<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended November 30, 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 number 0-l87l6
MATRIX SERVICE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 73-1352l74
(State of incorporation) (I.R.S. Employer Identification No.)
l070l E. Ute St., Tulsa, Oklahoma 74ll6-l5l7
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (9l8) 838-8822
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act of
l934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
As of January 9, 2001 there were 9,642,638 shares of the Company's common
stock, $.0l par value per share, issued and 8,415,766 shares outstanding.
================================================================================
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NO.
--------------------- --------
<S> <C> <C>
ITEM 1. Financial Statements (Unaudited)
Consolidated Statements of Income for the Three and Six Months Ended
November 30, 2000 and 1999........................................................ 1
Consolidated Balance Sheets November 30, 2000 and May 31, 2000....................... 2
Consolidated Statements of Cash Flow for the Six Months Ended
November 30, 2000 and 1999........................................................ 4
Notes to Consolidated Financial Statements........................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................... 9
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk........................... N/A
PART II OTHER INFORMATION
-----------------
ITEM 1. Legal Proceedings.................................................................... N/A
ITEM 2. Changes in Securities and Use of Proceeds............................................ N/A
ITEM 3. Defaults Upon Senior Securities...................................................... N/A
ITEM 4. Submission of Matters to a Vote of Security Holders.................................. 15
ITEM 5. Other Information.................................................................... N/A
ITEM 6. Exhibits and Reports on Form 8-K..................................................... 16
Signatures ..................................................................................... 16
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
Matrix Service Company
Consolidated Statements of Income
(in thousands, except share and per
share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
(unaudited) (unaudited)
---------------------------------- -------------------------------------
2000 1999 2000 1999
--------------- -------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Revenues $ 45,052 $ 50,737 $ 82,914 $ 98,244
Cost of revenues 40,284 45,505 74,326 87,246
--------------- -------------- ------------------ ---------------
Gross profit 4,768 5,232 8,588 10,998
Selling, general and administrative expenses 3,189 2,817 6,845 6,361
Goodwill and non-compete amortization 86 131 176 219
--------------- -------------- ------------------ ---------------
Operating income 1,493 2,284 1,567 4,418
Other income (expense):
Interest expense (65) (132) (129) (243)
Interest income 27 33 81 54
Other 100 462 48 423
--------------- -------------- ------------------ ---------------
Income before income tax expense 1,555 2,647 1,567 4,652
Provision for federal, state and
foreign income tax expense 566 170 570 170
--------------- -------------- ------------------ ---------------
Net income $ 989 $ 2,477 $ 997 $ 4,482
=============== ============== ================== ===============
Earnings per share of common stock:
Basic $0.12 $0.28 $0.12 $0.50
Diluted $0.11 $0.28 $0.11 $0.50
Weighted average number of common shares:
Basic 8,566,366 8,930,235 8,618,220 8,938,063
Diluted 8,691,460 9,005,095 8,734,145 9,015,324
</TABLE>
See Notes to Consolidated Financial Statements
1
<PAGE>
Matrix Service Company
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
November 30, May 31,
------------------- ----------------------
2000 2000
------------------- ----------------------
<S> <C> <C>
ASSETS: (unaudited)
Current assets:
Cash and cash equivalents $ 212 $ 1,806
Accounts receivable, less allowances
(November 30 - $30, May 31 - $150) 23,462 24,188
Costs and estimated earnings in excess
of billings on uncompleted contracts 15,209 11,029
Inventories 2,743 3,049
Income tax receivable 129 146
Prepaid expenses 3,360 2,559
------------------- ----------------------
Total current assets 45,115 42,777
Investment in Joint Venture 366 279
Property, plant and equipment at cost:
Land and buildings 10,020 9,992
Construction equipment 18,419 17,892
Transportation equipment 7,256 7,220
Furniture and fixtures 4,529 4,399
Construction in progress 2,800 1,995
------------------- ----------------------
43,024 41,498
Less accumulated depreciation 21,458 20,211
------------------- ----------------------
Net property, plant and equipment 21,566 21,287
Goodwill, net of accumulated amortization
(November 30 - $2,255, May 31 - $2,092) 11,439 11,660
Other assets 2,313 2,303
