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: September 30, 2000
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
Landover, Maryland 20785-1608
(Address of principal executive offices) (Zip Code)
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 November 1, 2000, 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
PART I - FINANCIAL INFORMATION Page Reference
------------------------------ --------------
Item 1. Financial Statements 3
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 2000 and 1999 (Unaudited) 3
Condensed Consolidated Balance Sheets
September 30, 2000 and June 30, 2000(Unaudited) 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended September 30, 2000 and 1999 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 6. Exhibits and Reports on Form 8-K 10
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
INSITUFORM EAST, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended September 30,
-------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
Sales $6,332,089 $7,314,454
---------------- ----------------
Costs and Expenses:
Cost of sales 5,162,982 6,119,386
Selling, general and administrative 937,156 1,110,103
----------------
----------------
Total Costs and Expenses 6,100,138 7,229,489
---------------- ----------------
Earnings from Operations 231,951 84,965
Investment Income 13,840 9,683
Interest Expense (106,862) (58,221)
Other Income 67,205 39,301
---------------- ----------------
Earnings Before Income Taxes and Non-owned Interests 206,134 75,728
Non-owned Interests in Pretax Loss of Midsouth Partners - 19,889
---------------- ----------------
Earnings Before Income Taxes 206,134 95,617
Provision for Income Taxes - 37,000
---------------- ----------------
Net Earnings $ 206,134 $ 58,617
================ ================
Basic Earnings Per Share $ 0.05 $ 0.01
================ ================
Diluted Earnings Per Share $ 0.05 $ 0.01
================ ================
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
INSITUFORM EAST, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, 2000 June 30, 2000
---------------------- ------------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 866,426 $ 571,874
Accounts receivable - net of allowance for doubtful accounts of $0 6,707,330 5,461,437
Inventories - raw materials 1,256,734 1,421,104
Prepaid and refundable income taxes 22,895 22,895
Prepaid expenses 306,467 175,010
------------------- ------------------
Total Current Assets 9,159,852 7,652,320
Property, Plant and Equipment - at cost less accumulated depreciation of
$17,180,516 and $17,088,553 9,851,916 10,231,632
Deferred Income Taxes - net of valuation allowance of $863,000 and
$943,000 - -
Cash Surrender Value of SERP Life Insurance 247,783 166,055
Other Assets 13,267 15,567
------------------- ------------------
Total Assets $19,272,818 $18,065,574
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to CERBCO, Inc. $ 4,800,000 $ 3,900,000
Accounts payable 1,475,211 1,278,760
Accrued compensation and related expenses 1,080,476 1,180,253
Income taxes payable 10,000 10,000
Current portion of capital lease obligations 30,976 30,177
------------------- -------------------
Total Current Liabilities 7,396,663 6,399,190
Long-Term Capital Lease Obligations 34,754 42,584
Accrued SERP Liability 110,220 98,753
-
------------------- -------------------
Total Liabilities 7,541,637 6,540,527
------------------- -------------------
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 8,732,980 8,526,846
------------------- -------------------
12,920,794 12,714,660
Less cost of 327,897 shares of common stock in treasury 1,189,613 1,189,613
------------------- -------------------
Total Stockholders' Equity 11,731,181 11,525,047
------------------- -------------------
Total Liabilities and Stockholders' Equity $19,272,818 $18,065,574
=================== ===================
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
INSITUFORM EAST, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended
September 30,
------------------------------------------
2000 1999
------------------- -------------------
Cash Flows from Operating Activities:
<S> <C> <C>
Net earnings $ 206,134 $ 58,617
Adjustments for noncash items included in net earnings:
Depreciation and amortization 513,559 578,563
Deferred income taxes - 36,000
Non-owned interests in loss of consolidated subsidiary - (19,889)
Accrued SERP liability 11,467 10,097
Changes in assets and liabilities:
Receivables (1,245,893) (1,279,748)
Inventories 164,370 124,163
Other current assets (131,457) 41,156
Payables and accruals 96,674 215,307
-------------------
-------------------
Net cash used in operating activities (385,146) (235,734)
------------------- -------------------
Cash Flows from Investing Activities:
Purchase of remaining interests in Midsouth Partners - (948,707)
Capital expenditures, net (131,543) (694,489)
Increase in cash surrender value of SERP life insurance (81,728) (75,405)
Increase in other assets - (20,000)
-------------------
-------------------
Net cash used in investing activities (213,271) (1,738,601)
------------------- -------------------
Cash Flows from Financing Activities:
Proceeds from line of credit advances from CERBCO, Inc. 1,200,000 2,400,000
Repayment of line of credit advances to CERBCO, Inc. (300,000) -
Repayment of partner loans by Midsouth Partners - (400,000)
Principal payments under capital lease obligations (7,031) (9,777)
-------------------
-------------------
Net cash provided by financing activities 892,969 1,990,223
------------------- -------------------
Net increase in cash and cash equivalents 294,552 15,888
Cash and cash equivalents at beginning of period 571,874 793,187
------------------- -------------------
Cash and cash equivalents at end of period $ 866,426 $ 809,075
=================== ===================
Supplemental disclosure of cash flow information:
Interest paid $ 100,266 $ 58,221
Income taxes paid (refunded) $ - $ (5,855)
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 September 30, 2000, the
Condensed Consolidated Statements of Operations for the three months ended
September 30, 2000 and 1999, and the Condensed Consolidated Statements of Cash
Flows for the three months ended September 30, 2000 and 1999 have been prepared
by the Company without audit. The Condensed Consolidated Balance Sheet as of
June 30, 2000 (unaudited) has been derived from the Company's June 30, 2000
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 September 30,
2000 and for all periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these condensed
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's June 30, 2000 audited financial
statements. The results of operations for the period ended September 30, 2000
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.; Insituform of Pennsylvania, Inc.; Midsouth,
LLC and Midsouth Partners (majority-controlled prior to July 20, 1999). All
significant intercompany accounts and transactions have been eliminated.
