand for the same three month period ended
August 31, 1998. Other comprehensive loss and accumulated other comprehensive
loss consisted of foreign currency translation adjustments.
NOTE D - INCOME TAXES
For the quarter ended August 31, 1999, a provision for income taxes was offset
by the benefit of operating loss carryforwards for which a valuation allowance
was provided at May 31, 1999 as required under Statement of Financial
Accounting Standards No 109.
7
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward Looking Statements
Certain matters discussed in this report, include forward-looking statements.
Matrix is making these forward-looking statements in reliance on the safe harbor
protections provided under the Private Securities Litigation Reform Act of 1995.
Such statements are subject to a number of uncertainties that could cause actual
results to differ materially from any results projected, forecasted, estimated,
or budgeted, including the following:
. Changes in general economic conditions in the United States.
. Changes in laws and regulations to which Matrix is subject, including tax,
environmental, and employment laws and regulations.
. The cost and effects of legal and administrative claims and proceedings
against Matrix or its subsidiaries.
. Conditions of the capital markets Matrix utilizes to access capital to
finance operations.
. The ability to raise capital in a cost-effective way.
. Year 2000 readiness of Matrix, its customers, and its vendors.
. The effect of changes in accounting policies.
. The ability to manage growth and to assimilate personnel and operations of
acquired businesses.
. The ability to control costs.
. Changes in foreign economies, currencies, laws, and regulations, especially
in Canada and Venezuela where Matrix has made direct investments.
. Political developments in foreign countries, especially in Canada and
Venezuela where Matrix has made direct investments.
. The ability of Matrix to develop expanded markets and product or service
offerings as well as its ability to maintain existing markets.
. Technological developments, high levels of competition, lack of customer
diversification, and general uncertainties of governmental regulation in the
energy industry.
. The ability to recruit, train, and retain project supervisors with
substantial experience.
. A downturn in the petroleum storage operations or hydrocarbon processing
operations of the petroleum and refining industries.
. Changes in the labor market conditions that could restrict the availability
of workers or increase the cost of such labor.
. The negative effects of a strike or work stoppage.
. The timing and planning of maintenance projects at customer facilities in the
refinery industry which could cause adjustments for seasonal shifts in
product demands.
. Exposure to construction hazards related to the use of heavy equipment with
attendant significant risks of liability for personal injury and property
damage.
. The use of significant production estimates for determining percent complete
on construction contracts could produce different results upon final
determination of project scope.
. The inherent inaccuracy of estimates used to project the timing and cost of
exiting operations of non-core businesses.
. Fluctuations in quarterly results.
8
<PAGE>
Results of Operations
AST Services 1999 vs. 1998
Revenues for AST Services in the quarter ended August 31, 1999 were relatively
flat at $27.1 million, decreasing $0.3 million or 1.1% over the quarter ended
August 31, 1998. Gross margin for the quarter ended August 31, 1999 of 16.6% was
better than the 14.6% produced for the quarter ended August 31, 1998 as a direct
result of higher margin lump sum work combined with better execution of job
plans. These margin improvements along with the increased sales volumes resulted
in gross profit for the quarter ended August 31, 1999 of $4.5 million exceeding
the $4.0 million for the quarter ended August 31, 1998 by $0.5 million, or
12.5%.
Selling, general and administrative costs as a percent of revenues increased to
7.3% in the quarter ended August 31, 1999 vs. 6.3% in the quarter ended August
31, 1998 primarily as a result of increased salary and wages, increased
professional services costs and increased information technology costs
associated with the new enterprise-wide management information system discussed
in the "Year 2000 Compliance" section.
Operating income and income before income tax expense for the quarter ended
August 31, 1999 of $2.3 million and $2.2 million respectively, was slightly
better than the $2.1 million and $2.0 million respectively produced in the
quarter ended August 31, 1998, primarily the result of the improvements in gross
profit offset by the increase in selling, general and administrative expenses
discussed above. No tax expense was recognized in the quarter ended August 31,
1999 as discussed in Note D - Income Taxes.
