ITEM 1. BUSINESS. The Registrant, Matlack Systems, Inc., together with its subsidiaries (herein collectively referred to as the "Company" unless the context indicates otherwise) is a specialized logistics and transportation company that provides specialized transportation of bulk commodities in tank trailers and tank containers to the nation's leading chemical and dry bulk shippers. In addition to specialized trucking, the Company provides intermodal transportation services, trailer leasing, dedicated contract carriage services, international bulk transportation, tank cleaning services and logistics management services to the chemical industry. The Company operates approximately 1,100 tractors and 2,600 trailers out of approximately 100 terminals located in 37 states and four Canadian provinces.
(a) General Development of Business There have been no significant changes in the business of the Company since September 30, 1995.
(b) Financial Information about Industry Segments The Company's principal operation is the transportation of bulk commodities in tank trailers. Financial information concerning this business is included on pages 2 to 5 and 8 through 18 of this 1996 Annual Report on Form 10-K.
(c) Narrative Description of Business The business discussed in this section is that of the Company's major operating subsidiary Matlack, Inc. ("Matlack"), the bulk carrier.
In terms of revenues, Matlack is one of the largest companies in the country engaged in highway transportation of bulk commodities primarily in tank trailers. Matlack is one of the few nationwide interstate tank truck carriers authorized to transport chemicals and other dry and liquid products in bulk. Matlack also operates on an intrastate basis in 37 states.
Matlack is subject to regulation by the Interstate Commerce Commission and various state regulatory agencies. As a common and contract carrier by motor vehicle, Matlack holds certificates of public convenience and necessity issued by the regulatory agencies. These certificates define the commodities that the holder is authorized to transport and the points of origin and destination for carriers of such commodities. Matlack has terminals in Toronto and Sarnia, Ontario; Montreal, Quebec; Vancouver, British Columbia and Leduc, Alberta and it holds operating licenses under which it may transport various commodities into and out of certain Canadian Provinces via specific border entry points from the United States. To the best of its knowledge, Matlack is in compliance with the regulations of the Interstate Commerce Commission and those of the various state and provincial regulatory agencies where it operates.
The business of the Company is generally not subject to seasonal variations, however, highway transportation activities can be adversely affected depending on the severity of the weather in the various sections of the country during the winter months. No customer accounts for more than 7% of the Company's consolidated revenues.
Competition For the most part, Matlack's competition consists of those bulk carriers having operating authority in the relevant jurisdictions. Competition is based primarily on service, rates and convenience. Competition in the bulk trucking industry formerly was restricted and was based primarily on a carrier's ability to obtain certificates of public convenience and necessity to transport defined commodities in specific geographic areas. Since the passage of the Motor Carrier Act of 1980, many bulk carriers have obtained authority to serve expanded geographic areas on an interstate basis, which, together with excess capacity, has resulted in the intensification of price competition.
To the extent that competition is based on service and convenience, the number and location of Matlack's terminals, together with its ability to clean tank trailers places Matlack in a favorable position to increase its business. Management believes that Matlack's fleet of trailers is one of the largest and most diversified in the tank truck industry. Matlack's network of strategically located terminal facilities is, in management's opinion, one of the largest and the best in the industry.
Matlack's largest competitors in the tank truck industry, based upon a comparison of gross revenues, are Trimac Limited, MTL Inc. and Chemical Leaman Tank Lines, Inc. In addition, there are approximately 190 other recognized competitors operating in the various regions where Matlack has operating authority.
The Company believes that its contractual arrangements and business policies are adequate in securing rate increases to recover rising costs and expenses to the extent permitted by competitive circumstances, which remain intense. Unusual increases in fuel costs can generally be offset by fuel surcharges to customers. Accordingly, while inflation has had some impact on the Company's operations during the last three fiscal years, competition within the industry has been a major factor in establishing the rates that the Company can charge for its services.
Employees At September 30, 1996, a total of 1,069 persons were employed by the Company.
ITEM 2.

ITEM 2. PROPERTIES. The Company maintains its headquarters in space leased from Rollins Properties, Inc., a wholly-owned subsidiary of Rollins Truck Leasing Corp., at 2200 Concord Pike, Wilmington, Delaware. The Company's principal properties consist of land and buildings used in its bulk trucking business. Matlack owns or leases approximately 100 truck terminals in 37 states and five terminals in four Canadian provinces.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS. There are various claims and legal actions pending against the Company. In the opinion of management, based on the advice of counsel, it is only remotely likely that the ultimate resolution of these claims and actions will be material.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. NONE.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. For the fiscal years ended September 30, 1996 and 1995, the range of share prices for the Common Stock on the New York Stock Exchange is as follows:
1996 1995 Fiscal Quarter High Low High Low First . . . . $10 1/2 $8 1/4 $10 7/8 $9 3/8 Second . . . . $ 9 3/4 $7 7/8 $12 $9 5/8 Third . . . . $ 9 3/8 $8 $12 1/4 $9 7/8 Fourth . . . . $ 8 3/8 $7 3/8 $11 $9 1/2
No dividends have been paid since the Company became publicly held in January of 1989.
At September 30, 1996, there were 1,811 holders of record of the Common Stock.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA.
