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, 1996
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.
Yes X No ---
As of November 6, 1996, 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>
TABLE OF CONTENTS
Page Reference
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 1996 and 1995 (Unaudited) 3
Condensed Consolidated Balance Sheets
September 30, 1996 and June 30, 1996 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended September 30, 1996 and 1995 (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 1. Legal Proceedings 9
Item 6. Exhibits and Reports on Form 8-K 9
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
INSITUFORM EAST, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended
September 30,
1996 1995
<S> <C> <C>
Sales $5,320,770 $8,470,336
---------- ----------
Costs and Expenses:
Cost of sales 4,710,687 5,845,307
Selling, general and administrative 1,202,441 1,372,490
--------- ---------
Total Costs and Expenses 5,913,128 7,217,797
--------- ---------
Earnings (Loss) from Operations (592,358) 1,252,539
Investment Income 46,541 27,490
Interest Expense (6,293) (4,104)
Other Income 48,904 60,958
---------- ----------
Earnings (Loss) Before Income Taxes and
Non-owned interests (503,206) 1,336,883
Non-owned Interests in Pretax Loss (Earnings)
of MIDSOUTH Partners 15,343 (251,581)
---------- ------------
Earnings (Loss) Before Income Taxes (487,863) 1,085,302
Provision (Credit) for Income Taxes (191,000) 424,000
---------- ----------
Net Earnings (Loss) $(296,863) $ 661,302
========= ----------
Net Earnings (Loss) Per Share $ (0.07) $ 0.15
======== ----------
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
INSITUFORM EAST, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, June 30,
1996 1996
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $3,172,601 $4,183,084
Accounts receivable - net of allowance
for doubtful accounts of $0 and $12,856 6,036,825 6,386,086
Inventories - raw materials 1,478,119 1,159,532
Prepaid and refundable income taxes 255,804 86,950
Prepaid expenses 437,292 258,387
------------- ------------
Total Current Assets 11,380,641 12,074,039
Property, Plant and Equipment - at cost less accumulated
depreciation of $12,018,444 and $11,642,743 10,949,484 11,009,316
Other Assets 101,000 106,000
-------------- --------------
Total Assets $22,431,125 $23,189,355
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 957,112 $ 707,730
Accrued compensation and related expenses 1,893,117 2,019,977
Income taxes payable 26,724 340,160
Dividends payable 0 261,412
Current portion of capital lease obligations 28,854 36,159
-------------- -------------
Total Current Liabilities 2,905,807 3,365,438
Deferred Income Taxes 837,000 818,000
Long-Term Capital Lease Obligations 107,339 112,732
------------- -------------
Total Liabilities 3,850,146 4,296,170
------------ ------------
Non-owned Interests in Consolidated Subsidiary 2,338,990 2,354,333
------------ ------------
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 13,243,788 13,540,651
----------- -----------
17,431,602 17,728,465
Less cost of 327,897 shares of common stock in treasury 1,189,613 1,189,613
------------- -------------
Total Stockholders' Equity 16,241,989 16,538,852
------------ ------------
Total Liabilities and Stockholders' Equity $22,431,125 $23,189,355
=========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
INSITUFORM EAST, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended
September 30,
1996 1995
Cash Flows from Operating Activities:
<S> <C> <C>
Net earnings (loss) $(296,863) $661,302
Adjustments for noncash items included in net earnings (loss):
Depreciation and amortization 432,041 393,172
Deferred income taxes 19,000 (74,000)
Non-owned interests in earnings (loss) of consolidated subsidiary (15,343) 251,581
Changes in assets and liabilities, net of effect of consolidation of
majority-controlled Partnership:
Receivables 349,261 (1,857,955)
Inventories (318,587) 17,491
Other current assets (347,759) (169,211)
Payables and accruals (190,914) 120,157
----------- ------------
Net cash provided by (used in) operating activities (369,164) (657,463)
----------- -------------
Cash Flows from Investing Activities:
Capital expenditures, net (367,209) (284,078)
Cash balance of majority-controlled Partnership prior
to consolidation 0 241,094
------------- ------------
Net cash used in investing activities (367,209) (42,984)
----------- --------------
Cash Flows from Financing Activities:
Dividends Paid (261,412) (261,412)
Principal payments under capital lease obligations (12,698) (13,894)
------------ --------------
Net cash used in financing activities (274,110) (275,306)
------------ -------------
Net increase (decrease) in cash and cash equivalents (1,010,483) (975,753)
Cash and cash equivalents at beginning of period 4,183,084 2,791,758
----------- ----------
Cash and cash equivalents at end of period $3,172,601 $1,816,005
========== ==========
Supplemental disclosure of cash flow information:
Interest paid $ 6,293 $ 4,104
Income taxes paid $ 272,290 $ 514,277
Supplemental schedule of noncash investing and financing activities:
Capital equipment acquired under capital lease obligations $ 0 $ 72,708
See notes to condensed consolidated financial statements.
