Page 1 of 14 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QA (Mark One) / X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 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 number 1-10105 MATLACK SYSTEMS, INC. (Exact name of registrant as specified in its charter) DELAWARE 51-0310173 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Rollins Plaza, Wilmington, Delaware 19803 (Address of principal executive offices) (Zip Code) (302) 426-2700 (Registrant's telephone number, including area code) (Former name of registrant) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 _____ The number of shares of the registrant's common stock outstanding as of March 31, 2000 was 8,814,434. FORM 10-QA Page 2 of 14 PART I - FINANCIAL Item 1. Financial Statements MATLACK SYSTEMS, INC. CONSOLIDATED STATEMENT OF OPERATIONS In Thousands, Except Per Share Amounts Quarter Six Months Ended March 31, March 31, 2000 1999 2000 1999 Revenues $49,554 $51,388 $101,347 $105,619 Operating expenses 48,219 45,962 91,764 93,585 Depreciation and amortization 3,106 3,128 5,667 6,329 Selling and administrative expenses 5,489 5,362 10,412 10,774 Other expense (income) 2,080 (199) 1,962 (67) 58,894 54,253 109,805 110,621 Operating loss (9,340) (2,865) (8,458) (5,002) Interest expense 1,348 948 2,765 1,882 Loss before income tax benefit (10,688) (3,813) (11,223) (6,884) Income tax benefit (4,124) (1,425) (4,268) (2,561) Net loss $(6,564) $(2,388) $ (6,955) $ (4,323) Loss per share - Basic $ (.74) $ (.27) $ (.79) $ (.49) - Diluted $ (.74) $ (.27) $ (.79) $ (.49) Average common shares outstanding (000) - Basic 8,814 8,814 8,814 8,814 - Diluted 8,814 8,814 8,814 8,814 Dividends paid per share None None None None The Notes to the Consolidated Financial Statements are an integral part of these statements. FORM 10-QA Page 3 of 14 MATLACK SYSTEMS, INC. CONSOLIDATED BALANCE SHEET In Thousands, Except Share and Per Share Amounts March 31, September 30, ASSETS 2000 1999 Current assets Cash $ 2,449 $ 2,837 Accounts receivable, net of allowance for doubtful accounts: March-$1,724; September-$1,284 39,192 34,330 Inventories 5,872 6,007 Other current assets 2,898 1,592 Refundable income taxes 692 2,631 Total current assets 51,103 47,397 Property and equipment, at cost, net of accumulated depreciation of: March-$125,513; September-$131,296 71,532 80,671 Property held for sale 4,699 5,403 Deferred income taxes 3,305 3,752 Other assets 2,108 1,958 Total assets $132,747 $139,181 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 10,136 $ 11,035 Accrued liabilities 18,601 19,583 Current maturities of long-term debt 55,728 5,309 Total current liabilities 84,465 35,927 Long-term debt 4,773 51,189 Insurance reserves 5,265 5,265 Other liabilities 5,598 2,429 Deferred income taxes - 4,770 Commitments and contingent liabilities See Part II Legal Proceedings Shareholders' equity: Preferred stock, $1 par value, 1,000,000 shares authorized; issued and outstanding - None Common stock, $1 par value, 24,000,000 shares authorized; issued and outstanding: March-8,814,434 and September-8,814,434 8,814 8,814 Capital in excess of par value 10,620 10,620 Retained earnings 13,212 20,167 Total shareholders' equity 32,646 39,601 Total liabilities and shareholders' equity $132,747 $139,181 The Notes to the Consolidated Financial Statements are an integral part of these statements. FORM 10-QA Page 4 of 14 MATLACK SYSTEMS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS In Thousands Six Months Ended March 31, 2000 1999 Cash flows from operating activities: Net loss $(6,955) $(4,323) Adjustments to reconcile net loss to net cash used in operating activities: Impairment loss 2,203 - Depreciation and amortization 5,667 6,329 Net gain on sale of property and equipment (237) (207) Changes in assets and liabilities: Accounts receivable (4,862) 467 Inventories and other assets (1,582) 585 Accounts payable and accrued liabilities (1,880) (1,684) Current and deferred income taxes (2,383) (3,712) Other, net 3,168 632 Net cash used in operating activities (6,861) (1,913) Cash flows from investing activities: Purchase of property and equipment (3,922) (4,123) Proceeds from sale of property and equipment 6,392 870 Net cash provided by (used in) investing activities 2,470 (3,253) Cash flows from financing activities: Proceeds of long-term debt 24,800 26,000 Repayment of long-term debt (20,797) (23,447) Exercise of stock options - 28 Net cash provided by financing activities 4,003 2,581 Net decrease in cash (388) (2,585) Cash beginning of period 2,837 5,477 Cash end of period $ 2,449 $ 2,892 Supplemental and noncash information: Interest paid $ 2,493 $ 1,441 Income taxes (recovered) paid $(1,885) $ 1,150 The Notes to the Consolidated Financial Statements are an integral part of these statements. FORM 10-QA Page 5 of 14 MATLACK SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS A. Basis of Presentation This Form 10-QA for the quarter ended March 31, 2000 is being filed in order to reflect restatement of the financial statements in the second quarter of fiscal 2000. Items 1 and 2, as well as Exhibit 27, are amended. See Note D: Restatement. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain prior year amounts have been reclassified to conform with the current period's presentation. Operating results for the quarter and six months ended March 31, 2000 are not necessarily indicative of the results that may be expected for the year ended September 30, 2000. These statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 1999. B. Earnings Per Share Pursuant to the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share," the number of weighted average shares used in computing basic and diluted earnings per share (EPS) are as follows (in thousands): Quarter Ended Six Months Ended March 31, March 31, 2000 1999 2000 1999 Basic EPS 8,814 8,814 8,814 8,814 Effect of assumed option exercises - (1) - (1) - (1) - (1) Diluted EPS 8,814 8,814 8,814 8,814 (1) The effect of options was not considered as it would have been anti-dilutive. No adjustments to net income available to common stockholders were required during the periods presented. C. Segment Information The Company's operations are classified into two reportable business segments based on differences in their operations. The Company's principal business is the transportation of bulk commodities in tank trailers and tank containers for chemical and dry bulk shippers. In connection with this transportation service, the Company may provide, when required, intermodal transportation services and tank cleaning. The Company is also in the business of leasing tank trailers, tank containers and other associated specialized equipment primarily to customers in the chemical and food industries and its suppliers. FORM 10-QA Page 6 of 14 Following is a tabulation of business segment information for the second quarter ended March 31, 1999 and 2000 and the six months ended March 31, 1999 and 2000, respectively. Bulk Corporate (In thousands) Transportation Leasing and Other Consolidated Quarter ended March 31, 1999 Revenues External customers $ 49,401 $ 1,975 $ 12 $ 51,388 Intersegment 153 55 (208) - Total revenues 49,554 2,030 (196) 51,388 Segment profit (loss) before income taxes (4,359) 705 (159) (3,813) Total assets 130,650 15,200 (6,628) 139,222 Capital expenditures 1,829 536 24 2,389 Depreciation and amortization 2,762 362 4 3,128 Interest expense 867 81 - 948 Quarter ended March 31, 2000 Revenues External customers $ 47,703 $ 1,837 $ 14 $ 49,554 Intersegment 30 79 (109) - Total revenues 47,733 1,916 (95) 49,554 Segment profit (loss) before income taxes (11,114) 467 (41) (10,688) Total assets 124,366 15,580 (7,199) 132,747 Capital expenditures 1,531 445 - 1,976 Depreciation and amortization 2,632 474 - 3,106 Interest expense 1,265 83 - 1,348 FORM 10-QA Page 7 of 14 Bulk Corporate (In thousands) Transportation Leasing and Other Consolidated Six months ended March 31, 1999 Revenues External customers $100,458 $ 5,123 $ 38 $105,619 Intersegment 241 100 (341) - Total revenues 100,699 5,223 (303) 105,619 Segment profit (loss) before income taxes (8,002) 1,525 (407) (6,884) Total assets 130,650 15,200 (6,628) 139,222 Capital expenditures 2,568 1,522 33 4,123 Depreciation and amortization 5,626 690 13 6,329 Interest expense 1,761 121 - 1,882 Six months ended March 31, 2000 Revenues External customers $ 97,397 $ 3,899 $ 51 $101,347 Intersegment 60 176 (236) - Total revenues 97,457 4,075 (185) 101,347 Segment profit (loss) before income taxes (12,329) 1,217 (111) (11,223) Total assets 124,366 15,580 (7,199) 132,747 Capital expenditures 3,447 475 - 3,922 Depreciation and amortization 4,701 961 5 5,667 Interest expense 2,574 191 - 2,765 D. Restatement In January 2000, the Company made the decision to purchase new transportation management software, which is expected to be fully implemented by January 31, 2001, at a total estimated cost, including all implementation costs, of approximately $1,300,000. Until the new transportation software is fully implemented, the Company's existing transportation software will continue to be utilized. As a result, the Company has restated the results of operations for the quarter and six months ended March 31, 2000 to reverse the asset impairment charge of $3,115,000 ($1,893,000 net of tax benefit) previously recorded in the quarter ended March 31, 2000. Restated net loss for the quarter ended March 31, 2000 is $6,564,000 ($.74 per share) compared with the previously reported net loss of $7,903,000 ($.90 per share). The net book value of the existing transportation software is being amortized over its remaining useful life. FORM 10-QA Page 8 of 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations: Six Months Ended March 31, 2000 vs. Six Months Ended March 31, 1999 The following table summarizes the changes in revenues for the six months ended March 31, 2000 when compared with the corresponding period of the prior year: Bulk Corporate (In thousands) Transportation Leasing and Other Consolidated Revenues-six months ended March 31, 1999 $100,458 $ 5,123 $ 38 $105,619 Leasing opportunity revenues (1,200) (1,200) Revenues associated with international operations (4,870) (4,870) Revenues associated with closed waste van operation (995) (995) Normalized prior year revenues 94,593 3,923 38 98,554 Increase (decrease) in revenues from normal operations 2,804 (24) 13 2,793 Revenues-six months ended March 31, 2000 $ 97,397 $ 3,899 $ 51 $101,347 Revenues for the six months ended March 31, 2000 decreased by $4,272,000 (4.0%) to $101,347,000 compared with $105,619,000 during the same period last year. The winding down of the Company's international operations accounted for $4,870,000 of the six-month decrease in revenues when compared with the prior year. In addition, the decline in leasing revenues from external customers of $1,224,000 resulted from the fact that revenues in the first quarter of fiscal 1999 included approximately $1,200,000 of opportunity revenues, which resulted from bad weather in Puerto Rico. After considering the effects of revenues earned and reported in the prior year for which there has been no comparable revenue earned during the current year, overall revenues from the remaining base level of the bulk transportation business have increased by $2,804,000. Operating expenses decreased by $1,821,000 (1.9%) to $91,764,000 in 2000 from $93,585,000 in 1999. FORM 10-QA Page 9 of 14 The following table identifies by general expense category net increases and decreases for the six months: (In thousands) Increase/(Decrease) Leased operator costs $ 2,353 (1) Fuel costs 2,580 (2) Facility costs (272)(3) Purchased transportation-international operations (3,112)(4) Purchased transportation-other (2,982)(5) All other items (388) Net decrease $(1,821) Explanation of certain variances: (1) Increase due to inclusion of additional fuel payments to leased operators and certain leased operator termination costs. (2) Increase due to significant increase in fuel costs incurred. (3) Includes provision of $725,000 for terminal closings. (4) Resulted from shutting down international operations. (5) Resulted from shifts in the mix of business. As a percentage of revenues, operating expenses were 90.5% in 2000 and 88.6% in 1999. Depreciation and amortization expense decreased by $662,000 (10.5%) reflecting both the disposition of property and equipment during fiscal 1999 and the first six months of fiscal 2000 and the fact that a larger portion of the Company's assets have become fully depreciated. Selling and administrative expenses decreased by $362,000 (3.4%) to $10,412,000 compared with $10,774,000 during the same period last year. Included in the fiscal year 2000 expenses are certain items that reduced the effect of management's cost containment measures implemented to more properly align the Company's infrastructure with the current level and mix of business. These expenses, which are not expected to be incurred in the future, include consulting fees, temporary staffing and overtime cost, which aggregated $499,000. As a percentage of revenue, selling and administrative expenses were 10.3% in 2000 and 10.2% in 1999. Other expense (income) for the six months ended March 31, 2000 includes a non-cash impairment charge of $2,203,000 related to the write-down of several Company-owned locations to adjust their carrying values to fair value. Interest expense increased by $883,000 (46.9%) reflecting higher borrowing rates and an increased level of indebtedness when compared with the same period of last year. The effective rate of income tax benefit was 38.0% in fiscal 2000 compared with 37.2% in the prior year. FORM 10-QA Page 10 of 14 The net loss of $6,955,000 or $.79 per diluted share reflects the additional costs incurred to eliminate unprofitable terminals and product lines, as well as higher interest costs due to increased rates and higher outstanding balances and the asset impairments. Results of Operations: Quarter Ended March 31, 2000 vs. Quarter Ended March 31, 1999 Revenues for the quarter ended March 31, 2000 decreased by $1,834,000 (3.6%) to $49,554,000 compared with $51,388,000 during the same quarter last year. The following table summarizes the change in revenues for the three months ended March 31, 2000 when compared with the corresponding period of the prior year: Bulk Corporate (In thousands) Transportation Leasing and Other Consolidated Revenues-three months ended March 31, 1999 $ 49,401 $ 1,975 $ 12 $ 51,388 Revenues associated with international operations (2,648) (2,648) Revenues associated with closed waste van operation (378) (378) Normalized prior year revenues 46,375 1,975 12 48,362 Increase (decrease) in revenues from normal operations 1,328 (138) 2 1,192 Revenues-three months ended March 31, 2000 $ 47,703 $ 1,837 $ 14 $ 49,554 Operating expenses increased by $2,257,000 (4.9%) to $48,219,000 in 2000 from $45,962,000 in 1999. The following table identifies by general expense category net increases and decreases for the quarter: (In thousands) Increase/(Decrease) Leased operator costs $ 1,225 (1) Fuel costs 1,740 (2) Facility