FIVE-YEAR SELECTED FINANCIAL DATA (Dollars in Thousands, Except Per Share Amounts)
Year Ended September 30, 1996 1995 1994 1993 1992 Revenues $224,866 $236,257 $217,880 $204,809 $199,488 Earnings (loss) before income taxes (benefit) $ (1,703)(1) $ 11,211 $ 10,516 $ 8,054 $ 4,043(3) Net earnings (loss) $ (1,477)(1) $ 6,601 $ 6,182 $ 4,414(2) $ 2,153(4) Earnings (loss) per share $ (.17)(1) $ .74 $ .69 $ .50(2) $ .25(4)
At September 30, Total assets $128,127 $131,974 $122,526 $105,363 $101,091 Long-term indebtedness $ 29,878 $ 32,970 $ 24,800 $ 20,360 $ 22,418 Shareholders' equity $ 55,676 $ 57,532 $ 50,726 $ 44,297 $ 39,763
(1) Includes a special charge of $4,000 ($2,432 after tax benefit or $.28 per share). (2) Reduced by additional deferred income tax provision of $169 ($.02 per share) to reflect the increase in the federal income tax rate from 34% to 35%. (3) Before charge of $328 to reflect a change in the method of revenue recognition. (4) Reduced by $190 ($.02 per share) representing the cumulative after-tax effect to September 30, 1991 of a change in the method of revenue recognition as of October 1, 1991.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Liquidity and Capital Resources The Company's operations require periodic investment in equipment and facilities. Net capital expenditures for equipment and facilities were $7.6 million in 1996, $25.7 million in 1995 and $20.0 million in 1994. Capital expenditures are funded principally by the cash flows from operations, which were $11.2 million in 1996, $14.6 million in 1995 and $16.4 million in 1994. The increased capital spending in 1995 required additional funding provided by equipment term loans from various financial institutions. The Company's strong cash flows from operations in 1996 were used in part to reduce debt by approximately $3.0 million. Based on its relationship with current lenders, the Company expects to continue to be able to obtain required financing at market rates and under satisfactory terms and conditions.
At September 30, 1996, the Company had commitments of $3.4 million to purchase transportation equipment. As necessary, additional funds are available to the Company from its unsecured revolving credit facility and from other financial institutions who have expressed an interest in providing equipment financing. The revolving credit agreement with two banks provides for an aggregate commitment of $30.0 million to meet equipment financing needs and letter of credit requirements. The agreement expires on March 31, 1997, but may be renewed on a year-to-year basis thereafter upon agreement of the parties thereto. At September 30, 1996, a total of $4.7 million was available under this credit facility.
In the normal course of its business, Matlack, Inc. ("Matlack") is subject to numerous state and federal environmental laws and regulations and also is exposed to the cost and risk of transporting and handling materials and wastes characterized as hazardous by various regulatory agencies. Matlack has received notices from the United States Environmental Protection Agency ("EPA") and others indicating that it is a "potentially responsible party" with respect to the cleanup of hazardous wastes at several waste disposal sites. Matlack has been named as a defendant in several lawsuits brought under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") for recovery of costs associated with the cleanup of waste disposal sites. In addition, Matlack has responded to various governmental requests, principally those of the EPA pursuant to CERCLA, for information with respect to possible disposition of waste materials attributable to it at various waste disposal sites. Based on information currently available, the Company's management believes its ultimate liability at these sites will not have a material adverse effect upon the Company.
Results of Operations The Company's principal line of business is the transportation of liquid and dry material by tank trucks. Competition in this industry remained intense during the past three years due to the excess capacity of the carriers.
The Company believes that its contractual arrangements and business policies generally are adequate in securing rate increases to recover rising fuel and other costs and expenses to the extent permitted by competitive circumstances, which remain intense.
Fiscal Year 1996 vs. 1995
Revenues for 1996 decreased by $11.4 million (4.8%) to $224.9 million from the $236.3 million reported in 1995. Total revenue miles decreased by 5.7% in 1996 while the number of loads carried decreased by 7.0% compared with the prior year. The Company's ancillary service revenues increased during the current year but the increase was not sufficient to offset the decline experienced in domestic bulk trucking revenues.
Operating expenses decreased by $3.4 million (1.8%) reflecting the decrease in revenues and a significant reduction in the Company's utilization of leased operators. Operating expenses were 84.3% of revenues in 1996 and 81.7% of revenues in 1995.
During the fourth quarter of 1996, the Company recorded a special charge of $4,000,000 ($2,432,000 after tax benefit or $.28 per share). The charge included costs associated with a reduction in the tractor fleet, reflecting the weak business conditions of the bulk trucking industry, and provision for closing certain terminals, the operation of which is no longer cost- effective, and related costs of $1,350,000. Also included in the charge was $1,900,000 related to reserves for medical, disability, workers' compensation and other insurance claims that continue to be evaluated and $750,000 for third party claims.
Depreciation expense increased by $1.8 million (17.8%) principally due to the increase in capital expenditures associated with the Company's tractor replacement program and several major new facilities completed in 1995.
Selling and administrative expenses decreased by $.5 million (2.7%) reflecting the lower level of business. These expenses were 8.1% and 7.9% of revenue in 1996 and 1995, respectively.
Interest expense decreased by $.3 million (9.4%) due to a reduction of borrowings and lower average interest rates during 1996.
The rate of income tax benefit in 1996 was 13.3%. The low effective rate of benefit was caused by the impact that non-deductible expenses had upon the tax computations. The effective income tax rate in 1995 was 41.1%.
