UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
------------
For the fiscal year ended: June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
---------------
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)
Securities registered pursuant to Section 12(b) of the Act: None Securities
registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.04 per share
Class B Common Stock, par value $.04 per share
(Title of Class)
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
- -
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes X No
- -
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant computed by reference to the last price at
which such stock was sold, as of September 8, 1998, was $6,743,761.
As of September 8, 1998, 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
Documents Incorporated by Reference:
None
Total number of pages of this report: 37 Index to Exhibits located at page: 33
<PAGE>
TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 8. Financial Statements and Supplementary Data 15
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 15
PART III
Item 10. Directors and Executive Officers of the Registrant 33
Item 11. Executive Compensation 33
Item 12. Security Ownership of Certain Beneficial Owners and Management 33
Item 13. Certain Relationships and Related Transactions 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports of Form 8-K 33
CONSOLIDATED
STATEMENTS OF OPERATIONS
AND BALANCE SHEETS
Pages 17 and 18
<PAGE>
PART I
Item 1. Business
(a) General Development of Business
Insituform East, Incorporated (the "Company" or "Registrant") was
organized under the laws of the State of Delaware on February 26, 1970, under
the name Universal Construction and Supply Company. Its present name was adopted
on August 24, 1978. The Company was engaged in underground conduit construction
from inception until 1974 and construction equipment rental from 1974 to 1978.
The Company then phased out these lines of business and entered into
sublicensing agreements for the Insituform(R) process, a patented technology for
reconstructing pipelines with little or no excavation. Since July 1978, the
Company has been primarily engaged in the business of rehabilitating underground
sewers and other pipelines using the Insituform process.
Between 1982 and 1986, the Company added western Pennsylvania, Ohio,
three Kentucky counties and West Virginia to its original Insituform licensed
territory of Maryland, Virginia, the District of Columbia, Delaware and eastern
Pennsylvania.
In December 1985, Midsouth Partners was organized as a Tennessee
General Partnership and became the exclusive licensee for the Insituform process
in Tennessee, the rest of Kentucky and northern Mississippi. The Company was
assigned three representatives to a seven-member Management Committee
established to manage the business activities of the Partnership and allocated a
42.5% interest in Partnership profits and losses.
In September 1987, the Company established a branch facility in
Cincinnati, Ohio, to support operating activities in the western region of its
licensed territory. In March 1998, the Company closed its Ohio branch facility
and completed an orderly plan to transfer the functions, personnel and equipment
to the Company's Landover, Maryland headquarters facility.
In May 1989, the Company acquired an 80% interest in Try Tek Machine
Works, Inc. ("Try Tek"). Try Tek, located in Hanover, Pennsylvania, was founded
in September 1985 to custom design and build special machinery, including
machinery used in the Insituform process. The Company acquired an additional 10%
interest in Try Tek in February 1993 and the remaining 10% interest in Try Tek
in March 1995.
In December 1990, the Company acquired exclusive licenses for the sale
and installation of pre-formed PVC thermoplastic pipe under the NuPipe(R)
process and trademark for a sales region identical to the territories licensed
to the Company for the Insituform process.
In September 1991, the Company added cement mortar lining of potable
water lines to its service capability. A formal plan to discontinue providing
cement mortar lining services, adopted in June 1993, was substantially completed
in June 1994.
On June 12, 1996, as a result of a default by a partner under the
Partnership Agreement, the Company was issued an arbitration award granting it
the unilateral right to appoint a Midsouth Partners Management Committee
representative in place of the defaulted partner's representative. Accordingly,
the Company obtained majority representation on the Management Committee
effective June 12, 1996.
For financial reporting purposes for the fiscal years ended June 30,
1998, 1997 and 1996, the Company has included its wholly-owned subsidiary
corporations (collectively, "East") and its majority-controlled subsidiary
partnership, Midsouth Partners, in its consolidated financial statements. Prior
to the fiscal year ended June 30, 1996, the Company accounted for its minority
investment in Midsouth Partners using the equity method.
(b) Financial Information about Industry Segments
Financial information about the Company's industry segments is
presented below. During the year ended June 30, 1998, the Company adopted the
disclosure requirements of Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS No.
131"). In accordance with the provisions of SFAS No. 131, the Company has
determined that its operating activities consist of two operating segments, (i)
Insituform East, Incorporated and its wholly-owned subsidiary corporations
(collectively, "East") and, (ii) its majority-controlled subsidiary partnership,
Midsouth Partners. For additional information relating to segment reporting, see
Part II, Item 8, "Notes to Consolidated Financial Statements - Note 14: Segment
Reporting Information" included elsewhere in this report.
Financial Information about
the Company's Operating Segments
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
---------------------------------------------
(In thousands) 1998 1997 1996
---------------------------------------------
SALES TO UNAFFILIATED CUSTOMERS:
Insituform East, Incorporated and
wholly-owned subsidiaries
<S> <C> <C> <C>
(collectively, "East") $17,521 $19,343 $22,088
Midsouth Partners 6,370 7,199 8,383
------- ------- -------
TOTAL SALES TO UNAFFILIATED COMPANIES $23,891 $26,542 $30,471
======= ======= =======
EARNINGS (LOSS) FROM OPERATIONS
East $ (306) $(1,296) $ 1,935
Midsouth Partners (1,593) 384 1,107
------- ------- -------
TOTAL EARNINGS (LOSS) FROM OPERATIONS $(1,899) $ (912) $ 3,042
======= ======= =======
NET EARNINGS (LOSS) CONTRIBUTION
East $ 131 $ (632) $ 1,382
Midsouth Partners (net of non-owned interests) (463) 88 297
------- ------- -------
NET EARNINGS (LOSS) $ (332) $ (544) $ 1,679
======= ======= =======
ASSETS
East $16,528 $18,001 $18,444
Midsouth Partners 4,424 5,064 4,745
------- ------- -------
TOTAL ASSETS $20,952 $23,065 $23,189
======= ======= =======
</TABLE>
(c) Narrative Description of Business
The Company is primarily engaged in the business of rehabilitating
underground sewers and other conduits -- including waste water, storm water, and
industrial process pipelines -- using the patented Insituform(R) process. The
Insituform process utilizes a polyester fiber-felt material, the Insitutube(R)
material, coated with polyethylene and impregnated with a liquid, thermosetting
resin. The Insitutube material is inserted in the pipe through an existing
manhole or other access point. By use of an inversion tube and cold water
pressure, the Insitutube material is forced through the pipeline, turned inside
out and pressed firmly against the inner wall of the damaged pipeline. When the
Insitutube material is fully extended, the cold water within the tube is
recirculated through a boiler in a truck. The heated water cures the
thermosetting resin to form a hard, jointless, impact and corrosion resistant
Insitupipe(R) product within the original pipe. Lateral or side connections are
then reopened by use of the Insitucutter(R) device, a remote-controlled cutting
machine.
<PAGE>
RELATIONSHIP WITH INSITUFORM TECHNOLOGIES, INC.
On December 9, 1992, Insituform Technologies, Inc. (formerly Insituform
of North America, Inc.), through its acquisition of Insituform Group, Ltd.,
N.V., acquired the worldwide patent rights for the Insituform process. East and
Midsouth Partners are sublicensees of Insituform Technologies, Inc. ("ITI"). The
Company has entered into seven sublicense agreements with ITI which grant the
Company rights to perform the Insituform process in Virginia, Maryland,
Delaware, Ohio, the District of Columbia, Pennsylvania, West Virginia,
Tennessee, Kentucky and Northern Mississippi. The Company can perform the
Insituform process in other locations subject to payment of additional
royalties.
The sublicense agreements require the Company to pay ITI a royalty of
8% of the revenue, excluding certain deductions, from all contracts using the
Insituform process, with a minimum annual royalty requirement for each licensed
territory. In the event the Company performs the Insituform process outside its
territory, the sublicense agreements require it to pay a royalty of from 8% to
12% of the gross contract price to the independent sublicensee of such other
territory, if any, in addition to all royalties due ITI.
The sublicense agreements extend for the life of the underlying patents
or patent rights, including any improvements or modifications extending such
life. The agreements may be terminated by the Company upon two calendar quarters
written notice to ITI. The agreements may only be canceled by ITI in certain
events. In addition, ITI has the right to approve the quality and specifications
of equipment and materials not purchased directly from ITI.
In 1981, the Company was assigned the rights to an agreement (the SAW
Agreement) regarding the introduction of potential Insituform process
sublicensees to ITI. In connection with the introduction of current Insituform
process sublicensees to ITI, the Company receives quarterly payments from ITI
equal to 0.5% of contract revenues from Insituform process installations in
East's licensed territory and the states of New York, New Jersey, North
Carolina, South Carolina, Georgia and Alabama.
On May 1, 1987, Midsouth Partners entered into supply agreements with
ITI whereby Midsouth Partners committed to purchase 90% of its Insitutube
material requirements from ITI. The agreements automatically renew annually
unless notice of termination is provided by either party six months prior to the
end of a renewal period. The Midsouth Partners continuing Insitutube supply
agreement presently extends through April 30, 1999.
On December 29, 1997, East entered into a revised supply agreement with
ITI whereby East committed to purchase 90% of its Insitutube requirements from
ITI for an initial five year period from January 1, 1998 to December 31, 2002.
The agreement will automatically extend for one year periods unless notice of
termination is provided by either party six months prior to the end of any such
annual period.
