UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended: December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from
to
--------------------------- -------------------------
Commission file number: 0-10800
INSITUFORM EAST, INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 52-0905854
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3421 Pennsy Drive 20785
Landover, Maryland (Zip Code)
(Address of principal executive offices)
Registrant's telephone and fax numbers, including area code:
(301) 386-4100 (tel)
(301) 386-2444 (fax)
(301) 773-4560 (24-hour public information Fax Vault System)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of February 1, 1999, the following number of shares of each of the issuer's
classes of common stock were outstanding:
Common Stock 4,059,266
Class B Common Stock 297,596
Total 4,356,862
<PAGE>
TABLE OF CONTENTS
Page Reference
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Statements of Operations
Three Months and Six Months Ended December 31, 1998
and 1997 (Unaudited) 3
Condensed Consolidated Balance Sheets
December 31, 1998 and June 30, 1998 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended December 31, 1998 and 1997 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
INSITUFORM EAST, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------------------------------------------------
1998 1997 1998 1997
--------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Sales $5,898,104 $5,487,623 $11,946,046 $14,635,908
---------- ---------- ----------- -----------
Costs and Expenses:
Cost of sales 5,030,790 5,373,820 10,081,241 11,743,897
Selling, general and administrative 1,057,656 1,141,133 2,097,482 2,469,673
---------- ---------- ----------- -----------
Total Costs and Expenses 6,088,446 6,514,953 12,178,723 14,213,570
---------- ---------- ----------- -----------
Earnings (Loss) from Operations (190,342) (1,027,330) (232,677) 422,338
Investment Income 14,320 26,278 39,060 44,732
Interest Expense (11,193) (20,836) (23,898) (54,719)
Other Income 90,970 41,952 146,575 104,579
---------- ---------- ----------- -----------
Earnings (Loss) Before Income Taxes
and Non-owned interests (96,245) (979,936) (70,940) 516,930
Non-owned Interests in Pretax Loss
of Midsouth Partners 20,725 250,950 82,348 408,096
---------- ---------- ----------- -----------
Earnings (Loss) Before Income Taxes (75,520) (728,986) 11,408 925,026
Provision (Credit) for Income Taxes (30,000) (285,000) 4,000 360,000
---------- ---------- ----------- -----------
Net Earnings (Loss) $ (45,520) $ (443,986) $ 7,408 $ 565,026
========== ========== =========== ===========
Basic Earnings (Loss) Per Share $ (0.01) $ (0.10) $ 0.00 $ 0.13
========== ========== =========== ===========
Diluted Earnings (Loss) Per Share $ (0.01) $ (0.10) $ 0.00 $ 0.13
========== ========== =========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INSITUFORM EAST, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, June 30,
1998 1998
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $1,289,378 $ 2,148,511
Accounts receivable - net of allowance
for doubtful accounts of $0 5,711,279 5,180,022
Inventories - raw materials 1,469,449 1,381,861
Prepaid and refundable income taxes 698,939 671,565
Prepaid expenses 345,699 401,659
---------- ------------
Total Current Assets 9,514,744 9,783,618
Property, Plant and Equipment - at cost less accumulated
depreciation of $14,242,142 and $14,105,020 10,769,908 11,108,691
Cash Surrender Value of SERP Life Insurance 66,789 0
Other Assets 56,000 60,000
---------- ------------
Total Assets $20,407,441 $ 20,952,309
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Partner loans to Midsouth Partners $ 0 $ 250,000
Accounts payable 1,181,303 1,120,910
Accrued compensation and related expenses 990,504 1,398,806
Income taxes payable 32,196 27,196
Current portion of capital lease obligations 38,219 34,621
----------- ------------
Total Current Liabilities 2,242,222 2,831,533
Deferred Income Taxes 1,019,000 915,000
Long-Term Capital Lease Obligations 84,783 104,829
Accrued SERP Liability 35,429 0
------------ ------------
Total Liabilities 3,381,434 3,851,362
------------ ------------
Non-owned Interests in Consolidated Subsidiary 1,616,712 1,699,060
----------- ------------
Commitments and Contingencies
Stockholders' Equity:
Common stock - $.04 par value; 10,000,000 shares authorized;
4,387,163 shares issued; 4,059,266 shares outstanding 175,486 175,486
Class B Common stock - $.04 par value; 800,000 shares
authorized; 297,596 shares issued and outstanding 11,904 11,904
Additional paid-in capital 4,000,424 4,000,424
Retained earnings 12,411,094 12,403,686
----------- ------------
16,598,908 16,591,500
