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, 1997
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 3, 1997, 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, 1997 and 1996 (Unaudited) 3
Condensed Consolidated Balance Sheets
September 30, 1997 and June 30, 1997 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended September 30, 1997 and 1996 (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,
------------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Sales $9,148,285 $5,320,770
----------- -----------
Costs and Expenses:
Cost of sales 6,370,077 4,710,687
Selling, general and administrative 1,328,540 1,202,441
----------- -----------
Total Costs and Expenses 7,698,617 5,913,128
----------- -----------
Earnings (Loss) from Operations 1,449,668 (592,358)
Investment Income 18,454 46,541
Interest Expense (33,883) (6,293)
Other Income 62,627 48,904
------------ -----------
Earnings (Loss) Before Income Taxes and
Non-owned interests 1,496,866 (503,206)
Non-owned Interests in Pretax Loss
of MIDSOUTH Partners 157,146 15,343
------------ -----------
Earnings (Loss) Before Income Taxes 1,654,012 (487,863)
Provision (Credit) for Income Taxes 645,000 (191,000)
------------ -----------
Net Earnings (Loss) $1,009,012 $ (296,863)
============ ============
Net Earnings (Loss) Per Share $ 0.23 $ (0.07)
============ ============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
INSITUFORM EAST, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, June 30,
1997 1997
------------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,947,553 $ 2,071,852
Accounts receivable - net of allowance
for doubtful accounts of $0 10,163,704 6,682,127
Inventories - raw materials 1,778,248 1,538,017
Prepaid and refundable income taxes 567,715 765,580
Prepaid expenses 425,326 251,572
------------ ------------
Total Current Assets 14,882,546 11,309,148
Property, Plant and Equipment - at cost less accumulated
depreciation of $13,575,151 and $13,165,282 11,639,943 11,670,061
Other Assets 81,000 86,000
------------ ------------
Total Assets $26,603,489 $23,065,209
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to bank $ 600,000 $ 0
Notes payable to CERBCO, Inc. 600,000 0
Accounts payable 2,376,616 1,486,841
Accrued compensation and related expenses 2,309,750 1,876,988
Income taxes payable 481,629 14,724
Dividends payable 0 261,412
Current portion of capital lease obligations 29,930 28,508
------------ -----------
Total Current Liabilities 6,397,925 3,668,473
Deferred Income Taxes 1,039,000 1,074,000
Long-Term Capital Lease Obligations 131,442 139,480
------------ -----------
Total Liabilities 7,568,367 4,881,953
------------ -----------
Non-owned Interests in Consolidated Subsidiary 2,292,316 2,449,462
------------ -----------
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 13,744,605 12,735,593
------------ -----------
17,932,419 16,923,407
Less cost of 327,897 shares of common stock in treasury 1,189,613 1,189,613
------------ -----------
Total Stockholders' Equity 16,742,806 15,733,794
------------ -----------
Total Liabilities and Stockholders' Equity $26,603,489 $23,065,209
============ ===========
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,
------------------------
1997 1996
------- -------
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings (loss) $1,009,012 $ (296,863)
Adjustments for noncash items included in net earnings (loss):
Depreciation and amortization 507,476 432,041
Deferred income taxes (35,000) 19,000
Non-owned interests in earnings (loss) of consolidated subsidiary (157,146) (15,343)
Changes in assets and liabilities:
Receivables (3,481,577) 349,261
Inventories (240,231) (318,587)
Other current assets 24,111 (347,759)
Payables and accruals 1,789,442 (190,914)
------------ ------------
Net cash used in operating activities (583,913) (369,164)
------------ ------------
Cash Flows from Investing Activities:
Capital expenditures, net (472,358) (367,209)
------------ -----------
Net cash used in investing activities (472,358) (367,209)
------------ -----------
Cash Flows from Financing Activities:
Dividends Paid (261,412) (261,412)
Proceeds from bank line of credit advances 1,800,000 0
Repayment of line of credit advances to bank (1,200,000) 0
Proceeds from line of credit advances from CERBCO, Inc. 600,000 0
Principal payments under capital lease obligations (6,616) (12,698)
------------ -----------
Net cash provided by (used in) financing activities 931,972 (274,110)
------------ -----------
Net decrease in cash and cash equivalents (124,299) (1,010,483)
Cash and cash equivalents at beginning of period 2,071,852 4,183,084
------------ -----------
Cash and cash equivalents at end of period $ 1,947,553 $3,172,601
============ ===========
Supplemental disclosure of cash flow information:
Interest paid $ 32,466 $ 6,293
Income taxes paid $ 15,230 $ 272,290
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, 1997, the
Condensed Consolidated Statements of Operations for the three months ended
September 30, 1997 and 1996, and the Condensed Consolidated Statements of Cash
Flows for the three months ended September 30, 1997 and 1996 have been prepared
by the Company without audit. The Condensed Consolidated Balance Sheet as of
June 30, 1997 (unaudited) has been derived from the Company's June 30, 1997
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,
1997 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, 1997 audited financial statements.