costs 631 (3) Purchased transportation-international operations (1,533)(4) Purchased transportation-other (924)(5) All other items 1,118 Net decrease $ 2,257 Explanation of certain variances: (1) Increase due to inclusion of additional fuel cost payments to leased operators. (2) Increase due to significant increase in fuel costs incurred. (3) Includes provision of $725,000 for terminal closings. (4) Resulted from shutting down international operations. (5) Resulted from shifts in the mix of business. FORM 10-QA Page 11 of 14 As a percentage of revenues, operating expenses were 97.3% in 2000 and 89.4% in 1999. Depreciation and amortization expense decreased on a net basis by $22,000 (0.7%) reflecting both the disposition of property and equipment during fiscal 1999 and fiscal 2000 and the fact that a larger portion of the Company's assets have become fully depreciated. During the quarter, the useful life of certain software was reduced. This reduction resulted in an increase in depreciation of $640,000, which is reflected in the net decrease described above. Selling and administrative expense increased by $127,000 (2.4%) to $5,489,000 compared with $5,362,000 during the same period last year. The second quarter of 2000 included consulting fees, temporary staffing and overtime costs of $499,000, as more fully described above. As a percentage of revenue, selling and administrative expenses were 11.1% in 2000 and 10.4% in 1999. Other expense (income) for the quarter and six months ended March 31, 2000 includes a non-cash impairment charge of $2,203,000 related to the write-down of several Company-owned locations to adjust their carrying values to fair value. Interest expense increased by $400,000 (42.2%) reflecting higher borrowing rates and an increased level of indebtedness when compared with the second quarter of fiscal 1999. The effective rate of income tax benefit was 38.6% in fiscal 2000 compared with 37.4% in the second quarter of fiscal 1999. The net loss of $6,564,000 or $.74 per diluted share reflects the additional costs incurred to eliminate unprofitable terminals and product lines, higher selling and administrative expenses, as well as higher interest costs due to increased rates and higher outstanding balances and the asset impairments. Liquidity and Capital Resources During the six months ended March 31, 2000, the Company's operating activities required a cash outflow of $6,861,000. However, the cash flow from operating activities was substantially better during the second quarter, as shown in the following table: First Quarter Second Quarter Six Months Ended 12/31/99 Ended 3/31/00 Ended 3/31/00 Cash (used in) provided by operating activities $(11,234,000) $ 4,373,000 $(6,861,000) During the first quarter of fiscal 2000, slower than normal collections of accounts receivable adversely affected cash provided by operating activities by $6,476,000. During the second quarter, collections of accounts receivable provided cash of $737,000. FORM 10-QA Page 12 of 14 The Company incurred a net loss of $6,955,000 during the first six months of fiscal year 2000, which, from a cash flow point of view, was more than offset by non-cash depreciation and amortization of $5,667,000 and the asset impairment of $2,203,000. The growth in accounts receivables as well as other working capital changes caused overall operations to require cash of $6,861,000. Drawing down cash balances of $388,000, net proceeds from the sale of equipment of $2,470,000 and net borrowings of $4,003,000 were the sources of funding these cash requirements. During the second quarter, the Company reduced its overall indebtedness by $3,239,000. Capital expenditures for the six months ended March 31, 2000 were $3,922,000 compared with $4,123,000 in the prior year. Proceeds from the sale of equipment and facilities were $6,392,000, primarily the result of selling four terminals. The net impact of purchasing and disposing of equipment and facilities during the six months ended March 31, 2000 was a source of cash of $2,470,000. The source of the borrowings was the Company's $75,000,000 bank credit facility, which had $54,400,000 outstanding at March 31, 2000. Under this facility, borrowings are restricted to the net book value of available equipment and eligible accounts receivable less outstanding letters of credit. The Company exceeded the borrowing base by $3,126,000 at March 31, 2000, was not in compliance with the fixed charge coverage ratio and the net worth covenant under this facility at March 31, 2000 and had incurred a loss in the first quarter due to a restatement, and a loss for the quarter ended March 31, 2000. The Company currently is negotiating with its bank group to obtain waivers and amendments to its credit agreement. Although there can be no assurance that the requested waivers and amendments will be received, the Company expects to be able to secure such waivers and amendments in an acceptable form. The Company anticipates that its currently available funds, cash generated from operations and cash realized