UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended May 31, 2000.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from_______ to________
Commission File No. 0-18716
MATRIX SERVICE COMPANY
(Exact name of registrant as specified in its charter)
Delaware 73-1352174
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10701 East Ute Street 74116
Tulsa, Oklahoma (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (918) 838-8822.
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
The approximate aggregate market value of the registrant's common stock (based
upon the August 14, 2000 closing sale price of the common stock as reported by
the NASDAQ National Market System) held by non-affiliates as of August 14, 2000
was approximately $41,716,608.
The number of shares of the registrant's common stock outstanding as of August
14, 2000 was 8,676,766 shares.
Documents Incorporated by Reference
Certain sections of the registrant's definitive proxy statement relating to the
registrant's 2000 annual meeting of stockholders, which definitive proxy
statement will be filed within 120 days of the end of the registrant's fiscal
year, are incorporated by reference into Part III of this Form 10-K.
<PAGE>
TABLE OF CONTENTS
Part I
Page
Item 1. Business.........................................................1
Item 2. Properties......................................................12
Item 3. Legal Proceedings...............................................12
Item 4. Submission of Matters to a Vote of Security Holders.............12
Part II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters.........................................13
Item 6. Selected Financial Data.............................................14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..........22
Item 8. Financial Statements and Supplementary Data.........................22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................50
Part III
Item 10. Directors and Executive Officers of the Registrant..................50
Item 11. Executive Compensation..............................................50
Item 12. Security Ownership of Certain Beneficial Owners and Management......50
Item 13. Certain Relationships and Related Transactions......................50
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....51
PART I
Item 1. Business
Background
Matrix Service Company ("Matrix" or the "Company") provides specialized on-site
maintenance and construction services for the petroleum, manufacturing,
industrial gas, transportation, chemical, food and processing industries.
Matrix's services include the maintenance, repair and construction of large
aboveground storage tanks ("ASTs"); Plant Services; including maintenance
contracts, "turnarounds" and safety services; and Construction Services,
including turnkey, design build and general construction. Matrix also provides
bundled services where two or more of its business units combine to provide a
complete service to their customers. Customers use these services to expand
their operation, improve operating efficiencies and to comply with stringent
environmental and safety regulations.
The Company's principal executive offices are located at 10701 East Ute Street,
Tulsa, Oklahoma 74116, and its telephone number is (918) 838-8822. Unless the
context otherwise requires, all references herein to "Matrix" or the "Company"
are to Matrix Service Company or its subsidiaries.
Aboveground Storage Tank (AST) Operations
The Company's AST Operations include maintenance, repair, design and
construction of AST's. The repair and construction of these tanks incorporate
devices that meet current federal and state air and water quality guidelines.
These devices include secondary tank bottoms for containment of leaks, primary
and secondary seals for floating roof tanks that reduce evaporation loss from
the tank and water intrusion into the tank and many other fittings unique to the
tank industry. The floating roof seals are marketed under the Company's
Flex-A-Seal(R) and Flex-A-Span(R) trade names. The Company also markets a
patented roof drain swivel, the Flex-A-Swivel(R) used for floating roof drains
that remove water from open-top floating roof tanks.
<PAGE>
AST Market and Regulatory Background
In 1989, the American Petroleum Institute ("API") estimated that there were
approximately 700,000 ASTs in the United States that stored crude oil,
condensate, lube oils, distillates, gasolines and various other petroleum
products. These tanks range in capacity from 26 barrels (42 gal/barrel) to in
excess of 1,000,000 barrels. The Company's principal focus is maintaining,
repairing, designing and constructing large ASTs, with capacities ranging from
250 barrels and larger. The Company believes, based on industry statistics, that
there are over 120,000 of these large tanks currently in use, accounting for
more than 70% of the domestic petroleum product storage capacity. These ASTs are
used primarily by the refining, pipeline and marketing segments of the petroleum
industry.
Historically, many AST owners limited capital expenditures on ASTs to new
construction and periodic maintenance on an as-needed basis. Typically, these
expenditures decreased during periods of depressed conditions in the petroleum
and petrochemical industries, as AST owners sought to defer expenditures not
immediately required for continued operations.
During recent years, many AST owners have taken a more proactive approach to
tank maintenance and repair and protection of the environment. Much of this is
driven by the fact that in 1989 it was estimated that over forty percent of the
existing AST's were over twenty years old. The AST owners have come to rely on
AST service companies to furnish the necessary modifications because they can
provide technical expertise, experienced field labor trained in safe work
habits, and materials and equipment that satisfy federal and state mandates. In
addition, because of the recent consolidations and cut backs in the petroleum
industry, the AST owners have fewer experienced personnel on staff and must rely
on qualified service providers to assist them in meeting their needs.
In January 1991, the API-adopted industry standards for the maintenance,
inspection and repair of existing ASTs (API 653). The API standards provide the
industry with uniform guidelines for the periodic inspection, maintenance and
repair of ASTs. The Company believes that these standards have resulted, and
will continue to result, in an increased level of AST maintenance and repair on
the part of many AST owners.
AST Services and Products
The Company provides its customers with a comprehensive range of AST services
and products as outlined below.
New Construction
The Company designs, fabricates and constructs new ASTs to both petroleum and
industrial standards and customer specifications. These tanks range in capacity
from approximately 50 barrels to 1,000,000 barrels and larger. Clients require
new tanks in conjunction with expansion plans, replacement of old or damaged
tanks, storage for additional product lines to meet environmental requirements,
replacement of surface impoundments and changes in population.
Maintenance and Modification
The Company derives a significant portion of its revenues from providing AST
maintenance, repair and modification services. The principal services in this
area involve the design, construction and installation of floating roof and seal
assemblies, the design and construction of secondary containment systems (double
bottoms), and the provision of a variety of services for underground and
aboveground piping systems. The Company also installs, maintains and modifies
tank appurtenances, including spiral stairways, platforms, water drain-off
assemblies, roof drains, gauging systems, fire protection systems, rolling
ladders and structural supports.
<PAGE>
Floating Roof and Seal Assemblies
Many ASTs are equipped with a floating roof and seal assembly. The floating roof
is required by environmental regulations to minimize vapor emissions and reduce
fire hazard. A floating roof also prevents losses of stored petroleum products.
The seal spans the gap between the rim of the floating roof and the tank wall.
The seal prevents vapor emissions from an AST by creating the tightest possible
seal around the perimeter of the roof while still allowing movement of the roof
and seal downward and upward with the level of stored product. In addition, the
Company's seal system prevents substantially all rainwater from entering the
product. The Company's seals are manufactured from a variety of materials
designed for compatibility with specific petroleum products. All of the seals
installed by the Company may be installed while the tank is in service, which
reduces tank owners' maintenance, cleaning and disposal costs.
Secondary Containment Systems
The Company constructs a variety of secondary containment systems under or
around ASTs according to its own design or the design provided by its customers.
Secondary leak detection systems allow tank owners to detect leaks in the tanks
at an early stage before groundwater contamination has occurred. In addition,
the systems help to contain leakage until the tank can be repaired. The most
common type of secondary containment system constructed involves installing a
liner of high-density polyethylene, reinforced polyurethane or a layer of
impervious clay under the steel tank bottom. The space between the liner and the
new bottom is then filled with a layer of concrete or sand. A cathodic
protection system may be installed between the liner and the new bottom to help
control corrosion. Leak detection ports are installed between the liner and
steel bottom to allow for visual inspection while the tank is in service. The
Company believes that during the 1990's a substantial number of AST owners have
installed, and will continue to install, secondary containment systems.
Specialty Tanks
The Company designs, fabricates and field erects new refrigerated liquefied gas
storage tanks for the storage of ammonia, butane, carbon dioxide, ethane,
methane, argon, nitrogen, oxygen, propane and other products. These tanks are
utilized by the chemical, petrochemical and industrial gas industries.
Manufacturing
The Company operates three "state-of-the-art" fabrication facilities located in
Oklahoma, California, and Pennsylvania. At the Tulsa Port of Catoosa, Oklahoma,
the Company owns and operates a fabrication facility located on 13 acres of
leased land. This facility has the capacity to fabricate new tanks, new tank
components and all maintenance, retrofit and repair parts including fixed roofs,
floating roofs, seal assemblies, shell plate and tank appurtenances. The Tulsa
Port has transportation service via railroad and Mississippi River barge
facilities in addition to the interstate highway system, making it economical to
transport heavy loads of raw material and fabricated steel. This facility is
qualified to perform services on equipment that requires American Society of
Mechanical Engineer Code Stamps ("ASME codes"). In Bristol, Pennsylvania, the
Company leases land and buildings and owns the equipment used in fabrication.
This facility has the capacity to fabricate new tanks, new tank components, all
maintenance, retrofit and repair parts including fixed roofs, floating roofs,
shell plate and tank appurtenances. This facility is located close to the
petrochemical industry which supplies the large population center of the
Northeastern United States. At Anaheim, California, the Company leases land and
buildings and owns the equipment used in fabrication. This facility has the
capacity to fabricate tank components, all maintenance, retrofit and repair
parts including fixed roofs, floating roofs and seals. This facility is located
close to the petrochemical industry which supplies the large population center
of the Southwest United States.
Plant Services Operations
The Company provides specialized maintenance and construction services to the
domestic petroleum refining industry and, to a lesser extent, to the gas
processing and petrochemical industries. The Company specializes in routine and
supplemental plant maintenance, turnarounds and capital construction services,
which involve complex, time-sensitive maintenance of the critical operating
units of a refinery or plant.
<PAGE>
Plant Services Market Overview
The domestic petroleum refining industry presently consists of approximately 161
operating refineries. To ensure the operability, environmental compliance,
efficiency and safety of their plants, refiners must maintain, repair or replace
process equipment, operating machinery and piping systems on a regular basis.
Major maintenance and capital projects require the shutdown of an operating
unit, or in some cases, the entire refinery. In addition to routine maintenance,
numerous repair and capital improvement projects are undertaken during a
turnaround. Depending on the type, utilization rate, and operating efficiency of
a refinery, turnarounds of a refinery unit typically occur at scheduled
intervals ranging from six months to four years.
The U.S. refinery industry has undergone significant changes in the last 18
years with refining capacity going from 18.6 million barrels per day to 16.4
million barrels per day. Many factors created this reduction in capacity
including the importing of refined product, the need to close inefficient,
uneconomic refining facilities and the changes in proximity of crude production
to refining capacity. With these refinery closings and the domestic increase in
demand for refined product, domestic refineries are operating at high
utilization rates. Generally higher utilization rates mean more wear and tear on
the processing units. With the consolidations and subsequent reductions in staff
within the petroleum industry and the need for reliable maintenance either
during the turn-around process or day to day maintenance, more reliance for
performance is placed on service providers such as Matrix.
Matrix provides day to day maintenance including managing the maintenance force
through reliability studies and other management tools. This continual effort to
improve performance is in concert with the industry's desire to reduce operating
cost. The day to day maintenance presence assists in the effort to obtain
turn-around work when the refinery periodically shuts down for major repairs.
Plant Service Customer Offerings
The Company provides its customers with a competitive range of services as
outlined below.
Turnaround Services
Effective plant shutdown and refinery turnaround management is achieved by a
combination of factors. Over the years Matrix has successfully developed and
implemented management requirements including:
o Planning o QA/QC Management
o Subcontractor Management o Experienced Supervisors
o Scheduling o Teamwork
o Safety Management o Quality Control
o Cost Control o Inspection
Matrix utilizes the following Planning and Scheduling Software
o Primavera Finest Hour o Microsoft Project
o Primavera P3 for Windows o CASP
o Primavera Suretrak for Windows o TASC/MASC (Kurtz and Steel)
o Teamwork (applicable modules) o SP - Impower
Additional Services
o Planning and Scheduling o ASME Code Work
o Blinding o Exchanger Slab Management
o Towers o Fin Fan Retube and Repair Procurement
o Vessels o Cost Control
o Exchangers o Subcontractor Management
<PAGE>
o Valves o QA/QC Services
o Piping o Safety Professionals
Maintenance Services
Matrix's maintenance services include on-going, routine maintenance, in addition
to providing "quick response" to emergency situations. The Company recognizes
that not only is a skilled daily maintenance workforce imperative to successful
plant operation, but it can have a very positive impact on turnaround and other
"non-routine" maintenance requirements. We believe our most successful projects
come from locations where we have more than a transient presence. Maintenance
services include:
o Daily Maintenance Management o Asbestos and Lead Abatement
o Multi Craft Workforce o Piping and Vessel Insulation
o Pipe Fitting and Welding o Marine Terminal Maintenance
o Machinist/Millwright o Exchanger Extraction and Tube Repairs
o Instrumentation o Tower and Vessel Maintenance
o Electrical Aboveground Storage Tank Maintenance
Maintenance Achievements
o Maintenance personnel reductions through the implementation of
Maintenance Management Systems and Reliability Based Maintenance.
o Maintenance Productivity Incentives.
o Highly successful Safety and Quality Programs.
Fin Fan Tube Repairs
The Company has the qualifications and expertise to make total fin fan tube
replacement and tube repairs on-site. The benefits to our clients include
reduced cost when compared to having to ship out the fin fan unit for repairs,
and reduced downtime as the repairs are done on-site.
ASME Code Stamp Services
The Company is qualified to perform services on equipment that contains ASME
codes. Many state agencies and insurance companies require that a qualified ASME
code installer perform services on ASME coded equipment. Many of the Company's
competitors are not ASME code qualified, which forces them to subcontract
portions of projects involving work with coded equipment.
Construction Services
The Company's Construction Services Division coordinates and executes major
projects for the following industries: power generation; petroleum refining;
industrial gas, liquid and dry bulk storage; chemical; food and processing
industries; and most manufacturing facilities. Proper execution of industrial
projects requires innovative thinking and well-conceived safety and execution
planning to ensure safe and on-time completion.
