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
For the fiscal year ended: June 30, 1999
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)
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 10, 1999, was $4,211,057.
As of September 10, 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
Documents Incorporated by Reference:
None
Total number of pages of this report: 38 Index to Exhibits located at page: 34
<PAGE>
TABLE OF CONTENTS
PART I Page
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 9
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . 13
Item 7a. Quantitative and Qualitative Disclosures About Market Risk. . . 16
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . 16
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . 16
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . 34
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 34
Item 12. Security Ownership of Certain Beneficial Owners and Management . 34
Item 13. Certain Relationships and Related Transactions. . . . . . . . . 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 34
CONSOLIDATED
STATEMENTS OF OPERATIONS
AND BALANCE SHEETS
Pages 18 and 19
<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 and its subsidiaries have been engaged in the business of rehabilitating
underground sewers and other pipelines principally using cured-in-place pipe
("CIPP") processes, with primary revenues generating from the Company's
Insituform(R) process product line.
Between 1982 and 1986, the Company added western Pennsylvania, Ohio,
three Kentucky counties and West Virginia to its original Insituform process
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 March 1999, the
Company reestablished a branch facility in Cincinnati, Ohio.
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.
In March 1999, Insituform Technologies, Inc. ("ITI") gave notice of a
purported termination of the Midsouth Partners partnership, purportedly
terminated Midsouth Partners' Insituform License Agreement and simultaneously
commenced litigation in the Chancery Court of Delaware to deny Midsouth Partners
any rights to further utilize cured-in-place pipe ("CIPP") rehabilitation
processes as previously practiced under such license. In April 1999, Midsouth
Partners responded to the Delaware Chancery Court litigation and filed a demand
for arbitration with the American Arbitration Association.
The Company subsequently settled its disputes with ITI concerning
Midsouth Partners under the terms of an agreement executed July 20, 1999 (the
"Midsouth Settlement Agreement") and actions before the Delaware Chancery Court
and the American Arbitration Association were dismissed. Under the terms of the
Midsouth Settlement Agreement, a wholly-owned subsidiary of the Company
purchased ITI's interests in the Midsouth Partners partnership at book value and
Midsouth Partners remained entitled to continue the business of the partnership
under its present name. The Insituform(R) License Agreement and its requirement
to pay royalties were relinquished under the settlement, henceforth permitting
direct competition between ITI and Midsouth Partners. The Midsouth Settlement
Agreement expressly provides that Midsouth Partners may utilize processes other
than the Insituform process to perform pipe rehabilitation services, and
Midsouth Partners also obtained a royalty-free non-exclusive right, without
limitation in time and within the partnership's previously licensed territory,
to continued use of the cured-in-place pipe processes, technique and inventions
that it formerly practiced pursuant to its since-terminated Insituform(R)
License Agreement as the same existed on July 20, 1999.
For financial reporting purposes for the fiscal years ended June 30,
1999, 1998 and 1997, 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.
<TABLE>
<CAPTION>
Financial Information about
the Company's Operating Segments
(In thousands) Fiscal Years Ended June 30,
---------------------------------------------
1999 1998 1997
---------------------------------------------
SALES TO UNAFFILIATED CUSTOMERS:
Insituform East, Incorporated and wholly-owned
<S> <C> <C> <C>
subsidiaries (collectively, "East") $16,986 $17,521 $19,343
Midsouth Partners 6,329 6,370 7,199
------- ------ -------
TOTAL SALES TO UNAFFILIATED COMPANIES $23,315 $23,891 $26,542
======= ======= =======
Earnings (Loss) from Operations
East $(1,755) $ (306) $(1,296)
Midsouth Partners (1,046) (1,593) 384
------- ------- ------
TOTAL EARNINGS (LOSS) FROM OPERATIONS $(2,801) $(1,899) $ (912)
======= ======= =======
NET Earnings (Loss) CONTRIBUTION
East $ (787) $ 131 $ (632)
Midsouth Partners (net of non-owned interests) (329) (463) 88
----- ------- -------
NET EARNINGS (LOSS) $(1,116) $ (332) $ (544)
======= ======= =======
ASSETS
East $17,267 $16,528 $18,001
Midsouth Partners 3,310 4,424 5,064
------- ------- -------
TOTAL ASSETS $20,577 $20,952 $23,065
======= ======= =======
</TABLE>
(c) Narrative Description of Business
Insituform East, Incorporated and its subsidiaries are engaged in the
trenchless rehabilitation of underground sewers and other pipelines principally
using cured-in-place pipe ("CIPP") rehabilitation processes to produce a
shape-conforming "pipe-within-a-pipe." Since 1978, the Company has performed
work in six Mid-Atlantic states and the District of Columbia using the patented
Insituform process under territorially exclusive sublicense agreements.
Utilizing other trenchless CIPP processes, the Company's wholly-owned
subsidiary, Midsouth Partners, operates substantially without geographic
restriction. The Company's CIPP rehabilitation processes utilize custom
manufactured unwoven polyester fiber-felt tubing with an elastomeric coating on
the exterior surface. The flat, pliable tube is later impregnated with a liquid
thermosetting resin and the resin-saturated material is inserted in the pipe
through an existing manhole or other access point. Using a temporary inversion
duct and cold water pressure, the material is turned inside out as it is forced
through the pipeline. When the inverted and inflated tube is fully extended, the
cold water within it is recirculated through a heat-exchange unit. The heated
water cures the thermosetting resin to form a new, hard, jointless, impact and
corrosion resistant cured-in-place pipe within the original pipe. Lateral or
side connections are then reopened by use of a remotely controlled cutting
device. The Company is certified to ISO 9001 quality standards for the design
and installation of its traditional Insituform process product line.
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(R) process.
Insituform East, Inc. is a sublicensee of Insituform Technologies, Inc. ("ITI")
for use of the Insituform process. The Company has entered into six sublicense
agreements with ITI which grant the Company exclusive rights to perform the
Insituform process in the designated territories of Virginia, Maryland,
Delaware, Ohio, the District of Columbia, Pennsylvania and West Virginia. 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 exclusive
territory, the sublicense agreements require it to pay a royalty of from 8% to
12% of the gross contract price to the independent Insituform sublicensee of
such other territory 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 December 29, 1997, Insituform East entered into a revised supply
agreement with ITI whereby the Company 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.
Under the terms of the Midsouth Settlement Agreement executed July 20,
1999, Midsouth Partners became a wholly-owned subsidiary of the Company and
additionally obtained a royalty-free non-exclusive right, without limitation in
time, to continued use within the partnership's previously licensed territory of
the cured-in-place pipe processes, technique and inventions that it formerly
practiced pursuant to its since-terminated Insituform(R) License Agreement as
the same existed on July 20, 1999. The Insituform(R) License Agreement and its
requirement to pay royalties were relinquished under the settlement, henceforth
permitting direct competition between ITI and Midsouth.