Less cost of 327,897 shares of common stock in treasury 1,189,613 1,189,613
----------- ------------
Total Stockholders' Equity 15,409,295 15,401,887
----------- ------------
Total Liabilities and Stockholders' Equity $20,407,441 $ 20,952,309
=========== ============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INSITUFORM EAST, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
1998 1997
Cash Flows from Operating Activities:
<S> <C> <C>
Net earnings $ 7,408 $ 565,026
Adjustments for noncash items included in net earnings:
Depreciation and amortization 1,010,759 1,079,937
Deferred income taxes 104,000 (19,000)
Non-owned interests in loss of consolidated subsidiary (82,348) (408,096)
Accrued SERP liability 35,429 0
Changes in assets and liabilities:
Receivables (531,257) (35,714)
Inventories (87,588) 98,716
Other current assets 28,586 (234,675)
Payables and accruals (342,909) (988,148)
-------------- ------------
Net cash provided by operating activities 142,080 58,046
-------------- ------------
Cash Flows from Investing Activities:
Capital expenditures, net (667,976) (1,025,345)
Increase in cash surrender value of SERP life insurance (66,789) 0
-------------- ------------
Net cash used in investing activities (734,765) (1,025,345)
-------------- ------------
Cash Flows from Financing Activities:
Dividends paid 0 (261,412)
Repayment of partner loans by Midsouth Partners (250,000) 0
Proceeds from bank line of credit advances 0 1,800,000
Repayment of line of credit advances to bank 0 (1,800,000)
Proceeds from line of credit advances from CERBCO, Inc. 0 2,600,000
Repayment of line of credit advances to CERBCO, Inc. 0 (2,200,000)
Principal payments under capital lease obligations (16,448) (13,562)
-------------- ------------
Net cash provided by (used in) financing activities (266,448) 125,026
-------------- ------------
Net decrease in cash and cash equivalents (859,133) (842,273)
Cash and cash equivalents at beginning of period 2,148,511 2,071,852
-------------- ------------
Cash and cash equivalents at end of period $ 1,289,378 $ 1,229,579
============== ============
Supplemental disclosure of cash flow information:
Interest paid $ 23,898 $ 54,719
Income taxes paid (refunded) $ (77,626) $ 448,310
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
INSITUFORM EAST, INCORPORATED
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Condensed Consolidated Financial Statements
The Condensed Consolidated Balance Sheet as of December 31, 1998, the
Condensed Consolidated Statements of Operations for the three months and six
months ended December 31, 1998 and 1997, and the Condensed Consolidated
Statements of Cash Flows for the six months ended December 31, 1998 and 1997
have been prepared by the Company without audit. The Condensed Consolidated
Balance Sheet as of June 30, 1998 (unaudited) has been derived from the
Company's June 30, 1998 audited financial statements. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows at December 31, 1998 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed financial
statements be read in conjunction with the audited financial statements and
notes thereto included in the Company's June 30, 1998 annual report on Form
10-K. The results of operations for the period ended December 31, 1998 are not
necessarily indicative of full year operating results.
2. Principles of Consolidation
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Insituform Ohio, Inc., Insitu, Inc.,
Try Tek Machine Works, Inc., and Insituform of Pennsylvania, Inc. (collectively,
"East") and the accounts of Midsouth Partners, the Company's majority-controlled
subsidiary Partnership. All significant intercompany accounts and transactions
have been eliminated.
3. Computation of 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 three months and six months ended December 31,
1998 and 1997.
Diluted earnings (loss) per share was computed by dividing net earnings
(loss) by the weighted average number of common shares outstanding during the
period including common stock equivalents from dilutive stock options. Weighted
average shares of 4,361,393 and 4,360,950 were used in computing diluted
earnings (loss) per share for the three months ended December 31, 1998 and 1997,
respectively; 4,359,127 and 4,360,384 shares were used in computing diluted
earnings per share for the six months ended December 31, 1998 and 1997
respectively.
4. Notes Payable
The Company maintains a $3,000,000 Revolving Line of Credit facility with a
commercial bank. This facility is currently available to the Company through
February 28, 1999. Due to a change in loan terms presently sought by the
commercial bank, it is the Company's current intention to let this facility
lapse on its expiration date.