The Company has also entered into license agreements with NuPipe, Inc.,
a wholly-owned subsidiary of ITI, for the sale and installation of pre-formed
PVC thermoplastic pipe under the NuPipe process and trademark. The Company has
committed to pay a royalty equal to 6.75% of gross contract revenues utilizing
the process and to purchase certain installation equipment and installation
materials from ITI.
PATENTS
The Insituform process was developed in the United Kingdom in 1971. The
Company's rights to utilize the patents, trademarks and know-how related to the
Insituform process are derived from its licensor, ITI. There are presently 61
United States patents which cover various aspects of the Insituform process and
related installation techniques. The last patent to expire will remain in effect
until 2016. Two initial method patents relating to the Insituform process (one
of which covers material aspects of the inversion process) expired in 1994. A
patent relating to the Insitutube material will expire in May 2001 and a primary
method patent relating to the Insitutube saturation process expires in February
2001.
Although management of the Company believes these patents are important
to the business of the Company, there can be no assurance that the validity of
the patents will not be successfully challenged or that they are sufficient to
afford protection against another company utilizing a process similar to the
Insituform process. It is possible that the Company's business could be
adversely affected upon expiration of the patents, or by increased competition
in the event that one or more of the patents were adjudicated to be invalid or
inadequate in scope to protect the Company's operations. Management of the
Company believes, however, that while the Company has relied on the strength and
validity of these patents, the Company's significant installation experience
with the Insituform process and its degree of market penetration in its licensed
territory should enable the Company to compete effectively in the pipeline
rehabilitation market in the future as older patents expire or become obsolete.
CUSTOMERS
The Company performs services under contract with governmental
authorities, private industries and commercial entities. In each of the last
three fiscal years, more than 58% of the Company's revenues have come from state
and local government entities - cities, counties, state agencies and regional
authorities. During the year ended June 30, 1998, the Perry Nuclear Power Plant
project, a combined city and county metropolitan government in Tennessee and a
county government in the Washington, D.C. metropolitan area accounted for 19%,
12% and 12%, respectively, of the Company's revenue. During the year ended June
30, 1997, Federal Government contracts (collectively), a municipal government in
central Ohio, a county government in the Washington, D.C. metropolitan area and
a combined city and county metropolitan government in Tennessee accounted for
17%, 15%, 13% and 12%, respectively, of the Company's revenues. During the year
ended June 30, 1996, Federal Government contracts (collectively), a county
government in the Washington, D.C. metropolitan area and a regional sanitary
authority in southwest Ohio accounted for 23%, 20% and 10%, respectively, of the
Company's revenues.
SUPPLIERS
The Company's materials and equipment are generally available from
several suppliers. However, the Company believes that ITI is presently the sole
source of proprietary Insitutube material and, therefore, the Company is
presently dependent upon ITI for its supply of Insitutube(R) material. During
the last three years the Company has not experienced any difficulty in obtaining
adequate supplies of Insitutube material from ITI and, subject to ITI's right to
approve the quality and specifications of material not purchased from ITI, the
Company has the right to substitute an alternate polyester fiber-felt or other
tube material available in the marketplace.
REVENUE RECOGNITION, CONTRACT AWARDS AND BACKLOG
The Company recognizes revenues using the units of completion method as
pipeline sections are rehabilitated using the Insituform process. An Insituform
process installation is generally performed between manholes or similar access
points within a twenty-four hour period. A rehabilitated pipeline section is
considered completed work and is generally billable to the customer. In most
cases, contracts consisting of individual line sections have a duration of less
than one year.
The Company's total backlog value of all uncompleted and multi-year
contract awards was approximately $24.9 million at June 30, 1998 as compared to
$24.4 million at June 30, 1997. The twelve-month backlog at June 30, 1998 was
approximately $10.7 million as compared to $16.1 million at June 30, 1997. The
total backlog value of all uncompleted and multi-year contracts at June 30, 1998
and 1997 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. While potentially helpful as a
possible trend indicator, 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 further subject to the
specifics of individual work releases.
COMPETITION
The general pipeline reconstruction, rehabilitation and repair business
is highly competitive. The Company faces conceptual and practical competition
both from a number of contractors employing traditional methods of pipeline
replacement and repair and from contractors offering alternative trenchless
products and technologies.
<PAGE>
Traditional Methods. The Insituform process conceptually competes with
traditional methods of pipe rehabilitation including full replacement, point
repair and sliplining. The Company believes the Insituform process usually
offers a cost advantage over full replacement as well as the practical advantage
of avoiding excavation. In addition, the Insituform process also offers
qualitatively better rehabilitation than sliplining which may significantly
reduce the diameter of the pipe. Grouting is also undertaken in the United
States. The Company considers grouting a short-term repair technique and not a
long-term pipeline rehabilitation solution competitive with the Insituform
process. As a practical matter, competition for the Company typically begins at
the point an end user has conceptually determined to employ trenchless
technology over traditional rehabilitation methods involving substantial
excavation.
Trenchless Cured-in-Place Technologies. Over the years, the Company has
witnessed a continuing introduction of alternative cured-in-place technologies,
none of which the Company believes has been able to offer the quality or
technical and other merits inherent in the Insituform process. The Company
believes it remains the dominant provider of trenchless cured-in-place pipeline
rehabilitation in its licensed territory.
Modified Sliplining Techniques. Several modified sliplining techniques
have been introduced in the trenchless marketplace to include the use of "fold
and formed" thermoplastic pipe. The NuPipe product offered by the Company is a
folded thermoplastic product installed using modified sliplining techniques. The
Company believes that the majority of customers will select the cured-in-place
Insituform process over modified sliplining techniques due to the quality and
longevity of the Insitupipe product, the proven performance record of the
Company's Insituform process installations over the past twenty years, and the
broader range of design alternatives available with the Insituform process. The
Company does offer its NuPipe product to customers in situations where, for
budget restraints or other reasons, customers or consulting engineers will
accept a technologically inferior modified sliplining technique to
cured-in-place technology.
Other Trenchless Technologies. The Company is aware of a number of
other trenchless technologies both under development and from time to time
introduced into the marketplace with mixed results. The Company believes that
the successful, in the ground, over twenty years proven performance of the
Insituform process continues to present a significant advantage over these
alternative trenchless products.
The principal areas of competition in general pipeline reconstruction,
rehabilitation and repair include the quality of the work performed, the ability
to provide a long-term solution to the pipeline problems rather than a
short-term repair, the amount of disruption to traffic and commercial activity
and the price. The Company believes that the Insituform process competes
favorably in each of these areas with traditional replacement or repair methods.
In particular, the ability to install an Insitupipe product with little or no
excavation at prices typically at or below traditional open trench replacement
methods is of substantial competitive advantage. Further, and despite a small
reduction in pipe diameter resulting from the installation of the Insitupipe
product against the walls of the original pipe, the smooth finished interior
reduces friction and generally increases flow capacity.
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 lowest priced product may be deemed technically "good enough,"
Insituform is at a disadvantage. Market share participation strategically
undertaken by the Company in this segment from time to time to preserve
competitive presence, typically at levels materially below normal margins, will
necessarily dilute the Company's overall margin performance. Conversely, in
"best value" and quality-based markets, 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 are often 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 reevaluate simple low bid award criteria - in favor of
"best value" award criteria - when procuring trenchless technology for the
rehabilitation of older pipelines.
<PAGE>
SALES AND MARKETING
The Company's sales and marketing effort is directed by its Vice
President of Sales and Marketing. The Company's sales and marketing group
includes six sales representatives assigned to serve the Company's municipal,
Federal Government and industrial market customers. Sales and marketing
personnel are full-time employees compensated through a combination of salary
and bonus. The Company also participates in seminars and trade shows, and
provides promotional materials to current and prospective users of the
Insituform process.
RESEARCH AND DEVELOPMENT
The Company is confident of its present capability to provide
rehabilitation services to its customers primarily using the Insituform process
and relies on its licensor, ITI, for major research and development projects. On
a continuing basis, however, the Company expends engineering efforts to improve
installation methods and design techniques for specific customer applications.
GOVERNMENTAL REGULATIONS
The Company does not anticipate any material impediments in the use of
the Insituform process arising from existing or future regulations or
requirements, including those regulating the discharge of materials into the
environment.
EMPLOYEES
At June 30, 1998, the Company employed 169 full-time personnel,
including 47 full-time personnel employed in the Company's Midsouth Partners
operating segment.
Item 2. Properties
The Company owns four buildings totaling 76,700 square feet situated on
a 15.45 acre site in the Ardwick Industrial Park, Prince George's County,
Maryland. This facility houses the maintenance, operations, marketing,
administration and executive offices of the Company.
The Company also owns 13,885 square feet of land in Hanover,
Pennsylvania. Try Tek's manufacturing, administration and storage facilities are
housed in three buildings totaling 6,139 square feet at this site.
The Company leases a 15,000 square foot facility in Knoxville,
Tennessee to serve Midsouth Partners customers in Tennessee, Kentucky and
northern Mississippi.
<PAGE>
Item 3. 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.
