UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1995
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: 0-10800
INSITUFORM EAST, INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 52-0905854
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3421 Pennsy Drive 20785
Landover, Maryland (Zip Code)
(Address of principal executive offices)
Registrant's telephone and fax numbers, including area code:
(301) 386-4100 (tel)
(301) 386-2444 (fax)
(301) 773-4560 (24-hour public information Fax Vault System)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. <PAGE>
Yes X No __
As of November 6, 1995, the following number of shares of each of the
issuer's classes of common stock were outstanding:
Common Stock 4,059,266
Class B Common Stock 297,596
Total 4,356,862 <PAGE>
<PAGE>
TABLE OF CONTENTS
Page Reference
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Statements of Earnings
Three Months Ended September 30, 1995 and 1994
(Unaudited) 3
Condensed Consolidated Balance Sheets
September 30, 1995 and June 30, 1995 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended September 30, 1995 and 1994
(Unaudited) 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
2 <PAGE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INSITUFORM EAST, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1995 1994
<S> <C> <C>
Sales $ 6,208,659 $ 4,894,861
------------ ------------
Costs and Expenses:
Cost of sales 4,284,771 3,646,857
Selling, general and administrative 1,122,636 863,992
------------ ------------
Total Costs and Expenses 5,407,407 4,510,849
------------ ------------
Earnings from Operations 801,252 384,012
Investment Income 25,441 5,244
Other Income 72,658 48,633
Equity in Earnings of MIDSOUTH Partners 185,951 173,645
------------ ------------
Earnings Before Income Taxes and
Non-owned Interest 1,085,302 611,534
Provision for Income Taxes 424,000 239,000
------------ ------------
Net Earnings Before Non-owned Interest 661,302 372,534
Non-owned Interest in Earnings of
Consolidated Subsidiary - (396)
------------- -------------
Net Earnings $ 661,302 $ 372,138
============= =============
Net Earnings Per Share $ 0.15 $ 0.09
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
3 <PAGE>
<PAGE>
INSITUFORM EAST, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
1995 1995
<S> ASSETS <C> <C>
Current Assets:
Cash and cash equivalents $ 1,107,453 $ 2,791,758
Accounts receivable - net of allowance for
doubtful accounts of $25,000 6,562,305 4,675,868
Inventories - raw materials 1,075,039 1,111,202
Prepaid and refundable income taxes 15,490 5,276
Prepaid expenses 387,372 200,926
----------- -----------
Total Current Assets 9,147,659 8,785,030
Investment in and Advances to MIDSOUTH Partners 1,667,677 1,481,726
Property, Plant and Equipment - at cost less
accumulated depreciation of $8,607,791 and
$8,406,817 9,112,122 9,142,211
Other Assets 67,000 71,000
----------- -----------
Total Assets $19,994,458 $19,479,967
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,323,851 $ 1,024,166
Accrued compensation and related expenses 1,522,013 1,627,034
Income taxes payable 454,585 460,648
Dividends payable - 261,412
----------- -----------
Total Current Liabilities 3,300,449 3,373,260
Deferred Income Taxes 911,000 985,000
----------- -----------
Total Liabilities 4,211,449 4,358,260
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Common stock - $.04 par value; 10,000,000
shares authorized; 4,387,163 shares issued;
4,059,266 shares outstanding 175,486 175,486
Class B Common stock - $.04 par value; 800,000
shares authorized; 297,596 shares issued and
outstanding 11,904 11,904
Additional paid-in capital 4,000,424 4,000,424
Retained earnings 12,784,808 12,123,506
----------- -----------
16,972,622 16,311,320
Less cost of 327,897 shares of common stock
in treasury 1,189,613 1,189,613
----------- -----------
Total Stockholders' Equity 15,783,009 15,121,707
----------- -----------
Total Liabilities and Stockholders' Equity $19,994,458 $19,479,967
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
INSITUFORM EAST, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1995 1994
<S> <C> <C>
Cash Flows from Operating Activities:
Net Earnings $ 661,302 $ 372,138
Adjustments for noncash items included in
net earnings:
Depreciation and amortization 289,621 248,542
Undistributed earnings of MIDSOUTH Partners (185,951) (173,645)
Deferred income taxes (74,000) (10,000)
Non-owned interest in earnings of
consolidated subsidiary - 396
Cash effect of changes in:
Receivables (1,886,437) 527,155
Inventories 36,163 (233,455)
Other current assets (196,660) (205,628)
Payables and accruals 188,601 254,663
----------- -----------
Net cash provided by (used in) operating
activities (1,167,361) 780,166
----------- -----------
Cash Flows from Investing Activities:
Capital expenditures, net (255,532) (186,385)
----------- -----------
Net cash used in investing activities (255,532) (186,385)
----------- -----------
Cash Flows from Financing Activities:
Dividends Paid (261,412) (217,843)
----------- -----------
Net cash used in financing activities (261,412) (217,843)
----------- -----------
Net increase (decrease) in cash and short-term
investments (1,684,305) 375,938
Cash and short-term investments at beginning
of period 2,791,758 788,402
Cash and short-term investments at end of ----------- -----------
period $ 1,107,453 $ 1,164,340
=========== ===========
Supplemental disclosure of cash flow information:
Income taxes paid (refunded) $ 514,277 $ (11,426)
</TABLE>
See notes to condensed consolidated financial statements.