The Company also maintains 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 presently available for an indefinite period.
5. 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:
<TABLE>
<CAPTION>
Financial Information about
Reportable Operating Segments
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------------------------------------------------
1998 1997 1998 1997
---------------------------------------------------------------------
SALES TO UNAFFILIATED CUSTOMERS:
Insituform East, Incorporated and
wholly-owned subsidiaries
<S> <C> <C> <C> <C>
(collectively, "East") $ 3,996,398 $ 3,830,005 $ 8,167,165 $11,581,528
Midsouth Partners 1,901,706 1,657,618 3,778,881 3,054,380
----------- ----------- ----------- -----------
Total Sales to Unaffiliated Customers $ 5,898,104 $ 5,487,623 $11,946,046 $14,635,908
=========== =========== =========== ===========
RECONCILIATION OF SALES BY SEGMENT
Total Sales
East $ 4,002,611 $ 3,832,345 $ 8,231,431 $11,619,107
Midsouth Partners 1,901,706 1,666,364 3,778,881 3,077,163
Less: Intersegment Sales
East to Midsouth Partners (6,213) (2,340) (64,266) (37,579)
Midsouth Partners to East (0) (8,746) (0) (22,783)
----------- ----------- ----------- -----------
Total Sales to Unaffiliated Customers $ 5,898,104 $ 5,487,623 $11,946,046 $14,635,908
=========== =========== =========== ===========
RECONCILIATION OF EARNINGS (LOSS)
BEFORE INCOME TAXES, CREDIT
(PROVISION) FOR INCOME TAXES AND
NET EARNINGS (LOSS) BY SEGMENT
East
Earnings (Loss) Before Income Taxes $ (60,201) $ (543,500) $ 72,275 $1,226,663
Credit (Provision) for Income Taxes 24,000 212,000 (28,000) (478,000)
----------- ----------- ----------- ----------
Net Earnings (Loss) $ (36,201) $ (331,500) $ 44,275 $ 748,663
=========== =========== =========== ==========
Midsouth Partners
Earnings (Loss) Before Income Taxes $ (15,319) $ (185,486) $ (60,867) $ (301,637)
Credit (Provision) for Income Taxes 6,000 73,000 24,000 118,000
----------- ----------- ----------- ----------
Net Earnings (Loss) $ (9,319) $ (112,486) $ (36,867) $ (183,637)
=========== =========== =========== ==========
Consolidated Total
Earnings (Loss) Before Income Taxes $ (75,520) $ (728,986) $ 11,408 $ 925,026
Credit (Provision) for Income Taxes 30,000 285,000 (4,000) (360,000)
----------- ----------- ----------- ----------
Net Earnings (Loss) $ (45,520) $ (443,986) $ 7,408 $ 565,026
=========== =========== =========== ==========
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview and Outlook
The Company reported a consolidated net loss of -$45,520 (-$0.01 per share)
on sales of $5.9 million for the second quarter of fiscal 1999 ended December
31, 1998, reducing consolidated net earnings over the first six months of fiscal
1999 to $7,408 ($0.00 per share) on sales of $11.9 million. In the previous
year, the Company recognized a net loss of -$443,986 (-$0.10 per share) on sales
of $5.5 million for the second quarter and net earnings of $565,026 ($0.13 per
share) on sales of $14.6 million for the first six months. The Company
attributed its modestly positive results for the first six months of fiscal 1999
to a favorable mix, despite deficient volume, of work available to the Company's
East operating segment (consisting of the Company's Landover, Maryland based
operations and its wholly-owned subsidiaries). The Company attributed its
favorable results for the first six months of fiscal 1998 to an exceptional
volume of sales revenue recognized during the period from the installation phase
of a nearly year long $4.7 million project performed for the owners of the Perry
Nuclear Power Plant in Perry, Ohio and installed between mid-September and early
October, 1997 by the Company's East operating segment. The Company experienced
contributory losses from its Midsouth Partners operating segment during the
first six months of fiscal 1999 and 1998.
With respect to forward-looking information, and 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 that the combination of a
regular component of sales at normal margins and increased production capacity
for anticipated net increases in discounted sales will be required through the
remainder of fiscal 1999 to sustain or increase the modest but positive
operating results achieved year-to-date.