Turnkey Construction
From design coordination through project start-up and commissioning, Matrix
provides expert, site-specific teams to support projects. The Company emphasizes
lowering costs and shortening schedules by combining the vast experience of the
owner, vendors and contractors to ensure a successful project.
<PAGE>
Heavy Mechanical Installations
Matrix controls all aspects of the execution plan through a merit shop
environment. The Company's background in equipment setting, alignment, piping,
instrumentation and electrical work gives it the multi-discipline craft
resources necessary to complete the installation in the most efficient way
possible.
Civil, Concrete, Steel Erection and Structures
Matrix's experience includes a complete range of construction services including
heavy civil, concrete foundations, shoring, structural concrete and steel. Work
includes construction of the infrastructure required for industrial facilities
such as clean rooms, laboratories, and research and development facilities.
High Pressure Vessel, Boiler and Heater Erection and Code Welding
Matrix erects boilers from new to repair or replacement, and can supply R, PP, S
and U stamps for all work requiring code stamp certification. The Company's
welding expertise includes all types of specialty, exotic and alloy welding. It
can also provide vessel and pipe fabrication and modular skid construction for
special projects.
Retrofits, Expansions and Modernizations
The Company's experience and reputation are built upon a list of successful
retrofit and expansion projects, including extensive work in existing "live"
units.
Plant Dismantle and Equipment Relocation Services
Matrix has the experience and talent to provide value engineering, execution
plant development, scheduling, demolition, removal, coordination, transportation
and installation of existing plants and equipment.
Full Service Distribution, Terminal and Bulk Storage Services
Matrix's extensive capabilities allow it to provide a full range of planning,
design, construction, and management services for all types of terminals and
bulk storage for aviation, rail, transit and marine facilities. In addition,
Matrix can supply full tank construction and maintenance services.
Other Business Matters
Customers and Marketing
The Company derives a significant portion of its revenues from performing
construction and maintenance services for the major integrated oil companies. In
fiscal 2000, BP/Amoco/Arco represented 17% of the Company's consolidated
revenues and Chevron accounted for 12% of consolidated revenues. The loss of any
one of these major customers could have a material adverse effect on the
Company. The Company also performs services for independent petroleum refining
and marketing companies, architectural and engineering firms, the food industry,
general contractors and several major petrochemical companies. The Company sold
its products and services to approximately 360 customers during fiscal 2000.
The Company markets its services and products primarily through its marketing
personnel, senior professional staff and its management. The marketing personnel
concentrate on developing new customers and assist management and staff with
existing customers. The Company enjoys many preferred provider relationships
with clients that are awarded without competitive bid through long-term contract
agreements. In addition, the Company competitively bids many projects.
Maintenance projects have a duration of one week to several months depending on
work scope. New tank projects have a duration of six weeks to more than a year.
General construction projects range from 3 months to 2 years.
<PAGE>
Competition
The AST, Plant Services, and Construction Services Divisions are highly
fragmented and competition is intense within these industries. Major competitors
in the AST Service Division include Chicago Bridge & Iron Company and Pitt-Des
Moines, Inc., as well as a number of smaller regional companies. Major
competitors in the West Coast plant service industry are Timec and a number of
large engineering firms. Competition is based on, among other factors, work
quality and timeliness of performance, safety and efficiency, availability of
personnel and equipment, and price. The Company believes that its expertise and
its reputation for providing safe and timely services allow it to compete
effectively. Although many companies that are substantially larger than the
Company have entered the market from time to time in competition with the
Company, the Company believes that the level of expertise and experience
necessary to perform complicated, on-site maintenance and construction
operations presents an entry barrier to these companies and other competitors
with less experience than the Company.
Backlog
At May 31, 2000, the Company's AST Services, Plant Maintenance and Construction
Services Divisions had an estimated backlog of work under contracts believed to
be firm of approximately $61.0 million, as compared with an estimated backlog of
approximately $40.8 million as of May 31, 1999. Virtually all of the projects
comprising this backlog are expected to be completed within fiscal year 2001.
Because many of the Company's contracts are performed within short time periods
after receipt of an order, the Company does not believe that the level of its
backlog is a meaningful indicator of its sales activity.
Seasonality
The operating results of the Plant Services Division, and to some extent AST
maintenance and repair, may be subject to significant quarterly fluctuations,
affected primarily by the timing of planned maintenance projects at customers'
facilities. Generally, the Company's turnaround projects are undertaken in two
primary periods-February through May and September through November-when
refineries typically shut down certain operating units to make changes to adjust
to seasonal shifts in product demand. As a result, the Company's quarterly
operating results can fluctuate materially. In addition, the AST Services
Division typically has a lower level of operating activity during the winter
months and early into the new calendar year as many of the Company's customers'
maintenance budgets have not been finalized and demand for storage fluctuates
with demand for product.
Raw Material Sources and Availability
The only significant raw material that the Company purchases is steel and steel
pipe which is used primarily in the AST Services Division for new tank
construction and tank repair and maintenance activities and construction
services. The Company purchases its steel products from a number of suppliers
located throughout the United States. In today's market environment, steel is
readily available at attractive prices. However, the price and availability of
steel historically has been volatile and there is no assurance that the current
market conditions will remain unchanged in the future. Significantly higher
steel prices or limited availability could have a negative impact on the
Company's future operating performance.
Insurance
The Company maintains worker's compensation insurance, general liability
insurance and auto liability insurance in the primary amount of $1.0 million,
and an umbrella policy with coverage limits of $50.0 million in the aggregate.
The Company also maintains policies to cover its equipment and other property
with coverage limits of $36.0 million and policies for care, custody and control
with coverage limits of $2.7 million in the aggregate. Most of the Company's
policies provide for coverage on an occurrence basis, not a "claims made" basis.
The Company's liability policies are subject to certain deductibles, none of
which is higher than $250,000. The Company maintains a performance and payment
bonding line of $150.0 million. The Company also maintains key-man life
insurance policies covering its current and former CEO's, and professional
liability insurance.
<PAGE>
Many of the Company's contracts require it to indemnify its customers for
injury, damage or loss arising in connection with their projects, and provide
for warranties of materials and workmanship. There can be no assurance that the
Company's insurance coverage will protect it against the incurrence of loss as a
result of such contractual obligations.
Employees
As of May 31, 2000, the Company employed 1,323 employees, of which 264 were
employed in non-field positions and 1,059 in field or shop positions. Throughout
fiscal year 2000, the Company employed a total of 2,281 employees in field or
shop positions who worked on a project-by-project basis.
As of May 31, 2000, 267 of the 1,059 field or shop employees were covered by a
collective bargaining agreement. The Company operates under two collective
bargaining agreements through the Boilermakers Union - the NTL Agreement for
Tank Construction Work and the Maintenance and Repair Agreement covering Tank
Repair and Related Work. Both agreements provide the union employees with
benefits including a Health and Welfare Plan, Pension Plan, National Annuity
Trust, Apprenticeship Training, and a Wage and Subsistence Plan.
The Company has not experienced any significant strikes or work shortages and
has maintained high-quality relations with its employees.
Patents and Proprietary Technology
The Company holds one patent in the United States and one in Canada under the
Flex-A-Seal(R) trademark which covers a seal for floating roof storage tanks.
The United States patent expires in August 2000 and the Canadian patent expires
in September 2008. The Company also holds two United States and one United
Kingdom patents under the Flex-A-Span(R) trademark which covers a peripheral
seal for floating roof tank covers. The United States patents expire in October
2001 and August 2008 and the United Kingdom patent expires in May 2011. The
Company holds a U.S. patent which covers its ThermoStor(R) diffuser system that
receives, stores and dispenses both chilled and warm water in and from the same
storage tank. The ThermoStor(R) patent expires in March 2010. The Company also
holds a patent for a Floating Deck Support Apparatus(R) for aluminum roofs. This
patent expires in January 2001. The Company has developed the RS 1000 Tank
Mixer(R) which controls sludge build-up in crude oil tanks through resuspension.
The RS 1000 Tank Mixer(R) patent expires in August 2012. The Company has
designed and developed the Flex-A-Swivel(R), a swivel joint for floating roof
drain systems. The United States Patent expires in March 2019. While the Company
believes that the protection of its patents is important to its business, it
does not believe that these patents are essential to the success of the Company.
Regulation
Various environmental protection laws have been enacted and amended during the
past 30 years in response to public concern over the environment. The operations
of the Company and its customers are subject to these evolving laws and the
related regulations, which are enforced by the EPA and various other federal,
state and local environmental, safety and health agencies and authorities. The
Company believes that its current operations are in material compliance with
such laws and regulations; however, there can be no assurance that significant
costs and liabilities will not be incurred due to increasingly stringent
environmental restrictions and limitations. Historically, however, the cost of
measures taken to comply with these laws has not had a material adverse effect
on the financial condition of the Company. In fact, the proliferation of such
laws has led to an increase in the demand for some of the Company's products and
services. A discussion of the principal environmental laws affecting the Company
and its customers is set forth below.
Air Emissions Requirements. The EPA and many state governments have adopted
legislation and regulations subjecting many owners and operators of storage
vessels and tanks to strict emission standards. The regulations prohibit the
storage of certain volatile organic liquids ("VOLs") in open-top tanks and
require tanks which store VOLs to be equipped with primary and/or secondary roof
seals mounted under a fixed or floating roof. Related regulations also impose
continuing seal inspection and agency notification requirements on tank owners
<PAGE>
and prescribe certain seal requirements. Under the latest EPA regulations, for
example, floating roofs on certain large tanks constructed or modified after
July 1984 must be equipped with one of three alternative continuous seals
mounted between the inside wall of the tank and the edge of the floating roof.
These seals include a foam or liquid-filled seal mounted in contact with the
stored petroleum product; a combination of two seals mounted one above the
other, the lower of which may be vapor mounted; and a mechanical shoe seal,
composed of a metal sheet held vertically against the inside wall of the tank by
springs and connected by braces to the floating roof. The EPA has imposed
similar requirements which are now effective or will be after completion of
various phase-in periods on certain large tanks, regardless of the date of
construction, operated by companies in industries such as petroleum refining and
synthetic organic chemical manufacturing which are subject to regulations
controlling hazardous air pollutant emissions. The EPA is in the process of
developing further regulations regarding seals and floating roofs.
Amendments to the federal Clean Air Act adopted in 1990 require, among other
things, that refineries produce cleaner burning gasoline for sale in certain
large cities where the incidence of volatile organic compounds in the atmosphere
exceeds prescribed levels leading to ozone depletion. Refineries are undergoing
extensive modifications to develop and produce acceptable reformulated fuels
that satisfy the Clean Air Act Amendments. Such modifications are anticipated to
cost refineries several billion dollars, and require the use of specialized
construction services such as those provided by the Company. A significant
number of refineries have completed changes to produce "reformulated fuels,"
principally refineries serving specific areas of the U.S.; however, there are a
substantial number of refineries that have not made the change. The EPA is also
in the process of developing further regulations to require production of
cleaner gasolines and diesel fuels including the production of reduced sulfur
gasoline and diesel duel.
As part of the Clean Air Act Amendments of 1990, Congress required the EPA to
promulgate regulations to prevent accidental releases of air pollutants and to
minimize the consequences of any release. The EPA adopted regulations requiring
Risk Management Plans ("RMPs") from companies which analyze and limit risks
associated with the release of certain hazardous air pollutants. In addition,
the EPA requires companies to make RMPs available to the public. Many petroleum
related facilities, including refineries, will be subject to the regulations and
may be expected to upgrade facilities to reduce the risks of accidental
releases. Accordingly, the Company believes that the promulgation of accidental
release regulations could have a positive impact on its business.
Water Protection Regulations. Protection of groundwater and other water
resources from spills and leakage of hydrocarbons and hazardous substances from
storage tanks and pipelines has become a subject of increasing legislative and
regulatory attention, including releases from ASTs. Under Federal Water
Pollution Control Act regulations, owners of most ASTs are required to prepare
spill prevention, control and countermeasure ("SPCC") plans detailing steps that
have been taken to prevent and respond to spills and to provide secondary
containment for the AST to prevent contamination of soil and groundwater. These
plans are also subject to review by the EPA, which has authority to inspect
covered ASTs to determine compliance with SPCC requirements. Various states have
also enacted groundwater legislation that has materially affected owners and
operators of petroleum storage tanks. The adoption of such laws has prompted
many companies to install double bottoms on their storage tanks to lessen the
chance that their facilities will discharge or release regulated chemicals.
State statutes regarding protection of water resources have also induced many
petroleum companies to excavate product pipelines located in or near marketing
terminals, to elevate the pipelines aboveground and to install leak detection
systems under the pipelines. These laws and regulations have generally led to an
increase in the demand for some of the Company's products and services.
In the event hydrocarbons are spilled or leaked into groundwater or surface
water from an AST that the Company has constructed or repaired, the Company
could be subject to lawsuits involving such spill or leak. To date, the Company
has not suffered a material loss resulting from such litigation.
Hazardous Waste Regulations. The Resource Conservation and Recovery Act of 1976
("RCRA") provides a comprehensive framework for the regulation of generators and
transporters of hazardous waste, as well as persons engaged in the treatment,
storage and disposal of hazardous waste. Under state and federal regulations,
many generators of hazardous waste are required to comply with a number of
requirements, including the identification of such wastes, strict labeling and
storage standards, and preparation of a manifest before the waste is shipped off
site. Moreover, facilities that treat, store or dispose of hazardous waste must
obtain a RCRA permit from the EPA, or equivalent state agency, and must comply
with certain operating, financial responsibility and site closure requirements.