5 <PAGE>
<PAGE>
INSITUFORM EAST, INCORPORATED
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Condensed Consolidated Financial Statements
The Condensed Consolidated Balance Sheet as of September 30, 1995, the
Condensed Consolidated Statements of Earnings for the three months ended
September 30, 1995 and 1994, and the Condensed Consolidated Statements of
Cash Flows for the three months ended September 30, 1995 and 1994 have been
prepared by the Company without audit. The Condensed Consolidated Balance
Sheet as of June 30, 1995 (unaudited) has been derived from the Company's
June 30, 1995 audited financial statements. In the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary
to present fairly the financial position, results of operations and cash
flows at September 30, 1995 and for all periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
these condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's June 30,
1995 audited financial statements. The results of operations for the period
ended September 30, 1995 are not necessarily indicative of full year operating
results.
2. Computation of Net Earnings Per Share
Net earnings per share was computed by dividing net earnings by the
weighted average number of common shares outstanding during the period
including common stock equivalents from dilutive stock options. Weighted
average number of shares of 4,429,817 and 4,358,845 were used in computing
net earnings per share for the three months ended September 30, 1995 and
1994, respectively.
3. MIDSOUTH Partners
MIDSOUTH Partners, a Tennessee general partnership organized in December
1985, is the Insituform process licensee for Tennessee, most of Kentucky and
Northern Mississippi. The Company's 42.5% investment in MIDSOUTH Partners is
accounted for using the equity method. Summarized results of operations for
MIDSOUTH Partners are as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1995 1994
<S> <C> <C>
Revenues $ 2,468,639 $ 1,805,292
=========== ===========
Gross Profit $ 701,141 $ 630,868
=========== ===========
Partnership Net Earnings $ 437,532 $ 408,575
=========== ===========
</TABLE>
6 <PAGE>
<PAGE>
On April 18, 1995, Insituform Mid-America, Inc. ("IMA") acquired the
pipeline rehabilitation business of ENVIROQ Corporation ("Enviroq"),
including Enviroq's 42.5% interest in MIDSOUTH Partners which is held through
Enviroq's special purpose subsidiary, E-Midsouth, Inc. Under the MIDSOUTH
Partners' Partnership Agreement, it is an event of default, if, among other
things, a change in the control of any partner occurs without the prior
written consent of all the other partners. The IMA acquisition of Enviroq,
which resulted in a change in the control of Enviroq and E-Midsouth, Inc.,
was made without prior written consent of the Partnership's two other
partners, special purpose subsidiaries of the Company and Insituform
Technologies, Inc. ("ITI").
The Partnership Agreement grants non-defaulting partners the right to
require compliance with the agreement, enjoin any breach, seek dissolution of
the partnership, replace Management Committee appointees of the defaulting
partner, or exercise any combination of these rights and other remedies. The
Company has filed with the American Arbitration Association a demand for
arbitration alleging a breach of the Partnership Agreement by E-Midsouth,
Inc. and intends to seek one or more of the foregoing remedies, including
replacement of a management appointee of E-Midsouth, Inc.
Separately, on April 4, 1995, ITI affiliated companies initiated action
against Enviroq and IMA in Tennessee Chancery Court regarding ITI's rights as
licensor to withhold consent to the assignment of Insituform and NuPipe
license agreements. Simultaneously with the initiation of its suit, ITI
entered into agreements with IMA and Enviroq to postpone, through April 30,
1995 (subsequently extended), the Tennessee court proceedings as well as any
other assertion by ITI of its rights under Insituform and NuPipe license
agreements and its rights under the MIDSOUTH Partners' Partnership Agreement.
Concurrently, representatives of ITI and IMA were engaged in discussions and
negotiations regarding a potential merger of these two companies.
On May 24, 1995, ITI and IMA jointly announced that they had entered into a
definitive agreement providing for the combination of ITI and IMA which, when
completed on October 25, 1995, resulted in IMA becoming a wholly-owned
subsidiary of ITI. The ITI acquisition of IMA, which resulted in a second
change in the control of Enviroq and E-Midsouth, Inc., was made without the
prior written consent of one of the Partnership's partners, the special
purpose subsidiary of the Company.