The Company's net loss for the year was $1,477,000 or $.17 per share compared with net earnings of $6,601,000 or $.74 per share in 1995. Exclusive of the special charge, the Company's reported net earnings were $955,000 or $.11 per share.
Fiscal Year 1995 vs. 1994
Revenues for 1995 increased by $18.4 million (8.4%) to $236.3 million from the $217.9 million reported in 1994. Total revenue miles increased by 7.9% in 1995 while the number of loads carried increased by 4.7% over the prior year. In addition to the bulk transportation revenue growth, the Company noted strong increases in tank cleaning and other service revenues.
Operating expenses increased by $13.5 million (7.5%) mainly due to costs associated with the increased revenues and fleet size. Operating expenses were 81.7% of revenues in 1995 and 82.5% of revenues in 1994.
Depreciation expense increased by $1.8 million (21.7%) principally due to the increase in capital expenditures associated with the Company's tractor replacement program, which was completed in 1995.
Selling and administrative expenses increased by $.9 million (5.1%) reflecting the increased level of business. These expenses were 7.9% and 8.2% of revenue in 1995 and 1994, respectively.
Interest expense increased by $1.1 million (52.4%) due to the higher borrowing levels associated with the Company's increased level of capital spending in 1995.
The effective income tax rates for 1995 and 1994 were 41.1% and 41.2%, respectively.
The Company's net earnings increased by 6.5% to $6.6 million in 1995 compared with $6.2 million in 1994. The improvement in net earnings resulted mainly from the increased revenues offset in large part by higher depreciation and interest expense.
Impact of Recent Accounting Pronouncements During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" (SFAS 121) and SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which are both effective in fiscal 1997. The Company has determined that SFAS 121 will not have a material effect on its financial statements. The Company has also decided to adopt only the disclosure provisions of SFAS 123 when required in fiscal 1997.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements of the Company, the Independent Auditors' Report and the financial statement schedules included in this report are shown on the Index to the Consolidated Financial Statements and Schedules on page 8.
ITEM 9.

ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. NONE. PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Except as presented below, the information called for by this Item 10 is incorporated by reference from the Company's Proxy Statement to be filed pursuant to Regulation 14A for the Annual Meeting of Shareholders to be held on January 30, 1997.
Executive Officers of the Registrant. As of October 31, 1996, the Executive Officers of the registrant were:
Name Position Age Term of Office
Patrick J. Bagley Vice President-Finance and 49 7/88 to date Treasurer
Michael B. Kinnard Vice President-General Counsel 39 6/94 to date and Secretary
John W. Rollins, Jr. Chairman of the Board 54 7/88 to date
G. J. Trippitelli President and Chief Executive 53 7/88 to date Officer
Eugene C. Bonacci Senior Vice President and 56 10/96 to date Chief Operating Officer
The Company's Executive Officers are elected for the ensuing year and until their successors are elected.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION. The information called for by this Item 11 is incorporated by reference from the Company's Proxy Statement to be filed pursuant to Regulation 14A for the Annual Meeting of Shareholders to be held on January 30, 1997.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information called for by this Item 12 is incorporated by reference from the Company's Proxy Statement to be filed pursuant to Regulation 14A for the Annual Meeting of Shareholders to be held on January 30, 1997.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. During the year ended September 30, 1996, the following officers and/or directors of the Company were also officers and/or directors of Rollins Environmental Services, Inc.; Patrick J. Bagley, Michael B. Kinnard, William B. Philipbar, Jr., John W. Rollins, John W. Rollins, Jr. and Henry B. Tippie. The following officers and/or directors of the Company were also officers and/or directors of Rollins Truck Leasing Corp.; Patrick J. Bagley, Michael B. Kinnard, William B. Philipbar, Jr., John W. Rollins, John W. Rollins, Jr. and Henry B. Tippie. John W. Rollins owns directly and of record 6.1% and 11.2% of the outstanding shares of Common Stock of Rollins Environmental Services, Inc. and Rollins Truck Leasing Corp., respectively at October 31, 1996. The description of transactions between the Company and Rollins Environmental Services, Inc. and between the Company and Rollins Truck Leasing Corp. appears under the caption "Transactions with Related Parties" on page 17 of this 1996 Annual Report on Form 10-K.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements - See accompanying Index to Consolidated Financial Statements and Schedules on page 8.
(2) Financial Statement Schedules - See accompanying Index to Consolidated Financial Statements and Schedules on page 8.
(3) Exhibits: (3) Articles of Incorporation and By-Laws of Matlack Systems, Inc. as filed with Registration Statement No. 33-23524 dated August 5, 1988 are incorporated herein by reference.
(4) (a) Credit Agreements and Amendment, see Exhibit 10.
(b) Rights Agreement dated as of June 14, 1989 as filed as an Exhibit to Registration Statement on Form 8-A filed by Registrant on June 15, 1989 is incorporated herein by reference.
(10) (a) Master Credit Agreement dated as of March 27, 1996 between Matlack (DE), Inc. et al, Bank of America Illinois and First Union National Bank.
(b) Credit Agreement dated as of March 27, 1996 between Matlack (DE), Inc. et al and Bank of America Illinois.
(c) Credit Agreement dated as of May 22, 1996 between Matlack (DE), Inc. et al and First Union National Bank.
(d) First Amendment to Master Credit Agreement dated August 9, 1996 between Matlack (DE), Inc. et al, Bank of America Illinois and First Union National Bank.