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's total backlog value of all uncompleted and multi-year
contract awards was approximately $26.4 million at December 31, 1998 as compared
to $25.1 million at December 31, 1997. The twelve-month backlog at December 31,
1998 was approximately $13.0 million as compared to $10.8 million at December
31, 1997. The total backlog value of all uncompleted and multi-year contracts at
December 31, 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 subject further to the irregularities of individual work
releases.
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
Three Months Ended December 31, 1998 Compared with Three Months Ended December
31, 1997
The Company recognized a consolidated net loss of -$45,520 (-$0.01 per
share) on sales of $5.9 million for the second quarter of fiscal 1999 ended
December 31, 1998 as compared to a net loss of -$443,986 (-$0.10 per share) on
sales of $5.5 million for the second quarter of fiscal 1998 ended December 31,
1997. The Company's improved comparable period results were due primarily to
improved sales and margins experienced by both the Company's East and Midsouth
Partners operating segments.
Sales increased $0.4 million (7%) from $5.5 million for the three months
ended December 31, 1997 to $5.9 million for the three months ended December 31,
1998. Comparable period sales for East increased 4% primarily as a result of
increases in available work. Comparable period sales for Midsouth Partners
increased 15% primarily as a result of increased production capacity.
Cost of sales decreased 6% in the second quarter of fiscal 1999 as compared
to the second quarter of fiscal 1998. As a result, gross profit as a percentage
of sales increased from 2% of sales for the second quarter of fiscal 1998 to 15%
of sales for the second quarter of fiscal 1999. The increase in gross profit as
a percentage of sales is due both to absorption of semi-fixed costs over higher
sales volume during the second quarter of fiscal 1999 and improved comparable
period margins on work performed.
Selling, general and administrative expenses decreased $83,477 (7%) for the
second quarter of fiscal 1999 as compared to the second quarter of fiscal 1998,
due in part to reduced costs to support Midsouth Partners operations.
Six Months Ended December 31, 1998 Compared with Six Months Ended December 31,
1997
The Company recognized consolidated net earnings of $7,408 ($0.00 per
share) on sales of $11.9 million for the first six months of fiscal 1999 ended
December 31, 1998 as compared to consolidated net earnings of $565,026 ($0.13
per share) from sales of $14.6 million for the first six months of fiscal 1998
ended December 31, 1997. The Company's modestly positive fiscal 1999 results
were due primarily to a favorable mix, despite deficient volume, of work
available to the Company's East operating segment. The Company's favorable
results for the first six months of fiscal 1998 were due primarily to an
exceptional volume of sales revenue recognized during the period from the
installation phase of a nearly year long $4.7 million project performed for the
owners of the Perry Nuclear Power Plant in Perry, Ohio and installed between
mid-September and early October, 1997 by the Company's East operating segment.
The Company experienced contributory losses from its Midsouth Partners operating
segment during the first six months of fiscal 1999 and 1998.
Sales decreased $2.7 million (18%) from $14.6 million for the six months
ended December 31, 1997 to $11.9 million for the six months ended December 31,
1998. Comparable period sales for East decreased 29% primarily as a result of
significant revenues from the Perry Nuclear project recognized during the first
quarter of fiscal 1998. Comparable period sales for Midsouth Partners increased
24% primarily as a result of increased production capacity. As a result,
Midsouth Partners sales as a percentage of total consolidated sales increased
from 21% for the first six months of fiscal 1998 to 32% for the first six months
of fiscal 1999.
Cost of sales decreased 14% in the first six months of fiscal 1999 as
compared to the first six months of fiscal 1998. As a result, gross profit as a
percentage of sales decreased from 20% of sales for the first six months of
fiscal 1998 to 16% of sales for the first six months of fiscal 1999. The
decrease in gross profit as a percentage of sales is due primarily to absorption
of semi-fixed costs over lower sales volume during the first six months of
fiscal 1999 and to increased Midsouth Partners sales at margins lower than
margins recognized from East sales.
Selling, general and administrative expenses decreased $372,191 (15%) for
the six months ended December 31, 1998 as compared to the six months ended
December 31, 1997, primarily as a result of reduced costs to support decreased
production activities.
Financial Condition
During the six months ended December 31, 1998, the Company's operating
activities provided $142,080 in cash, due primarily to the favorable impact of
$1,010,759 in Depreciation and Amortization expense included in net earnings
that did not require the outlay of cash more than offsetting the impact of a
$531,257 increase in Accounts Receivable combined with a $342,909 decrease in
payables and accruals.