Construction Services 1999 vs. 1998
Revenues for Construction Services in the quarter ended August 31, 1999 were
$1.5 million, compared to $4.7 million in the comparable quarter of the prior
year, a decrease of $3.2 million or 68.1%. Gross margin for the quarter ended
August 31, 1999 of (6.7%) was also significantly less than the 10.6% produced
for the quarter ended August 31, 1998 as a direct result the lack of significant
work to cover the fixed cost structure in place for Construction Services. These
margin declines along with the decreased sales volumes resulted in gross profit
for the quarter ended August 31, 1999 of ($0.1) million, $0.6 million less than
the $0.5 million in the quarter ended August 31, 1998.
Operating loss and loss before income tax expense for the quarter ended August
31, 1999 of ($0.5) million and ($0.5) million respectively, was significantly
worse than the $0.3 million and $0.3 million respectively produced in the
quarter ended August 31, 1998, primarily the result of the lack of significant
work discussed above. No tax expense is recognized in the quarter ended August
31, 1999 as discussed in Note D - Income Taxes.
Plant Services 1999 vs. 1998
Revenues for Plant Services in the quarter ended August 31, 1999 were
significantly higher at $8.9 million, increasing $2.3 million or 34.8% over the
$6.6 million in revenues for the quarter ended August 31, 1998. Gross margin for
the quarter ended August 31, 1999 of 10.1% was worse than the 10.6% produced for
the quarter ended August 31, 1998 as a direct result of a less favorable mix of
the type of work performed. However, the increased sales volumes resulted in
gross profit for the quarter ended August 31, 1999 of $0.9 million exceeding the
$0.7 million gross profit in the quarter ended August 31, 1998 by $0.2 million,
or 28.6%.
Operating income and income before income tax expense for the quarter ended
August 31, 1999 of $0.4 million and $0.4 million respectively, was slightly
better than the $0.1 million and $0.1 million respectively produced in the
quarter ended August 31, 1998, primarily the result of the higher sales volumes
discussed above. No tax expense is recognized in the quarter ended August 31,
1999 as discussed in Note D - Income Taxes.
9
<PAGE>
Exited Operations
- -----------------
On March 24, 1999, Matrix entered into a Letter of Intent with Caldwell Tanks,
Inc. ("Caldwell") for the sale of Brown Steel Contractors, Inc., ("Brown") a
subsidiary acquired in 1994. In April 1999, the Board of Directors approved the
transaction and a Stock Purchase Agreement was executed on June 9, 1999. Based
upon certain environmental concerns the structure of this transaction was
renegotiated as an asset sale with Matrix retaining temporary ownership of the
land and buildings until environmental remediation is completed.
On August 31, 1999, Matrix sold the assets and the business of Brown to Caldwell
for cash in the amount of $4.3 million and the assumption by the buyer of
ongoing construction contracts ("Work-in-Process Contracts") and certain
environmental liabilities of $0.4 million. Excluded from the assets sold were
cash, accounts receivable, real estate and buildings and other miscellaneous
assets. Included in the assets sold was all inventory of the subsidiaries, net
of $0.7 million used as work-in-process. The cash amount paid at closing is
subject to adjustment after the closing based upon the relationship of future
billings and the cost to complete the Work-in-Process Contracts which was
approximately $1.9 million payable to Matrix as of August 31, 1999. The buyer
has a three-year right to lease and an option to acquire the real estate and
buildings at a specified price of $2.2 million, and is obligated to acquire, at
the same specified price, if Matrix is able to satisfy specified environmental
clean-up measures within the three-year period. The estimated cost of the
clean-up has been accrued, and management believes these clean-up measures will
be satisfied within the specified period.
Matrix has agreed with the buyer not to compete in that business for five years.
For the fiscal years ended May 31, 1997, 1998 and 1999, Brown accounted for
19.8%, 14.4% and 15.9%, respectively, of Matrix's total revenues, and 19.0%,
20.2% and 17.7%, respectively, of Matrix's total assets.
Also, in May 1999 senior management approved and committed Matrix to an exit
plan related to the San Luis Tank & Piping Construction, Inc. ("SLT") operations
which were acquired in 1991. The exit plan specifically identified all
significant actions to be taken to complete the exit plan, listed the activities
that would not be continued, and outlined the methods to be employed for the
disposition, with an expected completion date of March 2000. Management
obtained Board approval and immediately began development of a communication
plan to the impacted employees under Workers Adjustment and Retraining
Notification Act ("WARN Act").