------------------- ----------------------
Total assets $ 80,799 $ 78,306
=================== ======================
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
Matrix Service Company
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
November 30, May 31,
------------------- ----------------------
2000 2000
------------------- ----------------------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 4,657 $ 8,759
Billings on uncompleted contracts in
excess of costs and estimated earnings 9,808 5,138
Accrued insurance 2,641 3,112
Accrued environmental reserves 252 432
Earnout payable - 968
Income taxes payable 672 412
Other accrued expenses 3,267 4,560
Current portion of long-term debt - 22
------------------- ----------------------
Total current liabilities 21,297 23,403
Long-term debt 5,325 -
Stockholders' equity:
Common stock 96 96
Additional paid-in capital 51,596 51,596
Retained earnings 8,761 7,785
Accumulated other comprehensive income (787) (693)
------------------- ----------------------
59,666 58,784
Less: Treasury stock, at cost (5,489) (3,881)
------------------- ----------------------
Total stockholders' equity 54,177 54,903
------------------- ----------------------
Total liabilities and stockholders' equity $ 80,799 $ 78,306
=================== ======================
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
Matrix Service Company
Consolidated Statements of Cash Flow
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
November 30,
(unaudited)
--------------------------------------------
2000 1999
------------------- ------------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 997 $ 4,482
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,278 1,932
(Gain) loss on sale of equipment (30) (46)
Changes in current assets and liabilities
increasing (decreasing) cash:
Accounts receivable 726 10,224
Costs and estimated earnings in excess
of billings on uncompleted contracts (4,180) (4,959)
Inventories 306 1,198
Prepaid expenses (801) (2,407)
Accounts payable (4,114) (4,860)
Billings on uncompleted contracts in
excess of costs and estimated earnings 4,670 (639)
Accrued expenses (2,900) (2,808)
Income taxes receivable/payable 277 (75)
Other (10) 6
------------------- ------------------
Net cash provided by (used in) operating activities (2,781) 2,048
Cash flow from investing activities:
Capital expenditures (2,420) (3,018)
Proceeds from sale of exited operations - 6,244
Investment in joint venture (87) -
Proceeds from other investing activities 53 46
------------------- ------------------
Net cash provided by (used in) investing activities $ (2,454) $ 3,272
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
Matrix Service Company
Consolidated Statements of Cash Flow
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
November 30,
(unaudited)
----------------------------------------------------------
2000 1999
--------------------- -------------------
<S> <C> <C>
Cash flows from financing activities:
Repayment of acquisition payables $ (17) $ (42)
Repayment of equipment notes (5) (5)
Issuance of long-term debt 25,650 20,535
Repayments of long-term debt (20,325) (27,135)
Purchase of treasury stock (1,660) (366)
Issuance of stock 31 12
--------------------- -------------------
Net cash provided (used) in financing activities 3,674 (7,001)
Effect of exchange rate changes on cash (33) 17
--------------------- -------------------
Increase (Decrease) in cash and cash equivalents (1,594) (1,664)
Cash and cash equivalents at beginning of period 1,806 2,972
--------------------- -------------------
Cash and cash equivalents at end of period $ 212 $ 1,308
===================== ===================
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Matrix Service
Company ("Matrix") and its subsidiaries, all of which are wholly owned. All
significant inter-company balances and transactions have been eliminated in
consolidation.
In March 2000, Matrix 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 accompanying unaudited consolidated financial statements have been prepared
in accordance with Rule 10-0l of Regulation S-X for interim financial statements
required to be filed with the Securities and Exchange Commission and do not
include all information and footnotes required by generally accepted accounting
principles for complete financial statements. However, the information
furnished reflects all adjustments, consisting only of normal recurring
adjustments that are, in the opinion of management, necessary for a fair
statement of the results for the interim periods.
The accompanying financial statements should be read in conjunction with the
audited financial statements for the year ended May 3l, 2000, included in
Matrix's Annual Report on Form 10-K for the year then ended. Matrix's business
is seasonal; therefore, results for any interim period may not necessarily be
indicative of future operating results.
NOTE B - SEGMENT INFORMATION
Matrix operates primarily in the United States and has operations in Canada.