The results of operations for the period ended September 30, 1997 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.
3. Notes Payable to CERBCO, Inc.
During the three months ended September 30, 1997, the Company established a
$3,000,000 Line of Credit facility with CERBCO, Inc., a parent holding company
with a controlling interest in Insituform East, Incorporated. Loans against this
facility are unsecured, due on demand, with interest payable monthly at the
commercial bank prime lending rate.
4. 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 4,359,817 and 4,385,498 were used in computing net earnings
(loss) per share for the three months ended September 30, 1997 and 1996,
respectively.
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per
Share" was issued February 1997 by the Financial Accounting Standards Board.
SFAS No. 128 is effective for periods ending after December 15, 1997 and early
adoption is not permitted. SFAS No. 128 will require the Company to compute and
present basic and diluted earnings per share. Had the Company computed net
earnings (loss) per share in accordance with SFAS No. 128, net earnings (loss)
per share would have been presented as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------
1997 1996
------------------------
<S> <C> <C>
Basic Earnings (Loss) Per Share $ 0.23 $ (0.07)
Diluted Earnings (Loss) Per Share $ 0.23 $ (0.07)
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview and Outlook
The Company reported consolidated net earnings of $1,009,012 ($0.23 per
share) on sales of $9.1 million, both records for the Company, for the first
quarter of fiscal 1998 ended September 30, 1997. The Company recognized a net
loss of -$296,863 (-$0.07 per share) on $5.3 million in sales for its first
quarter of fiscal 1997 ended September 30, 1996. The Company attributed its
historic first quarter earnings to a 72% increase in comparable period sales
volume at normal margins. The material increase in period sales was largely the
result of revenues recognized from the installation phase of a nearly year long
$4.7 million project performed for the owners of the Perry Nuclear Power Plant
in Perry, Ohio and installed between mid-September and early October, 1997.
Separately, first quarter sales for the Company and its wholly-owned
subsidiaries (collectively, "East") improved 106%; sales for MIDSOUTH Partners,
the Company's majority-controlled subsidiary partnership, declined 11%.
The $4.7 million Perry Nuclear Power Plant project in Perry, Ohio - the
single largest industrial plant Insituform project ever awarded worldwide-
significantly affected the Company's normal resource allocations and scheduling.
During the plant's scheduled refueling outage from mid-September through early
October, Operations personnel worked around the clock, seven days a week, to
perform 12 technically difficult Insituform installations. Perry Nuclear
representatives fully accepted the completed project on behalf of the Power
Plant's owners on October 2, 1997 with no extension required to the refueling
outage period.
The focus, planning, preparation and successful completion of the large
Perry project necessarily disturbed normal scheduling, processing and other
Company functions. As a result, the Company anticipates materially unbalanced
quarterly performance over the first six months of fiscal 1998. Thus, with
respect to forward-looking information, and while there can be no assurances
regarding future operating performance, the Company presently believes that
decreases in both immediately workable and in general backlog attendant to the
skewed activity of the successful Perry project could produce marginal or
negative results for the second quarter of fiscal 1998. It is possible this
trend could continue into the second half of the fiscal year, following
normalization from the Perry project, as modest improvements anticipated in
MIDSOUTH Partners operating results may be offset by ever increased difficulty
for East to continue to obtain sufficient core municipal work at normal margins.
The Company presently is unable to predict the likelihood or timing of
specialized work such as the Perry project.
The Company's total backlog value of all uncompleted and multi-year
contract awards was approximately $24.9 million at September 30, 1997 as
compared to $17.4 million at September 30, 1996. The twelve-month backlog at
September 30, 1997 was approximately $11.3 million as compared to $13.1 million
at September 30, 1996. The total backlog value of all uncompleted and multi-year
contracts at September 30, 1997 and 1996 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 are not necessarily indicative of
sales and earnings for future periods due to the irregular timing and receipt of
major project awards including large, multi-year, menu-priced contracts with
estimated but uncertain order quantities, subject additionally to the specifics
of individual work releases.
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.
<PAGE>
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 markets where
the lowest priced product may be deemed technically "good enough," Insituform is
at a disadvantage. Market share participation strategically undertaken by the
Company from time to time to preserve competitive presence, typically at levels
materially below normal margins, necessarily dilutes the overall margin
performance of the Company. In a "best value" and quality based market,
Insituform remains at a distinct advantage. While both the Federal Government
and industry routinely use best value and quality-weighted contract award
criteria in more sophisticated procurements, municipalities and local
governments have been politically reluctant to modernize from simply "low-bid"
buying to "best value" buying when evaluating sophisticated processes and
technologies. In the face of mounting technical failures from awards based upon
lowest price, municipalities are also expected over time to increasingly shift
from low bid to quality-driven award criteria when procuring trenchless
technology to rehabilitate older pipelines.
