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: December 31, 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 February 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 and Six Months Ended
December 31, 1996 and 1995 (Unaudited) 3
Condensed Consolidated Balance Sheets
December 31, 1996 and June 30, 1996 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended December 31, 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
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
INSITUFORM EAST, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------ ------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $6,637,618 $8,370,379 $11,958,388 $16,840,715
------------ ------------ ------------ ------------
Costs and Expenses:
Cost of sales 4,923,149 5,814,857 9,633,836 11,660,164
Selling, general and administrative 1,336,533 1,281,860 2,538,974 2,654,350
------------ ------------ ------------ ------------
Total Costs and Expenses 6,259,682 7,096,717 12,172,810 14,314,514
------------ ------------ ------------ ------------
Earnings (Loss) from Operations 377,936 1,273,662 (214,422) 2,526,201
Investment Income 37,169 16,134 83,710 43,624
Interest Expense (8,118) (4,571) (14,411) (8,675)
Other Income 29,191 41,841 78,095 102,799
------------ ------------ ------------ ------------
Earnings (Loss) Before Income Taxes and
Non-owned interests 436,178 1,327,066 (67,028) 2,663,949
Non-owned Interests in Pretax Earnings
of MIDSOUTH Partners (91,939) (230,772) (76,596) (482,353)
------------ ------------ ------------ ------------
Earnings (Loss) Before Income Taxes 344,239 1,096,294 (143,624) 2,181,596
Provision (Credit) for Income Taxes 134,000 428,000 (57,000) 852,000
------------ ------------ ------------ ------------
Net Earnings (Loss) $ 210,239 $ 668,294 $ (86,624) $ 1,329,596
============ ============ ============ ============
Net Earnings (Loss) Per Share $ 0.05 $ 0.15 $ (0.02) $ 0.30
============ ============ ============ ============
See notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
INSITUFORM EAST, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
December 31, June 30,
1996 1996
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 3,708,682 $ 4,183,084
Accounts receivable - net of allowance
for doubtful accounts of $0 and $12,856 6,139,524 6,386,086
Inventories - raw materials 1,394,520 1,159,532
Prepaid and refundable income taxes 437,330 86,950
Prepaid expenses 405,237 258,387
------------ ------------
Total Current Assets 12,085,293 12,074,039
Property, Plant and Equipment - at cost less accumulated
depreciation of $12,453,133 and $11,642,743 11,778,197 11,009,316
Other Assets 96,000 106,000
------------ ------------
Total Assets $ 23,959,490 $ 23,189,355
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,331,029 $ 707,730
Accrued compensation and related expenses 2,497,881 2,019,977
Income taxes payable 30,724 340,160
Dividends payable 00 261,412
Current portion of capital lease obligations 30,273 36,159
------------ ------------
Total Current Liabilities 3,889,907 3,365,438
Deferred Income Taxes 1,032,000 818,000
Long-Term Capital Lease Obligations 154,426 112,732
------------ ------------
Total Liabilities 5,076,333 4,296,170
------------ ------------
Non-owned Interests in Consolidated Subsidiary 2,430,929 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 13,454,027 13,540,651
------------ ------------
17,641,841 17,728,465
Less cost of 327,897 shares of common stock in treasury 1,189,613 1,189,613
------------ ------------
Total Stockholders' Equity 16,452,228 16,538,852
------------ ------------
Total Liabilities and Stockholders' Equity $ 23,959,490 $ 23,189,355
============ ============
See notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
INSITUFORM EAST, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended
December 31,
1996 1995
------------ ------------
Cash Flows from Operating Activities:
<S> <C> <C>
Net earnings (loss) $ (86,624) $ 1,329,596
Adjustments for noncash items included in net earnings (loss):
Depreciation and amortization 873,092 794,542
Deferred income taxes 214,000 (85,000)
Non-owned interests in earnings of consolidated subsidiary 76,596 482,353
Changes in assets and liabilities, net of effect of consolidation of
majority-controlled Partnership:
Receivables 246,562 (2,224,636)
Inventories (234,988) 323,351
Other current assets (497,230) (65,332)
Payables and accruals 791,767 (309,822)
------------ ------------
Net cash provided by operating activities 1,383,175 245,052
------------ ------------
Cash Flows from Investing Activities:
Capital expenditures, net (1,573,430) (811,754)
Cash balance of majority-controlled Partnership prior
to consolidation 0 241,094
------------ ------------
Net cash used in investing activities (1,573,430) (570,660)
------------ ------------
Cash Flows from Financing Activities:
Dividends Paid (261,412) (261,412)
Principal payments under capital lease obligations (22,735) (28,354)
------------ ------------
Net cash used in financing activities (284,147) (289,766)
------------ ------------
Net increase (decrease) in cash and cash equivalents (474,402) (615,374)
Cash and cash equivalents at beginning of period 4,183,084 2,791,758
------------ ------------