Effective July 20, 1999, Midsouth Partners also executed a Felt Tube
Supply Agreement with ITI for the purchase of felt tubes to be used in CIPP
rehabilitation in the partnership's previously licensed territories of
Tennessee, most of Kentucky and northern Mississippi. The agreement, with an
initial five year term, automatically extends for successive one year periods
unless notice of termination is provided by either party six months prior to the
expiration date of the initial five year period or any such annual period
thereafter.
The Company has also entered into a license agreement with NuPipe,
Inc., a previously wholly-owned and now merged subsidiary of ITI, for the sale
and installation of pre-formed PVC thermoplastic pipe under the NuPipe process
and trademark. The Company's licensed NuPipe territory is identical to the
Company's licensed Insituform territory. 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. In
connection with the Midsouth Settlement Agreement, Midsouth Partners' NuPipe
License Agreement was relinquished effective July 20, 1999.
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 Insituform 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 Insituform
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 Insituform patents, the Company's
other CIPP process alternatives and its significant CIPP installation experience
coupled with the Company's high degree of market recognition should enable the
Company to compete effectively in the pipeline rehabilitation market in the
future as Insituform 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, 1999, a county government in the
Washington D.C. metropolitan area, Federal Government contracts (collectively)
and a regional sanitary authority in southwest Ohio accounted for 18%, 12% and
11%, respectively, of the Company's revenue. 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.
SUPPLIERS
The Company's materials and equipment are generally available from
several suppliers. Although the Company believes that ITI is presently the sole
source of proprietary Insitutube material, the Company is aware of other
suppliers of felt tube materials and other materials used in CIPP
rehabilitation. The Company presently relies upon ITI for its supply of
Insitutube(R) material for its Insituform process product line. 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. In connection with the Midsouth
Settlement Agreement effective July 20, 1999, Midsouth Partners is no longer an
Insituform process licensee and therefore no longer subject to ITI approval for
the use of alternate installation materials.
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 $31.1 million at June 30, 1999 as compared to
$24.9 million at June 30, 1998. The twelve-month backlog at June 30, 1999 was
approximately $13.5 million as compared to $10.7 million at June 30, 1998. The
total backlog value of all uncompleted and multi-year contracts at June 30, 1999
and 1998 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 significantly 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, including cured-in-place pipeline ("CIPP")
technology.
Traditional Methods. CIPP processes conceptually compete with
traditional methods of pipe rehabilitation including full replacement, point
repair and sliplining. The Company believes CIPP processes usually offer a cost
advantage over full replacement as well as the practical advantage of avoiding
excavation. In addition, CIPP processes also offer qualitatively better
rehabilitation than sliplining which may significantly reduce the diameter of
the pipe. Grouting is also undertaken in the United States, but the Company
considers grouting a short-term repair technique and not a long-term pipeline
rehabilitation solution competitive with CIPP processes. 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 stream of entrants into the CIPP marketplace, few of
which the Company believes are able to offer the quality or technical capability
of the Company. The Company believes it remains the dominant provider of
trenchless cured-in-place pipeline rehabilitation in its Insituform licensed
territory and believes there is significant potential into the future for the
alternative CIPP processes available through its Midsouth Partners subsidiary.
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 CIPP processes
over modified sliplining techniques due to the quality and longevity of the CIPP
product, the proven performance record of the Company's CIPP process
installations over the past twenty-one years, and the broader range of design
alternatives available with a CIPP 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 modified sliplining
technique technologically inferior to cured-in-place technology.
Other Trenchless Competition. 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 its
significant years of proven performance continues to present a significant CIPP
capability advantage over alternative trenchless products and newer entrants.
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 CIPP processes compete favorably in
each of these areas with traditional replacement or repair methods. In
particular, the ability to install CIPP products 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 a CIPP 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
contractors with limited cured-in-place pipe ("CIPP") installation experience or
inferior products hoping that cheap price alone might permit them to succeed
against the Company's quality and time tested CIPP rehabilitation capability. In
that segment of the market where technical risk and the lowest priced product
may be deemed "good enough," the Company is at a disadvantage and market share
participation strategically undertaken by the Company in such segment, at levels
materially below normal margins, necessarily dilutes the Company`s overall
margin performance. Conversely, in the "best value" and quality-based market
segment, the Company's quality CIPP rehabilitation capability continues to
provide a distinct advantage. While both the Federal Government and industry
routinely use best value and quality-weighted contract award criteria in
technical procurements, municipalities and local governments are often
politically reluctant to modernize from simply "low bid" buying to "best value"
buying. In the face of mounting technical failures from awards based upon lowest
price, municipalities also are expected over time to reevaluate traditional
"low-bid" award criteria - in favor of "best value" award criteria - when
procuring trenchless technology for the rehabilitation of older pipelines.
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 five 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 pipeline
rehabilitation services to its customers primarily using CIPP processes.
Insituform East relies on its Insituform process licensor, ITI, for major
research and development of the Company's Insituform process product line. On a
continuing basis, however, the Company expends engineering efforts to improve
CIPP installation methods and design techniques for specific customer
applications.
GOVERNMENTAL REGULATIONS
The Company does not anticipate any material impediments in the use of
CIPP processes arising from existing or future regulations or requirements,
including those regulating the discharge of materials into the environment.
EMPLOYEES
At June 30, 1999, the Company employed 204 full-time personnel,
including 40 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.
The Company also leases a 5,460 square foot facility in Cincinnati,
Ohio to serve East's customers in the western region of its licensed territory.
Item 3. Legal Proceedings
Antitrust Suit - United States District Court
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. The plaintiffs' counsel has recently
moved to withdraw from the case.
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.
Settlement of Midsouth Partners Litigation and Arbitration
As previously reported, on March 11, 1999, Insituform Technologies,
Inc. ("ITI") filed a declaratory action (the "Declaratory Judgment Action") in
the Chancery Court of Delaware against Insitu, Inc. ("Insitu"), a wholly-owned
subsidiary of the Company, and the Company's majority-controlled subsidiary
partnership, Midsouth Partners ("Midsouth"), seeking confirmation of ITI's
ability to terminate Midsouth's Insituform process Sub-License Agreement (the
"Midsouth Sub-License Agreement") for the use of the Insituform process in the
territory covering Tennessee and portions of Mississippi and Kentucky (the
"Midsouth Territory"). ITI also gave notice of termination of the Midsouth
Partnership effective upon the later of (i) 120 days from the date of the notice
or (ii) entry of the order requested by ITI in the Delaware Chancery Court.