from the sale of property and equipment will be sufficient to meet cash and working capital requirements, including anticipated capital expenditures, through the end of fiscal 2000. The Company does not anticipate making any additional purchases of equipment in 2000. The Company expects to make modest capital expenditures for refurbishment of trailers and facilities in the second half of fiscal 2000. In connection with the previously mentioned purchase of transportation management software, the Company expects to spend $776,000 during fiscal 2000. Based on current operating projections, including the above capital expenditure estimates and excluding any non-operating proceeds, it is expected that overall indebtedness will decrease during the second half of fiscal 2000. Otherwise, there have been no material changes in the Company's financial condition and its liquidity and capital resources since September 30, 1999. For further details, see the Company's 1999 Annual Report to Shareholders on Form 10-K for the year ended September 30, 1999. FORM 10-QA Page 13 of 14 Forward-Looking Statements The Company may make forward-looking statements relating to anticipated financial performance, business prospects, acquisitions or divestitures, new products, market forces, commitments and other matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. Forward-looking statements typically contain words such as "anticipates", "believes", "estimates", "expects", "forecasts", "predicts", or "projects", or variations of these words, suggesting that future outcomes are uncertain. Various risks and uncertainties may affect the operations, performance, development and results of the Company's business and could cause future outcomes to differ materially from those set forth in forward- looking statements, including the following factors: general economic conditions, competitive factors and pricing pressures, shift in market demand, the performance and needs of industries served by the Company, particularly the chemical industry, equipment utilization, management's success in developing and introducing new services and lines of business, potential increases in labor costs, potential increases in equipment, maintenance and fuel costs, uncertainties of litigation, the Company's ability to finance its future business requirements through outside sources or internally generated funds, the availability of adequate levels of insurance, success or timing of completion of ongoing or anticipated capital maintenance or information systems projects, management retention and development, changes in Federal, State and local laws and regulations, including transportation and environmental regulations, as well as the risks, uncertainties and other factors described from time to time in the Company's SEC filings and reports. Year 2000 ("Y2K") Issues As of the filing date of this Form 10-Q, the Company's business operations have not been materially impacted by Y2K matters. The Company will continue to monitor its operations for possible Y2K information technology programming issues. PART II - OTHER INFORMATION Item 1. Legal Proceedings There are various ordinary routine claims and legal actions pending against the Company. In the opinion of management, based on the advice of in-house counsel, the likelihood that the ultimate resolution of these claims and actions will be material is remote. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. FORM 10-QA Page 14 of 14 Item 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Shareholders was held on February 10, 2000. With regard to Proposal No. 1 of the NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON FEBRUARY 10, 2000 to elect two Class II Directors to the Board of Directors, William B. Philipbar, Jr. and John W. Rollins, Jr. were elected. At the meeting, 6,110,517 and 6,117,814 affirmative votes were cast for William B. Philipbar, Jr. and John W. Rollins, Jr., respectively. There were no votes cast against either nominee and 48,526 and 41,229 votes were withheld from William B. Philipbar, Jr. and John W. Rollins, Jr., respectively. Additionally, the Company's 1999 Stock Option Plan was approved as Proposal No. 2. At the meeting, 5,613,453 affirmative votes and 539,339 negative votes were cast on Proposal No. 2 while 6,251 shares abstained. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K On January 27, 2000, a report on Form 8-K was filed that reported the following: Under Item 5. Other Events The Company announced that effective January 27, 2000, Michael B. Kinnard, previously President and Chief Operating Officer, will be President and Chief Executive Officer. John W. Rollins, Jr. will continue as Chairman of the Board of Directors. SIGNATURES 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. DATE: June 30, 2000 MATLACK SYSTEMS, INC. (Registrant) /s/ Michael B. Kinnard Michael B. Kinnard President and Chief Executive Officer /s/ Patrick J. Bagley Patrick J. Bagley Vice President-Finance and Treasurer Chief Financial Officer Chief Accounting Officer