UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: March 31, 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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of May 3, 1999, the following number of shares of each of the issuer's
classes of common stock were outstanding:
Common Stock 4,059,266
Class B Common Stock 297,596
Total 4,356,862
<PAGE>
TABLE OF CONTENTS
Page Reference
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended March 31, 1999
and 1998 (Unaudited) 3
Condensed Consolidated Balance Sheets
March 31, 1999 and June 30, 1998 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended March 31, 1999 and 1998 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About 11
Market Risk
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
INSITUFORM EAST, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- -----------------------------
1999 1998 1999 1998
---------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Sales $4,993,149 $4,147,345 $16,939,195 $18,783,253
---------- ---------- ----------- -----------
Costs and Expenses:
Cost of sales 5,325,240 4,510,966 15,406,481 16,254,863
Selling, general and administrative 1,150,464 1,025,537 3,247,946 3,495,210
---------- ---------- ----------- -----------
Total Costs and Expenses 6,475,704 5,536,503 18,654,427 19,750,073
---------- ---------- ----------- -----------
Earnings (Loss) from Operations (1,482,555) (1,389,158) (1,715,232) (966,820)
Investment Income 11,796 14,724 50,856 59,456
Interest Expense (18,334) (10,534) (42,232) (65,253)
Other Income 53,951 26,916 200,526 131,495
---------- ---------- ----------- -----------
Earnings (Loss) Before Income Taxes
and Non-owned interests (1,435,142) (1,358,052) (1,506,082) (841,122)
Non-owned Interests in Pretax Loss
of Midsouth Partners 430,060 242,176 512,408 650,272
---------- ---------- ----------- -----------
Earnings (Loss) Before Income Taxes (1,005,082) (1,115,876) (993,674) (190,850)
Provision (Credit) for Income Taxes (392,000) (434,000) (388,000) (74,000)
---------- ---------- ----------- -----------
Net Earnings (Loss) $ (613,082) $ (681,876) $ (605,674) $ (116,850)
========== ========== =========== ===========
Basic Earnings (Loss) Per Share $ (0.14) $ (0.16) $ (0.14) $ (0.03)
========== ========== =========== ===========
Diluted Earnings (Loss) Per Share $ (0.14) $ (0.16) $ (0.14) $ (0.03)
========== ========== =========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INSITUFORM EAST, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, June 30,
1999 1998
ASSETS ------------- ------------
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 655,523 $ 2,148,511
Accounts receivable - net of allowance
for doubtful accounts of $0 6,525,616 5,180,022
Inventories - raw materials 1,460,841 1,381,861
Prepaid and refundable income taxes 787,896 671,565
Prepaid expenses 344,285 401,659
------------- ------------
Total Current Assets 9,774,161 9,783,618
Property, Plant and Equipment - at cost less accumulated
depreciation of $14,728,283 and $14,105,020 11,252,660 11,108,691
Cash Surrender Value of SERP Life Insurance 69,533 0
Other Assets 54,000 60,000
------------- ------------
Total Assets $ 21,150,354 $ 20,952,309
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to CERBCO, Inc. $ 1,200,000 $ 0
Partner loans to Midsouth Partners 200,000 250,000
Accounts payable 1,296,120 1,120,910
Accrued compensation and related expenses 1,565,012 1,398,806
Income taxes payable 14,724 27,196
Current portion of capital lease obligations 40,142 34,621
------------- ------------
Total Current Liabilities 4,315,998 2,831,533
Deferred Income Taxes 732,000 915,000
Long-Term Capital Lease Obligations 73,995 104,829
Accrued SERP Liability 45,496 0
------------- ------------
Total Liabilities 5,167,489 3,851,362
------------- ------------
Non-owned Interests in Consolidated Subsidiary 1,186,652 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 11,798,012 12,403,686
------------- ------------
15,985,826 16,591,500
Less cost of 327,897 shares of common stock in treasury 1,189,613 1,189,613
------------- -----------
Total Stockholders' Equity 14,796,213 15,401,887
------------- -----------
Total Liabilities and Stockholders' Equity $ 21,150,354 $20,952,309
============= ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INSITUFORM EAST, INCORPORATED CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
---------------------------------