In June 1999, notices were given as required under the WARN Act and Matrix
announced that it would also pursue potential opportunities to sell SLT.
Municipal Water Services 1999 vs. 1998
Municipal Water Services consists of Brown (which was sold on August 31, 1999)
and SLT which is being shut down as discussed above. The only activity for the
quarter ending August 31, 1999 consisted of completing open contracts which had
been appropriately recorded as loss jobs in prior periods. As a result,
revenues for Municipal Water Services for the quarter ending August 31, 1999
were $10.9 million versus the $12.7 million for the quarter ending August 31,
1998. There was no operating income or net income for the quarter ending August
31, 1999 versus an operating loss and net loss of ($0.9) million and ($0.6)
million, respectively for the quarter ending August 31, 1998.
FCCU Services 1999 vs. 1998
Midwest was exited in February 1998 and there was no significant FCCU activity
for the quarters ending August 31, 1999 or August 31, 1998.
Financial Condition & Liquidity
Matrix's cash and cash equivalents totaled approximately $0.8 million at August
31, 1999 and $3.0 million at May 31, 1999.
Matrix has financed its operations recently with cash generated by operations
and advances under a credit agreement. Matrix has a credit agreement with a
commercial bank under which a total of $30.0 million may be borrowed. Matrix
may borrow up to $20.0 million on a revolving basis based on the level of
Matrix's eligible
10
<PAGE>
receivables. Revolving loans bear interest at a Prime Rate or a LIBOR based
option, and mature on October 31, 2000. At August 31, 1999, $0.7 million was
outstanding under the revolver at an interest rate of 6.5%. The credit agreement
also provides for a term loan up to $10.0 million. On March 2, 1998, a term loan
of $10.0 million was made to Matrix. The term loan is due on February 28, 2003
and is to be repaid in 60 equal payments beginning in March 1998 at an interest
rate based upon the Prime Rate or a LIBOR Option. At August 31, 1999 the balance
outstanding on the term loan was $7.0 million. In conjunction with the term loan
Matrix entered into an Interest Rate Swap Agreement with a commercial bank,
effectively providing a fixed interest rate of 7.5% for the five-year period of
the term loan. On September 3, 1999, the commercial bank paid Matrix to unwind
the Swap Agreement and Matrix began pre-paying on the term loan with the
proceeds from the Brown sale.
Operations of Matrix used $0.7 million of cash for the quarter ended August 31,
1999 as compared with providing $2.4 million of cash for the quarter ended
August 31, 1998, representing a decrease of approximately $3.1 million. The
decrease was due primarily to changes in net working capital.
Capital expenditures during the quarter ended August 31, 1999 totaled
approximately $1.6 million. Of this amount, approximately $0.8 million was used
to purchase transportation equipment for field operations, and approximately
$0.5 million was used to purchase welding, construction, and fabrication
equipment. Matrix has invested approximately $0.3 million in office equipment
furniture and fixtures during the quarter, which includes approximately $0.1
million invested for a new enterprise wide management information system. Matrix
has budgeted approximately $6.3 million for capital expenditures for fiscal
2000. Of this amount, approximately $1.4 million would be used to purchase
transportation equipment for field operations, and approximately $2.7 million
would be used to purchase welding, construction, and fabrication equipment. A
6,000 square foot expansion is planned for the Port of Catoosa fabrication
facility at a cost of approximately $0.7 million and an additional $0.8 million
is anticipated to be spent on the enterprise wide management information system.
Matrix expects to be able to finance these expenditures with operating cash flow
and borrowings under the credit agreement.
Matrix believes that its existing funds, amounts available from borrowings under
its existing credit agreement and cash generated by operations will be
sufficient to meet the working capital needs through fiscal 2000 and for the
foreseeable time thereafter unless significant expansions of operations not now
planned are undertaken, in which case Matrix would need to arrange additional
financing as a part of any such expansion. Excess funds will continue to be used
to pre-pay the term loan.