<PAGE>
In 1990, the EPA issued its Toxicity Characteristic Leaching Procedure ("TCLP")
regulations. Under the TCLP regulations, which have been amended from time to
time, wastes containing prescribed levels of any one of several identified
substances, including organic materials found in refinery wastes and
waste-waters (such as benzene), will be characterized as "hazardous" for RCRA
purposes. As a result, some owners and operators of facilities that produce
hazardous wastes are being required to make modifications to their facilities or
operations in order to remain outside the regulatory framework or to come into
compliance with the Subtitle C requirements. Many petroleum refining,
production, transportation and marketing facilities are choosing to replace
existing surface impoundments with storage tanks and to equip certain of the
remaining impoundments with secondary containment systems and double liners.
Accordingly, the Company believes that the promulgation of the TCLP regulations
are having a positive impact on its tank construction and modification business.
Amendments to RCRA require the EPA to promulgate regulations banning the land
disposal of hazardous wastes, unless the wastes meet certain treatment standards
or the particular land disposal method meets certain waste containment criteria.
Regulations governing disposal of wastes identified as hazardous under the TCLP,
for example, could require water drained from the bottom of many petroleum
storage tanks to be piped from the tanks to a separate facility for treatment
prior to disposal. Because the TCLP regulations can, therefore, provide an
incentive for owners of petroleum storage tanks to reduce the amount of water
seepage in the tanks, the Company believes that the regulations have and will
continue to positively influence sales of its Flex-A-Seal(R) roof seals, which
materially reduce the amount of water seepage into tanks.
CERCLA. The Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("CERCLA"), also known as "Superfund", authorizes the EPA to identify
and clean up sites contaminated with hazardous substances and to recover the
costs of such activities, as well as damages to natural resources, from certain
classes of persons specified as liable under the statute. Such persons include
the owner or operator of a site and companies that disposed or arranged for the
disposal of hazardous substances at a site. Under CERCLA, private parties which
incurred remedial costs may also seek recovery from statutorily responsible
persons. Liabilities imposed by CERCLA can be joint and several where multiple
parties are involved. Many states have adopted their own statutes and
regulations to govern investigation and cleanup of, and liability for, sites
contaminated with hazardous substances or petroleum products.
Although the liabilities imposed by RCRA, CERCLA and other environmental
legislation are more directly related to the activities of the Company's
clients, they could under certain circumstances give rise to liability on the
part of the Company if the Company's efforts in completing client assignments
were considered arrangements related to the transport or disposal of hazardous
substances belonging to such clients. In the opinion of management, however, it
is unlikely that the Company's activities will result in any liability under
either CERCLA or other environmental regulations in an amount which will have a
material adverse effect on the Company's operations or financial condition, and
management is not aware of any current liability of the Company based on such a
theory.
Oil Pollution Act. The Oil Pollution Act of 1990 ("OPA") established a new
liability and compensation scheme for oil spills from onshore and offshore
facilities. Section 4113 of the OPA directed the President to conduct a study to
determine whether liners or other secondary means of containment should be used
to prevent leaking or to aid in leak detection at onshore facilities used for
storage of oil. The Company believes that its business would be positively
affected by any regulations eventually promulgated by the EPA that required
liners and/or secondary containment be used to minimize leakage from ASTs. While
the regulation has not, to date, been enacted, the industry designs secondary
containment in all new tanks being built and, in general, secondary containment
is installed in existing tanks when they are taken out of service for other
reasons, in anticipation of this regulation.
Health and Safety Regulations. The operations of the Company are subject to the
requirements of the Occupational Safety and Health Act ("OSHA") and comparable
state laws. Regulations promulgated under OSHA by the Department of Labor
require employers of persons in the refining and petrochemical industries,
including independent contractors, to implement work practices, medical
surveillance systems, and personnel protection programs in order to protect
employees from workplace hazards and exposure to hazardous chemicals. In
addition, in response to recent accidents in the refining and petrochemical
industries, new legislation and regulations including OSHA's Process Safety
Management Standard ("PSM") requiring stricter safety requirements have been
enacted. Under PSM, employers and contractors must ensure that their employees
are trained in and follow all facility work practices and safety rules and are
informed of known potential hazards. The Company has established comprehensive
<PAGE>
programs for complying with health and safety regulations. While the Company
believes that it operates safely and prudently, there can be no assurance that
accidents will not occur or that the Company will not incur substantial
liability in connection with the operation of its business.
The State of California has promulgated particularly stringent laws and
regulations regarding health and safety and environmental protection. The
Company's operations in California are subject to strict oversight under these
laws and regulations and the failure to comply with these laws and regulations
could have a negative impact on the Company.
Environmental
Matrix is a participant in certain environmental activities in various stages
involving assessment studies, cleanup operations and/or remedial processes.
In connection with the Company's sale of Brown Steel Contractors and affiliated
entities ("Brown") in 1999, an environmental assessment was conducted at Brown's
Newnan, Georgia facilities. 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 total cost for cleanup and remediation is $1.7 million,
$0.4 million of which remains accrued at May 31, 2000. Additional testing,
however, could result in greater costs for cleanup and remediation than is
currently accrued.
Matrix closed or sold the business operations of its San Luis Tank Piping
Construction Company, Inc. ("SLT") and West Coast Industrial Coatings, Inc.
subsidiaries, which are located in California. 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 the testing is
unknown, however, Matrix has purchased a pollution legal liability insurance
policy with $5.0 million of coverage.
Matrix has other fabrication operations in Tulsa, Oklahoma; Bristol,
Pennsylvania; and Anaheim, California which could subject the Company to
environmental liability. It is unknown at this time if any such liability exists
but based on the types of fabrication and other manufacturing activities
performed at these facilities and the environmental monitoring that the Company
undertakes, Matrix does not believe it has any material environmental
liabilities at these locations.
Matrix builds aboveground storage tanks and performs maintenance and repairs on
existing aboveground storage tanks. A defect in the manufacturing of new tanks
or faulty repair and maintenance on an existing tank could result in an
environmental liability if the product stored in the tank leaked and
contaminated the environment. Matrix currently has liability insurance with
pollution coverage of $1 million, but the amount could be insufficient to cover
a major claim. Matrix is currently involved in one claim which occurred before
pollution coverage was obtained. The Company does not believe that its repair
work was defective and is not liable for any subsequent environmental damage.
<PAGE>
Item 2. Properties
The executive offices of the Company are located in a 20,400 square foot
facility owned by the Company and located in Tulsa, Oklahoma. The Company owns a
64,000 square foot facility located on 13 acres of land leased from the Tulsa
Port of Catoosa which is used for the fabrication of tanks and tank parts. The
Company owns a 60,000 square foot facility on 14 acres of land owned in Tulsa,
Oklahoma which is now occupied by the tank construction group and provides
excess fabrication capacity for tank parts. The Company also owns a 22,000
square foot facility located on 14 acres of owned land in Tulsa, Oklahoma for
Tulsa regional operations, a 13,300 square foot facility in Temperance, Michigan
for the Michigan regional operations and a 22,600 square foot facility in
Houston, Texas for Houston regional operations. The Company owns 143,300 square
foot and 41,000 square foot facilities, located on 6.5 acres and 31.8 acres,
respectively, in Newnan, Georgia which are being leased by Caldwell Tanks, the
Buyer of Brown. These facilities will be sold upon final environmental
remediation as provided under the Asset Sales Agreement with Caldwell Tanks,
Inc. The Company owns a 30,000 square foot facility located on 5.0 acres of
owned land in Bellingham, Washington. Also, the Company owns a 1,806 square foot
facility located in Sarnia, Ontario, Canada. The Company leases offices in
Anaheim, Bay Point, and Paso Robles, California; Bristol and Bethlehem,
Pennsylvania; Houston, Texas and Newark, Delaware. The aggregate lease payments
for these leases during fiscal 2000 were approximately $0.9 million. The Company
believes that its facilities are adequate for its current operations.
Item 3. Legal Proceedings
The Company and its subsidiaries are named defendants in several lawsuits
arising in the ordinary course of their business. While the outcome of lawsuits
cannot be predicted with certainty, management does not expect these lawsuits to
have a material adverse impact on the Company.
See also "Item 1 - Business - Environmental" for a discussion of environmental
proceedings involving the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Price Range of Common Stock
The Common Stock has traded on the National Market System of the National
Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System
since the Company's initial public offering on September 26, 1990. The trading
symbol for the Common Stock is "MTRX." The following table sets forth the high
and low closing sale prices for the Common Stock on the National Market System
as reported by NASDAQ for the periods indicated:
<TABLE>
Fiscal Year Fiscal Year
2000 1999
--------------------- -------------------
<S> <C> <C> <C> <C>
High Low High Low
---- --- ---- ---
First Quarter $4.75 $3.75 $7.75 $4.88
Second Quarter 4.81 3.63 5.50 3.97
Third Quarter 6.75 4.06 5.13 3.50
Fourth Quarter 5.50 4.38 4.50 2.94
Fiscal Year
2001
--------------------
High Low
---- ---
First Quarter (through August 14, 2000) $5.06 $4.63
</TABLE>
As of August 14, 2000 there were approximately 76 holders of record of the
Common Stock. The Company believes that the number of beneficial owners of its
Common Stock is substantially greater than 76.
Dividend Policy
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain earnings to finance the growth and development of
its business and does not anticipate paying cash dividends in the foreseeable
future. Any payment of cash dividends in the future will depend upon the
financial condition, capital requirements and earnings of the Company as well as
other factors the Board of Directors may deem relevant. The Company's credit
agreement restricts the Company's ability to pay dividends.
<PAGE>
Item 6. Selected Financial Data
The following table sets forth selected historical financial information for
Matrix covering the five years ended May 31, 2000.
<TABLE>
Matrix Service Company
(In millions, except per share data)
----------------------------------------------------------------------------
Years Ended
----------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues 193.8 211.0 225.4 183.1 183.7
Gross profit 20.5 14.0 18.6 17.4 16.6
Gross profit % 10.6% 6.6% 8.3% 9.5% 9.0%
Operating income (loss) 6.8 (11.5) (16.3) 5.5 4.7
Operating income (loss) % 3.5% (5.5)% (7.2)% 3.0% 2.6%
Pre-tax income / (loss) 7.2 (12.6) (17.3) 5.1 4.4
Net income / (loss) 6.6 (12.6) (11.6) 3.0 2.4
Net income / (loss) % 3.4% (6.0)% (5.1)% 1.6% 1.3%
Earnings / (loss) per share-diluted 0.74 (1.34) (1.22) 0.31 0.26
Equity per share-diluted 6.11 5.29 6.87 7.86 7.68
Weighted average shares outstanding 9.0 9.4 9.5 9.7 9.5
Working capital 19.4 25.7 41.1 28.2 26.4
Total assets 78.3 88.2 112.7 116.9 105.8
Long-term debt 0.0 5.5 13.1 6.4 4.8
Capital expenditures 6.3 5.4 2.6 5.8 3.4
Stockholders' equity 54.9 49.7 65.3 76.2 73.0
Total long-term debt to equity % 0.0% 11.1% 20.1% 8.4% 6.6%
Cash flow from operations 8.4 16.7 3.0 6.2 9.6
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
This Annual Report and the information incorporated herein by reference contains
various "forward-looking statements" within the meaning of federal and state
securities laws, including those identified or predicated by the words
"believes," "anticipates," "expects," "plans," "should" or "could" or similar
expressions. Such statements are subject to a number of uncertainties that could
cause the actual results to differ materially from those projected. Such factors
include, but are not limited to, the following:
o Changes in general economic conditions in the United States.
o Changes in laws and regulations to which Matrix is subject, including
tax, environmental, and employment laws and regulations.
o The cost and effects of legal and administrative claims and
proceedings against Matrix or its subsidiaries.
o Conditions of the capital markets Matrix utilizes to access capital to
finance operations.
o The ability to raise capital in a cost-effective way.
o The effect of changes in accounting policies.
o The ability to manage growth and to assimilate personnel and operations
of acquired businesses.
o The ability to control costs.
o Changes in foreign economies, currencies, laws, and regulations,
especially in Canada where Matrix has made direct investments.
o Political developments in foreign countries, especially in Canada where
Matrix has made direct investments.
o The ability of Matrix to develop expanded markets and product or
service offerings as well as its ability to maintain existing markets.
o Technological developments, high levels of competition, lack of
customer diversification, and general uncertainties of governmental
regulation in the energy industry.
o The ability to recruit, train, and retain project supervisors with
substantial experience.
o A downturn in the petroleum storage operations or hydrocarbon
processing operations of the petroleum and refining industries.
o Changes in the labor market conditions that could restrict the
availability of workers or increase the cost of such labor.
o The negative effects of a strike or work stoppage.
o The timing and planning of maintenance projects at customer
facilities in the refinery industry which could cause adjustments for
seasonal shifts in product demands.
o Exposure to construction hazards related to the use of heavy equipment
with attendant significant risks of liability for personal injury and
property damage.
o The use of significant production estimates for determining percent
complete on construction contracts could produce different results upon
final determination of project scope.
o The inherent inaccuracy of estimates used to project the timing
and cost of exiting operations of non-core businesses.
o Fluctuations in quarterly results.
Given these uncertainties, readers of this Annual Report are cautioned not to
place undue reliance upon such statements.