Cash and cash equivalents at end of period $ 3,708,682 $ 2,176,384
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 14,411 $ 8,675
Income taxes paid $ 388,816 $ 1,249,276
Supplemental schedule of noncash investing and financing activities:
Capital equipment acquired under capital lease obligations $ 58,543 $ 72,708
See notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE>
INSITUFORM EAST, INCORPORATED
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Condensed Consolidated Financial Statements
The Condensed Consolidated Balance Sheet as of December 31, 1996, the
Condensed Consolidated Statements of Operations for the three months and six
months ended December 31, 1996 and 1995, and the Condensed Consolidated
Statements of Cash Flows for the six months ended December 31, 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 December 31, 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 periods ended December 31, 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
Statements of Operations for the three months and six months ended December 31,
1995, and the Condensed Consolidated Statement of Cash Flows for the six months
ended December 31, 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 4,370,177 and 4,425,988 were used in computing net
earnings per share for the three months ended December 31, 1996 and 1995,
respectively; 4,377,838 and 4,427,903 shares were used in computing net earnings
(loss) per share for the six months ended December 31, 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
December 31, 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:
Insitu, Inc. 42.5%
E-Midsouth, Inc. 42.5%
Insituform California, Inc. 15.0%
<PAGE>
Summarized results of operations for MIDSOUTH Partners, the Company's
majority-controlled minority- owned subsidiary Partnership, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------ ------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 1,723,135 $ 2,226,906 $ 3,288,371 $ 4,695,545
------------ ------------ ------------ ------------
Gross Profit $ 395,494 $ 696,231 $ 569,777 $ 1,397,372
------------- ------------ ------------ ------------
Partnership Earnings $ 159,894 $ 401,343 $ 133,210 $ 838,875
------------- ------------ ------------ ------------
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview and Outlook
The Company reported consolidated net income of $210,239 ($0.05 per
share) on $6.64 million in sales for its second quarter ended December 31, 1996.
The second quarter turnaround, while positive, was insufficient to fully offset
first quarter negative results, leaving the Company at midyear with a modest
loss of $-86,624 (-$0.02 per share) on $11.96 million in sales. The Company
attributed its below par six month performance to the significant decrease of
$4.88 million (29%) in comparable period sales, principally due to a low level
of released and workable orders being made timely available by customers from
the Company's otherwise record level of backlog. For comparability, previous
year financial results have been restated to reflect consolidation of the
Company's now majority-controlled subsidiary, MIDSOUTH Partners.
With respect to forward-looking information, while there can be no
assurance regarding future operating performance, the Company believes that
delays experienced in January 1997 on several major projects will significantly
reduce third quarter results, but that anticipated increases in released and
workable orders over the balance of the fiscal year should permit a materially
improved and more typical three-month performance during the fourth quarter.
Overall, earnings for the twelve months ending June 30, 1997 are presently
anticipated to be both positive and significant but materially reduced as
compared to the previous fiscal year.
The Company's total backlog value of all uncompleted and multi-year
contract awards was approximately $23.0 million at December 31, 1996, a record,
as compared to $11.4 million at December 31, 1995. The twelve-month backlog at
December 31, 1996, also a record, was approximately $21.8 million as compared to
$11.2 million at December 31, 1995. Consolidated Company backlog figures include
MIDSOUTH Partners backlog of approximately $3.4 million and $2.6 million at
December 31, 1996 and 1995, respectively. The total backlog value of all
uncompleted and multi-year contracts at December 31, 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 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, from time to time, to preserve
competitive presence, usually at levels materially below normal margins,
necessarily dilutes 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 "best 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 December 31, 1996 Compared with Three Months Ended
December 31, 1995
The Company recognized net earnings of $210,239 ($0.05 per share) for
the second quarter of fiscal 1997 ended December 31, 1996, as compared to net
earnings of $668,294 ($0.15 per share) for the second quarter of fiscal 1996
ended December 31, 1995. The Company's second quarter turnaround, while
prositive, was insufficient to match second quarter fiscal 1996 operating
results, due primarily to lower comparable period workable backlog levels
throughout its licensed territory.