On April 1, 1999, Midsouth and Insitu answered the Declaratory Judgment
Action and counterclaimed for breaches of fiduciary and contract obligations by
ITI and for an injunction and a stay of the Declaratory Judgment Action pending
the outcome of arbitration. At the same time, Insitu filed against ITI and
Insituform Southwest, Inc. a demand for arbitration with the American
Arbitration Association. Insitu's arbitration complaint alleged that ITI's
purported termination and dissolution of Midsouth was in violation of
partnership and fiduciary obligations owed to Insitu under applicable law and
that such action was undertaken to usurp for ITI the opportunities of Midsouth
in the Midsouth Territory.
On May 7, 1999, the Delaware Chancery Court issued a Preliminary
Injunction Decree enjoining ITI from exploiting the Insituform Process in the
Midsouth Territory and ordering the arbitration commenced by Insitu to proceed.
On July 19, 1999, the American Arbitration Association notified the parties of
its decision to set hearings in late July and agreement to go forward on the
merits of Insitu's complaint.
On July 20, 1999, ITI entered into settlement with the Company and
related parties concerning Midsouth Partners (the "Midsouth Settlement
Agreement"). Under terms of the Midsouth Settlement Agreement, all remaining
disputes before the Delaware Chancery Court and the American Arbitration
Association were dismissed. On July 26, 1999, the Company filed a copy of the
Midsouth Settlement Agreement and a related press release with the Securities
and Exchange Commission under Form 8-K.
The Company is a party, both as plaintiff and defendant, to claims and
litigation arising from and in the ordinary course of its business. While it is
not possible at this time to establish the ultimate amount of liability, if any,
associated with pending claims or such litigation, 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") Nasdaq
SmallCap Market . Holders of Common Stock have one vote per share on all matters
on which stockholders are entitled to vote together. Prior to May 12, 1999, the
Company's Common Stock was traded on the Nasdaq National Market System. The
shift to the Nasdaq SmallCap Market was implemented because the Company's market
size did not permit continued maintenance under the rules of the larger National
Market System. 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, 1999 as reported by NASDAQ:
Bid Prices* For Common Stock
-----------------------------------------------------------
Quarter Ended High Low
1997
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
September 30 $2.38 $2.13
December 31 $2.25 $1.00
1999
March 31 $2.25 $0.75
June 30 $1.44 $1.00
- ---------------------
* 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 10, 1999, there were 605 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 the fiscal years ended June 30, 1999
and 1998, primarily as a result of negative operating results experienced during
the fiscal years ended June 30, 1999, 1998 and 1997.
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.
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.
<TABLE>
<CAPTION>
(in thousands, except per share and return on equity amounts)
Years Ended June 30,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
SUMMARY OF OPERATIONS:
<S> <C> <C> <C> <C> <C>
Sales $ 23,315 $ 23,891 $ 26,542 $ 30,471 $ 21,594
Gross Profit $ 1,698 $ 2,700 $ 4,119 $ 8,182 $ 6,578
Earnings (loss) before income taxes $ (1,829) $ (545) $ (888) $ 2,753 $ 3,496
Net earnings (loss) $ (1,116) $ (332) $ (544) $ 1,679 $ 2,120
Net earnings (loss) per share $ (0.26) $ (0.08) $ (0.12) $ 0.38 $ 0.48
Weighted average number of shares 4,357 4,357 4,357 4,420 4,377
Dividends declared per share:
Common Stock $ - $ - $ 0.06 $ 0.06 $ 0.06
Class B Common Stock $ - $ - $ 0.06 $ 0.06 $ 0.06
FINANCIAL POSITION:
Working capital $ 4,068 $ 6,952 $ 7,641 $ 8,709 $ 5,412
Total assets $ 20,577 $ 20,952 $ 23,065 $ 23,189 $ 19,480
Long-term debt $ 63 $ 105 $ 139 $ 113 $ -
Stockholders' equity $ 14,286 $ 15,402 $ 15,734 $ 16,539 $ 15,122
Book value per share $ 3.28 $ 3.53 $ 3.61 $ 3.79 $ 3.47
OTHER:
Average stockholders' equity
[Weighted average equity during the
year exclusive of current earnings (loss)] $15,402 $ 15,734 $ 16,531 $ 15,107 $ 13,247
Return on equity
[Net earnings (loss) divided by average
stockholders' equity as defined above] (7.2%) (2.1%) (3.3%) 11.1% 16.0%
</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 -$1,115,534 (-$0.26 per
share) on sales of $23.3 million for the fiscal year ended June 30, 1999. In the
previous year, the Company reported a consolidated net loss of -$331,907 (-$0.08
per share) on sales of $23.9 million. The Company attributed its unfavorable
fiscal 1999 results to Midsouth Partners' acceptance of additional job
completion costs on several incomplete projects, costs incurred in connection
with litigation initiated by Insituform Technologies, Inc. ("ITI") against the
Company and its majority-controlled subsidiary, Midsouth Partners, and an
increase in discounted sales performed by the Company's East operating segment
(consisting of the Company's Maryland and Ohio based operations and its
wholly-owned subsidiaries.)
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 and the curtailment of further legal costs as a result of the
Midsouth Settlement Agreement effective July 20, 1999, the Company presently
anticipates modest but positive operating results for the first quarter ending
September 30, 1999. A combination of additional sales at normal margins and
increased production levels will be required to sustain positive operating
results for the remaining quarters of fiscal 2000.
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
contractors with limited cured-in-place pipe ("CIPP") installation experience or
inferior products hoping that cheap price alone might permit them to succeed
against the Company's quality and time tested CIPP rehabilitation capability. In
that segment of the market where technical risk and the lowest priced product
may be deemed "good enough," the Company is at a disadvantage and market share
participation strategically undertaken by the Company in such segment, at levels
materially below normal margins, necessarily dilutes the Company`s overall
margin performance. Conversely, in the "best value" and quality-based market
segment, the Company's quality CIPP rehabilitation capability continues to
provide a distinct advantage. While both the Federal Government and industry
routinely use best value and quality-weighted contract award criteria in
technical procurements, municipalities and local governments are often
politically reluctant to modernize from simply "low bid" buying to "best value"
buying. In the face of mounting technical failures from awards based upon lowest
price, municipalities also are expected over time to reevaluate traditional
"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: 1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C>
Sales (100%) $23,315,198 $23,891,215 $26,541,542
Gross profit 7% 11% 16%
Selling, general and administrative expenses 19% 19% 19%
Net earnings (loss) (5%) (1%) (2%)
</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, 1999, 1998 and 1997 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 (wholly-owned
since July 20, 1999).
Consolidated sales decreased $570,000 (2%) from $23.89 million in fiscal
1998 to $23.32 million in fiscal 1999. Comparable period sales for East
decreased 3% 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 decreased 1% primarily as a result of the
assignment of resources to job completion tasks more than offsetting the impact
of increased productive capacity during the year.
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%.