<PAGE>
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
Matrix Service Company
Annual Results of Operations
(In millions, except per share data)
------------------------------------------------------------------------------------------------------------------------------------
Municipal
AST Construction Plant Water FCCU Combined
Services Services Services Total Services Services Total Total
---------- ------------- ----------- ---------- ----------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended May 31, 2000
Consolidated revenues 131.8 9.3 34.3 175.4 18.4 0.0 18.4 193.8
Gross profit (loss) 17.4 (0.5) 3.2 20.1 0.7 (0.3) 0.4 20.5
Operating income (loss) 8.0 (1.8) 1.3 7.5 (0.4) (0.3) (0.7) 6.8
Income (loss) before income tax expense 8.0 (1.5) 1.3 7.8 (0.3) (0.3) (0.6) 7.2
Net income (loss) 7.4 (1.5) 1.3 7.2 (0.3) (0.3) (0.6) 6.6
Earnings / (loss) per share - diluted 0.83 (0.17) 0.14 0.80 (0.03) (0.03) (0.06) 0.74
Weighted average shares 8,993
Year ended May 31, 1999
Consolidated revenues 112.6 22.9 29.9 165.4 45.1 0.5 45.6 211.0
Gross profit (loss) 12.9 (0.2) 3.8 16.5 (2.4) (0.1) (2.5) 14.0
Operating income (loss) 3.9 (1.5) 1.8 4.2 (15.6) (0.1) (15.7) (11.5)
Income (loss) before income tax expense 3.4 (1.6) 1.7 3.5 (16.1) 0.0 (16.1) (12.6)
Net income (loss) 3.4 (1.6) 1.7 3.5 (16.1) 0.0 (16.1) (12.6)
Earnings / (loss) per share - diluted 0.36 (0.17) 0.18 0.37 (1.71) 0.0 (1.71) (1.34)
Weighted average shares 9,440
Year ended May 31, 1998
Consolidated revenues 103.0 45.0 20.6 168.6 46.2 10.6 56.8 225.4
Gross profit (loss) 11.0 5.4 2.4 18.8 1.7 (1.9) (0.2) 18.6
Operating income (loss) 1.8 4.3 0.8 6.9 (5.3) (17.9) (23.2) (16.3)
Income (loss) before income tax expense 1.5 4.2 0.7 6.4 (5.4) (18.3) (23.7) (17.3)
Net income (loss) 1.2 2.5 0.4 4.1 (4.8) (10.9) (15.7) (11.6)
Earnings / (loss) per share - diluted 0.14 0.26 0.04 0.44 (0.51) (1.15) (1.66) (1.22)
Weighted average shares 9,546
Variances 2000 to 1999
Consolidated revenues 19.2 (13.6) 4.4 10.0 (26.7) (0.5) (27.2) (17.2)
Gross profit (loss) 4.5 (0.3) (0.6) 3.6 3.1 (0.2) 2.9 6.5
Operating income 4.1 (0.3) (0.5) 3.3 15.2 (0.2) 15.0 18.3
Income (loss) before income tax expense 4.6 0.1 (0.4) 4.3 15.8 (0.3) 15.5 19.8
Net income (loss) 4.0 0.1 (0.4) 3.7 15.8 (0.3) 15.5 19.2
Variances 1999 to 1998
Consolidated revenues 9.6 (22.1) 9.3 (3.2) (1.1) (10.1) (11.2) (14.4)
Gross profit (loss) 1.9 (5.6) 1.4 (2.3) (4.1) 1.8 (2.3) (4.6)
Operating income 2.1 (5.8) 1.0 (2.7) (10.3) 17.8 7.5 4.8
Income (loss) before income tax expense 1.9 (5.8) 1.0 (2.9) (10.7) 18.3 7.6 4.7
Net income (loss) 2.2 (4.1) 1.3 (0.6) (11.3) 10.9 (0.4) (1.0)
</TABLE>
<PAGE>
Results of Operations
AST Services 2000 vs. 1999
Revenues for AST Services in 2000 were $131.8 million, an increase of $19.2
million or 17.1% over 1999. Gross margin for 2000 of 13.2% was significantly
better than the 11.5% produced in 1999 as a direct result of higher margin lump
sum work combined with better execution of job plans. These margin improvements
were offset somewhat by the International Division as a result of a $0.6 million
gross profit loss on a project in Venezuela. These margin gains along with the
increased sales volumes resulted in gross profit for 2000 of $17.4 million
exceeding that of 1999 by $4.5 million, or 34.9%.
Selling, general and administrative costs as a percent of revenues decreased to
6.8% in 2000 vs. 7.1% in 1999.
Operating income for 2000 of $8.0 million, or 6.1% as a percent of revenues was
significantly better than the $3.9 million, or 3.5% produced in 1999, as a
direct result of the gross margin gains discussed above.
AST Services 1999 vs. 1998
Revenues for AST Services in 1999 were $112.6 million, an increase of $9.6
million or 9.3% over 1998, primarily as a result of a continued good business
climate and Matrix's strategic emphasis on alliances and building customer
relationships through value added services. Gross margin for 1999 of 11.5% was
slightly better than the 10.7% produced in 1998 as a direct result of higher and
more efficient man-hour utilization and better execution of job plans in a more
safety conscience work environment. These margin improvements along with the
increased sales volumes resulted in gross profit for 1999 of $12.9 million
exceeding that of 1998 by $1.9 million, or 17.3%.
Selling, general and administrative costs as a percent of revenues increased to
7.1% in 1999 vs. 6.6% in 1998 primarily as a result of increased salary and
wages, increased legal costs and increased information technology costs
associated with the new enterprise-wide management information system.
Operating income for 1999 of $3.9 million was significantly better than the $1.8
million produced in 1998, primarily the result of no restructuring, impairment
and abandonment costs in 1999 versus $1.9 million in 1998. The improvements in
gross profit of $1.9 million was almost offset by the increase in selling,
general and administrative expenses discussed above.
Construction Services 2000 vs. 1999
Revenues for Construction Services in 2000 were $9.3 million, a decrease of
$13.6 million or 59.4% over 1999. This decrease was due to a very low backlog at
the beginning of the Company's fiscal year 2000 compared to last year when
Construction Services was in the process of completing two major projects. Gross
margin for 2000 of (5.4%) was worse than the (0.9%) produced in 1999 as a result
of the lack of significant work to cover the fixed cost structure in place for
Construction Services and one time charges to low margin jobs in 2000 versus
1999. These margin declines along with the decreased sales volumes resulted in
gross profit for 2000 of ($0.5) million being $0.3 million less than the ($0.2)
million in 1999. Gross profit in 1999 was also negatively impacted by a $2.0
million reserve for bad debts for two large potentially uncollectible
receivables.
Selling, general and administrative expenses as a percent of revenues increased
to 14.0% in 2000 vs. 5.7% in 1999 primarily as a result of the fixed salary
costs being spread over a smaller revenue base in 2000 vs. 1999.
Operating loss for 2000 of ($1.8) million, or (19.4%) as a percent of revenues
was worse than the ($1.5) million, or (6.6%) produced in 1999 as a direct result
of the lack of significant work discussed above.
Construction Services 1999 vs. 1998
Revenues for Construction Services in 1999 were $22.9 million, a decrease of
$22.1 million or 49.1% from 1998, primarily as a result of two large projects
totaling $34.0 million of revenues in fiscal 1998 which were not replaced with
similar size projects in fiscal 1999. Gross margin for 1999 of (0.9)% was much
worse than the 12.0% produced in 1998 as a result of lower volume and the
establishment of a $2.0 million reserve for bad debts for two large potentially
<PAGE>
uncollectible receivables. These margin declines along with the decreased sales
volumes resulted in gross profit for 1999 of ($0.2) million which was a decrease
from 1998 gross profit of $5.6 million, or (103.7%).
Selling, general and administrative expenses as a percent of revenues increased
to 5.7% in 1999 vs. 2.4% in 1998 primarily as a result of the fixed salary costs
not being reduced sufficiently to compensate for the decreased revenues in 1999.
Operating losses for 1999 of ($1.5) million, or (6.6%) were significantly worse
than the operating income of $4.3 million, or 9.6% produced in 1998 as a direct
result of the selling, general and administrative expense increases and the
gross margin declines discussed above.
Plant Services 2000 vs. 1999
Revenues for Plant Services in 2000 were $34.3 million, an increase of $4.4
million or 14.7% over 1999. Gross margin for 2000 of 9.3% was worse than the
12.7% produced in 1999 as a direct result of lower margin turnarounds in fiscal
2000 versus fiscal 1999 and several one-time charges. These margin declines
resulted in gross profit for 2000 of $3.2 million which was a decrease from 1999
gross profit of $3.8 million, or (15.8%).
Selling, general and administrative expenses as a percent of revenues decreased
to 5.4% in 2000 vs. 6.5% in 1999.
Operating income for 2000 of $1.3 million, or 3.8% as a percent of revenues was
slightly less than the $1.8 million or 6.0% produced in 1999, as a direct result
of the margin declines discussed above.
Plant Services 1999 vs. 1998
Revenues for Plant Services in 1999 were $29.9 million, an increase of $9.3
million or 45.1% over 1998, primarily as a result of a good business climate and
Matrix's strategic emphasis on alliances and building customer relationships
through value-added services. Gross margin for 1999 of 12.7% was slightly better
than the 11.7% produced in 1998 as a direct result of better execution of job
plans, higher and more efficient man-hour utilization and a more favorable mix
of higher margin turnaround versus lower margin maintenance contracts. These
margin gains along with the increased sales volumes resulted in gross profit for
1999 of $3.8 million exceeding that of 1998 by $1.4 million, or 58.3%.
Selling, general and administrative expenses as a percent of revenues decreased
to 6.5% in 1999 vs. 7.8% in 1998 primarily as a result of the fixed salary costs
being spread over a larger revenue base in 1999 vs. 1998.
Operating income for 1999 of $1.8 million, or 6.0% as a percent of revenues was
significantly better than the $0.8 million, or 3.9% produced in 1998, as a
direct result of the selling, general and administrative decreases and the gross
margin gains discussed above.
Exited Operations
-----------------
Fiscal Year 2000
----------------
On August 31, 1999, Matrix sold the assets and the business (municipal water
services) 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 was 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 $1.9 million paid to Matrix on October 7, 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 provided, 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 5 years.
For the fiscal years ended May 31, 2000, 1999 and 1998, Brown accounted for
6.3%, 15.9% and 14.4%, respectively of Matrix's total revenues, and 4.8%, 17.7%
and 20.2%, respectively, of Matrix's total assets.
<PAGE>
For the year ended May 31, 2000, worker's compensation, general liability, and
environmental reserves for the Brown operation were determined to be $1.0
million short of previously anticipated expenditures, resulting in a
restructuring, improvement and abandonment charge (See Footnote 3 to the
Consolidated Financial Statements).
In June 1999, notices were given as required under the WARN Act and Matrix
announced that it would also pursue potential opportunities to sell the SLT
municipal water services. In January 2000, Matrix sold at fair market value
resulting in no gain or loss the assets of the coating operation, an affiliated
company of SLT, to existing management for $0.3 million. In April 2000, the
remaining open contracts were completed and all operations were shutdown. For
the year ended May 31, 2000, the exit plan reserves have been re-evaluated and
reduced by $0.8 million. This reduction is a result of a favorable ruling in
existing litigation, better than anticipated environmental findings, and
reductions in worker's compensation and general liability reserves.
Matrix has been in litigation over a contested contract in the FCCU segment. In
January 2000, Matrix won its case and was awarded $1.1 million plus interest and
attorney fees. This case is currently under appeal, however, the defendant was
required to post a bond for the judgement amount. As a result of legal costs
associated with this litigation as well as shortfalls in previously recorded
worker's compensation and general liability reserves, Matrix recorded a $0.3
million restructuring, impairment and abandonment charge to income.
Fiscal Year 1999
----------------
On March 24, 1999, Matrix entered into a Letter of Intent with Caldwell Tanks,
Inc. for the sale of 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 (see Item 1.
Business - Environmental), 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.
Also, in May 1999 senior management approved and committed Matrix to an exit
plan related to the SLT operations which were acquired in 1992. 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").
As a result of these restructuring, impairment and abandonment operations,
Matrix recorded a charge of $9.8 million (See Footnote 3 to the Consolidated
Financial Statements).
Fiscal Year 1998
----------------
During the third quarter of fiscal year 1998, the board of directors approved a
plan whereby Matrix would exit the operations of Midwest Industrial Contractors,
Inc. (Midwest), which was acquired in 1990, and discontinue to operate in the
markets that Midwest had historically participated. Matrix completed all open
contracts and disposed of all assets of Midwest. During the fiscal year ended
1998, Midwest had operating losses of $17.9 million.
Also during the third quarter of fiscal 1998, Matrix adopted a board of
directors approved plan to restructure operations to reduce costs, eliminate
duplication of facilities and improve efficiencies. The plan included closing
fabrication shops in Newark, Delaware and Rancocas, New Jersey and moving these
operations to a more efficient and geographically centered facility in Bristol,
Pennsylvania. Additionally, the Company closed a fabrication shop at Elkston,
Maryland. The production from the Maryland facility, which was principally
elevated water tanks, was then provided by the Company's Newnan, Georgia plant
until its sale on August 31, 1999 discussed above. (The facilities located in
Delaware, New Jersey, Pennsylvania and Maryland were all leased facilities.)
Matrix sold real estate that was not being utilized in Mississauga, Canada, and
terminated the business of certain product lines that were no longer profitable.
As part of the restructuring plan Matrix separately reviewed the operations of
SLT for impairment indicators as actual operating and cash flow results were
less than projections for Fiscal 1998, the principals in management, from whom
the original business was purchased, left the employment of the company in early
fiscal 1998, SLT reputation in the industry had deteriorated and the business
<PAGE>
name was dissolved into Matrix. The operating income and cash flows from this
business unit were not historically negative; however, there were significant
concerns that future operations may not be positive. Based on these potential
impairment indicators, an estimate of the undiscounted cash flows of the SLT
operations was made. This estimate indicated impairment and, as a result, the
entire amount of the goodwill related to SLT was written off.
Additionally, in evaluating Matrix's vapor seal operations, the operating income
and cash flows from this business unit indicated that positive amounts were not
attainable. Therefore, the business was completely abandoned, the goodwill
written-off, and impaired assets abandoned or sold at their net realizable
value. The operating results of this business were not significant to Matrix's
operations.
Employee termination costs associated with the reorganization and termination of
all employees of Midwest and the vapor seal operations were recognized and paid
during fiscal 1998.