Sales decreased $1.73 million (21%) from $8.37 million for the three
months ended December 31, 1995 to $6.64 million for the three months ended
December 31, 1996. This decrease was due primarily to lower workable backlog
levels experienced throughout the quarter. MIDSOUTH Partners sales decreased
$0.50 million (23%); East sales decreased $1.23 million (20%).
Cost of sales decreased 15% in the second quarter of fiscal 1997 as
compared to the second quarter of fiscal 1996. As a result, gross profit as a
percentage of sales decreased from 31% of sales for the second quarter of fiscal
1996 to 26% of sales for the second quarter of fiscal 1997. The decrease in
gross profit as a percentage of sales is due primarily to reduced comparable
period margins on installation contracts performed by MIDSOUTH Partners and, to
a lesser extent, absorption of semi-fixed costs over lower sales volume.
Selling, general and administrative expenses increased $54,673 (4%) for
the second quarter of fiscal 1997 as compared to the second quarter of fiscal
1996, primarily as a result of legal costs associated with the Inliner U.S.A. /
CAT Contracting antitrust lawsuit.
Six Months Ended December 31, 1996 Compared with Six Months Ended
December 31, 1995
The Company recognized a net loss of -$86,624 (-$0.02 per share) for
the first six months of fiscal 1997 ended December 31, 1996, as compared to net
earnings of $1,329,596 ($0.30 per share) for the first six months of fiscal 1996
ended December 31, 1995. The Company attributed its below par six month
performance to a significant decrease in comparable period sales, principally
due to a low level of released and workable customer orders throughout its
licensed territory.
Sales decreased $4.88 million (29%) from $16.84 million for the six
months ended December 31, 1995 to $11.96 million for the six months ended
December 31, 1996. This decrease was due primarily to lower workable backlog
levels experienced throughout the period. MIDSOUTH Partners sales decreased
$1.41 million (30%); East sales decreased $3.47 million (29%).
Cost of sales decreased 17% in the first six months of fiscal 1997 as
compared to the first six months of fiscal 1996. As a result, gross profit as a
percentage of sales decreased from 31% of sales for the six months ended
December 31, 1995 to 19% of sales for the six months ended December 31, 1996.
The decrease in gross profit margin as a percentage of sales is due primarily to
absorption of semi-fixed costs over lower sales volume and reduced comparable
period margins on installation contracts performed by MIDSOUTH Partners.
Selling, general, and administrative expenses decreased $115,376 (4%)
during the first six months of fiscal 1997 as compared to the first six months
of fiscal 1996, primarily as a result of lower costs to support reduced
production activities.
Financial Condition
During the six months ended December 31, 1996, $1,383,175 in cash was
provided by the Company's operating activities, due in part to a $791,767
increase in Accounts Payable and Accrued Expenses and $873,092 in depreciation
and amortization expenses included in operating results that did not require the
outlay of cash.
During the first six months of fiscal 1997, the Company expended
$1,573,430 for equipment purchases and other capital improvements and paid
$261,412 in dividends to shareholders. Although the Company experienced a
$474,402 decrease in cash during the six months ended December 31, 1997, the
Company's financial liquidity remained strong with working capital of $8.2
million and a current ratio of 3.1 at December 31, 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
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 15.05 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 believes it has strong defenses to, and will
vigorously contest, the suit. The Company has filed two motions to dismiss the
action which are currently pending. 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
of 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 February 13, 1997 /s/ Robert W. Erikson
----------------- ----------------------
Robert W. Erikson
President
Date February 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 DECEMBER 31, 1996, AND THE COMPANY'S UNAUDITED
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 3,708,682
<SECURITIES> 0
<RECEIVABLES> 6,139,524
<ALLOWANCES> 0
<INVENTORY> 1,394,520
<CURRENT-ASSETS> 12,085,293
<PP&E> 24,231,330
<DEPRECIATION> 12,453,133
<TOTAL-ASSETS> 23,959,490
<CURRENT-LIABILITIES> 3,889,907
<BONDS> 0
<COMMON> 187,390
0
0
<OTHER-SE> 16,264,838
<TOTAL-LIABILITY-AND-EQUITY> 23,959,490
<SALES> 11,958,388
<TOTAL-REVENUES> 11,958,388
<CGS> 9,633,836
<TOTAL-COSTS> 9,633,836
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,411
<INCOME-PRETAX> (143,624)
<INCOME-TAX> (57,000)
<INCOME-CONTINUING> (86,624)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (86,624)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