1999 1998
------------- -------------
Cash Flows from Operating Activities:
<S> <C> <C>
Net earnings (loss) $ (605,674) $ (116,850)
Adjustments for noncash items included in net earnings (loss):
Depreciation and amortization 1,533,569 1,602,142
Deferred income taxes (183,000) (65,000)
Non-owned interests in loss of consolidated subsidiary (512,408) (650,272)
Accrued SERP liability 45,496 0
Changes in assets and liabilities:
Receivables (1,345,594) 976,966
Inventories (78,980) 114,666
Other current assets (58,957) (620,533)
Payables and accruals 328,944 (1,133,420)
------------ ------------
Net cash provided by (used in) operating activities (876,604) 107,699
------------- ------------
Cash Flows from Investing Activities:
Capital expenditures, net (1,671,538) (1,101,911)
Increase in cash surrender value of SERP life insurance (69,533) 0
------------ ------------
Net cash used in investing activities (1,741,071) (1,101,911)
------------ ------------
Cash Flows from Financing Activities:
Dividends paid 0 (261,412)
Partner loans to Midsouth Partners 200,000 0
Repayment of partner loans by Midsouth Partners (250,000) 0
Proceeds from bank line of credit advances 0 1,800,000
Repayment of line of credit advances to bank 0 (1,800,000)
Proceeds from line of credit advances from CERBCO, Inc. 1,500,000 2,600,000
Repayment of line of credit advances to CERBCO, Inc. (300,000) (2,600,000)
Principal payments under capital lease obligations (25,313) (20,853)
------------ ------------
Net cash provided by (used in) financing activities 1,124,687 (282,265)
------------ -------------
Net decrease in cash and cash equivalents (1,492,988) (1,276,477)
Cash and cash equivalents at beginning of period 2,148,511 2,071,852
------------ -------------
Cash and cash equivalents at end of period $ 655,523 $ 795,375
============ =============
Supplemental disclosure of cash flow information:
Interest paid $ 42,232 $ 65,253
Income taxes paid (refunded) $ (76,197) $ 452,211
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
INSITUFORM EAST, INCORPORATED
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Condensed Consolidated Financial Statements
The Condensed Consolidated Balance Sheet as of March 31, 1999, the
Condensed Consolidated Statements of Operations for the three months and nine
months ended March 31, 1999 and 1998, and the Condensed Consolidated Statements
of Cash Flows for the nine months ended March 31, 1999 and 1998 have been
prepared by the Company without audit. The Condensed Consolidated Balance Sheet
as of June 30, 1998 (unaudited) has been derived from the Company's June 30,
1998 audited financial statements. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at March 31, 1999
and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed financial
statements be read in conjunction with the audited financial statements and
notes thereto included in the Company's June 30, 1998 annual report on Form
10-K. The results of operations for the period ended March 31, 1999 are not
necessarily indicative of full year operating results.
2. Principles of Consolidation
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Insituform Ohio, Inc., Insitu, Inc.,
Try Tek Machine Works, Inc., and Insituform of Pennsylvania, Inc. (collectively,
"East") and the accounts of Midsouth Partners, the Company's majority-controlled
subsidiary Partnership. All significant intercompany accounts and transactions
have been eliminated.
3. Computation of Net Earnings (Loss) Per Share
Basic earnings (loss) per share was computed by dividing net earnings
(loss) by the weighted average number of common shares outstanding during the
period. Weighted average shares of 4,356,862 were used in computing basic
earnings (loss) per share for the three months and nine months ended March 31,
1999 and 1998.
Diluted earnings (loss) per share was computed by dividing net earnings
(loss) by the weighted average number of common shares outstanding during the
period including common stock equivalents from dilutive stock options. Weighted
average shares of 4,356,862 were used in computing diluted earnings (loss) per
share for all periods presented herein.
4. 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 is presently available for an indefinite period.
The Company maintained a $3,000,000 Revolving Line of Credit facility with
a commercial 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.