Other reorganization costs include the cost of travel related expenses for
reorganization teams which proposed, planned and carried out the Company's
restructuring plans, cost of a failed merger and equipment moving.
As a result of these restructuring and closing operations, Matrix recorded a
charge of $21.0 million (See Footnote 3 to the Consolidated Financial
Statements).
Municipal Water Services 2000 vs. 1999
Revenues for Municipal Water Services in 2000 were $18.4 million, a decrease of
$26.7 million or 59.2% from 1999 as a result of the sale of Brown on August 31,
1999 and the final shutdown of SLT as discussed above. Gross margin for 2000 of
3.8% was significantly better than the (5.3%) produced in 1999 as a direct
result of working off the closed-out backlog. These decreased sales volumes
resulted in gross profit for 2000 of $0.7 million exceeding that 1999 by $3.1
million, or 129.2%.
Operating losses for 2000 of ($0.4) million were better than the operating
losses of ($15.6) million produced in 1999 as a direct result of gross profit
shortfalls discussed above and a $9.8 million charge for restructuring,
impairment and abandonment costs in 1999 relating to the decision to exit the
business.
Municipal Water Services 1999 vs. 1998
Revenues for Municipal Water Services in 1999 were $45.1 million, a slight
decrease of $1.1 million, or 2.4% as compared to 1998 due principally to weak
market demand in the flat bottom water tank sector. Gross margin for 1999 of
(5.3)% was significantly worse than the 3.7% produced in 1998 as a result of
major weakness in the markets, intensified competition, poor execution of job
plans and the inefficiency experienced during the selling and shutdown process.
Included in 1999 margins was the impact of losses accrued on jobs yet to be
completed of $0.5 million. These margin declines along with the slightly
decreased sales volumes resulted in gross profit for 1999 of ($2.4) million, a
$4.1 million decrease from 1998.
Operating losses for 1999 of ($15.6) million were significantly worse than the
operating losses of ($5.3) million, in 1998 as a result primarily of lower gross
profits discussed above and restructuring impairment and abandonment costs of
$9.8 million relating to the decision to exit the business versus a
restructuring, impairment and abandonment charge of $4.1 million in 1998
relating to the impairment of goodwill at SLT.
FCCU Services 2000 vs. 1999
Midwest was exited in the third quarter of 1998 and there was no significant
FCCU activity in 2000.
FCCU Services 1999 vs. 1998
Midwest was exited in the third quarter of 1998 and there was no significant
FCCU activity in 1999.
<PAGE>
Financial Condition & Liquidity
Matrix's cash and cash equivalents totaled approximately $1.8 million at May 31,
2000 and $3.0 million at May 31, 1999.
On November 30, 1999, the Company amended and restated its 1994 Amended Credit
Agreement with a commercial bank under which a total of $20.0 million may be
borrowed on a revolving basis based on the level of the Company's eligible
receivables which would have provided $12.8 million of availability at May 31,
2000. The agreement provides for an interest rate based on a prime or LIBOR
option and matures on October 31, 2002. The original amended credit facility
provided for a $10 million term loan, due February 29, 2003, payable in 60 equal
payments beginning in March 1999. The interest rate for the revolver at May 31,
2000 was 8.4%. The agreement requires maintenance of certain financial ratios,
limits the amount of additional borrowings and prohibits the payment of
dividends. The credit facility is secured by all accounts receivable, inventory,
intangibles, and proceeds related thereto. No amounts were outstanding at May
31, 2000.
In conjunction with the term note, effective March 2, 1998, the Company entered
into an interest rate swap agreement for an initial notional amount of $10
million with a commercial bank, effectively providing a fixed interest rate of
7.5% for the five-year period on the term note. The Company paid 7.5% interest
and received LIBOR plus 1.5%, calculated on the notional amount. The notional
amount was $7.7 million at May 31, 1999. Net receipts or payments under the
agreement were recognized as an adjustment to interest expense. On September 3,
1999 the commercial bank paid the Company to unwind the Swap Agreement and the
Company began pre-paying on the term loan with the proceeds of the Brown Sale
(See Exited Operations - Fiscal 2000).
Operations of the Company provided $8.4 million of cash for the year ended May
31, 2000 as compared with providing $16.7 million of cash for the year ended May
31, 1999, representing a decrease of approximately $8.3 million. The decrease
was due primarily to changes in net working capital for the year.
Capital expenditures during the year ended May 31, 2000 totaled approximately
$6.3 million. Of this amount, approximately $1.6 million was used to purchase
transportation equipment for field operations, and approximately $3.4 million
was used to purchase welding, construction, and fabrication equipment. Matrix
has invested approximately $1.3 million in office equipment furniture and
fixtures during the year, which includes approximately $0.2 million invested for
a new enterprise wide management information system. Matrix has budgeted
approximately $6.5 million for capital expenditures for fiscal 2001. Of this
amount, approximately $2.2 million would be used to purchase transportation
equipment for field operations, and approximately $3.3 million would be used to
purchase welding, construction, and fabrication equipment. A 200,000 square
foot, 45-acre facility is planned at the Port of Catoosa in order to consolidate
the Company's four facilities in the Tulsa market now containing fabrication,
operations and administration. This consolidation should take 18 to 24 months at
an estimated cost of approximately $11.0 million. This cost would be offset by
the sale of the existing 4 facilities for approximately $6.0 million.
On January 5, 2000, Matrix entered into a purchase agreement for $4.3 million to
acquire a facility for the relocation of its Anaheim, California operation.
Final resolution of the findings of the interim environmental assessment could
not be reached. Accordingly, Matrix rescinded the purchase agreement on May 25,
2000. Matrix continues to look for facility options in the Anaheim area.
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 its working capital needs through fiscal 2001 and thereafter.
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk
Matrix has subsidiary companies whose operations are located in Canada and
Venezuela. Matrix's financial results could be affected if these companies incur
a permanent decline in value as a result of changes in foreign currency exchange
rates and the economic conditions in these foreign countries. Matrix attempts to
mitigate these risks by investing in different countries and business segments.
Venezuela's currency has recently suffered significant devaluation and
volatility. The ultimate severity of the conditions in Venezuela remain
uncertain, as does the long-term impact on Matrix's investment, however, the
total investment in Venezuela is not material to the financial position of
Matrix taken as a whole and Matrix has exited all operations in Venezuela.
Item 8. Financial Statements and Supplementary Data
<TABLE>
Financial Statements of the Company
<S> <C>
Report of Independent Auditors 23
Consolidated Balance Sheets as of May 31, 2000 and 1999. 24
Consolidated Statements of Operations for the years ended May 31,
2000, 1999 and 1998. 26
Consolidated Statements of Changes in Stockholders' Equity for the
years ended May 31, 2000, 1999 and 1998. 27
Consolidated Statements of Cash Flows for the years ended May 31,
2000, 1999 and 1998. 28
Notes to Consolidated Financial Statements 30
Quarterly Financial Data (Unaudited) 47
Schedule II - Valuation and Qualifying Accounts 48
</TABLE>
Financial Statement Schedules
The following financial statement schedule is filed as a part of this report
under "Schedule II" immediately preceding the signature page: Schedule II -
Valuation and Qualifying Accounts for the three fiscal years ended May 31, 2000
and 1999. All other schedules called for by Form 10-K are omitted because they
are inapplicable or the required information is shown in the financial
statements, or notes thereto, included herein.
<PAGE>
Report of Independent Auditors
The Stockholders and Board of Directors
Matrix Service Company
We have audited the accompanying consolidated balance sheets of Matrix Service
Company as of May 31, 2000 and 1999, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for each of the
three years in the period ended May 31, 2000. Our audits also included the
financial statement schedule listed in the Index under Item 14. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Matrix
Service Company at May 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
May 31, 2000, in conformity with accounting principles generally accepted in the
United States. Also in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Tulsa, Oklahoma
August 11, 2000
<PAGE>
Matrix Service Company
Consolidated Balance Sheets
<TABLE>
May 31
2000 1999
------------------------------------
(In Thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,806 $ 2,972
Accounts receivable, less allowances
(2000-$150, 1999 - $2,464) 24,188 34,390
Costs and estimated earnings in excess of
billings on uncompleted contracts 11,029 8,541
Inventories 3,049 3,042
Assets held for disposal - 8,556
Income tax receivable 146 104
Prepaid expenses 2,559 1,051
------------------------------------
Total current assets 42,777 58,656
Investment in Joint Venture 279 -
Property, plant and equipment, at cost:
Land and buildings 9,992 9,645
Construction equipment 17,892 15,562
Transportation equipment 7,220 6,144
Furniture and fixtures 4,399 2,449
Construction in progress 1,995 2,385
------------------------------------
41,498 36,185
Accumulated depreciation 20,211 17,971
------------------------------------
21,287 18,214
Goodwill, net of accumulated amortization
(2000 - $2,092, 1999 - $1,753) 11,660 11,122
Other assets 2,303 228
------------------------------------
Total assets $ 78,306 $ 88,220
====================================
</TABLE>
<PAGE>
Matrix Service Company
Consolidated Balance Sheets
<TABLE>
May 31
2000 1999
------------------------------------
(In Thousands)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 8,759 $ 9,805
Billings on uncompleted contracts in excess
of costs and estimated earnings 5,138 7,356
Accrued insurance 3,112 4,541
Accrued environmental reserves 432 1,778
Earnout payable 968 727
Income tax payable 412 307
Other accrued expenses 4,560 6,378
Current portion of long-term debt 22 2,092
------------------------------------
Total current liabilities 23,403 32,984
Long-term debt - 5,521
Stockholders' equity:
Common stock - $.01 par value; 15,000,000
shares authorized; 9,642,638
shares issued in 2000 and 1999 96 96
Additional paid-in capital 51,596 51,596
Retained earnings 7,785 1,567
Cumulative translation adjustment (693) (555)
------------------------------------
58,784 52,704
Less treasury stock, at cost - 918,372 and
697,450 shares in 2000 and 1999, respectively (3,881) (2,989)
------------------------------------
Total stockholders' equity 54,903 49,715
------------------------------------
Total liabilities and stockholders' equity $ 78,306 $ 88,220
====================================
</TABLE>
See accompanying notes.
<PAGE>
Matrix Service Company
Consolidated Statements of Operations
<TABLE>
Year ended May 31
2000 1999 1998
-------------------------------------------------------
(In thousands, except share
and per share amounts)
<S> <C> <C> <C>
Revenues $193,753 $210,997 $225,428
Cost of revenues 173,269 197,012 206,839
-------------------------------------------------------
Gross profit 20,484 13,985 18,589
Selling, general and administrative expenses 12,993 15,025 12,947
Goodwill and noncompete amortization 484 670 977
Restructuring, impairment and abandonment
costs 180 9,772 20,956
-------------------------------------------------------
Operating income (loss) 6,827 (11,482) (16,291)
Other income (expense):
Interest expense (368) (969) (1,275)
Interest income 77 291 267
Other 660 (452) (54)
-------------------------------------------------------
Income (loss)
before income taxes 7,196 (12,612) (17,353)
Provision (benefit) for federal, state and
foreign income taxes 580 - (5,715)
-------------------------------------------------------
Net income (loss) $6,616 $(12,612) $ (11,638)
=======================================================
Basic earnings (loss) per common share $ 0.75 $ (1.34) $ (1.22)
=======================================================
Diluted earnings (loss) per common share $ 0.74 $ (1.34) $ (1.22)
=======================================================
Weighted average common shares
outstanding:
Basic 8,872,847 9,440,310 9,545,979
Diluted 8,992,819 9,440,310 9,545,979
</TABLE>
See accompanying notes.
<PAGE>
Matrix Service Company
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
Accumulated
Additional Other
Common Paid-In Retained Treasury Comprehensive
Stock Capital Earnings Stock Income (Loss) Total
------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balances, May 31, 1997 $95 $50,903 $26,269 $(910) $(145) $76,212
Net loss - - (11,638) - - (11,638)
Other comprehensive income
Translation adjustment - - - - (378) (378)
--------------
Comprehensive income (12,016)
--------------
Exercise of stock options
(224,307 shares) 1 555 (410) 910 - 1,056
------------------------------------------------------------------------------
Balances, May 31, 1998 96 51,458 14,221 - (523) 65,252
Net loss - - (12,612) - - (12,612)
Other comprehensive income
Translation adjustment - - - - (32) (32)
--------------
Comprehensive income (12,644)
--------------
Purchase of treasury stock
(704,200 shares) - - - (3,036) - (3,036)
Exercise of stock options
(49,156 shares) - 138 (42) 47 - 143
------------------------------------------------------------------------------
Balances, May 31, 1999 96 51,596 1,567 (2,989) (555) 49,715
Net income - - 6,616 - - 6,616
Other comprehensive income
Translation adjustment - - - - (138) (138)
--------------
Comprehensive income 6,478
--------------
Purchase of treasury stock
(288,000 shares) - - - (1,354) - (1,354)
Exercise of stock options
(67,078 shares) - - (398) 462 - 64
------------------------------------------------------------------------------
Balances, May 31, 2000 $96 $51,596 $7,785 $(3,881) $(693) $54,903
==============================================================================
</TABLE>
See accompanying notes.