In an extensive memorandum and order of August 25, 1997, the Court
granted a partial dismissal of Plaintiffs' claims and ordered Plaintiffs to
replead remaining potential claims. On January 30, 1998, the Court by order
denied Plaintiffs' motion to file a second amended complaint and granted
Plaintiffs twenty days to file a third amended complaint. On June 18, 1998, the
Court by order granted Plaintiffs' motion for leave to file a third amended
complaint and denied Defendants' motion to dismiss. On June 23, 1998, the Court
ordered this action dismissed without prejudice, pursuant to a notice of
dismissal initiated by Plaintiffs prior to receipt of the Court's June 18, 1998
order.
On June 30, 1998, Inliner U.S.A. and CAT Contracting, Inc.
(collectively, "Plaintiffs") filed an antitrust suit against Insituform
Technologies, Inc. ("ITI"), Insituform East, Inc. and Insituform Gulf South,
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), Insituform Gulf South, Inc. and the
Company of Sections 1 and 2 of the Sherman Act, Section 2 of the Clayton Act, as
amended by the Robinson-Patman Act, Section 43(a) of the Lanham Act, business
disparagement, tortious interference with contracts and prospective business
relationships, and unfair competition. 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. Plaintiffs'
allegations were consistent with the allegations contained in the Third Amended
Complaint of the previously dismissed litigation.
The Company believes it has strong defenses to, and is vigorously
contesting, the suit. On August 17, 1998, the Company filed its answer denying
plaintiffs' claims and a motion to dismiss this action. The Court has not yet
taken action with respect to this motion.
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 4. Submission of Matters to a Vote of Security Holders
Not applicable.
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
(a) Market Information
(i) Common Stock
The Company's Common Stock is traded in the over-the-counter market and
is included in the National Association of Securities Dealers ("NASD") National
Market System ("NMS"). Holders of Common Stock have one vote per share on all
matters on which stockholders are entitled to vote together. Quotations for such
shares are reported in the National Association of Securities Dealers Automated
Quotation ("NASDAQ") system under the trading symbol INEI.
The following table shows the range of bid quotations for each quarter
in the two year period ended June 30, 1998 as reported by NASDAQ:
<TABLE>
<CAPTION>
Bid Prices* For Common Stock
---------------------------------------------------------
Quarter Ended High Low
------------- ---- ---
1996
<S> <C> <C> <C>
September 30 $3.38 $2.75
December 31 $3.50 $2.50
1997
March 31 $3.63 $2.63
June 30 $3.25 $2.50
September 30 $2.88 $2.38
December 31 $3.50 $2.13
1998
March 31 $3.00 $2.25
June 30 $2.56 $2.19
</TABLE>
- ---------------------
* Bid prices reflect interdealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual
transactions.
(ii) Class B Common Stock
There is no public trading market for shares of the Company's Class B
Common Stock. Holders of shares of Class B Common Stock have ten votes per share
on all matters with the exception of voting power to elect directors. With
respect to election of directors, holders of Class B Common Stock, voting
separately as a class, are entitled to elect the remaining directors after
election of not less than 25% of the directors by the holders of shares of
Common Stock, voting separately as a class. Shares of Class B Common Stock are
convertible at any time to shares of Common Stock on a share-for-share basis.
(b) Holders
As of September 8, 1998, there were 665 shareholders of record of
Common Stock and 7 shareholders of record of Class B Common Stock.
<PAGE>
(c) Dividend Policy
The Company did not declare any cash dividends to its Common Stock or
Class B Common Stock shareholders during fiscal 1998, primarily as a result of
negative operating results experienced during the fiscal years ended June 30,
1998 and 1997.
On June 19, 1997 and June 10, 1996, the Company declared cash dividends
of six cents per share on its shares of Common Stock and six cents per share on
its shares of Class B Common Stock to its shareholders of record at the close of
business on June 30, 1997 and 1996, payable July 15, 1997 and 1996,
respectively.
The declaration of any future dividends will be determined by the Board
of Directors based upon conditions then existing, including the Company's
operating results, financial condition, capital requirements and other factors.
While there can be no assurances as to the declaration of any future dividends,
it is presently contemplated that declaration of any future dividends will be
considered on an annual basis. In addition, it is expected that any future cash
dividends would have a record date of June 30th and a payment date of July 15th.
Item 6. Selected Financial Data
The selected financial data set forth below should be read in
conjunction with the Company's financial statements and related notes included
elsewhere in this report.
(in thousands, except per share and return on equity amounts)
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
SUMMARY OF OPERATIONS:
<S> <C> <C> <C> <C> <C>
Sales $23,891 $26,542 $30,471 $21,594 $14,804
Gross Profit $ 2,700 $ 4,119 $ 8,182 $ 6,578 $ 3,327
Earnings (loss) before income taxes $ (545) $ (888) $ 2,753 $ 3,496 $ 243
Net earnings (loss) $ (332) $ (544) $ 1,679 $ 2,120 $ 147
Net earnings (loss) per share $ (0.08) $ (0.12) $ 0.38 $ 0.48 $ 0.03
Weighted average number of shares 4,357 4,357 4,420 4,377 4,360
Dividends declared per share:
Common Stock $ 0 $ 0.06 $ 0.06 $ 0.06 $ 0.05
Class B Common Stock $ 0 $ 0.06 $ 0.06 $ 0.06 $ 0.05
FINANCIAL POSITION:
Working capital $ 6,952 $ 7,641 $ 8,709 $ 5,412 $ 4,541
Total assets $20,952 $23,065 $23,189 $19,480 $16,796
Long-term debt $ 105 $ 139 $ 113 $ 0 $ 0
Stockholders' equity $15,402 $15,734 $16,539 $15,122 $13,263
Book value per share $ 3.53 $ 3.61 $ 3.79 $ 3.47 $ 3.05
OTHER:
Average stockholders' equity
[Weighted average equity during the $15,734 $16,531 $15,107 $13,247 $13,322
year exclusive of current earnings (loss)]
Return on equity
[Net earnings (loss) divided by average (2.1%) (3.3%) 11.1% 16.0% 1.1%
stockholders' equity as defined above]
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview and Outlook
The Company reported a consolidated net loss of -$331,907 (-$0.08 per
share) on sales of $23.9 million for the fiscal year ended June 30, 1998. In the
previous year, the Company reported a consolidated net loss of -$543,646 (-$0.12
per share) on sales of $26.5 million. The Company attributed reduced losses in
fiscal 1998 to the extraordinary positive first quarter results stemming from
completion of the installation phase of a year-long $4.7 million Perry Nuclear
Power Plant project, substantially concluded during the first quarter of fiscal
1998. The operations of the Company and its wholly-owned subsidiaries
(collectively, "East") produced positive fiscal 1998 operating results as the
favorable impact of the Perry Nuclear project during the first quarter more than
offset the impact of reduced sales volume for East during the rest of the year.
However, the impact of significantly reduced margins experienced by Midsouth
Partners during the year produced contributory losses from this
majority-controlled consolidated subsidiary that more than offset the modest
favorable results otherwise recognized by East. See Part I, Item 1(b),
"Financial Information about Industry Segments."
With respect to forward-looking information, while there can be no
assurances regarding the Company's future operating performance, based on the
volume and mix of the Company's present and expected workable backlog of
customer orders, the Company presently anticipates positive operating results
for the first quarter of fiscal 1999. A combination of additional sales at
normal margins and increased production levels will be required to sustain
positive operating results through the remainder of fiscal 1999.
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 lowest priced product may be deemed technically "good enough,"
Insituform is at a disadvantage. Market share participation strategically
undertaken by the Company in this segment from time to time to preserve
competitive presence, typically at levels materially below normal margins, will
necessarily dilute the Company`s overall margin performance. Conversely, in
"best value" and quality-based markets, 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 are often 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 also are
expected over time to reevaluate simple low bid award criteria - in favor of
"best value" award criteria - when procuring trenchless technology for the
rehabilitation of older pipelines.
Results of Operations:
<TABLE>
<CAPTION>
Key Statistics: 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales (100%) $23,891,215 $26,541,542 $30,470,867
Gross profit 11% 16% 27%
Selling, general and administrative expenses 19% 19% 17%
Net earnings (loss) (1%) (2%) 6%
</TABLE>
The Company's primary source of revenue is from the rehabilitation and
reconstruction of sewers and other underground conduits using the patented
Insituform(R) process. Although the Company does rehabilitate pipelines using
the NuPipe(R) process, does custom design and build special machinery and does
perform manhole rehabilitation and pipeline cleaning and television inspection
services exclusive of the Insituform process, over 89% of the Company's revenues
for the years ended June 30, 1998, 1997 and 1996 came from contracts with
customers to rehabilitate existing pipelines using the Insituform process.
The consolidated results of operations include the accounts of the
Company and its wholly-owned subsidiary corporations (collectively, "East") and
its majority-controlled subsidiary partnership, Midsouth Partners.
Consolidated sales decreased $2.65 million (10%) from $26.54 million in
fiscal 1997 to $23.89 million in fiscal 1998 primarily as a result of reduced
workable backlog levels experienced during the last three quarters of fiscal
1998. East sales decreased 9% in fiscal 1998; Midsouth Partners sales decreased
12%.
Consolidated sales decreased $3.93 million (13%) from $30.47 million in
fiscal 1996 to $26.54 million in fiscal 1997 primarily as a result of periods of
reduced workable backlog levels experienced during fiscal 1997 and third quarter
fiscal 1997 delays in the start-up and execution of several significant
projects. East sales decreased 12% in fiscal 1997 as compared to fiscal 1996.