<PAGE>
5. Segment Reporting Information
During the year ended June 30, 1998, the Company adopted the disclosure
requirements of Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information ("SFAS No. 131"). In
accordance with the provisions of SFAS No. 131, the Company has determined that
its operating activities consist of two reportable operating segments, (i)
Insituform East, Incorporated and its wholly-owned subsidiary corporations
(collectively, "East") and, (ii) its majority-controlled subsidiary partnership,
Midsouth Partners. Although both reportable operating segments are primarily
engaged in the business of rehabilitating underground sewers and other conduits
using the Insituform process, rehabilitation services are generally provided to
customers in separate licensed geographic territories. Financial Information
about the Company's reportable operating segments is as follows:
<TABLE>
<CAPTION>
Financial Information about
Reportable Operating Segments
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------------- --------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- -------------
SALES TO UNAFFILIATED CUSTOMERS:
Insituform East, Incorporated and
wholly-owned subsidiaries
<S> <C> <C> <C> <C>
(collectively, "East") $ 4,112,395 $ 2,415,883 $ 12,279,560 $13,997,411
Midsouth Partners 880,754 1,731,462 4,659,635 4,785,842
----------- ----------- ------------ -----------
Total Sales to Unaffiliated Customers $ 4,993,149 $ 4,147,345 $ 16,939,195 $18,783,253
=========== =========== ============ ===========
RECONCILIATION OF SALES BY SEGMENT
Total Sales
East $ 4,118,989 $ 2,593,541 $ 12,350,420 $14,212,648
Midsouth Partners 880,754 1,731,462 4,659,635 4,808,625
Less: Intersegment Sales
East to Midsouth Partners (6,594) (177,658) (70,860) (215,237)
Midsouth Partners to East (0) (0) (0) (22,783)
----------- ----------- ------------ -----------
Total Sales to Unaffiliated Customers $ 4,993,149 $ 4,147,345 $ 16,939,195 $18,783,253
=========== =========== ============ ===========
RECONCILIATION OF EARNINGS (LOSS)
BEFORE INCOME TAXES, CREDIT
(PROVISION) FOR INCOME TAXES AND
NET EARNINGS (LOSS) BY SEGMENT
East
Earnings (Loss) Before Income Taxes $ (687,211) $ (936,874) $ (614,936) $ 289,789
Credit (Provision) for Income Taxes 268,000 365,000 240,000 (113,000)
----------- ----------- ------------ ----------
Net Earnings (Loss) $ (419,211) $ (571,874) $ (374,936) $ 176,789
=========== =========== ============ ==========
Midsouth Partners
Earnings (Loss) Before Income Taxes $ (317,871) $ (179,002) $ (378,738) $ (480,639)
Credit (Provision) for Income Taxes 124,000 69,000 148,000 187,000
----------- ----------- ------------ ----------
Net Earnings (Loss) $ (193,871) $ (110,002) $ (230,738) $ (293,639)
=========== =========== ============ ==========
Consolidated Total
Earnings (Loss) Before Income Taxes $(1,005,082) $(1,115,876) $ (993,674) $ (190,850)
Credit (Provision) for Income Taxes 392,000 434,000 388,000 74,000
----------- ----------- ------------ ----------
Net Earnings (Loss) $ (613,082) $ (681,876) $ (605,674) $ (116,850)
=========== =========== ============ ==========
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview and Outlook
The Company reported a consolidated net loss of -$613,082 (-$0.14 per
share) on sales of $5.0 million for the third quarter of fiscal 1999 ended March
31, 1999, resulting in a consolidated net loss for the first nine months of
fiscal 1999 of -$605,674 (-$0.14 per share) on sales of $16.9 million. In the
previous year, the Company recognized a net loss of -$681,876 (-$0.16 per share)
on sales of $4.1 million for the third quarter and a net loss of -$116,850
(-$0.03 per share) on sales of $18.8 million for the first nine months. The
Company attributed its unfavorable results for the third quarter and first nine
months of fiscal 1999 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 Landover, Maryland based operations and its
wholly-owned subsidiaries).