The Company varies its prices according to pipe sizes and other contract
conditions. Aditionally, 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 7%, 11%
and 16% for fiscal 1999, 1998, and 1997, respectively. The decrease in fiscal
1999 gross profit margin as compared to fiscal 1998 is due primarily to Midsouth
Partners' acceptance of additional job completion costs on several incomplete
projects and an increase in discounted sales performed by the Company's East
operating segment. 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.
Selling, general and administrative expenses decreased $100,318 in
fiscal 1999 as compared to fiscal 1998 primarily as a result of reduced costs to
support decreased production activities more than offsetting additional legal
costs associated with the future of Midsouth Partners.
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.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
Key Statistics: 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Working Capital $4,067,819 $6,952,085 $7,640,675
Current Ratio 1.8 to 1 3.5 to 1 3.1 to 1
Cash provided by (used in) Operations $(800,306) $1,365,245 $ 726,322
Capital Expenditures $2,425,409 $1,695,586 $2,450,846
</TABLE>
During the fiscal year ended June 30, 1999, $800,306 in cash was used
in the Company's operating activities, due primarily to the Company's $1.1
million net loss for the year, as $2.1 million in depreciation and amortization
not requiring the outlay of cash was offset by a $1.4 million increase in
Accounts Receivable and a $0.7 million decrease in Deferred Income Taxes. The
Company's working capital position remains adequate with working capital of
$4.07 million and a current ratio of 1.8 to 1 at June 30, 1999.
Capital expenditures during fiscal 1999, 1998, and 1997 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. Net borrowings of $1.8 million on the
Company's intercompany line of credit were required to finance fiscal 1999 cash
used in operating activities and capital expenditures.
During fiscal 1997 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 Midsouth
Partners paid cash distributions of $101,200 to non-owned interests.
The Company maintains a $3,000,000 unsecured intercompany line of
credit with CERBCO, Inc. to meet the Company's short-term cash flow
requirements. This line of credit was increased to $4,500,000 on August 12, 1999
to finance the Company's purchase of the remaining partnership interests in
Midsouth Partners in connection with the Midsouth Settlement Agreement effective
July 20, 1999. 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 intercompany line 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
ready and will recognize years 2000 through 2029 in the proper century. The
Company's preliminary assessment of supporting information systems was that
these systems either were Year 2000 ready, could be modified to become Year 2000
ready, or would 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. Vendor-supplied modifications
for supporting information systems were implemented and tested prior to June 30,
1999, and are believed to be Year 2000 ready.
With respect to the Company's non-information technology systems, the
Company is dependent on information from vendors and suppliers in assessing and
evaluating these systems. As potential Year 2000 issues were identified during
the preliminary assessment stage, implementation plans were developed and
executed. The Company initiated and completed corrective action for its office
telephone system and headquarters facility security system, two systems that
were identified as not being Year 2000 ready.
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 ready or expect to be Year 2000 ready
by December 31, 1999. The Company will continue to seek to obtain responses from
suppliers and customers who have not as yet responded to inquiries and is
monitoring Year 2000 readiness from respondents not as yet Year 2000 ready.
The Company currently estimates that the cost of implementing its Year
2000 Plan will not exceed $50,000. This estimate is based on presently available
information and may require future reassessment. Specifically, this estimate
would change if, after receipt of additional information from key suppliers or
customers, a modified contingency plan requires development and implementation.
The Company has incurred $25,000 in implementation costs through June 30, 1999.
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
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 established a contingency plan, effective 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. Specifically, the Company has identified potential
alternate vendors for critical installation materials, tube and resin, in case
primary tube and resin suppliers fail to provide materials critical to the
Company's operations. In addition, the Company intends to rely on the geographic
separation of its operations facilities and reallocate resources as necessary
should vendors fail to supply sufficient electrical power or other utilities to
an operations facility, or if transportation of the Company's personnel and
equipment is seriously impeded in a particular geographic area.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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 F
inancial 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, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 1999. 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, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1999, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
McLean, Virginia
September 23, 1999
<PAGE>
<TABLE>
<CAPTION>
INSITUFORM EAST, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30,
----------------------------------------------------
1999 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
Sales $23,315,198 $23,891,215 $26,541,542
----------- ----------- -----------
Costs and Expenses:
Cost of sales 21,617,623 21,190,803 22,422,831
Selling, general and administrative 4,498,634 4,598,952 5,030,447
----------- ----------- -----------
Total Costs and Expenses 26,116,257 25,789,755 27,453,278
----------- ----------- -----------
Loss from Operations (2,801,059) (1,898,540) (911,736)
Investment Income 65,750 71,199 132,643
Interest Expense (85,013) (77,203) (39,871)
Other Income 261,324 333,235 127,647
----------- ----------- -----------
Loss Before Income Taxes
and Non-owned Interests (2,558,998) (1,571,309) (691,317)
Non-owned Interests in Pretax Loss
(Earnings) of Midsouth Partners 730,464 1,026,402 (196,329)
----------- ----------- -----------
Loss Before Income Taxes (1,828,534) (544,907) (887,646)
Credit for Income Taxes 713,000 213,000 344,000
----------- ----------- -----------
Net Loss $(1,115,534) $ (331,907) $ (543,646)
============ =========== ===========
Basic Loss Per Share $ (0.26) $ (0.08) $ (0.12)
============ =========== ===========
Diluted Loss Per Share $ (0.26) $ (0.08) $ (0.12)
============ =========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INSITUFORM EAST, INCORPORATED
CONSOLIDATED BALANCE SHEETS
June 30,
-----------------------------------
1999 1998
-----------------------------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 793,187 $2,148,511
Accounts receivable:
Due from customers 6,514,843 5,134,644
Other 73,592 45,378
Inventories 1,273,402 1,381,861
Prepaid and refundable income taxes 93,532 671,565
Prepaid expenses 303,752 401,659
---------- ----------
Total Current Assets 9,052,308 9,783,618
Property, Plant and Equipment, at cost less
accumulated depreciation 11,424,630 11,108,691
Cash Surrender Value of SERP Life Insurance 73,785 0
Other Assets 26,000 60,000
---------- ----------
Total Assets $20,576,723 $20,952,309
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to CERBCO, Inc. $ 1,800,000 $ 0
Partner loans to Midsouth Partners 400,000 250,000
Accounts payable 1,366,483 1,120,910