Comparable fiscal year sales for Midsouth Partners decreased 14%. The Company
experienced a 25% decrease in comparable year Insituform installation revenues
which was offset to some extent by increased NuPipe installation revenues and
increased services subcontracted to others.
Although Insituform prices vary for Insitutube sizes and other contract
conditions, the Company has generally incorporated anticipated cost increases,
resulting from inflation ranging from 2% to 5% during the past three years, into
its contract prices. As a result, inflation has not had a significant impact on
the Company's revenues and operating results.
The Company's gross profit as a percentage of sales revenues was 11%,
16% and 27% for fiscal 1998, 1997, and 1996, respectively. The decrease in
fiscal 1998 gross profit margin as compared to fiscal 1997 is due primarily to
reduced margins on work performed by Midsouth Partners more than offsetting
improved margins recognized by East. Improved East margins are due in part to
completion of the Perry Nuclear project and a mix of work that included a
reduced volume of discounted work and work subcontracted to others in fiscal
1998. Reduced margins for Midsouth Partners are principally due to the
combination of discounted sales and substantial cost overruns on two significant
projects. The decrease in fiscal 1997 gross profit margin as compared to fiscal
1996 is primarily a result of both sales mix and absorption of semi-fixed
operating costs over reduced sales levels. With respect to sales mix, dilution
to normal overall margin levels in fiscal 1997 was occasioned by increases in
subcontracted services, in modified sliplining installations and in certain
discounted work undertaken for strategic reasons.
Selling, general and administrative expenses decreased $431,495 (9%) in
fiscal 1998 as compared to fiscal 1997, primarily as a result of reduced legal
expenses and lower costs to support reduced production activities during fiscal
1998. Additional legal costs were incurred during fiscal 1997 in connection with
the Inliner U.S.A. / CAT Contracting antitrust lawsuit.
Selling, general and administrative expenses decreased $109,970 (2%) in
fiscal 1997 as compared to fiscal 1996. However, primarily as a result of
reduced comparable period sales levels, selling, general and administrative
expenses as a percentage of sales increased from 17% in fiscal 1996 to 19% in
fiscal 1997.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
Key Statistics 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Working Capital $6,952,085 $7,640,675 $8,708,601
Current Ratio 3.5 to 1 3.1 to 1 3.6 to 1
Cash provided from Operations $1,365,245 $ 726,322 $3,876,283
Capital Expenditures $1,695,586 $2,450,846 $2,056,459
</TABLE>
<PAGE>
During the fiscal year ended June 30, 1998, $1,365,245 in cash was
provided by the Company's operating activities, due primarily to $2.1 million in
depreciation and amortization and a $1.5 million decrease in receivables which
more than offset the Company's net loss for the year, a $0.8 million decrease in
payables and accruals and $1 million in pretax losses of Midsouth Partners
attributable to non-owned interests. The Company's working capital position
remains strong with working capital of $6.95 million and a current ratio of 3.5
to 1 at June 30, 1998.
Capital expenditures during fiscal 1998, 1997, and 1996 included
purchases of vehicles and production equipment to expand, upgrade and improve
the Company's production capabilities and purchases of vehicles and production
equipment to replace aging units.
During fiscal 1997 and 1996, the Company declared cash dividends of
$261,412, $0.06 per share, to its Common Stock and Class B Common Stock
shareholders. During fiscal 1998, Midsouth Partners received capital
contributions of $276,000 and loans of $250,000 from non-owned interests. During
fiscal 1997 and 1996, Midsouth Partners paid cash distributions of $101,200 and
$368,000, respectively, to non-owned interests.
The Company maintains a $3,000,000 unsecured bank line of credit and a
$3,000,000 unsecured intercompany line of credit with CERBCO, Inc. to meet the
Company's short-term cash flow requirements. 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 lines
of credit and the unencumbered real and personal property owned by the Company
provide adequate resources to finance the cash requirements of future capital
expenditures.
Year 2000 Issues
The inability of present computerized systems to process dates beyond
December 31, 1999 and the potential impact on businesses and governments in the
future are generally referred to as "Year 2000 Issues."
The Company has implemented plans to address Year 2000 issues. Primary
areas of focus include the Company's information technology systems, the
Company's non-information technology systems, the Year 2000 readiness of the
Company's vendors and suppliers and the Year 2000 readiness of the Company's
major customers. Because the Company's primary products and services neither
include nor rely upon computerized components, the Company believes that there
are no additional contingencies associated with actual or implied warranties
related to its products and services resulting from Year 2000 issues.
With respect to the Company's information technology systems, the
Company's primary accounting and information processing system is Year 2000
compliant and will recognize years 2000 through 2029 in the proper century. The
Company's preliminary assessment of supporting information systems is that these
systems either are Year 2000 compliant, can be modified to become Year 2000
compliant, or should not have a significant impact on either the primary
accounting and information system or the Company's operating activities should
non-compliant systems not be properly modified.
With respect to the Company's non-information technology systems, the
Company is still in the preliminary assessment stage. The Company is dependent
on information from vendors and suppliers in assessing and evaluating these
systems. As potential Year 2000 issues are identified, implementation plans are
developed and executed. The Company has initiated plans for corrective action
for its office telephone system and headquarters facility security system, two
systems that are not presently Year 2000 compliant.
With respect to the company's suppliers and customers, the Company has
initiated preliminary correspondence with selected critical suppliers and
customers. Responses received to date indicate that responding suppliers and
customers either are currently Year 2000 compliant or expect to be Year 2000
compliant by December 31, 1999. Prior to December 31, 1998, the Company plans to
seek to obtain responses from suppliers and customers who have not as yet
responded to inquiries and develop a plan to monitor and assess Year 2000
readiness from respondents not as yet Year 2000 compliant.
<PAGE>
The Company currently estimates that the cost of implementing its Year
2000 Plan will not exceed $200,000. This preliminary estimate is based on
presently available information and will be updated as the Company continues its
assessment and proceeds with implementation. Specifically, this estimate would
change if, after receipt of information from key suppliers or customers, a
formal contingency plan required development and implementation.
There can be no assurances that the Company's Year 2000 Plan will be
successful. The Company is dependent on vendors to identify and correct Year
2000 issues related to the Company's utilities and equipment using computerized
components. In addition, if key vendors fail to provide materials critical to
the Company's operations, or with sufficient electrical power or other
utilities, or if transportation of the Company's personnel and equipment is
seriously impeded; any such failure could have a material adverse effect on the
operational performance and financial condition of the Company.
In addition, if major municipal, industrial or Federal government
customers are seriously affected, directly or indirectly, by Year 2000 issues
such that pipeline rehabilitation programs are delayed or abandoned, this too
could have a material adverse effect on the operational performance and
financial condition of the Company.
The Company has not yet established a contingency plan, but intends to
formulate one prior to June 30, 1999, based primarily on potential actions that
would be required if key vendors or customers are unable to address and resolve
Year 2000 Issues that would directly or indirectly impact the Company's ability
to conduct normal business operations in the year 2000 and beyond.