(e) Matlack Systems, Inc. 1988 Stock Option Plan as filed with Registration Statement No. 33-23524 dated August 5, 1988 is incorporated herein by reference.
(f) Matlack Systems, Inc. 1995 Stock Option Plan, as filed with the Company's Proxy Statement for the Annual Meeting of Shareholders held on January 25, 1996, is incorporated hereby by reference.
(21) Matlack Systems, Inc. Subsidiaries at September 30, 1996.
(27) Matlack Systems, Inc. Financial Data Schedule at September 30, 1996.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by Matlack Systems, Inc. during the last quarter of the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DATED: November , 1996 Matlack Systems, Inc.
(Registrant)
BY: G. J. Trippitelli President and Chief Executive Officer and Director
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:
Director, Vice President-Finance November , Patrick J. Bagley and Treasurer Chief Financial Officer Chief Accounting Officer
Director, Chairman of the November , John W. Rollins, Jr. Board
Director November , 1996 John W. Rollins
Chairman of the Executive November , Henry B. Tippie Committee and Director
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DATED: November , 1996 Matlack Systems, Inc. (Registrant)
BY: /s/ G. J. Trippitelli G. J. Trippitelli President and Chief Executive Officer and Director
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:
/s/ Patrick J. Bagley Director, Vice President-Finance November 26, 1996 Patrick J. Bagley and Treasurer Chief Financial Officer Chief Accounting Officer
/s/ John W. Rollins, Jr. Director, Chairman of the November 26, 1996 John W. Rollins, Jr. Board
/s/ John W. Rollins Director November 26, 1996 John W. Rollins
/s/ Henry B. Tippie Chairman of the Executive November 26, 1996 Henry B. Tippie Committee and Director
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
(1) Consolidated Page(s) Independent Auditors' Report on Financial Statements and Financial Statement Schedules 9
Consolidated Statement of Earnings for the years ended September 30, 1996, 1995 and 1994 10
Consolidated Balance Sheet at September 30, 1996 and 1995 11
Consolidated Statement of Cash Flows for the years ended September 30, 1996, 1995 and 1994 12
Notes to the Consolidated Financial Statements 13 to 18
(2) Financial Statement Schedules
Matlack Systems, Inc. Schedule I - Condensed Financial Information
Balance Sheet at September 30, 1996 and 1995 19
Statement of Earnings for the years ended September 30, 1996, 1995 and 1994 20
Statement of Cash Flows for the years ended September 30, 1996, 1995 and 1994 21
Note to the Financial Statements 22
Matlack Systems, Inc. and Subsidiaries Consolidated
Schedule II - Valuation and Qualifying Accounts for the years ended September 30, 1996, 1995 and 1994 23
Any financial statement schedules otherwise required have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
Independent Auditors' Report
The Shareholders and Board of Directors Matlack Systems, Inc.:
We have audited the consolidated financial statements of Matlack Systems, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. 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 financial position of Matlack Systems, Inc. and subsidiaries as of September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania October 23, 1996
CONSOLIDATED STATEMENT OF EARNINGS
Year Ended September 30 1996 1995 1994 Revenues $224,866,000 $236,257,000 $217,880,000
Expenses: Operating 189,653,000 193,131,000 179,648,000 Special charge 4,000,000 - - Depreciation 11,917,000 10,079,000 8,261,000 Selling and administrative 18,197,000 18,708,000 17,837,000 Other income (101,000) (110,000) (433,000) 223,666,000 221,808,000 205,313,000
Operating earnings 1,200,000 14,449,000 12,567,000 Interest expense 2,903,000 3,238,000 2,051,000
Earnings (loss) before income taxes (benefit) (1,703,000) 11,211,000 10,516,000 Income taxes (benefit) (226,000) 4,610,000 4,334,000 Net earnings (loss) $ (1,477,000) $ 6,601,000 $ 6,182,000
Earnings (loss) per share $ (.17) $ .74 $ .69
Common shares and equivalents outstanding 8,812,000 8,907,000 8,899,000
The Notes to the Consolidated Financial Statements are an integral part of these statements. CONSOLIDATED BALANCE SHEET
September 30, 1996 1995 ASSETS
Current assets Cash $ 3,019,000 $ 2,845,000 Accounts receivable, net of allowance for doubtful accounts: 1996-$414,000; 1995-$391,000 24,282,000 24,688,000 Inventories 5,439,000 6,307,000 Other current assets 2,907,000 3,071,000 Refundable income taxes 1,114,000 - Deferred income taxes 1,885,000 1,586,000 Total current assets 38,646,000 38,497,000
Property and equipment, net 89,267,000 93,454,000 Other assets 214,000 23,000 Total assets $128,127,000 $131,974,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities Accounts payable $ 10,047,000 $ 10,603,000 Accrued liabilities 10,174,000 9,146,000 Income taxes payable - 53,000 Current maturities of long-term debt 6,213,000 6,169,000 Total current liabilities 26,434,000 25,971,000
Long-term debt 29,878,000 32,970,000 Insurance reserves 1,716,000 1,795,000 Other liabilities 2,023,000 2,157,000 Deferred income taxes 12,400,000 11,549,000
Commitments and contingencies (see Notes to the Consolidated Financial Statements)
Shareholders' equity: Common stock $1.00 par value Outstanding: 1996-8,762,116 shares; 1995-8,800,050 shares 8,762,000 8,800,000 Additional paid-in capital 10,553,000 10,894,000 Retained earnings 36,361,000 37,838,000 Total shareholders' equity 55,676,000 57,532,000 Total liabilities and shareholders' equity $128,127,000 $131,974,000