With respect to forward-looking information, and while there can be no
assurances regarding the Company's future operating performance, based on the
volume and mix of the Company's present and expected workable backlog of
customer orders, the Company presently anticipates that the combination of a
regular component of sales at normal margins and increased production capacity
for anticipated net increases in discounted sales will be required through the
remainder of fiscal 1999 and beyond to absorb both normal and expected operating
costs and the additional anticipated costs associated with continuing litigation
and arbitration with ITI over the future of Midsouth Partners.
The principal factor affecting the Company's future performance remains the
volatility of earnings as a function of sales volume at normal margins.
Accordingly, because a substantial portion of the Company's costs are semi-fixed
in nature, earnings can, at times, be severely reduced or eliminated during
periods of either depressed sales at normal margins or material increases in
discounted sales, even where total revenues may experience an apparent buoyancy
or growth from the addition of discounted sales undertaken from time to time for
strategic reasons. Conversely, at normal margins, increases in period sales
typically leverage positive earnings significantly.
The Company's total backlog value of all uncompleted and multi-year
contract awards was approximately $23.9 million at March 31, 1999 as compared to
$26.2 million at March 31, 1998. The twelve-month backlog at March 31, 1999 was
approximately $10.4 million as compared to $11.5 million at March 31, 1998. The
total backlog value of all uncompleted and multi-year contracts at March 31,
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
subject further to the irregularities of individual work releases.
<PAGE>
The Company believes the trenchless pipeline reconstruction marketplace is
continuing to expand, thereby enticing, however, the entry of ever more
imitations and substitute products hoping that cheap price alone may permit them
to succeed in a market otherwise dominated by Insituform. In those limited
markets where the lowest priced product may be deemed technically "good enough,"
Insituform is at a disadvantage. Market share participation strategically
undertaken by the Company in this segment from time to time to preserve
competitive presence, typically at levels materially below normal margins, will
necessarily dilute the Company`s overall margin performance. Conversely, in
"best value" and quality-based markets, Insituform remains at a distinct
advantage. While both the Federal Government and industry routinely use best
value and quality-weighted contract award criteria in more sophisticated
procurements, municipalities and local governments are often politically
reluctant to modernize from simply "low bid" buying to "best value" buying when
evaluating sophisticated processes and technologies. In the face of mounting
technical failures from awards based upon lowest price, municipalities also are
expected over time to reevaluate simple low bid award criteria - in favor of
"best value" award criteria - when procuring trenchless technology for the
rehabilitation of older pipelines.
Results of Operations
Three Months Ended March 31, 1999 Compared with Three Months Ended March 31,
1998
The Company recognized a consolidated net loss of -$613,082 (-$0.14 per
share) on sales of $5.0 million for the third quarter of fiscal 1999 ended March
31, 1999 as compared to a net loss of -$681,876 (-$0.16 per share) on sales of
$4.1 million for the third quarter of fiscal 1998 ended March 31, 1998. The
Company attributed its unfavorable third quarter fiscal 1999 results to Midsouth
Partners' acceptance of additional job completion costs on several incomplete
projects, costs incurred in connection with litigation initiated by ITI against
the Company and Midsouth Partners, and an increase in discounted sales performed
by the Company's East operating segment.
Sales increased $0.84 million (20%) from $4.15 million for the three months
ended March 31, 1998 to $4.99 million for the three months ended March 31, 1999.
Comparable period sales for East increased 70% primarily as a result of
significant increases in available work. Comparable period sales for Midsouth
Partners decreased 49% primarily as a result of assignment of resources from
revenue producing activities to job completion tasks on several incomplete
projects during the quarter.
Cost of sales increased 18% in the third quarter of fiscal 1999 as compared
to the third quarter of fiscal 1998. As a result, gross profit (loss) as a
percentage of sales improved from a gross profit (loss) of -9% of sales for the
third quarter of fiscal 1998 to gross profit (loss) of -7% of sales for the
third quarter of fiscal 1999. The improvement in gross profit (loss) as a
percentage of sales is due primarily to absorption of semi-fixed costs over
higher sales volume for East more than offsetting the impact of additional job
completion costs incurred by Midsouth Partners during the third quarter of
fiscal 1999.