Item 8. Financial Statements and Supplementary Data
See financial statements and supplementary financial information
following Item 9 below.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Insituform East, Incorporated
We have audited the accompanying consolidated balance sheets of Insituform East,
Incorporated and subsidiaries as of June 30, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Insituform East, Incorporated and
subsidiaries as of June 30, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1998, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
1900 M Street, NW
Washington, DC 20036
September 22, 1998
INSITUFORM EAST, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------------------
1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
Sales $23,891,215 $26,541,542 $30,470,867
----------- ----------- -----------
Costs and Expenses:
Cost of sales 21,190,803 22,422,831 22,288,437
Selling, general and administrative 4,598,952 5,030,447 5,140,417
----------- ----------- -----------
Total Costs and Expenses 25,789,755 27,453,278 27,428,854
----------- ----------- -----------
Earnings (Loss) from Operations (1,898,540) (911,736) 3,042,013
Investment Income 71,199 132,643 135,429
Interest Expense (77,203) (39,871) (16,719)
Other Income 333,235 127,647 250,656
----------- ----------- -----------
Earnings (Loss) Before Income Taxes
and Non-owned Interests (1,571,309) (691,317) 3,411,379
Non-owned Interests in Pretax Loss
(Earnings) of Midsouth Partners 1,026,402 (196,329) (658,822)
----------- ----------- -----------
Earnings (Loss) Before Income Taxes (544,907) (887,646) 2,752,557
Credit (Provision) for Income Taxes 213,000 344,000 (1,074,000)
----------- ----------- -----------
Net Earnings (Loss) $ (331,907) $ (543,646) $ 1,678,557
=========== =========== ===========
Basic Earnings (Loss) Per Share $ (0.08) $ (0.12) $ 0.39
=========== =========== ===========
Diluted Earnings (Loss) Per Share $ (0.08) $ (0.12) $ 0.38
=========== =========== ===========
See notes to consolidated financial statements
</TABLE>
<PAGE>
INSITUFORM EAST, INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
-------------------------------------------
1998 1997
-------------------------------------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 2,148,511 $ 2,071,852
Accounts receivable:
Due from customers 5,134,644 6,479,230
Other 45,378 202,897
Inventories 1,381,861 1,538,017
Prepaid and refundable income taxes 671,565 765,580
Prepaid expenses 401,659 251,572
----------- -----------
Total Current Assets 9,783,618 11,309,148
Property, Plant and Equipment, at cost less
accumulated depreciation 11,108,691 11,670,061
Other Assets 60,000 86,000
----------- -----------
Total Assets $20,952,309 $23,065,209
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Partner Loans to Midsouth Partners $ 250,000 $ 0
Accounts payable 1,120,910 1,486,841
Accrued compensation and related expenses 1,398,806 1,876,988
Income taxes payable 27,196 14,724
Dividends payable 0 261,412
Current portion of capital lease obligations 34,621 28,508
----------- -----------
Total Current Liabilities 2,831,533 3,668,473
Deferred Income Taxes 915,000 1,074,000
Long Term Capital Lease Obligations 104,829 139,480
----------- -----------
Total Liabilities 3,851,362 4,881,953
----------- -----------
Non-owned Interests in Consolidated Subsidiary 1,699,060 2,449,462
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Common stock - $.04 par value: 10,000,000 shares 175,486 175,486
authorized; 4,387,163 shares issued; 4,059,266
shares outstanding
Class B common stock - $.04 par value: 800,000 11,904 11,904
shares authorized; 297,596 shares issued and
outstanding
Additional paid-in capital 4,000,424 4,000,424
Retained earnings 12,403,686 12,735,593
----------- -----------
16,591,500 16,923,407
Less cost of 327,897 shares of common stock in 1,189,613 1,189,613
----------- -----------
treasury
Total Stockholders' Equity 15,401,887 15,733,794
----------- -----------
Total Liabilities and Stockholders' Equity $20,952,309 $23,065,209
=========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
INSITUFORM EAST, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997and 1996
<TABLE>
<CAPTION>
$.04 Par Value $.04 Par Value Additional Retained Common Stock in Total
Common Stock Class B Common Paid-in Capital Earnings Treasury Stockholders'
Stock Equity
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - July 1, 1995 $175,486 $11,904 $4,000,424 $12,123,506 $(1,189,613) $15,121,707
Dividends declared 0 0 0 (261,412) 0 (261,412)
Net earnings for the 0 0 0 1,678,557 0 1,678,557
year
-------------------------------------------------------------------------------------------------------
Balance - June 30, 1996 175,486 11,904 4,000,424 13,540,651 (1,189,613) 16,538,852
Dividends declared 0 0 0 (261,412) 0 (261,412)
Net loss for the year 0 0 0 (543,646) 0 (543,646)
-------------------------------------------------------------------------------------------------------
Balance - June 30, 1997 175,486 11,904 4,000,424 12,735,593 (1,189,613) 15,733,794
Net loss for the year 0 0 0 (331,907) 0 (331,907)
-------------------------------------------------------------------------------------------------------
Balance - June 30, 1998 $175,486 $11,904 $4,000,424 $12,403,686 $(1,189,613) $15,401,887
=======================================================================================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
INSITUFORM EAST, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------
1998 1997 1996
-----------------------------------------------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net earnings (loss) $ (331,907) $ (543,646) $1,678,557
Adjustments for noncash items included in net earnings
(loss):
Depreciation and amortization 2,112,006 1,853,294 1,633,358
Deferred income taxes (159,000) 256,000 (167,000)
Non-owned interests in earnings (loss) of consolidated
subsidiary (1,026,402) 196,329 658,822
Changes in assets and liabilities, net of effect of
consolidation of majority-controlled Partnership in 1996:
Receivables 1,502,105 (296,041) 566,218
Inventories 156,156 (378,485) 383,408
Other current assets (56,072) (671,815) (22,784)
Payables and accruals (831,641) 310,686 (854,296)
----------- ---------- ----------
Net cash provided by operating activities 1,365,245 726,322 3,876,283
----------- ---------- ----------
Cash Flows from Investing Activities:
Capital expenditures (1,695,586) (2,450,846) (2,056,459)
Capital contributions to Midsouth Partners by non-owned
interests 276,000 0 0
Cash distributions from Midsouth Partners to non-owned
interests 0 (101,200) (368,000)
Disposal of equipment, net 170,950 15,350 28,387
Cash balance of majority-controlled Partnership prior to 0 0 241,094
consolidation
Increase in other assets 0 0 (13,000)
----------- ---------- ----------
Net cash used in investing activities (1,248,636) (2,536,696) (2,167,978)
----------- ---------- ----------
Cash Flows from Financing Activities:
Dividends paid (261,412) (261,412) (261,412)
Proceeds from bank line of credit advances 1,800,000 800,000 0
Repayment of line of credit advances to bank (1,800,000) (800,000) 0
Proceeds from line of credit advances from CERBCO, Inc. 2,600,000 0 0
Repayment of line of credit advances to CERBCO, Inc. (2,600,000) 0 0
Loans to Midsouth Partners from non-owned interests 250,000 0 0
Principal payments under capital lease obligations (28,538) (39,446) (55,567)
----------- ---------- ----------
Net cash used in financing activities (39,950) (300,858) (316,979)
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 76,659 (2,111,232) 1,391,326
Cash and cash equivalents at beginning of year 2,071,852 4,183,084 2,791,758
----------- ---------- ----------
Cash and cash equivalents at end of year $2,148,511 $2,071,852 $4,183,084
=========== ========== ==========
Supplemental disclosure of cash flow information:
Interest paid $ 77,203 $ 39,871 $ 16,719
Income taxes paid (refunded) ($160,487) $ 404,066 $1,443,162
Supplemental schedule of noncash investing and financing activities:
Capital equipment acquired under capital lease obligations $ 0 $ 58,543 $ 133,088
See notes to consolidated financial statements
</TABLE>
<PAGE>
INSITUFORM EAST, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
1. Summary of Significant Accounting Policies
Business Operations
Insituform East, Incorporated (the "Company"), operating pursuant to
sublicense agreements as explained in Note 8, is primarily engaged in the
rehabilitation of underground sewers and other pipelines using the patented
Insituform(R) process. The process involves installing a cured-in-place
Insitupipe(R) product inside existing pipelines.
Principles of Consolidation
The 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"). The consolidated financial statements also include the accounts of
Midsouth Partners, the Company's majority-controlled subsidiary Partnership. All
significant intercompany accounts and transactions have been eliminated.
Revenue Recognition
The Company recognizes revenue using the units of completion method as
pipeline sections are rehabilitated using the Insituform process. Installation
of the Insitutube(R) product is generally performed between manholes or similar
access points within a twenty-four hour period. A rehabilitated pipeline section
is considered completed work and is generally billable to the customer. In most
cases, contracts consisting of individual line sections have a duration of less
than one year.
Cash and Cash Equivalents
Cash and cash equivalents consist of checking accounts and temporary
investments in repurchase agreements, money market funds, certificates of
deposit and U.S. Treasury instruments. Cash equivalents are stated at cost plus
accrued interest which approximates market. For purposes of the consolidated
statements of cash flows, the Company considers only highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
Inventories
Inventories are stated at the lower of cost (determined by the
first-in, first-out method) or market. Substantially all inventories consist of
raw materials utilized in the Insituform process.
Depreciation and Amortization
Property and equipment placed in service after December 31, 1981 is
depreciated using the straight-line method over the estimated useful lives.
Property and equipment placed in service before January 1, 1982, other than
office furniture and equipment, is depreciated using the double-declining
balance method. The useful lives for buildings and improvements range from
twenty to forty years. The useful lives for vehicles, production equipment and
office furniture and equipment range from three to ten years.
Ordinary maintenance and repairs are expensed as incurred while major
renewals and betterments are capitalized. Upon sale or retirement of property
and equipment, the cost and accumulated depreciation are removed from the
respective accounts and any gain or loss recognized.
<PAGE>
Income Taxes
The Company provides for federal and state income taxes at the
statutory rates in effect on taxable income. Deferred income taxes result
primarily from the temporary differences in recognizing depreciation, contract
revenues, compensated absences and the results of operations of Midsouth
Partners for tax and financial reporting purposes.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
2. Accounts Receivable
Accounts receivable due from customers consists of amounts due for
completed work, net of an allowance for doubtful accounts of $-0- both at June
30, 1998 and at June 30, 1997. Other accounts receivable includes expense
advances to officers and employees of $20,206 and $13,607 at June 30, 1998 and
1997, respectively.
3. Investment in 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 June
30, 1998 are Insitu, Inc., a wholly-owned subsidiary of the Company; E-Midsouth,
Inc., an affiliate of Insituform Technologies, Inc. ("ITI"); and Insituform
Southwest, Inc., also an affiliate of ITI.
Management and conduct of the business of Midsouth Partners is vested
in a Management Committee. At June 30, 1998, the seven-member Partnership
Management Committee consisted of four Insitu, Inc. representatives, one
disputed and one undisputed E-Midsouth, Inc. representative and one Insituform
Southwest, Inc. representative. Insituform East did not have majority
representation on the Partnership Management Committee prior to a June 12, 1996
arbitration award, which, in connection with a default of the Partnership
Agreement by E-Midsouth, Inc., granted Insitu, Inc. the unilateral right to
appoint an additional Management Committee member in place of one E-Midsouth,
Inc. representative.
Partnership profits and losses are allocated to the partners as
follows:
Insitu, Inc. 42.5%
E-Midsouth, Inc. 42.5%
Insituform Southwest, Inc. 15.0%
<PAGE>
The Company and Insituform Southeast Corp., both affiliates of general
partners, have each unconditionally committed to advance funds to Midsouth
Partners, up to a maximum of $250,000 each, with interest payable at Chase
Manhattan Bank's Prime Lending Rate. These commitments currently extend through
December 31, 1998.