Accrued compensation and related expenses 1,361,115 1,398,806
Income taxes payable 14,724 27,196
Current portion of capital lease obligations 42,167 34,621
---------- ----------
Total Current Liabilities 4,984,489 2,831,533
Deferred Income Taxes 219,000 915,000
Long Term Capital Lease Obligations 62,662 104,829
Accrued SERP Liability 55,623 0
---------- ----------
Total Liabilities 5,321,774 3,851,362
---------- ----------
Non-owned Interests in Consolidated Subsidiary 968,596 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 11,288,152 12,403,686
---------- ----------
15,475,966 16,591,500
Less cost of 327,897 shares of common stock in 1,189,613 1,189,613
---------- ----------
treasury
Total Stockholders' Equity 14,286,353 15,401,887
---------- ----------
Total Liabilities and Stockholders' Equity $20,576,723 $20,952,309
=========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INSITUFORM EAST, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999, 1998 and 1997
$.04 Par Value Total
$.04 Par Value Class B Common Additional Retained Common Stock in Stockholders'
Common Stock Stock Paid-in Capital Earnings Treasury Equity
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - July 1, 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
Net loss for the year 0 0 0 (1,115,534) 0 (1,115,534)
-------------------------------------------------------------------------------------------------------
Balance - June 30, 1999 $175,486 $11,904 $4,000,424 $11,288,152 $(1,189,613) $14,286,353
=======================================================================================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INSITUFORM EAST, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30,
-----------------------------------------------
-----------------------------------------------
1999 1998 1997
-----------------------------------------------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net earnings (loss) $ (1,115,534) $ (331,907) $ (543,646)
Adjustments for noncash items included in net earnings
(loss):
Depreciation and amortization 2,114,673 2,112,006 1,853,294
Deferred income taxes (696,000) (159,000) 256,000
Non-owned interests in earnings (loss) of consolidated
subsidiary (730,464) (1,026,402) 196,329
Accrued SERP Liability 55,623 0 0
Changes in assets and liabilities
Receivables (1,408,413) 1,502,105 (296,041)
Inventories 108,459 156,156 (378,485)
Other current assets 675,940 (56,072) (671,815)
Payables and accruals 195,410 (831,641) 310,686
------------- ----------- -----------
Net cash provided by (used in) operating activities (800,306) 1,365,245 726,322
------------- ----------- -----------
Cash Flows from Investing Activities:
Capital expenditures (2,425,409) (1,695,586) (2,450,846)
Increase in cash surrender value of SERP life insurance (73,785) 0 0
Capital contributions to Midsouth Partners by non-owned
interests 0 276,000 0
Cash distributions from Midsouth Partners to non-owned
interests 0 0 (101,200)
Disposal of equipment, net 28,797 170,950 15,350
------------- ----------- -----------
Net cash used in investing activities (2,470,397) (1,248,636) (2,536,696)
------------- ----------- -----------
Cash Flows from Financing Activities:
Dividends paid 0 (261,412) (261,412)
Loans to Midsouth Partners from non-owned interests 400,000 250,000 0
Repayment of partner loans by Midsouth Partners (250,000) 0 0
Proceeds from bank line of credit advances 0 1,800,000 800,000
Repayment of line of credit advances to bank 0 (1,800,000) (800,000)
Proceeds from line of credit advances from CERBCO, Inc. 2,100,000 2,600,000 0
Repayment of line of credit advances to CERBCO, Inc. (300,000) (2,600,000) 0
Principal payments under capital lease obligations (34,621) (28,538) (39,446)
------------- ----------- -----------
Net cash provided by (used in) financing activities 1,915,379 (39,950) (300,858)
------------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (1,355,324) 76,659 (2,111,232)
Cash and cash equivalents at beginning of year 2,148,511 2,071,852 4,183,084
------------- ----------- -----------
Cash and cash equivalents at end of year $ 793,187 $ 2,148,511 $ 2,071,852
============= =========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 85,013 $ 77,203 $ 39,871
Income taxes paid (refunded) $ (582,561) $ (160,487) $ 404,066
Supplemental schedule of noncash investing and financing activities:
Capital equipment acquired under capital lease obligations $ 0 $ 0 $ 58,543
See notes to consolidated financial statements.
</TABLE>
<PAGE>
INSITUFORM EAST, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, 1998, AND 1997
1. Summary of Significant Accounting Policies
Business Operations
Insituform East, Incorporated (the "Company") and its subsidiaries are
engaged in the trenchless rehabilitation of underground sewers and other
pipeline using cured-in-place pipe ("CIPP") rehabilitation processes to produce
a shape-conforming "pipe-within-a-pipe." Since 1978, the Company has performed
work in six Mid-Atlantic States and the District of Columbia using the patented
Insituform(R) process under territorially exclusive sublicense agreements as
explained in Note 8. Utilizing other trenchless CIPP processes, the Company's
wholly-owned subsidiary, Midsouth Partners, operates from and after July 20,
1999 substantially without geographic restriction.
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
(wholly-owned since July 20, 1999). 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. Installation of CIPP products 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.
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, 1999 and at June 30, 1998. Other accounts receivable includes expense
advances to officers and employees of $14,467 and $20,206 at June 30, 1999 and
1998, respectively.
3. Investment in Midsouth Partners
Midsouth Partners was organized as Insituform Midsouth, a Tennessee
general partnership, on December 23, 1985, with the Company as a general
partner. Midsouth Partners was the exclusive licensee for the Insituform process
and NuPipe process in Tennessee, Kentucky (excluding Boone, Kenton and Campbell
counties) and northern Mississippi from December 2, 1985 through July 20,1999.
The Partnership's general partners at June 30, 1999 were Insitu, Inc., a
wholly-owned subsidiary of the Company; Insituform Technologies, Inc. ("ITI");
and Insituform Southwest, Inc., an affiliate of ITI.
Management and conduct of the business of Midsouth Partners is vested
in a Management Committee. At June 30, 1999, the seven-member Partnership
Management Committee consisted of four Insitu, Inc. representatives, one ITI
representative and one Insituform Southwest, Inc. representative. The seventh
Committee representative remained disputed at June 30, 1999. 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 ITI's predecessor in interest, 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 were allocated through June 30, 1999 and
until July 20, 1999 to the partners as follows:
Insitu, Inc. 42.5%
Insituform Technologies, Inc. 42.5%
Insituform Southwest, Inc. 15.0%
The Company and ITI had each unconditionally committed to advance funds
to Midsouth Partners, up to a maximum of $500,000 each, with interest payable at
Chase Manhattan Bank's Prime Lending Rate. These commitments, which initially
extended through December 31, 1999, were cancelled effective July 20, 1999.
In March 1999, ITI gave notice of a purported termination of the
Midsouth Partners Partnership, purportedly terminated Midsouth Partners'
Insituform License Agreement and simultaneously commenced litigation in the
Chancery Court of Delaware to deny Midsouth Partners any rights to further
utilize cured-in-place pipe ("CIPP") rehabilitation processes as previously
practiced under such license. In April 1999, Midsouth Partners responded to the
Delaware Chancery Court litigation and filed a demand for arbitration with the
American Arbitration Association.