Matrix's industry segments are Aboveground Storage Tank (AST) Services,
Construction Services, Plant Services, and Other Services.
6
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Matrix Service Company
2nd Quarter Results of Operations
($ Amounts in millions)
------------------------------------------------------------------------------------------------------------------
AST Construction Plant Other Combined
Services Services Services Services Total
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Three Months Ended November 30, 2000
Gross revenues 33.5 5.1 6.6 0.0 45.2
Less: Inter-segment revenues (0.1) (0.1) 0.0 0.0 (0.2)
Consolidated revenues 33.4 5.0 6.6 0.0 45.0
Gross profit 4.6 0.0 0.5 (0.3) 4.8
Operating income (loss) 2.1 (0.3) 0.1 (0.4) 1.5
Income (loss) before income tax expense 2.1 (0.3) 0.1 (0.3) 1.6
Net income (loss) 1.4 (0.2) 0.0 (0.2) 1.0
Identifiable assets 62.7 4.4 10.0 3.7 80.8
Capital expenditures 1.3 0.1 0.2 0.0 1.6
Depreciation expense 1.0 0.0 0.1 0.0 1.1
Three Months Ended November 30, 1999
Gross revenues 32.9 3.0 8.4 6.7 51.0
Less: Inter-segment revenues 0.0 0.0 0.0 (0.3) (0.3)
Consolidated revenues 32.9 3.0 8.4 6.4 50.7
Gross profit 4.6 0.1 0.7 (0.2) 5.2
Operating income (loss) 2.3 (0.2) 0.2 0.0 2.3
Income (loss) before income tax expense 2.4 0.2 0.1 0.0 2.7
Net income (loss) 2.2 0.2 0.1 0.0 2.5
Identifiable assets 56.3 2.8 8.6 9.2 76.9
Capital expenditures 1.4 0.0 0.0 0.0 1.4
Depreciation expense 0.5 0.1 0.0 0.2 0.8
Six Months Ended November 30, 2000
Gross revenues 64.9 8.8 10.1 0.0 83.8
Less: Inter-segment revenues (0.8) (0.1) 0.0 0.0 (0.9)
Consolidated revenues 64.1 8.7 10.1 0.0 82.9
Gross profit 8.5 0.1 0.5 (0.5) 8.6
Operating income (loss) 3.1 (0.6) (0.4) (0.5) 1.6
Income (loss) before income tax expense 3.1 (0.7) (0.4) (0.4) 1.6
Net income (loss) 2.1 (0.5) (0.3) (0.3) 1.0
Identifiable assets 62.7 4.4 10.0 3.7 80.8
Capital expenditures 2.0 0.1 0.3 0.0 2.4
Depreciation expense 1.9 0.0 0.2 0.0 2.1
Six Months Ended November 30, 1999
Gross revenues 59.4 4.5 17.3 17.6 98.8
Less: Inter-segment revenues (0.1) 0.0 0.0 (0.5) (0.6)
Consolidated revenues 59.3 4.5 17.3 17.1 98.2
Gross profit 9.1 0.0 1.6 0.3 11.0
Operating income (loss) 4.6 (0.7) 0.6 (0.1) 4.4
Income (loss) before income tax expense 4.6 (0.3) 0.5 (0.1) 4.7
Net income (loss) 4.4 (0.3) 0.5 (0.1) 4.5
Identifiable assets 56.3 2.8 8.6 9.2 76.9
Capital expenditures 2.5 0.2 0.3 0.0 3.0
Depreciation expense 1.2 0.2 0.1 0.3 1.8
</TABLE>
7
<PAGE>
NOTE C - REPORTING ACCUMULATED OTHER COMPREHENSIVE LOSS
For the quarter ended November 30, 2000, total other comprehensive loss was $152
thousand as compared to other comprehensive income of $54 thousand for the same
three month period ended November 30, 1999. For the six months ended November
30, 2000, total other comprehensive loss was $94 thousand as compared to other
comprehensive income of $10 thousand for the same six month period ended
November 30, 1999. Other comprehensive income or loss and accumulated other
comprehensive loss consisted of foreign currency translation adjustments.