Selling, general and administrative expenses increased $124,927 (12%) for
the third quarter of fiscal 1999 as compared to the third quarter of fiscal
1998, due primarily to costs incurred in connection with litigation initiated by
ITI against the Company and Midsouth Partners.
Nine Months Ended March 31, 1999 Compared with Nine Months Ended March 31, 1998
The Company recognized a consolidated net loss of -$605,674 (-$0.14 per
share) on sales of $16.9 million for the first nine months of fiscal 1999 ended
March 31, 1999 as compared to a consolidated net loss of -$116,850 (-$0.03 per
share) from sales of $18.8 million for the first nine months of fiscal 1998
ended March 31, 1998. The Company's unfavorable fiscal 1999 results were due
primarily to the Company's third quarter loss. The Company's results for the
first nine months of fiscal 1998 were due primarily to its third quarter loss,
offset to some extent by an exceptional volume of sales revenue recognized
during the period from the installation phase of a nearly year long $4.7 million
project performed for the owners of the Perry Nuclear Power Plant in Perry, Ohio
and installed between mid-September and early October, 1997 by the Company's
East operating segment.
Sales decreased $1.9 million (10%) from $18.8 million for the nine months
ended March 31, 1998 to $16.9 million for the nine months ended March 31, 1999.
Comparable period sales for East decreased 12% 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
3% primarily as a result of the assignment of resources to job completion tasks
during the third quarter of fiscal 1999 more than offsetting the impact of
increased production capacity during the first two quarters of fiscal 1999.
Cost of sales decreased 5% in the first nine months of fiscal 1999 as
compared to the first nine months of fiscal 1998. As a result, gross profit as a
percentage of sales decreased from 13% of sales for the first nine months of
fiscal 1998 to 9% of sales for the first nine months of fiscal 1999. The
decrease in gross profit as a percentage of sales is due primarily to absorption
of semi-fixed costs over lower sales volume during the first nine months of
fiscal 1999.
Selling, general and administrative expenses decreased $247,264 (7%) for
the nine months ended March 31, 1999 as compared to the nine months ended March
31, 1998, primarily as a result of reduced costs to support decreased production
activities more than offsetting additional legal expenses incurred during the
third quarter of fiscal 1999.
Financial Condition
During the nine months ended March 31, 1999, $876,604 in cash was used in
the Company's operating activities due primarily to the unfavorable impact of
the Company's net operating loss and $1,345,594 increase in Accounts Receivable
more than offsetting the favorable impact of a $328,944 increase in Payables and
Accruals and $1,533,569 in Depreciation and Amortization expense included in net
earnings that did not require the outlay of cash.
During the first nine months of fiscal 1999, the Company expended
$1,671,538 for equipment purchases and other capital improvements and received
$1.2 million in proceeds from line of credit advances from CERBCO, Inc. to
finance temporary increases in Accounts Receivable balances. Although the
Company experienced a $1,492,988 decrease in cash during the first nine months
of fiscal 1999, the Company's financial liquidity remained strong with working
capital of $5.4 million and a current ratio of 2.26 at March 31, 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, remaining commitments from the Company's intercompany
line of credit from CERBCO, Inc. and the unencumbered real and personal property
owned by the Company provide adequate resources to finance cash requirements for
future capital expenditures.
Year 2000 Issues
The inability of present computerized systems to process dates beyond
December 31, 1999 and the potential impact on businesses and governments in the
future are generally referred to as "Year 2000 Issues."
The Company has implemented plans to address Year 2000 issues. Primary
areas of focus include the Company's information technology systems, the
Company's non-information technology systems, the Year 2000 readiness of the
Company's vendors and suppliers and the Year 2000 readiness of the Company's
major customers. Because the Company's primary products and services neither
include nor rely upon computerized components, the Company believes that there
are no additional contingencies associated with actual or implied warranties
related to its products and services resulting from Year 2000 issues.