The Company intends to seek to amend its demand for arbitration alleging,
among other things, a breach of the Partnership Agreement by ITI's special
purpose subsidiary, Insituform California, Inc. ("ICI"), in connection with
ICI's wrongfully seeking to deny the Company's special purpose subsidiary the
rights and remedies to which it is entitled as a non-defaulting partner under
the Partnership Agreement.
Although the Company cannot, at this time, predict the outcome of the
matters described herein, any potential outcome that resulted in the loss by
the Company of its ability to recognize its share of the results of
operations of MIDSOUTH Partners could have a material adverse effect on the
future earnings of the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview and Outlook
The Company recognized net earnings of $661,302 ($0.15 per share) from
$6.2 million in sales (up 27%) for the first quarter of fiscal 1996 ending
September 30, 1995, as compared to net earnings of $372,138 ($0.09 per share)
from $4.9 million in sales for the first quarter of fiscal 1995 ended September
30, 1994. The Company attributed its 77.7% upsurge in comparable period
operating results to the combined impact of expanded production capabilities,
increased sales at normal margins, installation performance in line with cost
estimates and continuing favorable operating results from MIDSOUTH Partners. <PAGE>
7
<PAGE>
While there can be no assurances regarding future operating performance,
based on the volume and mix of the Company's present and expected backlog of
customer orders, the favorable results experienced during the last six
quarters are presently anticipated to continue through fiscal 1996. The
Company is expanding its production capabilities during fiscal 1996 both to
increase its Insituform installation capacity and to further extend its
ability to provide complimentary products and services to its trenchless
rehabilitation customers.
The Company believes the trenchless pipeline reconstruction marketplace
is continuing to expand, thereby enticing, however, the entry of ever more
imitations and substitute products hoping that cheap price alone may permit
them to succeed in a market otherwise dominated by Insituform. In those
limited markets where the cheapest priced product may be deemed technically
"good enough," Insituform is at a disadvantage. However, the vast majority of
the Company's customers already use or are implementing improved procurement
specifications and contract award evaluation criteria emphasizing technical
value over simply low price. In a value and quality based market,
Insituform remains at an advantage. As customers and consulting engineers
increasingly rely on quality based purchasing criteria to help ensure long
term solutions to their infrastructure needs, they help clearly
differentiate proven products such as Insituform from cheaply priced
trenchless substitutes with technical, performance and installation risks not
equally tested by time or independent third parties.
The principal factor affecting the Company's future performance remains the
volatility of earnings as a function of sales volume at normal margins.
Accordingly, because a substantial portion of the Company's costs are semi-
fixed in nature, earnings can, at times, be severely reduced or eliminated
during periods of either depressed sales at normal margins or material
increases in discounted sales, even where total revenues may experience an
apparent buoyancy or growth from the addition of discounted sales undertaken
from time to time for strategic reasons. Conversely, at normal margins,
increases in period sales typically leverage positive earnings significantly.
Results of Operations
Three Months Ended September 30, 1995 Compared with Three Months Ended
September 30, 1994
The Company recognized net earnings of $661,302 ($0.15 per share) for the
first quarter of fiscal 1996 ended September 30, 1995, as compared to net
earnings of $372,138 ($0.09 per share) for the first quarter of fiscal 1995
ended September 30, 1994. The Company's improved comparable period operating
results are primarily a result of increased sales at normal margins,
installation performance in line with cost estimates and continuing favorable
operating results from MIDSOUTH Partners.
Sales increased 27% from $4.9 million for the three months ended September
30, 1994 to $6.2 million for the three months ended September 30, 1995. This
increase was due primarily to expanded production capabilities and a strong
workable backlog of customer orders throughout the first quarter of fiscal
1996.
Cost of sales increased 17% in the first quarter of fiscal 1996 as compared
to the first quarter of fiscal 1995. As a result, gross profit as a percentage
of sales increased from 25% of sales for the first quarter of fiscal 1995 to
31% of sales for the first quarter of fiscal 1996. The increase in gross profit
as a percentage of sales is due primarily to the mix of work performed. During
the first quarter of fiscal 1995, the Company provided additional collateral
services to customers at gross profit margins lower than margins realized for
Insituform installations.
Selling, general and administrative expenses increased $258,644 (30%) for
the first quarter of fiscal 1996 as compared to the first quarter of fiscal
1995, primarily as a result of increased costs to support expanded production
activities.