During the first six months of fiscal 1999, the Company expended $667,976
for equipment purchases and other capital improvements. Although the Company
experienced an $859,133 decrease in cash during the first six months of fiscal
1999, the Company's financial liquidity remained strong with working capital of
$7.2 million and a current ratio of 4.24 at December 31, 1998.
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, available line of credit commitments and the
unencumbered real and personal property owned by the Company provide adequate
resources to finance cash requirements for 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 completed corrective action for its
office telephone system and initiated corrective action for its headquarters
facility security system, two systems that were identified as not being 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 June 30, 1999, 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.
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. The Company has
incurred $16,000 in implementation costs through December 31, 1998.
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 the Company with
materials critical to its operations, or with sufficient electrical power or
other utilities, or if transportation of the Company's personnel and equipment
is seriously impeded; then any such failure or impedance 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 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, 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 earlier litigation initiated October 23, 1996 and dismissed without
prejudice on June 18, 1998.
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 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 5. Other Information
The Company recently was notified by the Nasdaq Stock Market, Inc. (the
"Nasdaq Notification"), that as of December 30, 1998, the Company, under current
marketplace conditions, no longer satisfied two of the ongoing criteria for the
listing of its shares of common stock for trading on the Nasdaq National Market
("NNM"), namely: (i) maintenance of an aggregate market value of public float of
its shares of common stock greater than $5 million; and (ii) maintenance of a
minimum bid price of $1.00 per share ("Quantitative Listing Standards"). Under
the Quantitative Listing Standards, the Company's common stock has ninety (90)
calendar days in which to satisfy Nasdaq's ongoing listing criteria. Such
standards will again be satisfied if, for a minimum of ten consecutive trading
days prior to March 31, 1999, the closing bid price of the Company's common
stock allows for the maintenance of an aggregate market value of public float of
greater than $5 million, and the Company's common stock maintains a closing bid
price of $1.00 per share or higher. If such prescribed marketplace conditions do
not occur, the Company's common stock would be subject to delisting from the NNM
on April 2, 1999, unless, on or before March 31, 1999, the Company requests a
hearing regarding any such contemplated delisting action by Nasdaq. The Company
intends to request a hearing for review of any such proposed Nasdaq action, and
to make such request prior to March 31, 1999, in order to stay the delisting of
the Company's securities pending the outcome of such hearing.
There can be no assurance that the Quantitative Listing Standards will be
satisfied on an ongoing basis or that the listing of the Company's common stock
for trading on the Nasdaq, after its requested hearing, will continue. While the
Company believes that in the event of a delisting from the NNM the Company may
be able to list its shares of common stock for trading on the Nasdaq Small Cap
Market ("SCM"), there can be no assurance that the ongoing listing criteria for
the SCM will be satisfied in accordance with applicable Nasdaq rules. If the
Company is unable to maintain the NNM listing or obtain the SCM listing for its
common stock, the Company's stockholders may find their ability to trade the
Company's common stock reduced, which may affect the actual or perceived market
value of the Company's securities.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INSITUFORM EAST, INCORPORATED
(Registrant)
Date February 12, 1999 /s/ Robert W. Erikson
----------------- ----------------------------------------
Robert W. Erikson
President
Date February 12, 1999 /s/ Raymond T. Verrey
----------------- ----------------------------------------
Raymond T. Verrey
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
UNAUDITED BALANCE SHEET AS OF DECEMBER 31, 1998, AND THE COMPANY'S UNAUDITED
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 1,289,378
<SECURITIES> 0
<RECEIVABLES> 5,711,279
<ALLOWANCES> 0
<INVENTORY> 1,469,449
<CURRENT-ASSETS> 9,514,744
<PP&E> 25,012,050
<DEPRECIATION> 14,242,142
<TOTAL-ASSETS> 20,407,441
<CURRENT-LIABILITIES> 2,242,222
<BONDS> 0
<COMMON> 187,390
0
0
<OTHER-SE> 15,221,905
<TOTAL-LIABILITY-AND-EQUITY> 20,407,441
<SALES> 11,946,046
<TOTAL-REVENUES> 11,946,046
<CGS> 10,081,241
<TOTAL-COSTS> 10,081,241
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,898
<INCOME-PRETAX> 11,408
<INCOME-TAX> 4,000
<INCOME-CONTINUING> 7,408
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,408
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