<PAGE>
Matrix Service Company
Consolidated Statements of Cash Flows
<TABLE>
Year ended May 31
2000 1999 1998
------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Operating activities
Net income (loss) $6,616 $(12,612) $(11,638)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 3,894 4,717 5,134
Deferred income tax - (1,697) (2,039)
(Gain) loss on sale of equipment (76) 632 467
Noncash write-off of restructuring,
impairment and abandonment costs - 6,344 19,772
Changes in operating assets and
liabilities increasing (decreasing)
cash, net of effects of acquisitions:
Accounts receivable 9,280 2,775 5,166
Costs and estimated earnings
in excess of billings on
uncompleted contracts (3,540) 6,799 (2,858)
Inventories 929 1,470 (138)
Prepaid expenses (1,508) (527) (77)
Accounts payable (1,046) (2,445) (3,486)
Billings on uncompleted
contracts in excess of costs
and estimated earnings (2,218) (256) 473
Accrued expenses (3,986) 5,957 (2,484)
Income taxes receivable/payable 63 5,482 (4,544)
Other 7 47 (797)
------------------------------------------------------
Net cash provided by operating activities 8,415 16,686 2,951
Investing activities
Acquisition of property, plant and equipment (6,316) (5,379) (2,577)
Acquisitions net of cash acquired (851) (637) (5,068)
Proceeds from sale of exited operations 6,805 - -
Investment in joint venture (279) - -
Proceeds from other investing activities 36 182 652
------------------------------------------------------
Net cash used in investing activities $(605) $(5,834) $(6,993)
</TABLE>
<PAGE>
Matrix Service Company
Consolidated Statements of Cash Flows (continued)
<TABLE>
Year ended May 31
2000 1999 1998
------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Financing activities
Issuance of common stock $ 64 $ 143 $ 1,056
Purchase of treasury stock (1,354) (3,036) -
Advances under bank credit agreement 49,760 5,425 11,750
Repayments of bank credit agreement (57,260) (12,925) (4,200)
Repayment of other notes (17) (17) (3,652)
Repayment of acquisition note (66) (62) (459)
Issuance of acquisition note - - 250
Issuance of equipment notes - 4 40
Repayments of equipment notes (8) (23) -
------------------------------------------------------
Net cash provided by (used in)
financing activities (8,881) (10,491) 4,785
Effect of exchange rate changes on cash (95) 5 (14)
------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (1,166) 366 729
Cash and cash equivalents, beginning of year 2,972 2,606 1,877
------------------------------------------------------
Cash and cash equivalents, end of year $ 1,806 $ 2,972 $ 2,606
======================================================
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Income taxes $ 587 $ 477 $1,064
Interest 370 967 1,275
</TABLE>
See accompanying notes.
<PAGE>
Matrix Service Company
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
--------------------------------------
The consolidated financial statements present the accounts of Matrix Service
Company ("Matrix") and its subsidiaries (collectively referred to as the
"Company"). Subsidiary companies include Matrix Service, Inc., ("MSI"), Matrix
Service Mid-Continent ("Mid-Continent"), Matrix Service, Inc. - Canada
("Canada"), San Luis Tank Piping Construction, Inc. and Affiliates ("San Luis"),
Brown Steel Contractors, Inc. and Affiliates ("Brown"), and Midwest Industrial
Contractors, Inc. ("Midwest"). In 1998, Matrix purchased General Services
Corporation and affiliates ("GSC") which was later merged into existing
subsidiaries (see Note 2). In 1998, Matrix exited the Midwest operation, in 1999
Matrix sold Brown and in 2000, Matrix shutdown San Luis (see Note 3).
Intercompany transactions and balances have been eliminated in consolidation.
In March 2000, the Company entered into a joint venture partnership agreement
for the construction of a pulp and paper project. The joint venture is accounted
for under the equity method.
The Company operates primarily in the United States and has operations in
Canada, Mexico and Venezuela. The Company's industry segments are Aboveground
Storage Tank Services (AST), Construction Services, Plant Services, Municipal
Water Services, and Fluid Catalytic Cracking Unit Services (FCCU).
Cash Equivalents
----------------
The Company includes as cash equivalents all investments with original
maturities of three months or less which are readily convertible into cash. The
carrying value of cash equivalents approximates fair value.
Inventories
-----------
Inventories consist primarily of raw materials and are stated at the lower of
cost or net realizable value. Cost is determined using the first-in, first-out
or average cost method.
Revenue Recognition
-------------------
Revenues from fixed-price contracts are recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
date to estimated total costs for each contract. Revenues from cost-plus-fee
contracts are recognized on the basis of costs incurred plus the estimated fee
earned. Anticipated losses on uncompleted contracts are recognized in full when
they become known.
<PAGE>
Matrix Service Company
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (continued)
Depreciation and Amortization
-----------------------------
Depreciation is computed using the straight-line method over the estimated
useful lives of the depreciable assets. Goodwill and noncompete agreements are
being amortized over 40 and 3 to 5 years, respectively, using the straight-line
method. Goodwill represents the excess of cost over fair value of assets of
businesses acquired.
Impairment of Long-Lived Assets
-------------------------------
The Company evaluates the long-lived assets and intangibles, including goodwill,
of identifiable business activities for impairment when events or changes in
circumstances indicate, in management's judgment, that the carrying value of
such assets may not be recoverable. The determination of whether an impairment
has occurred is based on management's estimate of undiscounted future cash flows
attributable to the assets as compared to the carrying value of the assets. If
an impairment has occurred, the amount of the impairment recognized is
determined by estimating the fair value for the assets and recording a provision
for loss if the carrying value is greater than fair value.
For assets identified to be disposed of in the future, the carrying value of
these assets is compared to the estimated fair value less the cost to sell to
determine if an impairment is required. Until the assets are disposed of, an
estimate of the fair value is redetermined when related events or circumstances
change.
Environmental Costs
-------------------
Environmental liabilities are recognized when it is probable that a loss has
been incurred and the amount of that loss is reasonably estimable. Environmental
liabilities are based upon estimates of expected future costs without
discounting.
Income Taxes
------------
Deferred income taxes are computed using the liability method whereby deferred
tax assets and liabilities are recognized based on temporary differences between
financial statement and tax basis of assets and liabilities using presently
enacted tax rates.
Earnings per Common Share
-------------------------
Basic earnings per common share is calculated based on the weighted average
shares outstanding during the period. Diluted earnings per share includes in
average shares outstanding employee stock options which are dilutive (119,972,
-0-, and -0- shares in 2000, 1999 and 1998, respectively).
<PAGE>
Matrix Service Company
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (continued)
Stock Option Plans
------------------
Employee stock options are accounted for under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Comprehensive Income
--------------------
In fiscal 1999, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income." This statement establishes standards
for reporting and display of comprehensive income and its components. The
Company has presented comprehensive income and its components, foreign currency
transaction adjustments, in the consolidated statements of stockholders' equity.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. Acquisition
On June 17, 1997, the Company acquired all of the outstanding common stock of
GSC for up to $7.75 million, subject to certain adjustments. The purchase price
consisted of $4.75 million in cash, a $0.25 million, prime rate (currently
8.25%) promissory note payable in 12 equal quarterly installments and, future
payments of $2.75 if GSC satisfied certain earnings requirements. During fiscal
2000, 100% of the earnout provisions were satisfied. Operations of GSC are
included in the accompanying financial statements from date of acquisition.
<PAGE>
Matrix Service Company
Notes to Consolidated Financial Statements
3. Restructuring, Impairment and Abandonment Costs
Fiscal Year 1998
----------------
During the third quarter of fiscal year 1998, the board of directors approved a
plan whereby the Company would exit the operations of Midwest and discontinue to
operate in the markets that Midwest had historically participated. The Company
completed all open contracts and disposed of all assets. The Company abandoned
this business entirely. During fiscal 1998, Midwest had operating losses of
$17.9 million.
Also during the third quarter of 1998, the Company adopted a board of directors
approved plan to restructure operations to reduce costs, eliminate duplication
of facilities and improve efficiencies. The plan included closing fabrication
shops in Newark, Delaware and Rancocas, New Jersey and moving these operations
to a more efficient and geographically centered facility in Bristol,
Pennsylvania. Additionally, the Company closed a fabrication shop at Elkston,
Maryland. The production from the Maryland facility, which was principally
elevated water tanks, was then provided by the Company's Newnan, Georgia plant
until its sale on August 31, 1999 discussed below. (The facilities located in
Delaware, New Jersey, Pennsylvania and Maryland were all leased facilities.) The
Company sold real estate that was not being utilized in Mississauga, Canada, and
also discontinued certain product lines that were no longer profitable.
As part of the 1998 restructuring plan the Company separately reviewed the
operations of San Luis for impairment indicators as actual operating and cash
flow results were less than projections for fiscal 1998, the principals in
management, from whom the original business was purchased, left the employment
of the company in early fiscal 1998, San Luis reputation in the industry had
deteriorated and the business name was dissolved into Matrix. The operating
income and cash flows from this business unit were not historically negative;
however, there were significant concerns that future operations may not be
positive. Based on these potential impairment indicators, an estimate of the
undiscounted cash flows of the San Luis operations was made. This estimate
indicated impairment and, as a result, the entire amount of the goodwill related
to San Luis was written off.
Additionally, in evaluating the Company's vapor seal operations, the operating
income and cash flows from this business unit indicated that positive amounts
were not attainable. Therefore, the businesses were completely abandoned in
fiscal 1998, the goodwill written-off, and impaired assets abandoned and sold at
their net realizable value. The operating results of this business have not been
significant to the Company's operations.
Employee termination costs associated with the reorganization and termination of
all employees of Midwest and the vapor seal operations were recognized and paid
during fiscal 1998.
<PAGE>
Matrix Service Company
Notes to Consolidated Financial Statements
3. Restructuring, Impairment and Abandonment Costs (continued)
Other reorganization costs in fiscal 1998 include the cost of travel related
expenses for reorganization teams which proposed, planned and carried out the
Company's restructuring plans, cost of a failed merger and equipment moving.
Fiscal Year 1999
----------------
On March 24, 1999 the Company entered into a Letter of Intent with Caldwell
Tanks, Inc. for the sale of 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 however,
the structure of this transaction was renegotiated as an asset sale with the
Company retaining temporary ownership of the land and buildings until
environmental remediation is completed.
Also, in May 1999 senior management approved and committed the Company to an
exit plan related to the San Luis operations which were acquired in 1992. 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 the Workers Adjustment and Retraining Notification Act ("WARN Act").
Fiscal Year 2000
----------------
On August 31, 1999, the Company sold the assets and the business (municipal
water services) 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 was 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 $1.9 million paid to the Company on October 7, 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 the Company is able to satisfy specified
environmental clean-up measures within the three-year period. The estimated cost
of the clean up has been provided, and management believes these clean up
measures will be satisfied within the specified period.
<PAGE>
Matrix Service Company
Notes to Consolidated Financial Statements
3. Restructuring, Impairment and Abandonment Costs (continued)
The Company has agreed with the buyer not to compete in that business for 5
years. For the fiscal years ended May 31, 2000, 1999 and 1998, Brown accounted
for 6.3%, 15.9% and 14.4%, respectively of the Company's total revenues, and
4.8%, 17.7% and 20.2%, respectively, of the Company's total assets.
Based upon amounts paid and charged against the reserves for the year ended May
31, 2000, worker's compensation, general liability, and environmental amounts
for the Brown operation were determined to be $1.0 million short of previously
anticipated expenditures, resulting in a restructuring, impairment and
abandonment charge.
In June 1999, notices were given as required under the WARN Act indicating that
100% of the workforce would be terminated and the Company announced that it
would also pursue potential opportunities to sell the San Luis municipal water
services. In January 2000, the Company sold at fair market value resulting in no
gain or loss the assets of the coating operation, an affiliated company of San
Luis, to existing management for $0.3 million. In April 2000, the remaining open
contracts were completed and all operations were shutdown. This shutdown
resulted in actual termination benefits paid approximating termination benefits
accrued. Based upon amounts paid and charged against the reserves for the year
ended May 31, 2000, the exit plan amounts have been re-evaluated and reduced by
$0.8 million. This reduction is a result of a favorable ruling in existing
litigation, better than anticipated environmental findings, and reductions in
worker's compensation and general liability reserves.
During the years ended 2000, 1999 and 1998, Brown had operating losses of $0.9
million, $4.0 million and $0.2 million, respectively. During the year ended
2000, San Luis had operating income of $0.6 million. During the years ended 1999
and 1998, San Luis had operating losses of $1.8 million and $1.0 million,
respectively.
<PAGE>
Matrix Service Company
Notes to Consolidated Financial Statements
As a result of these restructuring and closing operations, the Company recorded
the following charges:
<TABLE>
May 31
2000 1999 1998
------------------- ------------------- -----------------
(In Thousands)
<S> <C> <C> <C>
Impairment:
Midwest Goodwill $ - $ - $14,555
San Luis Goodwill - - 4,103
Vapor Seal Goodwill - - 466
Brown Goodwill - 2,333 -
Asset Impairment - 4,011 648
Employee Termination - 205 386
Environmental Reserves (32) 1,778 -
Other Reorganization Costs 212 1,445 798
------------------- ------------------- -----------------
Restructuring, impairment and
abandonment costs $ 180 $9,772 $20,956
=================== =================== =================
</TABLE>
In addition, the Company wrote down inventory held by Brown and San Luis by $1.0
million in fiscal 1999, which is included in cost of revenues.
4. Uncompleted Contracts
Contract terms of the Company's construction contracts generally provide for
progress billings based on completion of certain phases of the work. The excess
of costs incurred and estimated earnings recognized for construction contracts
over amounts billed on uncompleted contracts is reported as a current asset and
the excess of amounts billed over costs incurred and estimated earnings
recognized for construction contracts on uncompleted contracts is reported as a
current liability as follows:
<TABLE>
May 31
2000 1999
------------------------------------
(In Thousands)
<S> <C> <C>
Costs incurred and estimated earnings
Recognized on uncompleted contracts $150,676 $151,739
Billings on uncompleted contracts 144,785 150,554
------------------------------------
$ 5,891 $ 1,185
====================================
Shown on balance sheet as:
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 11,029 $ 8,541
Billings on uncompleted contracts in
excess of costs and estimated earnings 5,138 7,356
------------------------------------
$ 5,891 $ 1,185
====================================
</TABLE>
Approximately $0.8 million and $3.7 million of accounts receivable at May 31,
2000 and 1999, respectively, relate to billed retainages under contracts.