</TABLE>
<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, 1996, the
Condensed Consolidated Statements of Operations for the three months ended
September 30, 1996 and 1995, and the Condensed Consolidated Statements of Cash
Flows for the three months ended September 30, 1996 and 1995 have been prepared
by the Company without audit. The Condensed Consolidated Balance Sheet as of
June 30, 1996 (unaudited) has been derived from the Company's June 30, 1996
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,
1996 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, 1996 audited financial statements.
The results of operations for the period ended September 30, 1996 are not
necessarily indicative of full year operating results.
2. Principles of Consolidation
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Insituform Ohio, Inc., Insitu, Inc.,
TRY TEK Machine Works, Inc., and Insituform of Pennsylvania, Inc. (collectively,
"East") and the accounts of MIDSOUTH Partners, the Company's majority-
controlled subsidiary Partnership. All significant intercompany accounts and
transactions have been eliminated. The Condensed Consolidated Statement of
Operations and the Condensed Consolidated Statement of Cash Flows for the three
months ended September 30, 1995 have been restated to include consolidation of
the financial activities of MIDSOUTH Partners beginning July 1, 1995.
3. Computation of Net Earnings (Loss) Per Share
Net earnings (loss) per share was computed by dividing net earnings (loss)
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 4,385,498 and 4,429,817 were used in computing net earnings
(loss) per share for the three months ended September 30, 1996 and 1995,
respectively.
4. MIDSOUTH Partners
MIDSOUTH Partners was organized as Insituform MIDSOUTH, a Tennessee general
partnership, in December 1985 with the Company as a general partner. MIDSOUTH
Partners is the exclusive licensee for the Insituform process and NuPipe process
in Tennessee, Kentucky (excluding Boone, Kenton and Campbell counties) and
northern Mississippi. The Partnership's general partners at September 30, 1996
are Insitu, Inc., a wholly-owned subsidiary of the Company; E-Midsouth, Inc., an
affiliate of Insituform Technologies, Inc. ("ITI"); and Insituform California,
Inc. also an affiliate of ITI.
Management and conduct of the business of MIDSOUTH Partners is vested in a
Management Committee. The seven-member Partnership Management Committee has
consisted of four Insitu, Inc. representatives, two E-Midsouth, Inc.
representatives and one Insituform California, Inc. representative since June
12, 1996. Partnership profits and losses are allocated to the partners as
follows:
<PAGE>
Insitu, Inc. 42.5%
E-Midsouth, Inc. 42.5%
Insituform California, Inc. 15.0%
Summarized results of operations for MIDSOUTH Partners, the Company's
majority-controlled minority-owned subsidiary Partnership, are as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1996 1995
<S> <C> <C>
Revenues $1,565,236 $2,468,639
---------- ----------
Gross Profit $ 174,283 $ 701,141
----------- -----------
Partnership Earnings (Loss) $ (26,684) $ 437,532
------------ -----------
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview and Outlook
The Company reported consolidated net losses of -$296,863 (-$0.07 per
share), on $5.32 million in sales, for its first quarter ended September 30,
1996. The Company attributed unfavorable first quarter operating results to a
$3.15 million (37%) decrease in comparable period sales, materially as a result
both of the timing of work releases and of the low workable backlog levels in
its licensed territory throughout the quarter. Comparative first quarter results
of the previous year have been restated to reflect comparable consolidation of
the Company's now majority-controlled subsidiary, MIDSOUTH Partners.
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 Company presently believes that increases in
both immediately workable and in general backlog should result in favorable
results over the remaining three quarters of fiscal 1997.
The Company's total backlog value of all uncompleted and multi-year
contract awards was approximately $17.4 million at September 30, 1996 as
compared to $12.8 million at September 30, 1995. The twelve-month backlog at
September 30, 1996 was approximately $13.1 million as compared to $12.5 million
at September 30, 1995. Consolidated Company backlog figures include MIDSOUTH
Partners backlog of approximately $1.3 million and $3.6 million at September 30,
1996 and 1995, respectively. The total backlog value of all uncompleted and
multi-year contracts at September 30, 1996 and 1995 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. Backlog figures at specific dates, however, 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.
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.
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. Strategic market share
participation undertaken by the Company in this segment to preserve competitive
presence, usually at levels materially below normal margins, necessarily dilutes
the overall margin performance of the Company. However, a majority of the
Company's customers already use or are implementing improved procurement
specifications and contract award evaluation criteria emphasizing technical
value instead of simply low price. In a value and quality based market,
Insituform remains at a distinct 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.