The preceding discussion contains forward-looking statements including, without
limitation, statements relating to Matrix's plans, strategies, objectives,
expectations, intentions, and adequate resources, that are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Readers are cautioned that such forward-looking statements contained in
the financial condition and liquidity section are based on certain assumptions
which may vary from actual results. Specifically, the capital expenditure
projections are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the successful
remediation of environmental issues relating to the Brown sale and other
factors. However, there can be no guarantee that these estimates will be
achieved, or that there will not be a delay in, or increased costs associated
with, the successful remediation of the remaining Brown property.
Outlook
For the balance of the year, management will continue to evaluate those
businesses that are negatively impacting Matrix's operating performance. The
current backlog in the Construction Services Division suggests that the second
quarter could also be impacted with lower sales volumes. The International
Division has experienced some difficulty with its Venezuelan operations due to
cost overruns.
The strengthening experienced in Matrix's AST Services Division in the latter
part of the first quarter should continue as our customer's maintenance budgets
are spent during the last four months of the calendar year. It is unclear,
however, whether or not these maintenance budgets will be approved at levels
comparable, greater, or lower in the upcoming calendar year of 2000. Management
believes that its strategic alliances put Matrix in a more favorable position
than our competition if budgets are reduced or increased.
11
<PAGE>
Environmental
Matrix is a participant in certain environmental activities in various stages
involving assessment studies, cleanup operations and/or remedial processes.
An environmental assessment was conducted at the Newnan, Georgia facilities of
Brown upon execution of a Letter of Intent on March 24, 1999 to sell Brown to
Caldwell. The assessment turned up a number of deficiencies relating to storm
water permitting, air permitting and waste handling and disposal. An
inspection of the facilities also showed friable asbestos that needed to be
removed. In addition, Phase II soil testing indicated a number of VOC's, SVOC's
and metals above the State of Georgia notification limits. Ground water testing
also indicated a number of contaminants above the State of Georgia notification
limits.
Appropriate State of Georgia agencies have been notified of the findings and
corrective and remedial actions have been completed, are currently underway, or
plans for such actions have been submitted to the State of Georgia for approval.
The current estimated cost for cleanup and remediation is $1.2 million, all of
which has been accrued at August 31, 1999. Additional testing, however, could
result in greater costs for cleanup and remediation than is currently accrued.
Matrix still retains ownership of $2.2 million in land and buildings following
the sale of Brown on August 31, 1999, which is expected to be sold to Caldwell
after successful remediation of the property.
Matrix is in the process of closing down or selling its SLT and West Coast
Industrial Coatings, Inc. subsidiaries. Although Matrix does not own the land or
building, it would be liable for any environmental exposure while operating at
the facility, a period from June 1, 1991 to the present. At the present time,
the environmental liability that could result from testing of this property is
unknown.
Year 2000 Compliance
Matrix initiated an enterprise-wide project on 1998 to address the year 2000
compliance issue for both traditional and non-traditional technology areas. The
project focuses on all technology hardware, software, external interfaces with
customers and suppliers, and facility items. The phases of the project are
awareness, assessment, remediation, and implementation.
Matrix has completed its inventory and assessment efforts. During the
assessment phase, all systems were inventoried and classified into five
categories: 1) business applications, 2) end-user applications, 3) development
tools, 4) hardware and system software and 5) non-IT systems. Each system also
was assigned one of three priorities: critical, necessary, or low.
Based on assessment results, Matrix determined that it would be required to
modify, upgrade or replace only a limited number of its systems so that its
business areas would function properly with respect to dates in the year 2000
and thereafter. As of May 31, 1999, all critical and necessary systems have
been remediated and implemented in the production environment.
Remediation of the low priority systems is substantially complete. These systems
represent a minor portion of the inventory and have been considered to have no
material impact on the operations of the business.
Matrix has minimal external interface systems; however, communications have been
initiated with significant suppliers and large customers to determine the extent
to which these companies are addressing year 2000 compliance. In connection
with this activity, Matrix has processed approximately 250 letters and
questionnaires with external parties. As of August 31, 1999, approximately 75
percent of the companies contacted have responded and all of these have
indicated that they are already compliant or will be compliant on a timely
basis.
The anticipated cost of the year 2000 effort has been estimated at $200,000 and
is being funded through operating cash flows. Of the total project cost, 40% is
attributable to the purchase of new systems, which will be capitalized. The
remaining 60% will be expensed as incurred, is not expected to have a material
effect on the results of operations. As of August 31, 1999, expended project
costs were approximately $160,000. Matrix estimates any future costs will not
exceed $40,000.