NOTE D - INCOME TAXES
For the quarter ended November 30, 1999, a provision for state income taxes of
$170 thousand was recorded. The federal income tax provision was offset $0.8
million and $1.6 million for the quarter and six months ended November 30, 1999,
respectively, by the benefit of operating loss carryforwards for which a
valuation allowance was provided at May 31, 1999 as required under Statement of
Financial Accounting Standards No 109.
8
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward Looking Statements
Certain matters discussed in this report include forward-looking statements.
Matrix is making these forward-looking statements in reliance on the safe harbor
protections provided under the Private Securities Litigation Reform Act of 1995.
Such statements are subject to a number of uncertainties that could cause actual
results to differ materially from any results projected, forecasted, estimated,
or budgeted, including the following:
. The timing and planning of maintenance projects at customer facilities in
the refinery industry which could cause adjustments for seasonal shifts in
product demands.
. Changes in general economic conditions in the United States.
. Changes in laws and regulations to which Matrix is subject, including tax,
environmental, and employment laws and regulations.
. The cost and effects of legal and administrative claims and proceedings
against Matrix or its subsidiaries.
. Conditions of the capital markets Matrix utilizes to access capital to
finance operations.
. The ability to raise capital in a cost-effective way.
. The effect of changes in accounting policies.
. The ability to manage growth and to assimilate personnel and operations of
acquired businesses.
. The ability to control costs.
. Severe weather which could cause project delays and/or a decline in labor
productivity.
. Changes in foreign economies, currencies, laws, and regulations, especially
in Canada and Venezuela where Matrix has made direct investments.
. Political developments in foreign countries, especially in Canada and
Venezuela where Matrix has made direct investments.
. The ability of Matrix to develop expanded markets and product or service
offerings as well as its ability to maintain existing markets.
. Technological developments, high levels of competition, lack of customer
diversification, and general uncertainties of governmental regulation in
the energy industry.
. The ability to recruit, train, and retain project supervisors with
substantial experience.
. A downturn in the petroleum storage operations or hydrocarbon processing
operations of the petroleum and refining industries.
. Changes in the labor market conditions that could restrict the availability
of workers or increase the cost of such labor.
. The negative effects of a strike or work stoppage.
. Exposure to construction hazards related to the use of heavy equipment with
attendant significant risks of liability for personal injury and property
damage.
. The use of significant production estimates for determining percent
complete on construction contracts could produce different results upon
final determination of project scope.
. The inherent inaccuracy of estimates used to project the timing and cost of
exiting operations of non-core businesses.
. Fluctuations in quarterly results.
9
<PAGE>
Results of Operations
Three Months Ended November 30, 2000 Compared to Three Months Ended
November 30, 1999
AST Services 2000 vs. 1999
Revenues for AST Services in the quarter ended November 30, 2000 were $33.5
million, compared to $32.9 million in the comparable quarter of the prior year,
an increase of $0.6 million or 1.8% due to a strong business environment in most
tank repair and maintenance regions partially offset by a revenue decline in the
tank construction business. Gross margin for the quarter ended November 30,
2000 of 13.7% was slightly worse than the 14.0% produced for the quarter ended
November 30, 1999 as a direct result of margin declines in the Gulf Coast and
from the Tank Construction group. These net margin declines offset by the
increased sales volumes resulted in gross profit for the quarter ended November
30, 2000 of $4.6 million being identical to the amount produced for the quarter
ended November 30, 1999.
Selling, general and administrative costs as a percent of revenues increased to
7.0% in the quarter ended November 30, 2000 vs. 6.9% in the quarter ended
November 30, 1999 primarily as a result of increased depreciation for the
information technology costs associated with the new enterprise-wide management
information system purchased in fiscal 2000.
Operating income and income before income tax expense for the quarter ended
November 30, 2000 of $2.1 million and $2.1 million respectively, were slightly
worse than the $2.3 million and $2.4 million respectively produced in the
quarter ended November 30, 1999, primarily the result of the increase in
selling, general and administrative expenses discussed above.