<PAGE>
With respect to the Company's information technology systems, the Company's
primary accounting and information processing system is Year 2000 compliant and
will recognize years 2000 through 2029 in the proper century. The Company's
preliminary assessment of supporting information systems is that these systems
either are Year 2000 compliant, can be modified to become Year 2000 compliant,
or should not have a significant impact on either the primary accounting and
information system or the Company's operating activities should non-compliant
systems not be properly modified.
With respect to the Company's non-information technology systems, the
Company is still in the preliminary assessment stage. The Company is dependent
on information from vendors and suppliers in assessing and evaluating these
systems. As potential Year 2000 issues are identified, implementation plans are
developed and executed. The Company has completed corrective action for its
office telephone system and its headquarters facility security system, two
systems that were identified as not being Year 2000 compliant.
With respect to the Company's suppliers and customers, the Company has
initiated preliminary correspondence with selected critical suppliers and
customers. Responses received to date indicate that responding suppliers and
customers either are currently Year 2000 compliant or expect to be Year 2000
compliant by December 31, 1999. Prior to June 30, 1999, the Company plans to
seek to obtain responses from suppliers and customers who have not as yet
responded to inquiries and develop a plan to monitor and assess Year 2000
readiness from respondents not as yet Year 2000 compliant.
The Company currently estimates that the cost of implementing its Year 2000
Plan will not exceed $200,000. This preliminary estimate is based on presently
available information and will be updated as the Company continues its
assessment and proceeds with implementation. Specifically, this estimate would
change if, after receipt of information from key suppliers or customers, a
formal contingency plan required development and implementation. The Company has
incurred $21,000 in implementation costs through March 31, 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 the Company with
materials critical to its operations, or with sufficient electrical power or
other utilities, or if transportation of the Company's personnel and equipment
is seriously impeded; then any such failure or impedance could have a material
adverse effect on the operational performance and financial condition of the
Company.
In addition, if major municipal, industrial or Federal government customers
are seriously affected, directly or indirectly, by Year 2000 issues such that
pipeline rehabilitation programs are delayed or abandoned, this too could have a
material adverse effect on the operational performance and financial condition
of the Company.
The Company has not yet established a contingency plan, but intends to
formulate one prior to June 30, 1999, based primarily on potential actions that
would be required if key vendors or customers are unable to address and resolve
Year 2000 Issues that would directly or indirectly impact the Company's ability
to conduct normal business operations in the year 2000 and beyond.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
<PAGE>
PART II. OTHER INFORMATION
Item 1. 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.
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.
Declaratory Judgment Action - Delaware Chancery Court
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 a demand for
arbitration, which was served upon ITI and Insituform Southwest, Inc., with the
American Arbitration Association. This demand alleges that the purported
termination and dissolution of Midsouth is in violation of partnership and
fiduciary obligations owed to Insitu under applicable law and that such action
is being undertaken to usurp for ITI the opportunities of Midsouth in the
Midsouth Territory. The claims for arbitration include, among other things, a
declaration that Insitu is entitled to continue the business of Midsouth and to
use either Midsouth's current ITI licenses or new licenses for the additional
use of the Insituform and NuPipe processes, and for an amount of appropriate
damages. ITI has denied the allegations of Insitu in the arbitration and has
counterclaimed that Insitu has breached fiduciary duties to the other partners
in Midsouth and committed acts of malfeasance in exercising control of Midsouth
in such a manner that Midsouth sustained losses in calendar years 1997 and 1998.
In a Memorandum Opinion decided April 16, 1999, the Chancery Court of
Delaware granted Insitu's motion for a temporary restraining order and denied
ITI's motion for summary judgment. Thereafter, ITI gave a second notice
purporting to terminate Midsouth effective August 17, 1999.
<PAGE>
Pursuant to the Court's Memorandum Opinion of April 16, 1999, as corrected
April 19, 1999, the Chancery Court of Delaware issued a Preliminary Injunction
Decree on May 7, 1999 enjoining ITI from exploiting the Insituform process in
the Midsouth Territory until August 17, 1999, or the further order of the Court.