Results of Operations
Three Months Ended September 30, 1997 Compared with Three Months Ended September
30, 1996
The Company recognized consolidated net earnings of $1,009,012 ($0.23
per share) on sales of $9.1 million for the first quarter of fiscal 1998 ended
September 30, 1997, as compared to a net loss of -$296,863 (-$0.07 per share) on
sales of $5.3 million for the first quarter of fiscal 1997 ended September 30,
1996. The Company's record first quarter fiscal 1998 operating results are
primarily a result of a 72% increase in comparable period sales to include a
significant contribution to both sales and earnings from the $4.7 million
project performed at the Perry Nuclear Power Plant in Perry, Ohio.
Sales increased $3.8 million (72%) from $5.3 million for the three
months ended September 30, 1996 to $9.1 million for the three months ended
September 30, 1997. Comparable period sales for East increased 106%.
Comparable period sales for MIDSOUTH Partners decreased 11%.
Cost of sales increased 35% in the first quarter of fiscal 1998 as
compared to the first quarter of fiscal 1997. As a result, gross profit as a
percentage of sales increased from 11% of sales for the first quarter of fiscal
1997 to 30% of sales for the first quarter of fiscal 1998. The increase in gross
profit as a percentage of sales is due primarily to absorption of semi-fixed
costs over higher sales during the first quarter of fiscal 1998.
Selling, general and administrative expenses increased $126,099 (10%)
for the first quarter of fiscal 1998 as compared to the first quarter of fiscal
1997, primarily as a result of increased costs to support increased production
activities.
Financial Condition
During the three months ended September 30, 1997, the Company used
$583,913 in cash in operating activities, due primarily to a $3.5 million
increase in Accounts Receivable that more than offset a $1.8 million increase in
Payables and Accruals and $1 million in Net Earnings. During the first quarter
of fiscal 1998, the Company received $1.8 million in bank line of credit
advances, repaid $1.2 million of these advances and received $0.6 million in
line of credit advances from CERBCO, Inc. These line of credit borrowings were
required to finance increases in Accounts Receivable balances resulting
primarily from increased sales during the quarter and, to a lesser extent,
collection delays on several completed projects.
During the first three months of fiscal 1998, the Company expended
$472,358 for equipment purchases and other capital improvements and paid
$261,412 in dividends to shareholders. Although the Company experienced a $0.1
million decrease in cash during the first quarter of fiscal 1998, the Company's
financial liquidity remained strong with working capital of $8.5 million and a
current ratio of 2.3 at September 30, 1997.
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 remaining commitments available from the Company's
lines 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
As previously reported, 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 (a) and (b) of the Texas
Business and Commercial 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 $50 million.
The Company believes it has strong defenses to, and is vigorously
contesting, the suit. The Company filed two motions to dismiss the action during
the fiscal year ended June 30, 1997. On August 25, 1997, the Court denied one of
the Company's motions to dismiss, granted in part and denied in part the
Company's second motion to dismiss and ordered Plaintiffs to file an amended
complaint. The Plaintiffs filed a motion for leave to file a Second Amended
Complaint on September 29, 1997. The Defendants each filed responses to the
Plaintiffs' motion. Should the Court grant Plaintiffs' motion for leave to file
the Second Amended Complaint, the Defendants will have 45 days from that date to
file motions to dismiss.
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, 1997 /s/ Robert W. Erikson
----------------- ----------------------
Robert W. Erikson
President
Date November 13, 1997 /s/ Raymond T. Verrey
----------------- ----------------------
Raymond T. Verrey
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
UNAUDITED BALANCE SHEET AS OF SEPTEMBER 30, 1997, AND THE COMPANY'S UNAUDITED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 1,947,553
<SECURITIES> 0
<RECEIVABLES> 10,163,704
<ALLOWANCES> 0
<INVENTORY> 1,778,248
<CURRENT-ASSETS> 14,882,546
<PP&E> 25,215,094
<DEPRECIATION> 13,575,151
<TOTAL-ASSETS> 26,603,489
<CURRENT-LIABILITIES> 6,397,925
<BONDS> 0
<COMMON> 187,390
0
0
<OTHER-SE> 16,555,416
<TOTAL-LIABILITY-AND-EQUITY> 26,603,489
<SALES> 9,148,285
<TOTAL-REVENUES> 9,148,285
<CGS> 6,370,077
<TOTAL-COSTS> 6,370,077
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,883
<INCOME-PRETAX> 1,654,012
<INCOME-TAX> 645,000
<INCOME-CONTINUING> 1,009,012
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,009,012
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
</TABLE>