The Notes to the Consolidated Financial Statements are an integral part of these statements. CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended September 30, 1996 1995 1994
Cash flows from operating activities: Net earnings (loss) $(1,477,000) $ 6,601,000 $ 6,182,000 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Special charge 4,000,000 - - Depreciation and amortization 11,921,000 10,079,000 8,386,000 Net gain on sale of equipment (102,000) (110,000) (433,000) Changes in assets and liabilities: Accounts receivable 406,000 2,697,000 (3,323,000) Inventories and other assets 841,000 849,000 (616,000) Accounts payable and accrued liabilities (2,317,000) (6,970,000) 6,362,000 Current and deferred income taxes (615,000) 2,174,000 279,000 Other, net (1,424,000) (750,000) (406,000) Net cash provided by operating activities 11,233,000 14,570,000 16,431,000
Cash flows from investing activities: Purchase of property and equipment (7,895,000) (28,474,000) (22,561,000) Proceeds from the sale of equipment 263,000 2,822,000 2,573,000 Net cash used in investing activities (7,632,000) (25,652,000) (19,988,000)
Cash flows from financing activities: Proceeds of long-term debt 37,960,000 41,002,000 26,601,000 Repayment of long-term debt (41,008,000) (32,319,000) (22,285,000) Exercise of stock options 46,000 205,000 263,000 Common stock acquired and retired (425,000) - - Other - - (16,000) Net cash (used in) provided by financing activities (3,427,000) 8,888,000 4,563,000
Net increase (decrease) in cash 174,000 (2,194,000) 1,006,000 Cash beginning of period 2,845,000 5,039,000 4,033,000 Cash end of period $ 3,019,000 $ 2,845,000 $ 5,039,000
Supplemental information: Interest paid $ 2,861,000 $ 3,233,000 $ 2,043,000 Income taxes paid $ 389,000 $ 2,436,000 $ 4,055,000
The Notes to the Consolidated Financial Statements are an integral part of these statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Organization and Accounting Policies Organization - Matlack Systems, Inc., together with its subsidiaries, is a specialized logistics and transportation company that provides specialized transportation of bulk commodities in tank trailers and tank containers to the nation's leading chemical and dry bulk shippers. In addition to specialized trucking, the Company provides intermodal transportation services, trailer leasing, dedicated contract carriage services, international bulk transportation, tank cleaning services and logistics management services to the chemical industry.
Consolidation - The consolidated financial statements include the accounts of all subsidiaries with appropriate elimination of intercompany transactions and balances.
Revenue recognition - The Company recognizes revenue when shipments are delivered.
Earnings per share - Earnings per share are computed assuming the conversion of all potentially dilutive securities, namely options to purchase shares of the Company's stock.
Inventories - Inventories of transportation equipment parts and supplies are valued at the lower of first-in, first-out cost or market. Tires on vehicles, including new or recapped replacement tires, are valued at cost and are written off over the expected aggregate useful life which approximates two to three years.
Property and equipment - Property and equipment are recorded at cost. Depreciation is provided on a straight-line basis net of salvage or residual values. Gains or losses on sales or retirements of property and equipment are included in other income in the Consolidated Statement of Earnings. Repairs and maintenance are expensed as incurred. Improvements which extend the original life of the assets are capitalized and depreciated over the remaining lives of the assets.
Claims and insurance reserves - The Company retains a specific portion of insurable risks with regard to public liability and workers' compensation claims. Retention levels are currently $500,000. Reserves are established for claims incurred plus an estimate for claims incurred but not reported. Reserve requirements are evaluated and established utilizing historical trends, the Company's experience, claim severity and other factors. Claims estimated to be paid within one year have been classified in accrued liabilities with the balance reflected as non-current insurance reserves.
Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair values of financial instruments - The carrying amounts reported in the balance sheet for current assets and current liabilities approximate their fair value at September 30, 1996.
Special Charge During the fourth quarter of 1996, the Company recorded a special charge of $4,000,000 ($2,432,000 after tax benefit or $.28 per share). The charge included costs associated with a reduction in the tractor fleet, reflecting the weak business conditions of the bulk trucking industry, and provision for closing certain terminals, the operation of which is no longer cost- effective, and related costs of $1,350,000. Also included in the charge was $1,900,000 related to reserves for medical, disability, workers' compensation and other insurance claims which continue to be evaluated and $750,000 for third party claims.
Property and Equipment The Company's property and equipment accounts are as follows: Useful September 30, 1996 1995 Lives Land $ 13,861,000 $ 13,576,000 Transportation equipment 137,434,000 136,261,000 4 to 12 years Transportation service facilities 63,830,000 58,968,000 5 to 40 years Less accumulated depreciation (125,858,000) (115,351,000) $ 89,267,000 $ 93,454,000
The Company had commitments for the purchase of transportation equipment of $3,433,000 at September 30, 1996.