<PAGE>
Matrix Service Company
Notes to Consolidated Financial Statements
5. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
May 31
2000 1999
--------------------------------
(In Thousands)
<S> <C> <C>
Borrowings under bank credit facility:
Term note $ - $7,500
Other 22 113
--------------------------------
22 7,613
Less current portion 22 2,092
--------------------------------
$ - $ 5,521
================================
</TABLE>
On November 30, 1999, the Company amended and restated its 1994 Amended Credit
Agreement with a commercial bank under which a total of $20.0 million may be
borrowed on a revolving basis based on the level of the Company's eligible
receivables which would have provided $12.8 million of availability at May 31,
2000. The agreement provides for an interest rate based on a prime or LIBOR
option and matures on October 31, 2002. The original amended credit facility
provided for a $10 million term loan, due February 29, 2003, payable in 60 equal
payments beginning in March 1999. The interest rate for the revolver at May 31,
2000 was 8.4%. The agreement requires maintenance of certain financial ratios,
limits the amount of additional borrowings and prohibits the payment of
dividends. The credit facility is secured by all accounts receivable, inventory,
intangibles, and proceeds related thereto.
In conjunction with the term note, effective March 2, 1998, the Company entered
into an interest rate swap agreement for an initial notional amount of $10
million with a commercial bank, effectively providing a fixed interest rate of
7.5% for the five-year period on the term note. The Company paid 7.5% interest
and received LIBOR plus 1.5%, calculated on the notional amount. The notional
amount was $7.7 million at May 31, 1999. Net receipts or payments under the
agreement were recognized as an adjustment to interest expense. On September 3,
1999 the commercial bank paid the Company to unwind the Swap Agreement and the
Company began pre-paying on the term loan with the proceeds of the Brown Sale
(See Note 3).
<PAGE>
Matrix Service Company
Notes to Consolidated Financial Statements
5. Long-Term Debt (continued)
The Company has outstanding letters of credit and letters of guarantee totaling
$3.4 million which mature during 2000 and 2001.
The carrying value of debt approximates fair value.
6. Income Taxes
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
2000 1999 1998
-----------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $ 50 $ 1,003 $(2,760)
State 360 387 (961)
Foreign 170 307 45
-----------------------------------------------
580 1,697 (3,676)
Deferred:
Federal - (1,516) (1,963)
State - - (13)
Foreign - (181) (63)
-----------------------------------------------
- (1,697) (2,039)
-----------------------------------------------
$ - $ - $(5,715)
===============================================
</TABLE>
At May 31, 2000, the Company had net operating loss carry-forwards (NOL's) of
$3.8 million for income tax purposes that expire in 2013. The use of the NOL's
is limited to future taxable earnings of the Company.
<PAGE>
Matrix Service Company
Notes to Consolidated Financial Statements
6. Income Taxes (continued)
The difference between the expected tax rate and the effective tax rate
is indicated below:
<TABLE>
2000 1999 1998
-----------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Expected provision (benefit) for
Federal income taxes
at the statutory rate $ 2,446 $(4,288) $(5,900)
State income taxes, net of
Federal benefit 305 (255) (642)
Charges without tax benefit,
Primarily goodwill amortization 118 836 827
Valuation allowance (3,041) 3,373 -
Other 752 334 -
-----------------------------------------------
Provision for income taxes $ 580 $ - $(5,715)
===============================================
</TABLE>
Significant components of the Company's deferred tax liabilities and assets as
of May 31, 2000 and 1999 are as follows:
<TABLE>
2000 1999
------------------------------------
(In Thousands)
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $1,950 $2,478
Other - net 141 123
------------------------------------
Total deferred tax liabilities 2,091 2,601
Deferred tax assets:
Bad debt reserve 51 826
Foreign insurance dividend 111 104
Vacation accrual 267 248
Restructuring reserves 281 1,626
Noncompete amortization 412 481
Loss carryforward 1,277 2,664
Other - net 24 25
Valuation allowance (332) (3,373)
------------------------------------
Total deferred tax assets $2,091 $2,601
------------------------------------
$ - $ -
====================================
</TABLE>
<PAGE>
Matrix Service Company
Notes to Consolidated Financial Statements
7. Stockholders' Equity
Preferred Stock
---------------
The Company has $5.0 million shares of preferred stock authorized, none of which
was issued or outstanding at May 31, 2000, or 1999.
Preferred Share Purchase Rights
-------------------------------
The Company's Board of Directors authorized and directed a dividend of one
preferred share purchase right for each common share outstanding on November 12,
1999, and authorized and directed the issuance of one right per common share for
any shares issued after that date. These rights, which expire November 12, 2009,
will be exercisable only if a person or group acquires 15 percent or more of the
Company's common stock or announces a tender offer that would result in
ownership of 15 percent or more of the common stock. Each right will entitle
stockholders to buy one one-hundredth of a share of preferred stock at an
exercisable price of $40. In addition, the rights enable holders to either
acquire additional shares of the Company's common stock or purchase the stock of
an acquiring company at a discount, depending on specific circumstances. The
rights may be redeemed by the Company in whole, but not in part, for one cent
per right.
Incentive Stock Options
-----------------------
The Company has a 1990 Incentive Stock Option Plan (the "1990 Plan") and a 1991
Incentive Stock Option Plan (the "1991 Plan") to provide additional incentives
for officers and other key employees of the Company. The Company also has a 1995
Nonemployee Directors' Stock Option Plan (the "1995 Plan"). Under the 1990 and
1991 Plans, incentive and nonqualified stock options may be granted to the
Company's key employees and nonqualified stock options may be granted to
nonemployees who are elected for the first time as directors of the Company
after January 1, 1991. Employee options generally become exercisable over a
five-year period from the date of the grant. Under the 1995 Plan, qualified
stock options are granted annually to nonemployee directors and generally become
exercisable over a two-year period from the date of the grant. Under each plan,
options may be granted with durations of no more than ten years. The option
price per share may not be less than the fair market value of the common stock
at the time the option is granted. Shareholders have authorized an aggregate of
900,000, 1,320,000 and 250,000 options to be granted under the 1990, 1991, and
1995 Plans, respectively. Options exercisable total 540,069; 679,267; and
803,211 at May 31, 2000, 1999 and 1998, respectively.
<PAGE>
Matrix Service Company
Notes to Consolidated Financial Statements
7. Stockholders' Equity (continued)
Pro forma information regarding net income and earnings per share is required by
Statement of Financial Accounting Standards No. 123, and has been determined as
if the Company had accounted for its employee stock options under the fair value
method of that Statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rates of 4.01% to 6.62%;
dividend yield of -0-%; volatility factors of the expected market price of the
Company's stock of .326 to .860; and an expected life of the options of 2 to 5
years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The Statement's pro forma information from the options is as follows:
<TABLE>
2000 1999 1998
------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Net income (loss) as reported $6,616 $(12,612) $(11,638)
Compensation expense from stock options 495 812 528
------------------------------------------------
Pro forma net income (loss) $6,121 $(13,424) $(12,166)
================================================
Pro forma earnings (loss) per common share:
Basic $ .69 $ (1.42) $ (1.27)
Diluted $ .68 $ (1.42) $ (1.27)
</TABLE>
The effect of compensation expense from stock options on pro forma net income
reflects the vesting of awards granted after June 1, 1995, the year in which the
pro forma reporting requirements under SFAS 123 were adopted.
<PAGE>
Matrix Service Company
Notes to Consolidated Financial Statements
7. Stockholders' Equity (continued)
The following summary reflects option transactions for the past three years:
<TABLE>
Shares Option Price Per Share
----------------------------------------------------
<S> <C> <C> <C> <C>
Shares under option:
Balance at May 31, 1997 1,525,004 $ .67 - $7.875
Granted 530,500 6.75 - 8.00
Exercised (224,307) .67 - 6.25
Canceled (170,540) 3.625 - 8.00
----------------------------------------------------
Balance at May 31, 1998 1,660,657 $ .67 - $8.00
Granted 883,000 3.75 - 4.375
Exercised (49,156) .67 - 6.25
Canceled (869,201) 3.625 - 8.00
----------------------------------------------------
Balance at May 31, 1999 1,625,300 $ .67 - $7.75
Granted 40,000 4.125 - 5.188
Exercised (67,078) 0.67 - 5.75
Canceled (522,128) 3.88 - 7.75
----------------------------------------------------
Balance at May 31 ,2000 1,076,094 $3.625 - $7.75
====================================================
</TABLE>
At May 31, 2000 the weighted average exercise price is $4.544 and the weighted
average remaining contractual life is 7.09 years.
8. Commitments
The Company is the lessee under operating leases covering real estate in Tulsa,
Oklahoma; Bristol, Pennsylvania; Anaheim, California; Bay Point, California;
Paso Robles, California; Bellingham, Washington; and Carson, California. The
Paso Robles lessors are former stockholders of San Luis. The Company is also the
lessee under operating leases covering office equipment. Future minimum lease
payments are as follows (in thousands): 2001 - $892, 2002 - $556, 2003 - $116,
2004 - $43, and 2005 - $43 and thereafter - $77. Rental expense was $1.0
million, $1.3 million and $0.7 million for the years ended May 31, 2000, 1999
and 1998, respectively. Rental expense related to related party leases was $0.3
million, $0.3 million and $0.2 million for the years ended May 31, 2000, 1999
and 1998.
<PAGE>
Matrix Service Company
Notes to Consolidated Financial Statements
9. Other Financial Information
The Company provides specialized on-site maintenance and construction services
for petrochemical processing and petroleum refining and storage facilities. The
Company grants credit without requiring collateral to customers consisting of
the major integrated oil companies, independent refiners and marketers, and
petrochemical companies. Although this potentially exposes the Company to the
risks of depressed cycles in oil and petrochemical industries, the Company's
receivables at May 31, 2000 have not been adversely affected by such conditions.
The Company did establish a bad debt reserve in 1999 for construction service
projects of $2.0 million as well as a reserve of $0.4 million for municipal
water projects, as that segment was being exited.
Sales to two customers accounted for approximately 17% and 12%, respectively of
the Company's revenues for the year ended May 31, 2000. The customer that
represented 17% of consolidated revenues, represented 57% of Plant Services
revenues and 7% of AST Services revenues. The customer that represented 12% of
consolidated revenues represented 14% of AST Services revenues and 6% of Plant
Services revenues. Sales to one customer accounted for approximately 11% of the
Company's revenues for the years ended May 31, 1999 and 1998.
10. Employee Benefit Plan
The Company sponsors a defined contribution 401(k) savings plan (the "Plan") for
all employees meeting length of service requirements. Participants may
contribute an amount up to 15% of pretax annual compensation as defined in the
Plan, subject to certain limitations in accordance with Section 401(k) of the
Internal Revenue Code. Beginning on July 1, 1998, the Company matched
contributions at 25% of the first 6% of employee contributions. After May 31,
2000, the Company will match according to the following table:
1 - 7 years service 25% of the first 6%
8 - 15 years of service 50% of the first 6%
16 or more years of service 75% of the first 6%
The Company recognized cost relating to the plan of $0.3 million and $0.3
million for the years ended May 31, 2000 and 1999, respectively.
<PAGE>
Matrix Service Company
Notes to Consolidated Financial Statements
11. Contingent Liabilities
The Company is insured for worker's compensation, auto, and general liability
claims with deductibles for self-insured retention of $250,000, $25,000, and
$250,000 per incident, respectively. Management estimates the reserve for such
claims based on knowledge of the circumstances surrounding the claims, the
nature of any injuries involved, historical experience, and estimates of future
costs provided by certain third parties. Accrued insurance at May 31, 2000
represents management's estimate of the Company's liability at that date.
Changes in the assumptions underlying the accrual could cause actual results to
differ from the amounts reported in the financial statements.
The Company has been in litigation over a contested contract in the FCCU
segment. In January 2000, the Company won its case and was awarded $1.1 million.
This case is currently under appeal, however, the defendant was required to post
a bond for the judgement amount.
The Company is a defendant in various other legal actions and is vigorously
defending against each of them. It is the opinion of management that none of
such legal actions will have a material effect on the Company's financial
position.
12. Segment Information
The Company has three reportable segments from operations which are continuing -
Aboveground Storage Tank (AST) Services, Construction Services, and Plant
Maintenance Services - as well as two reportable segments from exited operations
- Municipal Water Services and Fluid Catalytic Cracking Units (FCCU) Services.
The AST Services Division consists of five operating units that perform
specialized on-site maintenance and construction services with related products
for large petroleum storage facilities. The Construction Services Division
provides services to industrial process plants. The Plant Maintenance Services
Division specializes in performing "turnarounds," which involve complex,
time-sensitive maintenance of the critical operating units of a refinery. The
Municipal Water Services Division consists of two operating units "Brown" and
"San Luis," both of which have been exited (see footnote 3). The FCCU Services
Division consisted of one operating unit "Midwest" which was exited in the 3rd
quarter of fiscal 1998 (see Note 3).
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies. Intersegment sales and transfers are recorded
at cost and there is no inter-company profit or loss on intersegment sales or
transfers.
The Company's reportable segments are business units that offer different
services. The reportable segments are each managed separately because they
require different expertise and resources for the services provided.