12
<PAGE>
Despite the best planning and execution efforts, Matrix is working from the
premise that some issues will not be uncovered, and that some issues that are
uncovered will not be successfully resolved. In an effort to manage and
mitigate this risk exposure, Matrix has developed a risk management and
contingency plan for its critical operations.
In addition to Matrix's remediation strategy, a new enterprise-wide management
information system has been purchased as a replacement for the core financial
and operational systems. The project began in January 1999 and the system was
put into production October 1, 1999. The scope of this project has been
maintained separately and independent of Matrix's year 2000 efforts.
All critical systems over which Matrix has control have been tested and are
compliant for year 2000. However, Matrix has identified the possibility of
service disruptions due to non-compliance by third parties as the area equating
to the most reasonably likely worst case scenario. For example, power failures
and telecommunication outages would cause service interruptions. It is not
possible to quantify the possible financial impact if this most reasonably
likely worst case scenario were to come to fruition.
The preceding discussion contains forward-looking statements including, without
limitation, statements relating to Matrix's plans, strategies, objectives,
expectations, intentions, and adequate resources, that are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Readers are cautioned that such forward-looking statements contained in
the year 2000 update are based on certain assumptions which may vary from actual
results. Specifically, the dates on which Matrix believes the year 2000 project
will be completed and computer systems will be implemented are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources,
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved, or that there will not be a
delay in, or increased costs associated with, the implementation of the year
2000 project. Other specific factors that might cause differences between the
estimates and actual results include, but are not limited to, the availability
and cost of personnel trained in these areas, the ability to locate and correct
all relevant computer code, timely responses to and corrections by third parties
and suppliers, the ability to implement interfaces between the new systems and
the systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in the year 2000 problem, resulting in large part from the
uncertainty of the year 2000 readiness of third parties, Matrix cannot ensure
its ability to timely and cost effectively resolve problems associated with the
year 2000 issue that may affect its operations and business, or expose it to
third-party liability.
PART II
OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K:
A. Exhibit 11 - Computation of Earnings Per Share.
B. Exhibit 27 - Financial Data Schedule.
C. Reports on Form 8-K: Sale of Brown on August 31, 1999
8-K filed September 13, 1999
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATRIX SERVICE COMPANY
Date: October 7, 1999 By: /s/Michael J. Hall
--------------------------------
Michael J. Hall Vice President-Finance
Chief Financial Officer signing on
behalf of the registrant and as the
registrant's chief financial officer.
13
<PAGE>
EXHIBIT 11
STATEMENTS RE COMPUTATION OF EARNINGS PER SHARE
[ARTICLE] 5
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] MAY-31-2000
[PERIOD-START] JUN-01-1999
[PERIOD-END] AUG-31-1999
[COMMON] 8,946
[NET-INCOME] 2,005
[EPS-BASIC] 0.22
[COMMON] 9,025
[NET-INCOME] 2,005
[EPS-DILUTED] 0.22
[FISCAL-YEAR-END] MAY-31-1999
[PERIOD-START] JUN-01-1998
[PERIOD-END] AUG-31-1998
[COMMON] 9,525
[NET-INCOME] 837
[EPS-BASIC] 0.09
[COMMON] 9,662
[EPS-DILUTED] 0.09
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-END> AUG-31-1999
<CASH> 824
<SECURITIES> 0
<RECEIVABLES> 35,593
<ALLOWANCES> 2,464
<INVENTORY> 2,933
<CURRENT-ASSETS> 48,452
<PP&E> 37,709
<DEPRECIATION> 18,833
<TOTAL-ASSETS> 81,540
<CURRENT-LIABILITIES> 24,185
<BONDS> 0
0
0
<COMMON> 96
<OTHER-SE> 51,583
<TOTAL-LIABILITY-AND-EQUITY> 81,540
<SALES> 47,507
<TOTAL-REVENUES> 47,507
<CGS> 41,741
<TOTAL-COSTS> 41,741
<OTHER-EXPENSES> 3,650
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 111
<INCOME-PRETAX> 2,005
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,005
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.22
</TABLE>