3. Computation of Net Earnings Per Share
Basic earnings per share were computed by dividing net earnings 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 per share for
the three months ended September 30, 2000 and 1999.
Diluted earnings per share were computed by dividing net earnings by
the weighted average number of common shares outstanding during the period
including common stock equivalents from dilutive stock options. Weighted average
shares of 4,362,016 and 4,372,000 were used in computing diluted earnings per
share for the three months ended September 30, 2000 and 1999, respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview and Outlook
The Company reported consolidated net earnings of $206,134 ($0.05 per
share) on sales of $6.3 million for the first quarter of fiscal 2001 ended
September 30, 2000. The Company recognized net earnings of $58,617 ($0.01 per
share) on sales of $7.3 million for the first quarter of fiscal 2000 ended
September 30, 1999. The Company attributed its improved first quarter results,
and its dramatic turnaround from the previous three quarters, to a consistent
flow of immediately workable backlog and the impact of an aggressive cost
reduction program initiated during the fourth quarter of fiscal 2000.
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 current and expected workable backlog of
customer orders, the Company presently anticipates that a combination of a
favorable mix of work and a consistently high volume of immediately workable
backlog will be required to sustain positive operating results in the remaining
quarters of fiscal 2001.
As previously reported, The Company's Insituform process licensor and
former partner in the Midsouth Partners partnership, Insituform Technologies,
Inc. ("ITI") initiated a second calendar 1999 lawsuit against the Company on
December 3, 1999, following the July 20, 1999 settlement (the Midsouth
Settlement Agreement) of earlier litigation filed March 11, 1999. The newest
litigation appears again targeted by ITI to usurp for itself certain rights
belonging to the Company or to Midsouth Partners including the Company's
legitimate competitive rights as a licensee and the competitive rights of
Midsouth Partners acquired pursuant to the Midsouth Settlement Agreement. While
the ultimate outcome of any litigation including the December 1999 most recent
ITI litigation cannot be predetermined, pending resolution the Company intends
to continue to exercise its rights under its license agreements and the Midsouth
Settlement Agreement as exercised prior to the instigation of such litigation.
Trial of the December 1999 litigation is currently scheduled for July 31, 2001.
The Company's total backlog value of all uncompleted and multi-year
contract awards was approximately $31.5 million at September 30, 2000 as
compared to $31.1 million at September 30, 1999. The twelve-month backlog at
September 30, 2000 increased significantly to approximately $19.8 million as
compared to $10.8 million at September 30, 1999. The total backlog value of all
uncompleted and multi-year contracts at September 30, 2000 and 1999 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, "total" and "twelve month" 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. On a week-to-week
and month-to-month basis, the availability of often volatile "immediately
workable" backlog most directly affects productivity, with such availability
subject to unpredictable changes such as weather, customer-initiated delays and
found variances in site conditions.
In addition to immediately workable backlog, a primary 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.
In response to continuing unfavorable operating margins, the Company
embarked on an aggressive cost reduction program in the closing quarter of
fiscal 2000 to return the Company to positive operating results in fiscal 2001.
Additionally, the Company repositioned to provide a range of customer service
and quality in response to market demand, including being the low-cost provider
where price alone is the predominantly controlling procurement factor.
Results of Operations
Three Months Ended September 30, 2000 Compared with Three Months Ended September
30, 1999
The Company recognized consolidated net earnings of $206,134 ($0.05 per
share) on sales of $6.3 million for the first quarter of fiscal 2001 ended
September 30, 2000 as compared to consolidated net earnings of $58,617 ($0.01
per share) on sales of $7.3 million for the first quarter of fiscal 2000 ended
September 30, 1999. The Company attributed its improved first quarter results,
and its dramatic turnaround from the previous three quarters, to a consistent
flow of immediately workable backlog and the impact of an aggressive cost
reduction program initiated during the fourth quarter of fiscal 2000.