The Company subsequently settled its disputes with ITI concerning
Midsouth Partners under the terms of an agreement executed July 20, 1999 (the
"Midsouth Settlement Agreement") and actions before the Delaware Chancery Court
and the American Arbitration Association were dismissed. Under the terms of the
Midsouth Settlement Agreement, a wholly-owned subsidiary of the Company
purchased ITI's interests in the Midsouth Partners partnership at book value and
Midsouth Partners remained entitled to continue the business of the partnership
under its present name. The Insituform(R) License Agreement and its requirement
to pay royalties were relinquished under the settlement, henceforth permitting
direct competition between ITI and Midsouth Partners. The Midsouth Settlement
Agreement expressly provides that Midsouth Partners may utilize processes other
than the Insituform process to perform pipe rehabilitation services, and
Midsouth Partners also obtained a royalty-free non-exclusive right, without
limitation in time and within the partnership's previously licensed territory,
to continued use of the cured-in-place pipe processes, technique and inventions
that it formerly practiced pursuant to its since-terminated Insituform(R)
License Agreement as the same existed on July 20, 1999.
4. Property, Plant and Equipment
<TABLE>
<CAPTION>
Property, plant and equipment consist of the following:
June 30,
1999 1998
<S> <C> <C>
Land and improvements $ 2,018,587 $ 2,018,587
Buildings and improvements 5,615,186 5,579,498
Vehicles and production equipment 13,303,716 11,853,458
Small tools, radios and machine shop equipment 4,466,896 4,545,414
Office furniture and equipment 1,209,718 1,122,254
Leasehold improvements 94,125 94,500
----------- ----------
26,708,228 25,213,711
Less accumulated depreciation 15,283,598 14,105,020
----------- ----------
Property, plant and equipment, at cost less
accumulated depreciation $11,424,630 $11,108,691
=========== ===========
</TABLE>
The Company incurred repair and maintenance costs of $1,028,106,
$742,308, and $984,060 for the years ended June 30, 1999, 1998, and 1997,
respectively.
5. Notes Payable
The Company 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, which is available for an indefinite period, was increased to
$4,500,000 on August 12, 1999 in connection with the Company's acquisition of
remaining partnership interests in Midsouth Partners.
The Company maintained a $3,000,000 Revolving Line of Credit facility
with a bank. This facility was available to the Company through February 28,
1999. Due to a change in loan terms sought by the commercial bank, the Company
let this facility lapse on its expiration date.
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, 1999 is $67,607. A schedule of minimum
lease payments and the present value of minimum lease payments for these leases
at June 30, 1999 is as follows:
Minimum lease payments:
Year Ending June 30,
2000 61,080
2001 39,000
2002 34,125
2003 6,500
-------
Total minimum lease payments 140,705
Less amount representing interest 35,876
-------
Present value of minimum lease payments 104,829
Less current portion 42,167
-------
Long-term capital lease obligations $62,662
=======
Midsouth Partners leases operations facilities in Nashville and
Knoxville, Tennessee. East leases an operations facility in Cincinnati, Ohio.
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 $162,750, $452,292, and $499,310 for the years ended
June 30, 1999, 1998 and 1997, respectively. These leases are classified as
operating leases. The Company has committed to make minimum lease payments of
$64,710 on noncancelable operating leases during the years ending June 30, 2000,
2001 and 2002, and minimum lease payments of $26,514 and $15,361 on
noncancelable operating leases during the years ending June 30, 2003 and 2004,
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,
-----------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate: 34% 34% 34%
===== ===== =====
Income tax expense (benefit)
computed at the statutory Federal rate $(621,700) $(185,265) $(301,800)
State income tax expense (benefit),
net of Federal tax benefit (expense) (112,600) (45,776) (59,398)
Non-deductible expenses 21,300 18,041 17,198
---------- --------- ----------
Provision (credit) for income taxes $(713,000) $(213,000) $(344,000)
=========== ========= =========
Effective tax rate 39% 39% 39%
===== ===== =====
</TABLE>
<PAGE>
The provision (credit) for income taxes consists of the
following:
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------------
1999 1998 1997
---- ---- ----
Current
<S> <C> <C> <C>
Federal $ (15,000) $ (47,000) $(523,000)
State ( 2,000) ( 7,000) ( 77,000)
---------- ---------- ----------
(17,000) (54,000) (600,000)
---------- ---------- ----------
Deferred
Federal (607,000) (139,000) 223,000
State (89,000) (20,000) 33,000
---------- ---------- ----------
(696,000) (159,000) 256,000
---------- ---------- ----------
Total $(713,000) $(213,000) $(344,000)
========== ========== ==========
The components of the deferred tax expense (benefit) resulting
from net temporary differences are as follows:
Years Ended June 30,
-----------------------------------------------------
1999 1998 1997
---- ---- ----
Depreciation $ (44,000) $ 14,000 $ 80,000
Midsouth Partners segment 36,000 (188,000) (10,000)
Deferred revenue 51,000 10,000 201,000
Deferred compensation (4,000) 12,000 (12,000)
Other (6,000) (7,000) (3,000)
Net operating loss carry forward (729,000) 0 0
---------- ---------- ----------
Total $(696,000) $(159,000) $ 256,000
========== ========== ==========
</TABLE>
Deferred Income Taxes, provided for the tax effect of cumulative
temporary differences for income tax and financial reporting purposes, consists
of the following:
Years Ended June 30,
1999 1998
Depreciation $ 1,071,000 $ 1,115,000
Midsouth Partners segment (77,000) (113,000)
Deferred revenue 0 (51,000)
Deferred compensation (19,000) (15,000)
Other (27,000) (21,000)
Net operating loss carry forward (729,000) 0
----------- ------------
Total $ 219,000 $ 915,000
============ ============
8. Commitments and Contingencies
License Agreements
East has entered into six sublicense agreements with Insituform
Technologies, Inc.("ITI") which grant East the right to perform the Insituform
process in Maryland, Virginia, Delaware, the District of Columbia, Pennsylvania,
Ohio, West Virginia, and three Kentucky counties. The agreements are for the
life of the patents or the patent rights unless sooner terminated by a specified
action of East or ITI. The agreements specify that a royalty equal to 8% of the
gross contract price of all contracts performed by East utilizing the process,
less certain fees, be paid to ITI.
Midsouth Partners entered into a sublicense agreement with ITI which
granted Midsouth Partners the right to perform the Insituform Process in
Tennessee, most of Kentucky and northern Mississippi under terms similar to
East's sublicense agreements discussed above. In connection with the Midsouth
Settlement Agreement, Midsouth Partners' Insituform License Agreement and its
requirement to pay royalties were relinquished effective July 20, 1999.
East has also entered into a license agreement 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. East 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.