<PAGE>
Matrix Service Company
Notes to Consolidated Financial Statements
12. Segment Information (continued)
<TABLE>
-----------------------------------------------------------------------------------------------------------------------------------
Matrix Service Company
Annual Results of Operations
($ Amounts in Millions)
------------------------------------------------------------------------------------------------------------------------------------
Municipal
AST Construction Plant Water FCCU Combined
Services Services Services Services Services Total
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year ended May 31, 2000
Gross revenues $131.9 $9.3 $34.3 $19.1 $0.0 $194.6
Less: inter-segment revenues (0.1) 0.0 0.0 (0.7) 0.0 (0.8)
------------ -------------- ----------- ------------- -------------- ------------
Consolidated revenues 131.8 9.3 34.3 18.4 0.0 193.8
Gross profit (loss) 17.4 (0.5) 3.2 0.7 (0.3) 20.5
Operating income (loss) 8.0 (1.8) 1.3 (0.4) (0.3) 6.8
Income (loss) before income tax expense 8.0 (1.5) 1.3 (0.3) (0.3) 7.2
Net income (loss) 7.4 (1.5) 1.3 (0.3) (0.3) 6.6
Identifiable assets 62.6 3.1 8.3 4.3 0.0 78.3
Capital expenditures 5.4 0.1 0.8 0.0 0.0 6.3
Depreciation expense 2.7 0.1 0.4 0.2 0.0 3.4
Year ended May 31, 1999
Gross revenues $117.6 $23.3 $29.9 $46.0 $0.5 $217.3
Less: inter-segment revenues (5.0) (0.4) 0.0 (0.9) 0.0 (6.3)
------------ -------------- ----------- ------------- -------------- ------------
Consolidated revenues 112.6 22.9 29.9 45.1 0.5 211.0
Gross profit (loss) 12.9 (0.2) 3.8 (2.4) (0.1) 14.0
Operating income (loss) 3.9 (1.5) 1.8 (15.6) (0.1) (11.5)
Income (loss) before income tax expense 3.4 (1.6) 1.7 (16.1) 0.0 (12.6)
Net income (loss) 3.4 (1.6) 1.7 (16.1) 0.0 (12.6)
Identifiable assets 52.9 8.1 6.7 20.5 0.0 88.2
Capital expenditures 4.2 0.2 0.2 0.8 0.0 5.4
Depreciation expense 2.5 0.2 0.3 1.0 0.0 4.0
Year ended May 31, 1998
Gross revenues $103.0 $45.0 $20.6 $46.2 $10.6 $225.4
Less: inter-segment revenues 0.0 0.0 0.0 0.0 0.0 0.0
------------ -------------- ----------- ------------- -------------- ------------
Consolidated revenues 103.0 45.0 20.6 46.2 10.6 225.4
Gross profit (loss) 11.0 5.4 2.4 1.7 (1.9) 18.6
Operating income (loss) 1.8 4.3 0.8 (5.3) (17.9) (16.3)
Income (loss) before income tax expense 1.5 4.2 0.7 (5.4) (18.3) (17.3)
Net income (loss) 1.2 2.5 0.4 (4.8) (10.9) (11.6)
Identifiable assets 61.9 13.7 7.7 29.4 0.0 112.7
Capital expenditures 1.7 0.2 0.4 0.3 0.0 2.6
Depreciation expense 2.5 0.2 0.3 1.1 0.2 4.3
</TABLE>
<PAGE>
Matrix Service Company
Notes to Consolidated Financial Statements
12. Segment Information (continued)
Geographical information is as follows:
<TABLE>
Revenues Long Lived Assets
----------------------- --------------------------
2000 1999 2000 1999
----------------------- --------------------------
<S> <C> <C> <C> <C>
Domestic $192.4 $207.7 $35.3 $26.6
International 1.4 3.3 0.0 2.9
----------------------- -------------------------
$193.8 $211.0 $35.3 $29.5
======================= =========================
</TABLE>
<PAGE>
Matrix Service Company
Quarterly Financial Data (Unaudited)
Summarized quarterly financial data are as follows:
<TABLE>
First Second Third Fourth
2000 Quarter Quarter Quarter Quarter
------------------------------------------------------------------------------------------------------------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Revenues $47,507 $50,737 $48,033 $47,476
Gross profit 5,766 5,232 4,481 5,005
Net income 2,005 2,477 1,184 950
Net income per common
share:
Basic .22 .28 .13 .11
Diluted .22 .28 .13 .11
1999
---------------------------------------------------
Revenues $51,158 $55,399 $47,074 $57,366
Gross profit 4,989 4,878 3,136 982
Net income (loss) 837 1,023 (333) (14,139)
Net income (loss) per common
share:
Basic .09 .11 (.03) (1.49)
Diluted .09 .10 (.03) (1.49)
</TABLE>
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Matrix Service Company
May 31, 2000 and 1999
<TABLE>
-------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
-------------------------------------------------------------------------------------------------------------------------
Additions
-----------------------------
Charged to
Balance at Charged to Other Balance
Beginning Costs and Accounts- Deductions- At End
Description of Period Expenses Describe Describe Of Period
-------------------------------------------------------------------------------------------------------------------------
(Amounts in Thousands)
<S> <C> <C> <C> <C> <C>
Year ended May 31, 2000:
Deducted from assets accounts:
Allowance for doubtful accounts $2,464 $ - $ - $(2,314) $ 150
Reserve for deferred tax assets 3,373 - - (3,045) 328
-----------------------------------------------------------------------
Total $5,837 $ - $ - $(5,359) $ 478
Year ended May 31, 1999:
Deducted from assets accounts:
Allowance for doubtful accounts $ - $2,464 $ - $ - $2,464
Reserve for deferred tax assets - 3,373 - - 3,373
-----------------------------------------------------------------------
Total $ - $5,837 $ - $ - $5,837
=======================================================================
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable
PART III
The information called for by Part III of Form 10-K (consisting of Item 10 -
Directors and Executive Officers of the Registrant. Item 11 - Executive
Compensation, Item 12 - Security Ownership of Certain Beneficial Owners and
Management and Item 13 - Certain Relationships and Transactions), is
incorporated by reference from the Company's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
the end of the fiscal year to which this Report relates.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Financial Statements of the Company
The following financial statements are filed as a part of this report under
"Item 8 - Financial Statements and Supplementary Data":
<TABLE>
<S> <C>
Report of Independent Auditors 23
Consolidated Balance Sheets as of May 31, 2000 and 1999. 24
Consolidated Statements of Operations for the years ended May 31,
2000, 1999 and 1998. 26
Consolidated Statements of Changes in Stockholders' Equity for the
years ended May 31, 2000, 1999 and 1998. 27
Consolidated Statements of Cash Flows for the years ended May 31,
2000, 1999 and 1998. 28
Notes to Consolidated Financial Statements 30
Quarterly Financial Data (Unaudited) 47
Schedule II - Valuation and Qualifying Accounts 48
</TABLE>
Financial Statement Schedules
The following financial statement schedule is filed as a part of this report
under "Schedule II" immediately preceding the signature page: Schedule II -
Valuation and Qualifying Accounts for the three fiscal years ended May 31, 2000.
All other schedules called for by Form 10-K are omitted because they are
inapplicable or the required information is shown in the financial statements,
or notes thereto, included herein.
<PAGE>
<TABLE>
List of Exhibits
<S> <C> <C>
2.1 Stock Purchase Agreement, dated February 22, 1994, by and among
Matrix Service Company and the shareholders of Georgia Steel
Fabricators, Inc. (Exhibit 2.1 to the Company's Current Report
on Form 8-K (File No. 0-18716) filed March 7, 1994, is hereby
incorporated by reference).
3.1 Restated Certificate of Incorporation (Exhibit 3.1 to the
Company's Registration Statement on Form S-1 (No. 33-36081), as
amended, filed July 26, 1990 is hereby incorporated by
reference).
3.2 Bylaws, as amended (Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (No. 33-36081) as amended, filed July 26,
1990 is hereby incorporated by reference).
4.1 Specimen Common Stock Certificate (Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (File No. 33-36081), as
amended, filed July 26, 1990 is hereby incorporated by
reference).
+ 10.1 Matrix Service Company 1990 Incentive Stock Option Plan (Exhibit
10.14 to the Company's Registration Statement on Form S-1 (File
No. 33-36081), as amended, filed July 26, 1990 is hereby
incorporated by reference).
+ 10.2 Matrix Service Company 1991 Stock Option Plan, as amended. Form
S-8 (File No. 333-56945) filed June 12, 1998 is hereby
incorporated by reference. Exhibit 10.1 to the Company's
Registration Statement.
10.3 Standard Industrial Lease, dated June 30, 1989, between Matrix
Service, Inc. and the Kinney Family Trust (Exhibit 10.16 to the
Company's Registration Statement on Form S-1 (No. 33-36081), as
amended, filed July 26, 1990 is hereby incorporated by
reference).
10.4 Lease Agreement, dated May 30, 1991, between Tim S. Selby and
Stephanie W. Selby as Co-Trustees of the Selby Living Trust
dated October 20, 1983, Tim S. Selby and Stephanie W. Selby, and
Richard Chafin, Trustee of the Selby Children's Trust 1 dated
December 12, 1983 and San Luis Tank Piping Construction Co.,
Inc. (Exhibit 10.9 to the Company's Registration Statement on
Form S-1 (File No. 33-48373) filed June 4, 1992 is hereby
incorporated by reference).
+ 10.5 Employment and Noncompetition Agreement, dated June 1, 1991,
between West Coast Industrial Coatings, Inc. and San Luis Tank
Piping Construction Co., Inc., and Tim S. Selby (Exhibit 10.10
to the Company's Registration Statement on Form S-1 (File No.
33-48373) filed June 4, 1992 is hereby incorporated by
reference).
10.6 Promissory Note, dated December 30, 1992, by and between the
Company, Colt Acquisition Company and Colt Construction Company
and Duncan Electric Company. (Exhibit 10.17 to the Company's
Annual Report on Form 10-K (File No. 0-18716), filed August 27,
1993, is hereby incorporated by reference).
+ 10.7 Employment and Noncompetition Agreement dated February 22, 1994,
between Brown Steel Contractors, Inc. and Mark A. Brown (Exhibit
99.2 to the Company's Current Report on Form 8-K, (File No.
0-18716), filed March 7, 1994, is hereby incorporated by
reference).
<PAGE>
List of Exhibits
+ 10.8 Employment and Noncompetition Agreement dated February 22, 1994,
between Brown Steel Contractors, Inc. and Sample D. Brown
(Exhibit 99.3 to the Company's Current Report on Form 8-K, (File
No. 0-18716), filed March 7, 1994, is hereby incorporated by
reference).
+ 10.9 Matrix Service Company 1995 Nonemployee Directors' Stock Option
Plan (Exhibit 4.3 to the Company's Registration Statement on
Form S-8 (File No. 333-2771), filed April 24, 1996 is hereby
incorporated by reference).
10.10 Stock Purchase Agreement, dated June 17, 1997, by and among
Matrix Service Company and the shareholders of General Service
Corporation.
10.11 Promissory Note (Term Note, due August 31, 1999), by and between
the Company and its subsidiaries, and Liberty Bank & Trust
Company of Tulsa, N.A.
10.12 Promissory Note (Term Note, due June 19, 2002), dated June 19,
1997 by and between the Company and its subsidiaries, and
Liberty Bank & Trust Company, N.A.
10.13 Interest Rate Swap Agreement, dated February 26, 1998 between
Matrix Service Company and Bank One, Oklahoma, N.A.
10.14 Stock Purchase Agreement by and among Caldwell Tanks Alliance,
LLC, Caldwell Tanks, Inc., Brown Steel Contractors, Inc.,
Georgia Steel Acquisition Corp. and Matrix Service Company,
dated June 9, 1999.
10.15 Amended and Restated Stock Purchase Agreement and Conversion to Asset
Purchase Agreement, dated August 31, 1999, by and among Matrix Service Company
and Caldwell Tanks, Inc. (Exhibit 99.1 to the Company's current report on Form
8-K (File No. 0-18716)filed September 13, 1999, is hereby incorporated by reference).
10.16 Matrix Service Company 1990 Incentive Stock Option Plan, as Amended (Exhibit A to the
Company's Annual Report on Schedule 14A filed September 17, 1999, is hereby
incorporated by reference).
10.17 Matrix Service Company 1991 Incentive Stock Option Plan, as Amended
Exhibit B to the Company's Annual Report on Schedule 14A filed September
17, 1999, is hereby incorporated by reference).
10.18 Rights Agreement (including a form of Certificate of Designation of
Series B Junior participating Preferred Stock as Exhibit A thereto,
a form of Right Certificate as Exhibit B thereto and a summary of Rights to
Purchase Preferred Stock as Exhibit C thereto), dated November
2, 1999, (Exhibit I to the Company's current report on Form 8-K
(File No. 0-18716) filed November 9, 1999, is hereby
incorporated by reference).
<PAGE>
10.19 Second Amended and Restated Agreement, dated November 30, 1999 by and
among the Company and its subsidiaries and Bank One, Oklahoma, N.A. (Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q (File No. 0-18716) filed
January 13, 2000, is hereby incorporated by reference).
* 10.20 Chief Executive Officer "CEO" Severance Agreement.
* 10.21 Chief Financial Officer "CFO" Severance Agreement.
* 11.1 Computation of Per Share Earnings.
* 21.1 Subsidiaries of Matrix Service Company.
* 23.1 Consent of Ernst & Young LLP.
* 27.1 Financial Data Schedule.
</TABLE>
------------------
* Filed herewith.
+ Management Contract or Compensatory Plan.
Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Matrix Service Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Matrix Service Company
Date: August 16, 2000 /s/Bradley S. Vetal
------------------------------------------------
Bradley S. Vetal, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
Signatures Title Date
/s/ Bradley S. Vetal Bradley S. Vetal August 16, 2000
Bradley S. Vetal President and Director
(Principal Executive Officer)
/s/ Michael J. Hall Michael J. Hall August 16, 2000
Michael J. Hall Chief Financial Officer
and Director
(Principal Financial and
Accounting Officer)
/s/ Hugh E.Bradley Director August 16, 2000
Hugh E Bradley
/s/ Robert A. Peterson Director August 16, 2000
Robert A. Peterson
/s/ John S. Zink Director August 16, 2000
John S. Zink
</TABLE>