Results of Operations
Three Months Ended September 30, 1996 Compared with Three Months Ended September
30, 1995
The Company recognized a net loss of -$296,863 (-$0.07 per share) for
the first quarter of fiscal 1997 ended September 30, 1996, as compared to net
earnings of $661,863 ($0.15 per share) for the first quarter of fiscal 1996
ended September 30, 1995. The Company's unfavorable first quarter fiscal 1997
operating results are primarily a result of the timing of then low workable
backlog levels in the its licensed territory.
Sales decreased $3.15 million (37%) from $8.47 million for the three
months ended September 30, 1995 to $5.32 million for the three months ended
September 30, 1996. This decrease was due primarily to lower workable backlog
levels experienced throughout the quarter. MIDSOUTH Partners sales decreased
$0.9 million (37%); East sales decreased $2.25 million (also 37%).
Cost of sales decreased 19% in the first quarter of fiscal 1997 as
compared to the first quarter of fiscal 1996. As a result, gross profit as a
percentage of sales decreased from 31% of sales for the first quarter of fiscal
1996 to 11% of sales for the first quarter of fiscal 1997. The decrease in gross
profit as a percentage of sales is due primarily to absorption of semi-fixed
costs over lower sales volume and, to a lesser extent, reduced comparable period
margins on installation contracts performed by MIDSOUTH Partners.
Selling, general and administrative expenses decreased $170,049 (12%)
for the first quarter of fiscal 1997 as compared to the first quarter of fiscal
1996, primarily as a result of lower costs to support reduced production
activities.
Financial Condition
During the three months ended September 30, 1996, the Company used
$369,164 in cash in operating activities, due in part to the Company's first
quarter fiscal 1997 loss of -$296,863. Expenditures for increases in inventory
and other current asset account balances were offset by a decrease in accounts
receivable and depreciation and amortization expenses included in operating
results that did not require the outlay of cash.
During the first three months of fiscal 1997, the Company expended
$367,209 for equipment purchases and other capital improvements and paid
$261,412 in dividends to shareholders. Although the Company experienced a $1.0
million decrease in cash during the first quarter of fiscal 1997, the Company's
financial liquidity remained strong with working capital of $8.4 million and a
current ratio of 3.9 at September 30, 1996.
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.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 23, 1996, Inliner U.S.A. and CAT Contracting, Inc.
(collectively, "Plaintiffs") filed an antitrust suit against Insituform
Technologies, Inc. ("ITI") and Insituform East, Inc. (collectively,
"Defendants") in United States District Court for the Southern District of
Texas, Houston Division, alleging violations by ITI (including all of its
subsidiary licensees) and the Company of Sections 1 and 2 of the Sherman Act,
Section 43(a) of the Lanham Act, Section 15.05 of the Texas Business and
Commerce Code, tortious interference with contracts and business disparagement.
Plaintiffs are seeking from the Defendants an unspecified amount of compensatory
damages, treble damages and attorneys' fees, as well as punitive damages of at
least $50 million. The Company, which has not yet filed its answer to the
complaint, believes it has strong defenses to, and will vigorously contest, the
suit. Although the ultimate outcome and consequences of the suit cannot be
ascertained at this time and the results of legal proceedings cannot be
predicted with certainty, it is the opinion of the management of the Company
that the suit is meritless and will not have a material adverse effect on the
financial condition or the results of operations of the Company.
The Company is a party, both as plaintiff and defendant, to other
claims arising out of the ordinary course of business. While it is not possible
at this time to establish the ultimate amount of liability, if any, associated
with pending claims, management of the Company is of the opinion that the
aggregate amount of any such liability will not have a material adverse effect
on the financial position of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
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, 1996 /s/ Robert W. Erikson
----------------- ----------------------
Robert W. Erikson
President
Date November 13, 1996 /s/ Raymond T. Verrey
----------------- ----------------------
Raymond T. Verrey
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
UNAUDITED BALANCE SHEET AS OF SEPTEMBER 30, 1996, AND THE COMPANY'S UNAUDITED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 3,172,601
<SECURITIES> 0
<RECEIVABLES> 6,036,825
<ALLOWANCES> 0
<INVENTORY> 1,478,119
<CURRENT-ASSETS> 11,380,641
<PP&E> 22,967,928
<DEPRECIATION> 12,018,444
<TOTAL-ASSETS> 22,431,125
<CURRENT-LIABILITIES> 2,905,807
<BONDS> 0
<COMMON> 187,390
0
0
<OTHER-SE> 16,054,599
<TOTAL-LIABILITY-AND-EQUITY> 22,431,125
<SALES> 5,320,770
<TOTAL-REVENUES> 5,320,770
<CGS> 4,710,687
<TOTAL-COSTS> 4,710,687
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,293
<INCOME-PRETAX> (487,863)
<INCOME-TAX> (191,000)
<INCOME-CONTINUING> (296,863)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (296,863)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