Long-Term Debt Long-term debt is as follows: September 30, 1996 1995 Revolving credit agreement - $30,000,000 line $17,700,000 $14,750,000
Equipment financing obligations due banks and other financial institutions with equipment pledged as security at interest rates ranging from 6.5% to 8.0%, payable in installments to 2003 16,170,000 21,692,000
Real estate mortgage obligations, at interest rates ranging from 5.8% to 8.0%, with land and buildings of $5,131,000 pledged as collateral, payable in installments over various periods to 2001 2,221,000 2,697,000
Less amounts due within one year (6,213,000) (6,169,000) $29,878,000 $32,970,000
The revolving credit agreement is unsecured but, at the option of the banks, amounts outstanding under the agreement may be secured with unpledged equipment and accounts receivable. Interest rates on borrowings under the agreement averaged 6.9% at September 30, 1996. The agreement requires the maintenance of certain financial ratios, restricts the payment of dividends and regulates payments to affiliated companies. As of September 30, 1996, a subsidiary was not in compliance with one of the agreement's covenants but has received a waiver with respect to such covenant and management believes it will be in compliance with this covenant for fiscal year 1997. The credit agreement expires on March 31, 1997 but may be renewed on a year-to-year basis thereafter upon agreement of the parties thereto. Termination of the agreement would result in the repayment of the outstanding loan balance over a period of 60 months in equal monthly installments. Otherwise, no repayments are required unless the financing value of the equipment and accounts receivable falls below the outstanding principal balance of the loan.
The aggregate amounts of maturities for all indebtedness during the next five fiscal years are as follows: 1997-$6,213,000; 1998-$5,213,000; 1999- $4,341,000; 2000-$1,280,000 and 2001-$630,000.
Based upon borrowing rates available to the Company for long-term debt with similar terms and maturities, the carrying amounts approximate the fair value of such financial instruments.
Accrued Liabilities Accrued liabilities are as follows:
September 30, 1996 1995
Employee compensation $ 3,722,000 $3,851,000 Insurance reserves 2,577,000 2,373,000 Taxes other than income 1,394,000 1,206,000 Other 2,481,000 1,716,000 $10,174,000 $9,146,000
Stock Option Plans Under the Company's stock option plans, options to purchase common stock of the Company may be granted to officers and key salaried employees at not less than 100% of the fair market value on the date of grant. Option activity is summarized as follows:
Year Ended September 30,
1996 1995 1994 Number of options: Outstanding at beginning of year 491,018 424,128 505,969 Granted 181,200 124,900 20,115 Exercised (17,066) (43,724) (87,473) Expired or canceled (10,725) (14,286) (14,483) Outstanding at September 30 644,427 491,018 424,128 At September 30: Options available for grant 374,079 44,554 155,168 Options exercisable 227,638 136,265 92,610
Per share prices: Options granted $8.25 $9.50 to $ 9.75 $9.25 to $11.33 Options exercised $2.42 to $ 3.00 $2.42 to $ 9.00 $2.42 to $ 8.92 Options outstanding at September 30 $2.42 to $11.33 $2.42 to $11.33 $2.42 to $11.33
Lease Commitments The Company leases certain of its transportation service and administrative facilities, office space and transportation equipment. These leases are classified as operating leases and expire on various dates during the next nine years. Minimum future payments required under operating leases having non-cancelable terms in excess of one year as of September 30 are considered in the lease commitments.
Total rent expense incurred under operating leases for the fiscal years ended September 30, 1996, 1995 and 1994 amounted to $14,643,000, $13,732,000 and $6,672,000, respectively.
Minimum future payments are as follows:
Year Ending September 30, 1997 $ 9,602,000 1998 6,994,000 1999 4,404,000 2000 1,626,000 2001 789,000 Later years 296,000 Total minimum payments required $23,711,000
Income Taxes The tax provisions (benefit) for the three years ended September 30, 1996 are comprised as follows: Year Ended September 30, 1996 1995 1994 Current: Federal $(223,000) $2,270,000 $2,699,000 State 77,000 556,000 739,000 Deferred: Federal (68,000) 1,469,000 759,000 State (12,000) 315,000 137,000 Total income taxes (benefit) $(226,000) $4,610,000 $4,334,000
A reconciliation of the tax provisions (benefit) for the three years ended September 30, 1996 with amounts calculated by applying the statutory federal income tax rate for those years to earnings (loss) before income taxes (benefit) is as follows:
Year Ended September 30, 1996 1995 1994 Federal tax at statutory rate $(596,000) $3,924,000 $3,580,000 State taxes, net of federal benefit 43,000 567,000 577,000 Non-deductible business expenses 294,000 298,000 130,000 Other, net 33,000 (179,000) 47,000 Total income taxes (benefit) $(226,000) $4,610,000 $4,334,000
The tax effect of temporary differences that comprise the current and non- current deferred income tax amounts shown on the balance sheet are as follows: September 30, 1996 1995 Depreciation $12,808,000 $11,590,000 Expenses deductible when paid (2,334,000) (1,815,000) Other 41,000 188,000 Deferred income taxes, net $10,515,000 $ 9,963,000
Pension Plans The Company maintains a noncontributory pension plan for eligible employees not covered by pension plans under collective bargaining agreements. Pension costs for this plan are funded in accordance with the provisions of the Internal Revenue Code. The Company also maintains a nonqualified, non-contributory defined benefit pension plan for certain employees to restore pension benefits reduced by federal income tax regulations. The cost associated with the plan is determined using the same actuarial methods and assumptions as those used for the Company's qualified pension plan.