4. Property, Plant and Equipment
Property, plant and equipment consist of the following:
June 30,
--------------------------------
1998 1997
---- ----
Land and improvements $ 2,018,587 $ 2,018,587
Buildings and improvements 5,579,498 5,566,697
Vehicles and production equipment 11,853,458 11,406,621
Small tools, radios and machine shop equipment 4,545,414 4,658,431
Office furniture and equipment 1,122,254 1,037,975
Leasehold improvements 94,500 147,032
----------- ------------
25,213,711 24,835,343
Less accumulated depreciation 14,105,020 13,165,282
----------- ------------
Property, plant and equipment, at cost less
accumulated depreciation $11,108,691 $11,670,061
=========== ===========
The Company incurred repair and maintenance costs of $742,308, $984,060
and $1,021,845 for the years ended June 30, 1998, 1997, and 1996, respectively.
5. Notes Payable
The Company maintains a $3,000,000 Revolving Line of Credit facility
with a bank. This facility, currently available to the Company through December
31, 1998, is reviewed annually. Interest on borrowings against this facility is
payable monthly at the bank's prime rate. Loans against this facility are
unsecured; however, the Company is required to comply quarterly with financial
liquidity, net worth, tangible net worth and debt to equity leverage covenants.
The Company has established a $3,000,000 Intercompany 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. This facility is available for an indefinite period.
6. Leases
Midsouth Partners leases mobile production equipment from an unrelated
party. These leases are classified as capital leases. The net book value of
equipment under capital lease at June 30, 1998 is $107,887. A schedule of
minimum lease payments and the present value of minimum lease payments for these
leases at June 30, 1998 is as follows:
Minimum lease payments:
Year Ending June 30,
1999 61,080
2000 61,080
2001 39,000
2002 34,125
2003 6,500
--------
Total minimum lease payments 201,785
Less amount representing interest 62,335
--------
Present value of minimum lease payments 139,450
Less current portion 34,621
--------
Long-term capital lease obligations $104,829
========
<PAGE>
Midsouth Partners leases operations facilities in Nashville and
Knoxville, Tennessee. The Company leases equipment on a short-term basis for
specific contract requirements. The Company's rental expense for leased
equipment and facilities charged to operations was $452,292, $499,310 and
$361,184 for the years ended June 30, 1998, 1997 and 1996, respectively. These
leases are classified as operating leases. The Company has committed to make
minimum lease payments of $46,796 and $3,472 on noncancelable operating leases
during the years ending June 30, 1999 and 2000, respectively.
7. Income Taxes
A reconciliation of income tax computed at the statutory Federal rate
to the provision (credit) for income taxes included in the consolidated
statements of operations is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------------
1998 1997 1996
---- ---- ----
Statutory Federal income tax rate: 34% 34% 34%
===== ===== =====
Income tax expense (benefit)
<S> <C> <C> <C>
computed at the statutory Federal rate $(185,265) $(301,800) $ 935,869
State income tax expense (benefit),
net of Federal tax benefit (expense) (45,776) (59,398) 116,282
Non-deductible expenses 18,041 17,198 21,849
--------- --------- --------
Provision (credit) for income taxes $(213,000) $(344,000) $1,074,000
========= ========= ==========
Effective tax rate 39% 39% 39%
===== ===== =====
</TABLE>
<PAGE>
The provision (credit) for income taxes consists of the
following:
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------------
1998 1997 1996
---- ---- ----
Current
<S> <C> <C> <C>
Federal $ (47,000) $ (523,000) $1,082,000
State (7,000) (77,000) 159,000
--------- --------- ---------
(54,000) (600,000) 1,241,000
--------- --------- ---------
Deferred
Federal (139,000) 223,000 (146,000)
State (20,000) 33,000 (21,000)
--------- --------- ---------
(159,000) 256,000 (167,000)
--------- --------- ---------
Total $ (213,000) $(344,000) $1,074,000
========= ========= =========
</TABLE>
The components of the deferred tax expense (benefit) resulting
from net temporary differences are as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Depreciation $ 14,000 $ 80,000 $ 52,000
Midsouth Partners segment (188,000) (10,000) (76,000)
Deferred revenue 10,000 201,000 (155,000)
Deferred compensation 12,000 (12,000) 8,000
Other (7,000) (3,000) 4,000
---------- ---------- ----------
Total $ (159,000) $ 256,000 $ (167,000)
========== ========== ==========
</TABLE>
<PAGE>
Deferred Income Taxes, provided for the tax effect of cumulative
temporary differences for income tax and financial reporting purposes, consists
of the following:
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Depreciation $ 1,115,000 $ 1,101,000
Midsouth Partners segment (113,000) 75,000
Deferred revenue (51,000) (61,000)
Deferred compensation (15,000) (27,000)
Other (21,000) (14,000)
----------- ----------
Total $ 915,000 $1,074,000
=========== ==========
</TABLE>
8. Commitments and Contingencies
License Agreements
The Company has entered into seven sublicense agreements with
Insituform Technologies, Inc.("ITI") which grant the Company rights to perform
the Insituform process in Maryland, Virginia, Delaware, the District of
Columbia, Pennsylvania, Ohio, West Virginia, Kentucky, Tennessee and Northern
Mississippi. The agreements are for the life of the patents or the patent rights
unless sooner terminated by a specified action of the Company or ITI. The
agreements specify that a royalty equal to 8% of the gross contract price of all
contracts performed by the Company utilizing the process, less certain fees, be
paid to ITI.
The Company has also entered into license agreements for identical
territories with NuPipe, Inc., a wholly-owned subsidiary of ITI, for the sale
and installation of pre-formed PVC thermoplastic pipe under the NuPipe(R)
process and trademark. The Company has committed to pay royalty equal to 6.75%
of gross contract revenues utilizing the NuPipe process and to purchase certain
installation equipment and installation materials from NuPipe, Inc.
The agreements also obligate the Company to pay minimum annual
royalties during the terms of the agreements unless waived upon approval of the
Company's marketing and sales plans for licensed processes by ITI. Payments of
minimum annual royalties for East for the years ended June 30, 1999 and 1998
have been waived by ITI. Payments of minimum annual royalties for Midsouth
Partners for the years ended December 31, 1998, and 1997 have been waived by
ITI. During the years ended June 30, 1998, 1997, and 1996, the Company incurred
royalty expense of $1,409,696, $1,428,378 and $1,846,932, respectively.
Supply Agreements
On December 29, 1997, East entered into a supply agreement with ITI
whereby East committed to purchase 90% of its Insitutube requirements from ITI
for an initial five year period from January 1, 1998 to December 31, 2002. The
agreement will automatically extend for one year periods unless notice of
termination is provided by either party six months prior to the end of any such
annual period.
On May 1, 1987, Midsouth Partners entered into supply agreements with
ITI whereby Midsouth Partners committed to purchase 90% of its Insitutube
material requirements from ITI. The agreements automatically renew annually
unless notice of termination is provided by either party six months prior to the
end of a renewal period. The Midsouth Partners continuing Insitutube supply
agreement presently extends through April 30, 1999.
Pending Litigation
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.
In an extensive memorandum and order of August 25, 1997, the Court
granted a partial dismissal of Plaintiffs' claims and ordered Plaintiffs to
replead remaining potential claims. On January 30, 1998, the Court by order
denied Plaintiffs' motion to file a second amended complaint and granted
Plaintiffs twenty days to file a third amended complaint. On June 18, 1998, the
Court by order granted Plaintiffs' motion for leave to file a third amended
complaint and denied Defendants' motion to dismiss. On June 23, 1998, the Court
ordered this action dismissed without prejudice, pursuant to a notice of
dismissal initiated by Plaintiffs prior to receipt of the Court's June 18, 1998
order.
On June 30, 1998, Inliner U.S.A. and CAT Contracting, Inc.
(collectively, "Plaintiffs") filed an antitrust suit against Insituform
Technologies, Inc. ("ITI"), Insituform East, Inc. and Insituform Gulf South,
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), Insituform Gulf South, Inc. and the
Company of Sections 1 and 2 of the Sherman Act, Section 2 of the Clayton Act, as
amended by the Robinson-Patman Act, Section 43(a) of the Lanham Act, business
disparagement, tortious interference with contracts and prospective business
relationships, and unfair competition. 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. Plaintiffs'
allegations were consistent with the allegations contained in the Third Amended
Complaint of the previously dismissed litigation.
The Company believes it has strong defenses to, and is vigorously
contesting, the suit. On August 17, 1998, the Company filed its answer denying
Plaintiff's claims and a motion to dismiss this action. The court has not yet
taken action with respect to this motion.
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.
Other Contingent Liabilities
The Company performs services for the U.S. Government under contracts
which are subject to audit and potential adjustment. Contract revenues are
recorded in amounts which are expected to be realized at contract completion
upon final settlement with U.S. Government representatives.
The Company is a party, both as plaintiff and defendant, to 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.
9. Stockholders' Equity
The Company has two classes of Common Stock, which are designated as
Common Stock and Class B Common Stock. Shares of Class B Common Stock are
convertible at any time into shares of Common Stock on a share-for-share basis.