Construction Services 2000 vs. 1999
Revenues for Construction Services in the quarter ended November 30, 2000 were
$5.1 million, compared to $3.0 million in the comparable quarter of the prior
year, an increase of $2.1 million or 70.0% resulting from increased business
development efforts last year. Gross margin for the quarter ended November 30,
2000 of 0.0% was less than the 3.3% produced for the quarter ended November 30,
1999 as a direct result of increased volume on lower margin subcontracting work.
These margin declines offset by the increased sales volumes resulted in gross
profit for the quarter ended November 30, 2000 of $0.0 million being $0.1
million less than the $0.1 million for the quarter ended November 30, 1999.
Operating loss for the quarter ended November 30, 2000 of ($0.3) million was
worse than the ($0.2) million produced in the quarter ended November 30, 1999,
primarily as the result of the gross profit decline discussed above. Other
income includes a one-time benefit of $0.4 million for the quarter ended
November 30, 1999 as a result of a customer invoice previously reserved as a bad
debt being fully collected.
Plant Services 2000 vs. 1999
Revenues for Plant Services in the quarter ended November 30, 2000 were $6.6
million compared to $8.4 million in the comparable quarter of the prior year, a
decrease of $1.8 million or 21.4%. The decrease was the result of a shift in
turnaround activity between the second fiscal quarter of last year and the third
and fourth fiscal quarters of this year. Gross margin for the quarter ended
November 30, 2000 of 7.6% was worse than the 8.3% produced for the quarter ended
November 30, 1999 as a result of a lower volume of turnaround work. These margin
declines along with the decreased sales volume resulted in gross profit for the
quarter ended November 30, 2000 of $0.5 million being $0.2 million less than the
$0.7 million in the quarter ended November 30, 1999.
Operating income and income before income tax expense for the quarter ended
November 30, 2000 of $0.1 million and $0.1 million respectively, were slightly
worse than the $0.2 million and $0.1 million respectively produced in the
quarter ended November 30, 1999, primarily as the result of lower gross margins
discussed above.
10
<PAGE>
Six Months Ended November 30, 2000 Compared to Six Months Ended
November 30, 1999
AST Services 2000 vs. 1999
Revenues for AST Services in the six months ended November 30, 2000 were $64.9
million, compared to $59.4 million in the comparable six months of the prior
year, an increase of $5.5 million or 9.3%. The increase was due primarily to a
strong business environment. Gross margin for the six months ended November 30,
2000 of 13.1% was slightly worse than the 15.3% produced for the six months
ended November 30, 1999 as a direct result of less than satisfactory execution
on a number of large maintenance jobs in the first quarter of fiscal 2001.
These margin declines offset by the increased sales volumes resulted in gross
profit for the six months ended November 30, 2000 of $8.5 million being $0.6
million less than the $9.1 million for the six months ended November 30, 1999.
Selling, general and administrative costs as a percent of revenues increased to
8.1% in the six months ended November 30, 2000 versus 7.2% in the six months
ended November 30, 1999 primarily as a result of increased depreciation for the
information technology costs associated with the new enterprise-wide management
information system purchased in fiscal 2000.
Operating income and income before income tax expense for the six months ended
November 30, 2000 of $3.1 million and $3.1 million respectively, were worse than
the $4.6 million and $4.6 million respectively produced in the six months ended
November 30, 1999, primarily as the result of the gross profit declines and
selling, general and administrative cost increases discussed above.
Construction Services 2000 vs. 1999
Revenues for Construction Services for the six months ended November 30, 2000
were $8.8 million, compared to $4.5 million for the comparable six months of the
prior year, an increase of $4.3 million or 95.6%. This increase was due to a
greater backlog of projects in the current year than in the prior year. Gross
margin for the six months ended November 30, 2000 of 1.1% was also better than
the 0.0% produced for the six months ended November 30, 1999 as a direct result
of better absorption of fixed costs associated with the higher revenue volumes.
These margin increases along with the increased sales volumes resulted in gross
profit for the six months ended November 30, 2000 of $0.1 million being $0.1
million more than the break even level in the six months ended November 30,
1999.
Operating loss for the six months ended November 30, 2000 of $(0.6) million was
slightly better than the operating loss of $(0.7) million produced in the six
months ended November 30, 1999, primarily as the result of the improved fixed
cost absorption discussed above. Other income includes a one-time benefit of
$0.4 million for the six months ended November 30, 1999 as a result of a
customer invoice previously reserved as a bad debt being fully collected.