The components of net periodic pension cost are as follows:
Year Ended September 30, 1996 1995 1994 Service cost $ 545,000 $ 510,000 $ 496,000 Interest cost 686,000 591,000 520,000 Return on plan assets (1,004,000) (1,309,000) 7,000) Net amortization and deferral 280,000 772,000 (551,000) Net periodic pension cost $ 507,000 $ 564,000 $ 458,000 The following table sets forth the funded status and the amount recognized in the Company's balance sheet for the plans:
September 30, 1996 1995 Actuarial present value of accumulated benefit obligation: Vested $7,733,000 $6,581,000 Non-vested 271,000 251,000 $8,004,000 $6,832,000
Projected benefit obligation $9,651,000 $8,408,000 Plan assets at market value 9,239,000 7,627,000 Projected benefit obligation in excess of plan assets 412,000 781,000 Unrecognized gain 1,141,000 1,110,000 Unrecognized prior service cost (104,000) (113,000) Unrecognized overfunding at adoption 65,000 81,000 Accrued pension liability $1,514,000 $1,859,000
The discount rate and the rate of assumed compensation increase for all three years were 8.0% and 5.0%, respectively. The expected long-term rate of return on assets was 9.0% for 1996 and 1995 and 9.5% for 1994.
At September 30, 1996, the assets of the pension plans were invested 66% in equity securities, 22% in fixed income securities and the balance in other short-term interest bearing accounts.
Effective October 1, 1994, the Company established a defined contribution 401(k) plan which permits participation by substantially all employees not represented under a collective bargaining agreement.
The Company expensed payments to multi-employer pension plans required by collective bargaining agreements of $3,248,000 in 1996, $3,082,000 in 1995 and $2,731,000 in 1994. The actuarial present value of accumulated plan benefits and net assets available for benefits to employees under these plans are not available.
Transactions with Related Parties Certain directors and officers of the Company are also directors and officers of Rollins Environmental Services, Inc. and of Rollins Truck Leasing Corp.
The Company provided transportation services to Rollins Environmental Services, Inc. and realized revenues therefrom of $13,916,000 in 1996, $13,265,000 in 1995 and $3,175,000 in 1994.
The Company purchased materials, administrative services, insurance and rented office space from Rollins Truck Leasing Corp., its subsidiaries and affiliates. The aggregate cost of these materials, services and rents, which have been included in operating expenses or selling and administrative expenses, as appropriate, in the Consolidated Statement of Earnings, was $3,542,000 in 1996, $3,286,000 in 1995 and $2,949,000 in 1994.
In connection with a note payable to Rollins Truck Leasing Corp. (which was repaid in March of 1995), the Company incurred interest expense that was paid to Rollins Truck Leasing Corp. of $272,000 in 1995 and $593,000 in 1994.
An officer of the Company is the trustee of an employee benefits trust which provides certain insurance and health care benefits to employees of the Company. Contributions to the trust, which were charged to operating or selling and administrative expenses, as appropriate, were $2,598,000 in 1996, $2,567,000 in 1995 and $2,529,000 in 1994.
In the opinion of management of the Company, the foregoing transactions were effected at rates which approximate those which the Company would have realized or incurred had such transactions been effected with independent third parties.
Commitments and Contingencies In the normal course of its business, Matlack is subject to numerous state and federal environmental laws and regulations and is also exposed to the cost and risk of transporting and handling materials and wastes characterized as hazardous by various regulatory agencies. Matlack has received notices from the United States Environmental Protection Agency ("EPA") and others indicating that it is a "potentially responsible party" with respect to the cleanup of hazardous wastes at several waste disposal sites. Matlack has been named as a defendant in several lawsuits brought under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") for recovery of costs associated with the cleanup of waste disposal sites. In addition, Matlack has responded to various governmental requests, principally those of the EPA pursuant to CERCLA, for information with respect to possible disposition of waste materials attributable to it at various waste disposal sites.
Where losses are probable, provision has been made based on available information with respect to the cost of all such claims. In determining the Company's liability with respect to such claims, consideration is given to the total cost to remediate the site, the Company's contribution of waste at the site, the participation of other responsible parties and all other relevant circumstances of the claim. All claims and litigations are reviewed to determine the likelihood that their ultimate resolution would have a material adverse effect upon the Company.
Matlack is involved in ordinary routine litigation incidental to the operation of its business. In the opinion of management, based on the advice of counsel, it is only remotely likely that the ultimate resolution of these claims and actions will be material.
Quarterly Results (Unaudited) December March June September
1996 31 31 30 30 Revenues $55,562,000 $57,666,000 $57,600,000 $54,038,000 Gross profit $ 5,807,000 $ 6,527,000 $ 5,922,000 $ 1,040,000(1) Earnings (loss) before income taxes (benefit) $ 469,000 $ 1,164,000 $ 622,000 $(3,958,000)(1) Net earnings (loss) $ 274,000 $ 629,000 $ 270,000 $(2,650,000)(1) Earnings (loss) per share $ .03 $ .07 $ .03 $ (.30)(1) Revenues $57,085,000 $60,750,000 $61,301,000 $57,121,000 Gross profit $ 7,078,000 $ 8,252,000 $ 9,125,000 $ 8,592,000 Earnings before income taxes $ 1,734,000 $ 2,739,000 $ 3,789,000 $ 2,949,000 Net earnings $ 1,014,000 $ 1,602,000 $ 2,238,000 $ 1,747,000 Earnings per share $ .11 $ .18 $ .25 $ .20 (1) Includes special charge of $4,000,000 ($2,432,000 after tax benefit or $.28 per share).