Shares of Class B Common Stock have ten votes per share on all matters with the
exception of voting power to elect directors. With respect to election of
directors, holders of shares of Class B Common Stock, voting separately as a
class, are entitled to elect the remaining directors after election of not less
than 25% of the directors by the holders of shares of Common Stock, voting
separately as a class.
On June 19, 1997, the Company declared cash dividends of six cents per
share on its shares of Common Stock and six cents per share on its shares of
Class B Common Stock to its shareholders of record at the close of business on
June 30, 1997, payable July 15, 1997.
<PAGE>
On June 10, 1996, the Company declared cash dividends of six cents per
share on its shares of Common Stock and six cents per share on its shares of
Class B Common Stock to its shareholders of record at the close of business on
June 30, 1996, payable July 15, 1996.
At June 30, 1998, the Company held 327,897 shares of its Common Stock
in Treasury at an average price of $3.63 per share.
10. Profit Sharing Plans
East and Midsouth Partners maintain separate profit sharing retirement
plans for all employees meeting certain minimum eligibility requirements who are
not covered by collective bargaining agreements. Contributions are determined
annually by the Company. During the years ended June 30, 1998, 1997, and 1996,
the Company recognized profit sharing expense of $47,739, $276,359 and $263,722,
respectively.
11. Supplemental Executive Retirement Plan
On January 1, 1998, the Company established an unfunded supplemental
executive retirement plan ("SERP") for three of its executive officers who are
not otherwise participants in the parent company SERP. The expense for this plan
was $17,715 for the fiscal year ended June 30, 1998.
On July 1, 1998, the Company established a trust to facilitate the
payment of benefits under the plan. Funds in the trust are invested in variable
life insurance policies on the lives of two of the three plan-covered officers.
One of the three officers did not qualify for such insurance and, therefore, any
premature death of this officer prior to retirement would result in an
accelerated recognition by the Company of his unaccrued plan benefits. Assets of
the trust are subject to the claims of the Company's creditors in the event of
bankruptcy or insolvency.
12. Net Earnings (Loss) Per Share
Basic earnings (loss) per share was computed by dividing net earnings
(loss) by the weighted average number of common shares outstanding during the
period. Weighted average shares of 4,356,862 were used in computing basic
earnings (loss) per share for the years ended June 30, 1998, 1997 and 1996.
Diluted earnings (loss) per share was computed by dividing net earnings
(loss) by the weighted average number of common shares outstanding including
common stock equivalents from dilutive stock options. Weighted average shares of
4,356,862, 4,356,862 and 4,419,636, were used in computing diluted earnings
(loss) per share for the years ended June 30, 1998, 1997, and 1996,
respectively. Weighted average shares used in computing diluted earnings per
share for the year ended June 30, 1996, included 62,774 net shares associated
with unexercised dilutive stock options.
13. Stock Options
The Company maintains two stock option plans. All grants of options are
made at the market price of the Company's Common Stock at the date of the grant
and are exercisable at the date of the grant.
On December 1, 1989, the shareholders of the Company adopted the
Insituform East, Incorporated 1989 Board of Directors Stock Option Plan. Under
the terms of this plan, up to 525,000 shares of Common Stock have been reserved
for the Directors of the Company. If not exercised, the remaining 60,000 option
shares granted December 10, 1993 at a per share exercise price of $2.44 will
expire December 10, 1998.
On December 9, 1994, the shareholders of the Company adopted the
Insituform East, Incorporated 1994 Board of Directors Stock Option Plan. Under
the terms of this plan, up to 525,000 shares of Common Stock have been reserved
for the Directors of the Company. If not exercised, option shares granted under
this plan will expire five years from the date of the grant.
<PAGE>
The following summary sets forth the activity under the 1989 and 1994
Board of Directors Plans during the past three years:
<TABLE>
<CAPTION>
1994 Board of Directors 1989 Board of Directors
Stock Option Plan Stock Option Plan
----------------- -----------------
Average Price Average Price
Shares Per Share Shares Per Share
------ ------------- ------ -------------
Outstanding
<S> <C> <C> <C> <C>
July 1, 1995 105,000 2.63 240,000 5.00
Granted 105,000 4.22 0 0
Exercised 0 0 0 0
Expired 0 0 (60,000) 5.75
------- --------
Outstanding
June 30, 1996 210,000 3.43 240,000 4.75
Granted 105,000 2.63 0 0
Exercised 0 0 0 0
Expired 0 0 (60,000) 6.63
------- --------
Outstanding
June 30, 1997 315,000 3.16 120,000 3.81
Granted 105,000 2.47 0 0
Exercised 0 0 0 0
Expired 0 0 (60,000) 5.19
-------- --------
Outstanding
June 30, 1998 420,000 $2.98 60,000 $2.44
======= ========
</TABLE>
The Company adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS No. 123") during the year ended June 30, 1997. As allowed under
provisions of SFAS 123, the Company will continue to measure compensation cost
for employee stock-based compensation plans using the intrinsic value based
method of accounting prescribed by the Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees. As such, the Company is required
under SFAS No. 123 to make pro forma disclosures of net earnings (loss) and net
earnings (loss) per share as if the fair value-based method of accounting had
been applied.
Summary information for stock options granted during the years ended
June 30, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Date of grant 12/12/97 12/13/96 12/08/95
Option shares granted 105,000 105,000 105,000
Per share exercise price $2.47 $2.63 $4.22
Fair value per option share $0.94 $1.78 $2.84
</TABLE>
The fair value of options granted during the years ended June 30, 1998,
1997 and 1996 was estimated on the dates of the grants using the binomial
option-pricing model using the following assumptions:
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 4.69% 6.06% 5.56%
Expected option term 5 years 5 years 5 years
Expected stock price volatility 38% 86% 86%
Expected dividend yield 1% 1% 1%
</TABLE>
If compensation costs for the Company's stock option grants had been
determined using the fair value-based method of accounting per SFAS 123, the
Company's pro forma net earnings (loss) and pro forma net earnings (loss) per
share for the years ended June 30, 1998, 1997 and 1996 would be as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------
1998 1997 1996
---- ---- ----
Net earnings (loss):
<S> <C> <C> <C>
As reported $(331,907) $ (543,646) $1,678,557
Pro forma $(397,349) $ (666,872) $1,481,458
Basic Net earnings (loss) per share:
As reported $ (0.08) $ (0.12) $ 0.39
Pro forma $ (0.09) $ (0.15) $ 0.34
Diluted Net earnings (loss) per share:
As reported $ (0.08) $ (0.12) $ 0.38
Pro forma $ (0.09) $ (0.15) $ 0.34
</TABLE>
14. Segment Reporting Information
During the year ended June 30, 1998, the Company adopted the disclosure
requirements of Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information ("SFAS No. 131"). In
accordance with the provisions of SFAS No. 131, the Company has determined that
its operating activities consist of two reportable operating segments, (i)
Insituform East, Incorporated and its wholly-owned subsidiary corporations
(collectively, "East") and, (ii) its majority-controlled subsidiary partnership,
Midsouth Partners. Although both reportable operating segments are primarily
engaged in the business of rehabilitating underground sewers and other conduits
using the Insituform process, rehabilitation services are generally provided to
customers in separate licensed geographic territories. Financial Information
about the Company's reportable operating segments is as follows:
<PAGE>
Financial Information about
Reportable Operating Segments
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
-----------------------------------------------------
1998 1997 1996
-----------------------------------------------------
SALES TO UNAFFILIATED CUSTOMERS:
Insituform East, Incorporated and
wholly-owned subsidiaries
<S> <C> <C> <C>
(collectively, "East") $17,520,974 $19,342,794 $22,087,604
Midsouth Partners 6,370,241 7,198,748 8,383,263
----------- ----------- -----------
Total Sales to Unaffiliated Companies $23,891,215 $26,541,542 $30,470,867
=========== =========== ===========
RECONCILIATION OF SALES BY SEGMENT
Total Sales
East $17,825,307 $19,442,214 $22,424,772
Midsouth Partners 6,393,024 7,210,604 8,395,698
Less: Intersegment Sales
East to Midsouth Partners (304,333) (99,420) (337,168)
Midsouth Partners to East (22,783) (11,856) (12,435)
----------- ----------- -----------
Total Sales to Unaffiliated Customers $23,891,215 $26,541,542 $30,470,867
=========== =========== ===========
INVESTMENT INCOME
East $ 47,233 $ 96,071 $ 101,049
Midsouth Partners 32,062 36,572 34,380
Less: Intersegment Income (8,096) 0 0
----------- ----------- -----------
Total Investment Income $ 71,199 $ 132,643 $ 135,429
=========== =========== ===========
INTEREST EXPENSE
East $ 40,780 $ 7,003 $ 0
Midsouth Partners 44,519 32,868 16,719
Less: Intersegment Expense (8,096) 0 0
----------- ----------- -----------
Total Interest Expense $ 77,203 $ 39,871 $ 16,719
=========== =========== ===========
DEPRECIATION AND AMORTIZATION EXPENSE
East $ 1,563,709 $ 1,408,437 $ 1,179,532
Midsouth Partners 548,297 444,857 453,826
----------- ----------- -----------
Total Depreciation and Amortization Expense $ 2,112,006 $ 1,853,294 $ 1,633,358
=========== =========== ===========
RECONCILIATION OF EARNINGS (LOSS)
BEFORE INCOME TAXES, CREDIT
(PROVISION) FOR INCOME TAXES AND
NET EARNINGS (LOSS) BY SEGMENT
East
Earnings (Loss) Before Income Taxes $ 213,738 $(1,032,758) $ 2,265,602
Credit (Provision) for Income Taxes (83,000) 401,000 (884,000)
----------- ----------- -----------
Net Earnings (Loss) $ 130,738 $ (631,758) $ 1,381,602
=========== =========== ===========
<PAGE>
Midsouth Partners
Earnings (Loss) Before Income Taxes $ 758,645) $ 145,112 $ 486,955
Credit (Provision) for Income Taxes 296,000 (57,000) (190,000)
----------- ----------- -----------
Net Earnings (Loss) $ (462,645) $ 88,112 $ 296,955
=========== =========== ===========
Consolidated Total
Earnings (Loss) Before Income Taxes $ (544,907) $ (887,646) $ 2,752,557
Credit (Provision) for Income Taxes 213,000 344,000 (1,074,000)
----------- ----------- -----------
Net Earnings (Loss) $ (331,907) $ (543,646) $ 1,678,557
=========== =========== ===========
CAPITAL EXPENDITURES
East $ 1,252,758 $ 1,915,983 $ 1,760,430
Midsouth Partners 442,828 534,863 296,029
----------- ----------- -----------
Total Capital Expenditures $ 1,695,586 $ 2,450,846 $ 2,056,459
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------
TOTAL ASSETS 1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
East $16,778,119 $18,039,528 $18,462,622
Midsouth Partners 4,424,190 5,063,529 4,744,974
Less: Intersegment Loans (250,000) 0 0
Less: Intersegment Receivables 0 (37,848) (18,241)
----------- ----------- -----------
Total Consolidated Assets $20,952,309 $23,065,209 $23,189,355
=========== =========== ===========
</TABLE>
Intersegment services are provided under contracts between segments,
generally on a cost recovery (direct cost plus overhead and administrative
mark-up) basis. During the three years ended June 30, 1998, East received
$46,800 annually for accounting and administrative services provided to Midsouth
Partners. During the year ended June 30, 1998, East received $153,819 for
executive management services provided to Midsouth Partners. Interest on
intersegment loans is payable at Chase Manhattan Bank's prime lending rate.