The Court further ordered ITI to deposit in an interest-bearing escrow account
7% of the proceeds generated by any contract contemplating exploitation of the
Insituform process in the Midsouth Territory the right to which ITI has won or
wins as a result of bids it submitted or submits before the entry of this
Decree, which funds shall be held for the potential benefit of Insitu. The Court
further ordered ITI to provide technical support and Insitutube materials to
Midsouth Partners for the duration of this injunction and ordered all parties to
proceed expeditiously to submit to and proceed with the arbitration commenced by
Insitu on April 1, 1999.
It is the present intention of Insitu and Midsouth that this matter be
resolved by such arbitration, and accordingly, Midsouth has represented that it
will not bid in the Midsouth Territory for additional projects using the
Insituform process without the agreement of ITI or 72 hours prior notice to ITI.
The Company anticipates the arbitration proceedings and Delaware Chancery Court
proceedings will be substantially concluded, with the exception of calculation
of any damages, on or before August 17, 1999. Although the outcome and
consequences of such proceedings cannot be ascertained at this time, and the
results of such legal proceedings cannot be predicted with certainty; the
Company, through Midsouth Partners and Insitu, intends to enforce its rights
under the Midsouth Sub-License Agreement and the Midsouth Partners Partnership
Agreement and to hold ITI and its subsidiaries liable for their violations of
these agreements.
The Company is a party to other claims arising out of the ordinary course
of business. While it is not possible at this time to establish the ultimate
amount of liability, if any, associated with pending claims, management of the
Company is of the opinion that the aggregate amount of any such liability will
not have a material adverse effect on the financial position of the Company.
Item 5. Other Information
On May 11, 1999, the Company reported that, commencing Wednesday, May 12,
1999, trading in its shares of common stock will shift from the Nasdaq National
Market(R) to The Nasdaq SmallCap Market(SM). The Company's Nasdaq trading
symbol, INEI, remains unchanged. The shift in trading to The Nasdaq SmallCap
Market was implemented because the Company's present market size did not permit
continued maintenance under the rules of the larger National Market system.
The Company noted that The Nasdaq SmallCap Market offers both the Company
and its present and prospective shareholders continuous transaction data in
terms of price and volume activity similar to the Nasdaq National Market,
including vigorous competition among multiple market makers. Bid and asked
prices, last-sale prices and volume information are available throughout the
trading day. High, low and closing price information will continue to appear in
major newspapers such as The Wall Street Journal and The Washington Post.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
The Company filed one Report on Form 8-K during the three months ended
March 31, 1999. This Report on Form 8-K, dated March 18, 1999, reported on Item
5. Other Events. This report includes a discussion of correspondence received by
the Company from Insituform Technologies, Inc. ("ITI") dated March 11, 1999 and
the Company's March 17, 1999 response to such correspondence. No financial
statements were filed with this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INSITUFORM EAST, INCORPORATED
(Registrant)
Date May 17, 1999 /s/ Robert W. Erikson
------------ ----------------------------------------
Robert W. Erikson
President
Date May 17, 1999 /s/ Raymond T. Verrey
------------ ----------------------------------------
Raymond T. Verrey
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
UNAUDITED BALANCE SHEET AS OF MARCH 31, 1999, AND THE COMPANY'S UNAUDITED
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 655,523
<SECURITIES> 0
<RECEIVABLES> 6,525,616
<ALLOWANCES> 0
<INVENTORY> 1,460,841
<CURRENT-ASSETS> 9,774,161
<PP&E> 25,980,943
<DEPRECIATION> 14,728,283
<TOTAL-ASSETS> 21,150,354
<CURRENT-LIABILITIES> 4,315,998
<BONDS> 0
<COMMON> 187,390
0
0
<OTHER-SE> 14,608,823
<TOTAL-LIABILITY-AND-EQUITY> 21,150,354
<SALES> 16,939,195
<TOTAL-REVENUES> 16,939,195
<CGS> 15,406,481
<TOTAL-COSTS> 15,406,481
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,232
<INCOME-PRETAX> (993,674)
<INCOME-TAX> (388,000)
<INCOME-CONTINUING> (605,674)
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