Midsouth Partners entered into a license agreement with NuPipe, Inc.
for the sale and installation of pre-formed thermoplastic pipe under the NuPipe
process and trademark in Tennessee, most of Kentucky and northern Mississippi
under terms similar to East's license agreement discussed above. In connection
with the Midsouth Settlement Agreement, Midsouth Partners' NuPipe License
Agreement and its requirement to pay royalties were relinquished effective July
20, 1999.
The East agreements 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, 1999, 1998, and 1997, the Company incurred
royalty expense of $1,244,954, $1,409,696, and $1,428,378, 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.
Effective July 20, 1999, Midsouth Partners executed a Felt Tube Supply
Agreement with ITI for the purchase of felt tubes to be used in CIPP pipe
rehabilitation in the partnership's previously licensed territories of
Tennessee, most of Kentucky and northern Mississippi. The agreement , with an
initial five year term, automatically extends for successive one year periods
unless notice of termination is provided by either party six months prior to the
expiration date of the initial five year period or any such annual period
thereafter.
Pending Litigation
Antitrust Suit - United States District Court
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. The plaintiffs' counsel has recently
moved to withdraw from the case.
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.
Settlement of Midsouth Partners Litigation and Arbitration
As previously reported, on March 11, 1999, Insituform Technologies,
Inc. ("ITI") filed a declaratory action (the "Declaratory Judgment Action") in
the Chancery Court of Delaware against Insitu, Inc. ("Insitu"), a wholly-owned
subsidiary of the Company, and the Company's majority-controlled subsidiary
partnership, Midsouth Partners ("Midsouth"), seeking confirmation of ITI's
ability to terminate Midsouth's Insituform process Sub-License Agreement (the
"Midsouth Sub-License Agreement") for the use of the Insituform process in the
territory covering Tennessee and portions of Mississippi and Kentucky (the
"Midsouth Territory"). ITI also gave notice of termination of the Midsouth
Partnership effective upon the later of (i) 120 days from the date of the notice
or (ii) entry of the order requested by ITI in the Delaware Chancery Court.
On April 1, 1999, Midsouth and Insitu answered the Declaratory Judgment
Action and counterclaimed for breaches of fiduciary and contract obligations by
ITI and for an injunction and a stay of the Declaratory Judgment Action pending
the outcome of arbitration. At the same time, Insitu filed against ITI and
Insituform Southwest, Inc. a demand for arbitration with the American
Arbitration Association. Insitu's arbitration complaint alleged that ITI's
purported termination and dissolution of Midsouth was in violation of
partnership and fiduciary obligations owed to Insitu under applicable law and
that such action was undertaken to usurp for ITI the opportunities of Midsouth
in the Midsouth Territory.
On May 7, 1999, the Delaware Chancery Court issued a Preliminary
Injunction Decree enjoining ITI from exploiting the Insituform Process in the
Midsouth Territory and ordering the arbitration commenced by Insitu to proceed.
On July 19, 1999, the American Arbitration Association notified the parties of
its decision to set hearings in late July and agreement to go forward on the
merits of Insitu's complaint.
On July 20, 1999, ITI entered into settlement with the Company and
related parties concerning Midsouth Partners (the "Midsouth Settlement
Agreement"). Under terms of the Midsouth Settlement Agreement, all remaining
disputes before the Delaware Chancery Court and the American Arbitration
Association were dismissed. On July 26, 1999, the Company filed a copy of the
Midsouth Settlement Agreement and a related press release with the Securities
and Exchange Commission under Form 8-K.
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 and
litigation arising from and in the ordinary course of its business. While it is
not possible at this time to establish the ultimate amount of liability, if any,
associated with pending claims or such litigation, 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.
At June 30, 1999, 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, 1999, 1998, and 1997,
the Company recognized profit sharing expense of $243,123, $47,739, and
$276,359, 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 $59,673 and $17,715 for the fiscal years ended June 30, 1999 and 1998,
respectively.
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 Loss Per Share
Basic loss per share was computed by dividing net 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 loss per share for the years
ended June 30, 1999, 1998 and 1997.
Diluted loss per share was computed by dividing net 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
were used in computing diluted loss per share for the years ended June 30, 1999,
1998, and 1997.
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. The final 60,000 option shares granted
December 10, 1993 at a per share exercise price of $2.44 expired 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.
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> <C>
July 1, 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
Granted 105,000 1.14 0 0
Exercised 0 0 0 0
Expired 0 0 (60,000) 2.44
------- ------ ------- ------
Outstanding
June 30, 1999 525,000 $ 2.62 0 $ 0.00
======= ====== ======= ======
</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, 1999, 1998 and 1997 is as follows:
Years Ended June 30,
1999 1998 1997
Date of grant 12/11/98 12/12/97 12/13/96
Option shares granted 105,000 105,000 105,000
Per share exercise price $1.14 $2.47 $2.63
Fair value per option share 0.43 $0.94 $1.78
The fair value of options granted during the years ended June 30, 1999,
1998 and 1997 was estimated on the dates of the grants using the binomial
option-pricing model using the following assumptions:
Years Ended June 30,
1999 1998 1997
Risk-free interest rate 4.58% 4.69% 6.06%
Expected option term 5 years 5 years 5 years
Expected stock price volatility 38% 38% 86%
Expected dividend yield 1% 1% 1%
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, 1999, 1998 and 1997 would be as follows:
Years Ended June 30,
1999 1998 1997
Net earnings (loss):
As reported $(1,115,534) $(331,907) $ (543,646)
Pro forma $(1,145,612) $(397,349) $ (666,872)
Basic Net earnings (loss) per share:
As reported $ (0.26) $ (0.08) $ (0.12)
Pro forma $ (0.26) $ (0.09) $ (0.15)
Diluted Net earnings (loss) per share:
As reported $ (0.26) $ (0.08) $ (0.12)
Pro forma $ (0.26) $ (0.09) $ (0.15)
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:
<TABLE>
<CAPTION>
Financial Information about
Reportable Operating Segments
Fiscal Years Ended June 30,
-----------------------------------------------------
1999 1998 1997
---- ---- ----
-----------------------------------------------------
SALES TO UNAFFILIATED CUSTOMERS:
Insituform East, Incorporated and
wholly-owned subsidiaries
<S> <C> <C> <C>
(collectively, "East") $16,986,032 $17,520,974 $19,342,794