The Company's equity in the operating results of MIDSOUTH Partners increased
7% from pretax earnings of $173,645 for the first quarter of fiscal 1995 to
pretax earnings of $185,951 for the first quarter of
8 <PAGE>
<PAGE>
fiscal 1996 primarily as a result of increased comparable period sales, offset
to some extent by reduced gross profit margins. The Partnership's sales
increased 37% from $1,805,292 during the three months ended September 30, 1994
to $2,468,639 for the three months ended September 30,1995 primarily as a result
of increased sales to Federal government customers and an increase in collateral
services performed in addition to Insituform process installations, principally
manhole rehabilitation and lateral reconstruction services. The Partnership's
gross profit as a percentage of sales decreased from 35% of sales for the first
quarter of fiscal 1995 to 28% of sales for the first quarter of fiscal 1996
primarily as a result of the mix of work performed, to include increased manhole
rehabilitation and lateral reconstruction services, collateral services
generally performed at gross profit margins lower than margins realized for
Insituform process installations.
As discussed further in Note 3 to the Financial Statements enclosed herein,
the Company has filed a demand for arbitration in connection with the
acquisition of control of a 42.5% interest in MIDSOUTH Partners by Insituform
Mid-America, Inc. (IMA) on April 18, 1995. The Company also intends to seek to
amend this demand in connection with the subsequent acquisition of this 42.5%
interest in MIDSOUTH Partners by Insituform Technologies, Inc. ("ITI") on
October 25, 1995 and related actions taken by Insituform California, Inc.,
ITI's special purpose subsidiary. Although the Company cannot, at this time,
predict the eventual outcome of these matters and their impact on the Company's
interest in the Partnership, any potential outcome that resulted in the loss by
the Company of its ability to recognize its share of the results of operations
of MIDSOUTH Partners could have a material adverse effect on the future earnings
of the Company.
The total value of all uncompleted and multi-year contract awards from
customers was approximately $9.2 million at September 30, 1995 as compared to
$17.7 million at September 30, 1994. The twelve-month backlog at September 30,
1995 was approximately $8.9 million as compared to $12.5 million at September
30, 1994. The total value of all uncompleted and multi-year contracts at
September 30, 1995 and 1994 includes work not estimated to be released and
installed within twelve months as well as potential work included in term
contract awards which may or may not be fully ordered by contract expiration.
Twelve-month backlog for MIDSOUTH Partners was approximately $3.6 million and
$7.1 million at September 30, 1995 and 1994, respectively. Backlog figures at
specific dates are not necessarily indicative of sales and earnings for future
periods due to the irregular timing and receipt of larger annual term
contract renewals and other large project awards.
Financial Condition
During the three months ended September 30, 1995, the Company used $1,167,361
in cash in operating activities, due in part to a $1.9 million increase in
Accounts Receivable. The increase in Accounts Receivable is primarily the
result of temporary delays in billings and collections for several larger
projects performed during the first quarter of fiscal 1996.
During the first three months of fiscal 1996, the Company expended $255,532
for equipment purchases and other capital improvements and paid $261,412 in
dividends to shareholders. Although the Company experienced a $1.7 million
decrease in cash during the first quarter of fiscal 1996, the Company's
financial liquidity remained strong as working capital increased $400,000 to
$5.8 million with a current ratio of 2.77 at September 30, 1995.
The Company anticipates that expanding production capabilities and improving
operational performance in the future will require additional capital
expenditures. Management believes that cash flow from future operations,
existing working capital, the available line of credit and the unencumbered real
and personal property owned by the Company provide adequate resources to finance
cash requirements for future capital expenditures.
9 <PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
None.
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.
INSITUFORM EAST, INCORPORATED
(Registrant)
Date November 13, 1995 /s/ Robert W. Erikson
Robert W. Erikson
President
Date November 13, 1995 /s/ Raymond T. Verrey
Raymond T. Verrey
Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED BALANCE SHEET AS OF SEPTEMBER 30, 1995, AND THE COMPANY'S
UNAUDITED STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> SEP-30-1995
<CASH> 1,107,453
<SECURITIES> 0
<RECEIVABLES> 6,587,305
<ALLOWANCES> 25,000
<INVENTORY> 1,075,039
<CURRENT-ASSETS> 9,147,659
<PP&E> 17,719,913
<DEPRECIATION> 8,607,791
<TOTAL-ASSETS> 19,994,458
<CURRENT-LIABILITIES> 3,300,449
<BONDS> 0
<COMMON> 187,390
0
0
<OTHER-SE> 15,595,619
<TOTAL-LIABILITY-AND-EQUITY> 19,994,458
<SALES> 6,208,659
<TOTAL-REVENUES> 6,208,659
<CGS> 4,284,771
<TOTAL-COSTS> 4,284,771
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,085,302
<INCOME-TAX> 424,000
<INCOME-CONTINUING> 661,302
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 661,302
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