Plant Services 2000 vs. 1999
Revenues for Plant Services in the six months ended November 30, 2000 were $10.1
million compared to $17.3 million in the comparable six months of the prior
year, a decrease of $7.2 million or 41.6%. The revenue decline in Plant Services
was due to a shift in turnaround work from the first and second quarters of last
year to the third and fourth quarters of this year and lower maintenance
contract revenues this year versus last year. Gross margin for the six months
ended November 30, 2000 of 5.0% was worse than the 9.2% produced for the six
months ended November 30, 1999 as a direct result of lower margin work coupled
with worse fixed cost absorption due to the revenue volume declines. These
margin declines, along with the decreased sales volume, resulted in gross profit
for the six months ended November 30, 2000 of $0.5 million being $1.1 million
less than the $1.6 million for the six months ended November 30, 1999.
Operating loss and loss before income tax expense for the six months ended
November 30, 2000 of $(0.4) million and $(0.4) million respectively, were worse
than the operating income and income before income taxes of $0.6 million and
$0.5 million respectively produced in the six months ended November 30, 1999,
primarily as the result of the gross profit declines discussed above.
11
<PAGE>
Other Services
Other services consist of Brown Steel Contractors, Inc. ("Brown") (which was
sold in August 1999) and San Luis Tank Piping Construction Company, Inc. ("SLT")
(which was shut down in April 2000). Activity for the quarter and six months
ended November 30, 2000 consists mainly of increased worker's compensation
claims activity of these exited activities. The only activity for the quarter
and six months ended November 30, 1999 consisted of completing open contracts,
which had been appropriately recorded in prior periods.
12
<PAGE>
Financial Condition & Liquidity
Matrix's cash and cash equivalents totaled approximately $0.2 million at
November 30, 2000 and $1.8 million at May 31, 2000.
Matrix has financed its operations recently with cash from advances under a
credit agreement. On October 31, 2000, Matrix amended its 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 Matrix's eligible receivables which would
have provided approximately $15.0 million of availability at November 30, 2000.
Revolving loans bear interest at a Prime Rate or a LIBOR based option, and
mature on October 31, 2003. At November 30, 2000, $5.3 million was outstanding
under the revolver at an interest rate of 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.
Operations of Matrix used $2.8 million of cash for the six months ended November
30, 2000 as compared with providing $2.0 million of cash for the six months
ended November 30, 1999, representing a decrease of approximately $4.8 million.
The decrease was due primarily to changes in net working capital and decreased
profitability.
Capital expenditures during the six months ended November 30, 2000 totaled
approximately $2.4 million. Of this amount, approximately $0.6 million was used
to purchase transportation equipment for field operations, and approximately
$0.8 million was used to purchase welding, construction, and fabrication
equipment. Matrix has invested approximately $0.7 million in an office expansion
in Houston during the period. 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 20,000 square foot, 50-acre facility is planned in
Tulsa, Oklahoma in order to consolidate Matrix's four facilities in the Tulsa
market now containing fabrication, operations and administration. Matrix expects
to sign a 30-year lease for a 50-acre tract of land at the Port of Catoosa,
Oklahoma in January, 2001. Additionally, on December 19, 2000, the Tulsa
operations facility was sold for $0.6 million, with an option to lease back
until March 2002. This consolidation should take 18 to 24 months at an estimated
cost of approximately $11.0 million. The cost is expected to be offset by the
sale of the existing four facilities for approximately $6.0 million.
Matrix purchased $0.5 million treasury shares in the quarter ended August 31,
2000, which fully exhausted the authorized amounts available under the Share
Buyback Plan approved in March 1999. In October 2000, the Board of Directors
authorized a new Share Buyback Plan for up to 20% of the outstanding shares or
1,723,753 shares. Matrix purchased $1.1 million in Treasury shares for the
quarter ended November 30, 2000 under this new plan.
Matrix believes that its existing funds, amounts available from borrowings under
its existing credit agreement and cash generated by operations will be
sufficient to meet the working capital needs through Fiscal 2001 and for the
foreseeable time thereafter unless significant expansions of operations not now
planned are undertaken, in which case Matrix would need to arrange additional
financing as a part of any such expansion.