Midsouth Partners 6,329,166 6,370,241 7,198,748
----------- ----------- -----------
Total Sales to Unaffiliated Companies $23,315,198 $23,891,215 $26,541,542
=========== =========== ===========
RECONCILIATION OF SALES BY SEGMENT
Total Sales
East $17,119,452 $17,825,307 $19,442,214
Midsouth Partners 6,329,166 6,393,024 7,210,604
Less: Intersegment Sales
East to Midsouth Partners (133,420) (304,333) (99,420)
Midsouth Partners to East (22,783) (11,856)
----------- ----------- -----------
Total Sales to Unaffiliated Customers $23,315,198 $23,891,215 $26,541,542
=========== =========== ===========
INVESTMENT INCOME
East $ 66,546 $ 47,233 $ 96,071
Midsouth Partners 16,037 32,062 36,572
Less: Intersegment Income (16,833) (8,096)
----------- ----------- -----------
Total Investment Income $ 65,750 $ 71,199 $ 132,643
=========== =========== ===========
INTEREST EXPENSE
East $ 43,040 $ 40,780 $ 7,003
Midsouth Partners 58,806 44,519 32,868
Less: Intersegment Expense (16,833) (8,096)
----------- ----------- -----------
Total Interest Expense $ 85,013 $ 77,203 $ 39,871
=========== =========== ===========
DEPRECIATION AND AMORTIZATION EXPENSE
East $ 1,585,234 $ 1,563,709 $ 1,408,437
Midsouth Partners 529,439 548,297 444,857
----------- ----------- -----------
Total Depreciation and Amortization Expense $ 2,114,673 $ 2,112,006 $ 1,853,294
=========== =========== ===========
RECONCILIATION OF EARNINGS (LOSS)
BEFORE INCOME TAXES, CREDIT
(PROVISION) FOR INCOME TAXES AND
NET EARNINGS (LOSS) BY SEGMENT
East
Earnings (Loss) Before Income Taxes (1,288,621) $ 213,738 $(1,032,758)
Credit (Provision) for Income Taxes 502,000 (83,000) 401,000
----------- ----------- -----------
Net Earnings (Loss) $ (786,621) $ 130,738 $ (631,758)
=========== =========== ===========
Midsouth Partners
Earnings (Loss) Before Income Taxes $ (539,911) $ (758,645) $ 145,112
Credit (Provision) for Income Taxes 211,000 296,000 (57,000)
----------- ----------- -----------
Net Earnings (Loss) $ (328,911) $ (462,645) $ 88,112
=========== =========== ===========
Consolidated Total
Earnings (Loss) Before Income Taxes $(1,828,532) $ (544,907) $ (887,646)
Credit (Provision) for Income Taxes 713,000 213,000 344,000
----------- ----------- -----------
Net Earnings (Loss) $(1,115,532) $ (331,907) $ (543,646)
=========== =========== ===========
Capital expenditures
East $ 2,081,296 $ 1,252,758 $ 1,915,983
Midsouth Partners 344,113 442,828 534,863
----------- ----------- -----------
Total Capital Expenditures $ 2,425,409 $ 1,695,586 $ 2,450,846
=========== =========== ===========
June 30,
TOTAL ASSETS 1999 1998 1997
---- ---- ----
East $17,667,157 $16,778,119 $18,039,528
Midsouth Partners 3,309,566 4,424,190 5,063,529
Less: Intersegment Loans (400,000) (250,000) 0
Less: Intersegment Receivables 0 0 (37,848)
----------- ----------- -----------
Total Consolidated Assets $20,576,723 $20,952,309 $23,065,209
=========== =========== ===========
</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, 1999, East received
$46,800 annually for accounting and administrative services provided to Midsouth
Partners. During the years ended June 30, 1999 and 1998, East received $125,000
and $153,819, respectively, 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 $89,356, $178,782, and $137,081 for the years ended June 30, 1999, 1998 and
1997, 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, 1999, a county government in the
Washington, D.C. metropolitan area, Federal government contracts (collectively)
and a regional sanitary authority in southwest Ohio accounted for 18%, 12% and
11%, respectively, of the Company's revenue. 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. 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, 1999 and
1998 are presented in the following table.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------
September 30, December 31, March 31, June 30,
1998 1998 1999 1999
-------------------- ------------------ ---------------- ------------------
Year Ended June 30, 1999
<S> <C> <C> <C> <C>
Sales $6,047,942 $ 5,898,104 $4,993,149 $ 6,376,003
Gross Profit (Loss) $ 997,491 $ 867,314 $ (332,091) $ 164,861
Net Earnings (Loss) $ 52,928 $ (45,520) $ (613,082) $ (509,860)
Net Earnings (Loss) Per Share $ 0.01 $ (0.01) $ (0.14) $ (0.12)
Three Months Ended
---------------------------------------------------------------------------
September 30, December 31, March 31, June 30,
1997 1997 1998 1998
-------------------- ------------------ ---------------- ------------------
Year Ended June 30, 1998
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)
</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 10, 1999.
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 17
Consolidated Statements of Operations 18
Consolidated Balance Sheets 19
Consolidated Statements of Stockholders' Equity 20
Consolidated Statements of Cash Flows 21
Notes to Consolidated Financial Statements 22-33
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 36
23.0 Independent Auditors' Consent 37
27.0 Financial Data Schedule 38
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, 1999.
<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
George Wm. Erikson
Chairman
September 24, 1999
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
George Wm. Erikson Director and September 24, 1999
Chairman Principal Executive Officer
Robert W. Erikson Director and September 24, 1999
President Principal Executive Officer
Calvin G. Franklin Director September 24, 1999
Webb C. Hayes, IV Director September 24, 1999
Paul C. Kincheloe, Jr. Director September 24, 1999
Jack Massar Director September 24, 1999
Thomas J. Schaefer Director September 24, 1999
Raymond T. Verrey Principal Accounting Officer, September 24, 1999
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, 1999, 1998 and 1997 were computed as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------
1999 1998 1997
---- ---- ----
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 0
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 4,356,862
========= ========= =========
</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 23, 1999, appearing in this Annual Report on Form 10-K of Insituform
East, Incorporated for the year ended June 30, 1999.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
McLean, Virginia
September 23, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED BALANCE SHEET AS OF JUNE 30, 1999, AND THE COMPANY'S AUDITED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. </LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 793,187
<SECURITIES> 0
<RECEIVABLES> 6,588,435
<ALLOWANCES> 0
<INVENTORY> 1,273,402
<CURRENT-ASSETS> 9,052,308
<PP&E> 26,708,228
<DEPRECIATION> 15,283,598
<TOTAL-ASSETS> 20,576,723
<CURRENT-LIABILITIES> 4,984,489
<BONDS> 0
<COMMON> 187,390
0
0
<OTHER-SE> 14,098,963
<TOTAL-LIABILITY-AND-EQUITY> 20,576,723
<SALES> 23,315,198
<TOTAL-REVENUES> 23,315,198
<CGS> 21,617,623
<TOTAL-COSTS> 21,617,623
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85,013
<INCOME-PRETAX> (1,828,534)
<INCOME-TAX> (713,000)
<INCOME-CONTINUING> (1,115,534)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,115,534)
<EPS-BASIC> (.26)
<EPS-DILUTED> (.26)
</TABLE>