SCHEDULE I - Condensed Financial Information
MATLACK SYSTEMS, INC. BALANCE SHEET ($000 Omitted)
Assets September 30, 1996 1995 Current assets Cash $ 273 $ 18 Accounts receivable from subsidiaries 4 - Other current assets 97 111 Total current assets 374 129
Investments in subsidiaries, at equity* 57,448 59,108 Other assets - 35 Total assets $57,822 $59,272
Liabilities and Shareholders' Equity
Current liabilities Accounts payable $ 12 $ 14 Accrued liabilities 271 130 Income taxes payable 247 135 Total current liabilities 530 279
Advance from subsidiary* 1,364 1,257 Other liabilities 53 - Deferred federal income taxes 199 204
Shareholders' equity Common stock $1 par value, 24,000,000 shares authorized; issued and outstanding: 1996: 8,762,116; 1995: 8,800,050 8,762 8,800 Additional paid-in capital 10,553 10,894 Retained earnings 36,361 37,838 Total shareholders' equity 55,676 57,532 Total liabilities and shareholders' equity $57,822 $59,272
* Eliminated in consolidation.
The Note to the Financial Statements is an integral part of these statements.
SCHEDULE I - Condensed Financial Information (continued)
MATLACK SYSTEMS, INC. STATEMENT OF EARNINGS ($000 Omitted)
Year Ended September 30, 1996 1995 1994
Revenues: Dividends from subsidiaries $ 720 $ 250 $ 900
Administrative expenses 116 110 315
Earnings before income taxes (benefits) 604 140 585
Income tax (benefits) (17) 84 (129)
Net earnings of Matlack Systems, Inc. 621 56 714
Equity in undistributed net earnings (loss) of subsidiaries (2,098) 6,545 5,468
Net earnings (loss) $(1,477) $6,601 $6,182
The Note to the Financial Statements is an integral part of these statements. SCHEDULE I - Condensed Financial Information (continued)
MATLACK SYSTEMS, INC. STATEMENT OF CASH FLOWS ($000 Omitted)
Year Ended September 30, 1996 1995 1994
Cash flows from operating activities: Earnings prior to equity in subsidiaries' undistributed earnings (loss) $621 $ 56 $ 714
Adjustments to reconcile earnings to net cash provided by operating activities: Changes in assets and liabilities: Accounts receivable (4) - 63 Accounts payable and accrued liabilities 139 47 (10) Current and deferred income taxes 107 152 135 Other, net 102 (129) 1 Net cash provided by operating activities 965 126 903
Cash flows from investing activities - - -
Cash flows from financing activities: Exercise of stock options 46 205 263 Common stock acquired and retired (425) - - Capital contribution to subsidiary (438) (2,178) (700) Advance from subsidiary 107 1,257 - Other - - (16) Net cash flows used in financing activities (710) (716) (453)
Net increase (decrease) in cash 255 (590) 450
Cash beginning of period 18 608 158
Cash end of period $273 $ 18 $ 608
Supplemental information:
Interest paid $ - $ - $ - Income taxes paid $119 $1,743 $3,249
The Note to the Financial Statements is an integral part of these statements. SCHEDULE I - Condensed Financial Information (continued)
MATLACK SYSTEMS, INC. Note to the Financial Statements
Accounting Policies
The accounting policies of the Registrant and its subsidiaries are set forth on page 13 of this 1996 Annual Report on Form 10-K.
The Company's principal source of earnings is dividends paid by its subsidiaries. Certain loan agreements restrict payments to the Company by its subsidiaries. Net assets of subsidiaries not restricted under such loan agreements totaled $6,605,000 at September 30, 1996. The Company also realizes cash receipts by assessing subsidiaries for federal taxes on income and expends cash in payment of such taxes on a consolidated basis. Tax assessments are based on the amount of federal income taxes which would be payable (recoverable) by each subsidiary company based on its current year's earnings (loss) reduced by that subsidiary's applicable portion of any consolidated credits utilized currently in the consolidated federal income tax return.
Matlack Systems, Inc.
Exhibits to Form 10-K
For Fiscal Year Ended September 30, 1996
Index to Exhibits Page Nos.
Exhibit 10 (a) Master Credit Agreement dated as of March 27, 1996 between Matlack (DE), Inc. et al, Bank of America Illinois and First Union National Bank.
Exhibit 10 (b) Credit Agreement dated as of March 27, 1996 between Matlack (DE), Inc. et al and Bank of America Illinois.
Exhibit 10 (c) Credit Agreement dated as of May 22, 1996 between Matlack (DE), Inc. et al and First Union National Bank.
Exhibit 10 (d) First Amendment to Master Credit Agreement dated August 9, 1996 between Matlack (DE), Inc. et al, Bank of America Illinois and First Union National Bank.
Exhibit 21 Matlack Systems, Inc. Subsidiaries at September 30, 1996
Exhibit 27 Matlack Systems, Inc. Financial Data Schedule at September 30, 1996
Exhibit 21
Matlack Systems, Inc. Subsidiaries at September 30, 1996
Jurisdiction of Name Incorporation
Matlack (DE), Inc. Delaware
Bayonne Terminals, Inc. Pennsylvania
Matlack International, Inc. Delaware