The Company's sales to foreign countries, consisting of equipment and
parts used in the Insituform process manufactured by East's Try Tek Machine
Works subsidiary and sold through ITI to ITI's foreign affiliates and licensees,
were $178,782, $137,081 and $118,736 for the years ended June 30, 1998, 1997 and
1996, respectively.
15. Significant Customers
The Company performs services under contract with governmental authorities,
private industries and commercial entities. In each of the last three fiscal
years, more than 58% of the Company's revenues have come from state and local
government entities - cities, counties, state agencies and regional authorities.
During the year ended June 30, 1998, the Perry Nuclear Power Plant project, a
combined city and county metropolitan government in Tennessee and a county
government in the Washington, D.C. metropolitan area accounted for 19%, 12% and
12%, respectively, of the Company's revenue. During the year ended June 30,
1997, Federal government contracts (collectively), a municipal government in
central Ohio, a county government in the Washington, D.C. metropolitan area and
a combined city and county metropolitan government in Tennessee accounted for
17%, 15%, 13% and 12%, respectively, of the Company's revenues. During the year
ended June 30, 1996, Federal government contracts (collectively), a county
government in the Washington, D.C. metropolitan area and a regional sanitary
authority in southwest Ohio accounted for 23%, 20% and 10%, respectively, of the
Company's revenues. Services to Federal government customers were provided by
both of the Company's reportable operating segments, East and Midsouth Partners.
Services to the combined city and county metropolitan government in Tennessee
were provided by Company's Midsouth Partners operating segment. Services to the
other significant customers listed above were provided by the Company's East
operating segment.
<PAGE>
16. Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data for the years ended June 30, 1998 and
1997 are presented in the following table.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------
September 30, December 31, March 31, June 30,
1997 1997 1998 1998
-------------------- ----------------- ----------------- ------------------
Year Ended June 30, 1998
<S> <C> <C> <C> <C>
Sales $ 9,148,285 $ 5,487,623 $ 4,147,345 $ 5,107,962
Gross Profit (Loss) $ 2,778,208 $ 113,803 $ (363,621) $ 172,022
Net Earnings (Loss) $ 1,009,012 $ (443,986) $ (681,876) $ (215,057)
Net Earnings (Loss) Per Share $ 0.23 $ (0.10) $ (0.16) $ (0.05)
Three Months Ended
---------------------------------------------------------------------------
September 30, December 31, March 31, June 30,
1996 1996 1997 1997
-------------------- ----------------- ----------------- ------------------
Year Ended June 30, 1997
Sales $ 5,320,770 $ 6,637,618 $6,271,529 $8,311,625
Gross Profit $ 610,083 $ 1,714,469 $ 458,086 $1,336,073
Net Earnings (Loss) $ (296,863) $ 210,239 $ (500,181) $ 43,159
Net Earnings (Loss) Per Share $ (0.07) $ 0.05 $ (0.11) $ 0.01
</TABLE>
<PAGE>
PART III
Pursuant to General Instruction G(3) of Form 10-K, the information
required by Part III (Items 10, 11, 12, and 13) is hereby incorporated by
reference to the Company's definitive proxy statement to be filed with the
Securities and Exchange Commission, pursuant to Regulation 14A promulgated under
the Securities Exchange Act of 1934, in connection with the Company's Annual
Meeting of Shareholders scheduled to be held on December 11, 1998.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements included under Part II, Item 8: Pages
Independent Auditors' Report on Financial Statements 16
Consolidated Statements of Operations 17
Consolidated Balance Sheets 18
Consolidated Statements of Stockholders' Equity 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 21-32
2. Financial Statement Schedules:
All schedules are omitted because they are not required,
inapplicable or the information is otherwise shown in the
financial statements or the notes thereto.
3. Exhibits:
Exhibit Number o Pages
11.0 Statement re computation of per share earnings 35
23.0 Independent Auditors' Consent 36
27.0 Financial Data Schedule 37
o The Exhibit Number used refers to the appropriate
subsection in paragraph (b) of Item 601 of Regulation S-K.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended June 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INSITUFORM EAST, INCORPORATED
/s/ GEORGE Wm. ERIKSON
George Wm. Erikson
Chairman
September 23, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature & Title Capacity Date
/s/GEORGE Wm. ERIKSON
George Wm. Erikson Director and September 23, 1998
Chairman Principal Executive Officer
/s/ROBERT W. ERIKSON
Robert W. Erikson Director and September 23, 1998
President Principal Executive Officer
/s/CALVIN G. FRANKLIN
Calvin G. Franklin Director September 23, 1998
/s/WEBB C. HAYES, IV
Webb C. Hayes, IV Director September 23, 1998
/s/PAUL C. KINCHELOE, JR.
Paul C. Kincheloe, Jr. Director September 23, 1998
/s/JACK MASSAR
Jack Massar Director September 23, 1998
/s/THOMAS J. SCHAEFER
Thomas J. Schaefer Director September 23, 1998
/s/RAYMOND T. VERREY
Raymond T. Verrey Principal Accounting Officer, September 23, 1998
Vice President and Principal Financial Officer
Chief Financial Officer
INSITUFORM EAST, INCORPORATED
EXHIBIT 11.0 - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Net earnings (loss) per share is based on the weighted average number
of common shares outstanding including common stock equivalents from dilutive
stock options. The weighted average number of shares outstanding for the years
ended June 30, 1998, 1997 and 1996 were computed as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
1998 1997 1996
---- ---- ----
Issued shares of Common Stock and
<S> <C> <C> <C>
Class B Common Stock 4,684,759 4,684,759 4,684,759
Add: Weighted average of net shares
(using treasury stock method) of
unexercised dilutive stock options 0 0 62,774
Less: Weighted average shares of treasury
stock (327,897) (327,897) (327,897)
--------- --------- ---------
Weighted average number of common
shares and common stock equivalents 4,356,862 4,356,862 4,419,636
========= ========= =========
</TABLE>
EXHIBIT 23.0
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-60165 of Insituform East, Incorporated on Form S-8 of our report dated
September 22, 1998, appearing in this Annual Report on Form 10-K of Insituform
East, Incorporated for the year ended June 30, 1998.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
1900 M Street, NW
Washington, DC 20036
September 22, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED BALANCE SHEET AS OF JUNE 30, 1998, AND THE COMPANY'S AUDITED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,148,511
<SECURITIES> 0
<RECEIVABLES> 5,180,022
<ALLOWANCES> 0
<INVENTORY> 1,381,861
<CURRENT-ASSETS> 9,783,618
<PP&E> 25,213,711
<DEPRECIATION> 14,105,020
<TOTAL-ASSETS> 20,952,309
<CURRENT-LIABILITIES> 2,831,533
<BONDS> 0
<COMMON> 187,390
0
0
<OTHER-SE> 15,214,497
<TOTAL-LIABILITY-AND-EQUITY> 20,952,309
<SALES> 23,891,215
<TOTAL-REVENUES> 23,891,215
<CGS> 21,190,803
<TOTAL-COSTS> 21,190,803
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77,203
<INCOME-PRETAX> (544,907)
<INCOME-TAX> (213,000)
<INCOME-CONTINUING> (331,907)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (331,907)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