The preceding discussion contains forward-looking statements including, without
limitation, statements relating to Matrix's plans, strategies, objectives,
expectations, intentions, and adequate resources, that are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Readers are cautioned that such forward-looking statements contained in
the financial condition and liquidity section are based on certain assumptions
which may vary from actual results. Specifically, the capital expenditure
projections are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the successful
remediation of environmental issues relating to the Brown sale and other
factors. However, there can be no guarantee that these estimates will be
achieved, or that there will not be a delay in, or increased costs associated
with, the successful remediation of the remaining Brown property.
13
<PAGE>
Outlook
For the balance of the year, management will continue to evaluate those
businesses that are negatively impacting Matrix's operating performance. The
current backlog in the Construction Services Division is $18.8 million but it is
still lower than needed to profitably sustain this Division.
Our business climate continues to be positive and we anticipate that the balance
of the year's performance will be significantly above last year's third and
fourth quarters although the recent severe weather throughout the country has
had a significant impact on productivity over the last three to four weeks. Our
client base is currently in the process of finalizing budgets for calendar year
2001 and it is too early to make any specific observations but we are not
currently aware of any major negative aspects of this process.
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 and affiliated entities 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,
$0.3 million of which remains accrued at November 30, 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. 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 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.
14
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders:
The Company's annual meeting of stockholders was held in Tulsa,
Oklahoma at 10:00 a.m. local time, on Wednesday, October 18, 2000.
Proxies for the meeting were solicited pursuant to Regulation 14 under
the Securities Exchange Act of 1934, as amended. There was no
solicitation in opposition to the nominees for election as directors as
listed in the proxy statement, and all nominees were elected.
Out of a total of 8,618,766 shares of the Company's common stock
outstanding and entitled to vote, 8,341,643 shares were present at the
meeting in person or by proxy, representing approximately 96.79
percent. Matters voted upon at the meeting were as follows:
a. Election of six directors to serve on the Company's board of directors.
Messrs. Bradley, Hall, Lackey, Peterson, Vetal and Zink were elected to
serve until the 2001 Annual Meeting. The vote tabulation with respect
to each nominee was as follows:
<TABLE>
<CAPTION>
Authority
Nominee For Withheld
---------------------- ---------------- ---------------
<S> <C> <C>
Hugh E. Bradley 8,186,058 155,585
Michael J. Hall 8,307,358 34,285
Paul K. Lackey 8,289,358 52,285
Robert A. Peterson 8,290,258 51,385
Bradley S. Vetal 7,446,858 894,785
John S. Zink 8,204,358 137,285
</TABLE>
b. The stockholders approved a proposal to amend the Company's
Certificates of Incorporation to increase the Company's shares
authorized from 15,000,000 to 30,000,000.
<TABLE>
<CAPTION>
Number of Votes Cast
--------------------
Broker
For Against Abstain Non-Votes
------------------ --------------- ------------ -------------
<S> <C> <C> <C>
8,144,960 185,833 10,850 -0-
</TABLE>
c. The stockholders approved the ratification of the appointment of Ernst
& Young LLP as the Company's independent public accountants.
<TABLE>
<CAPTION>
Number of Votes Cast
--------------------
Broker
For Against Abstain Non-Votes
------------------ --------------- ------------ -------------
<S> <C> <C> <C>
8,328,512 12,526 605 -0-
</TABLE>
15
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K:
A. Exhibit 3.1 - Certificate of Amendment of Restated Certificate of
Incorporation of Matrix Service Company
B. Exhibit 10.1 - First Amendment to the Seconded Amended and
Restated Credit Agreement, dated October 31, 2000, by and among
the Company and its subsidiaries and Bank One, Oklahoma, N.A.
C. Exhibit 11 - Computation of Earnings Per Share
D. Exhibit 27 - Financial Data Schedule
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATRIX SERVICE COMPANY
Date: January 10, 2001 By: /s/ Michael J. Hall
------------------------------------------------
Michael J. Hall, Vice President-Finance,
signing on behalf of the registrant and as the
registrant's chief accounting officer.
16