Sales decreased $0.98 million (13%) from $7.31 million for the three
months ended September 30, 1999 to $6.33 million for the three months ended
September 30, 2000, due primarily to the mix of work performed. Work performed
during the first quarter of fiscal 2000 included a higher volume of larger
diameter work producing higher sales per installation for the three months ended
September 30, 1999.
Cost of sales decreased 16% in the first quarter of fiscal 2001 as
compared to the first quarter of fiscal 2000. As a result, gross profit as a
percentage of sales increased from a gross profit of 16% for the first quarter
of fiscal 2000 to a gross profit of 18% for the first quarter of fiscal 2001.
This increase is due primarily to reduced semi-fixed operating costs during the
first quarter of fiscal 2001 as a result of an aggressive cost reduction program
initiated during the fourth quarter of fiscal 2000. Both comparable periods
benefited from a high volume of sales at normal margins and a correspondingly
low volume of sales with discounted margins.
Selling, general and administrative expenses decreased $172,947 (16%)
for the first quarter of fiscal 2001 as compared to the first quarter of fiscal
2000, primarily as a result of the impact of an aggressive cost reduction
program initiated during the fourth quarter of fiscal 2000.
Interest expense increased $48,641 from $58,221 for the three months
ended September 30, 1999 to $106,862 for the three months ended September 30,
2000, primarily as a result of interest expense incurred on increased borrowings
on the Company's intercompany Notes Payable to CERBCO, Inc. during the three
months ended September 30, 2000.
Other income increased $27,904 from $39,301 for the three months ended
September 30, 1999 to $67,205 for the three months ended September 30, 2000
primarily as a result of gains recognized from the sale of excess equipment
during the three months ended September 30, 2000.
No provision for income taxes was recorded for the first quarter of
fiscal 2001 as the provision calculated using applicable enacted federal and
state tax rates of 39% of pretax earnings was applied to reduce the valuation
allowance recorded against the deferred tax asset during fiscal 2000. The
provision for income taxes for the first quarter of fiscal 2000 was calculated
using applicable tax rates of 39% of pretax earnings.
Financial Condition
During the three months ended September 30, 2000, the Company used
$385,146 in cash in operating activities, due primarily to a $1,245,893 increase
in Accounts Receivable that more than offset the impact of $513,559 in
Depreciation and Amortization expense included in net earnings that did not
require the outlay of cash and Net Earnings of $206,134. The increase in
Accounts Receivable is due primarily to a $659,386 increase in sales from the
three months ended June 30, 2000 to the three months ended September 30, 2000
and delays in customer collections. The Company's working capital position
remains adequate with working capital of $1.76 million and a current ratio of
1.2 at September 30, 2000.
The Company maintains a $6 million intercompany revolving line of
credit with its parent corporation, CERBCO, Inc. At September 30, 2000, the
Company had an outstanding balance of $4,800,000 against this intercompany line.
During the three months ended September 30, 2000, the Company received
$1,200,000 in proceeds from line of credit advances from CERBCO, Inc. The
Company expended $131,543 for installation equipment and other capital additions
and repaid $300,000 in intercompany line of credit advances to CERBCO, Inc.
during the three months ended September 30, 2000.
The Company anticipates that increased production levels in the future
will require additional capital expenditures. Management believes that cash flow
from future operations, existing working capital and the remaining commitment
available from the Company's intercompany line of credit provide adequate
resources to finance cash requirements for future operating activities.
Forward-Looking Information
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements that are
based on certain assumptions and describe future plans, strategies, and
expectations of the Company are generally identifiable by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project" or similar
expressions. The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors that could have a
material adverse affect on the operations and future prospects of the Company
include, but are not limited to, the availability of immediately workable
backlog, mix of work, weather, changes in interest rates and general economic
conditions, and legislative/regulatory changes. These risks and uncertainties
should be considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Dispute with ITI - United States District Court for the Middle District of
Tennessee
As previously reported, on December 3, 1999, Insituform Technologies,
Inc. and its Netherlands affiliate (collectively, "ITI") filed suit in the
United States District Court for the Middle District of Tennessee against the
Company and its subsidiary Midsouth Partners. In its Amended Complaint, which
was filed on June 13, 2000, ITI contends that Midsouth Partners has violated a
Settlement Agreement entered into in July 1999 (the "Settlement Agreement") with
respect to certain litigation initiated earlier in 1999 by allegedly using or
failing to timely remove from certain materials and equipment the Insituform(R)
trademark. ITI contends that these alleged breaches of the Settlement Agreement
also constitute violations of the Lanham Act, the Tennessee Model Trademark Act,
and applicable state law for the alleged unauthorized use of the Insituform
trademark. ITI seeks to terminate the Settlement Agreement and with it Midsouth
Partners' rights to continue to exploit the Insituform process as provided in
the Settlement Agreement. ITI seeks declarations (i) that Midsouth Partners has
committed one or more noncurable breaches of the Settlement Agreement; (ii) that
Midsouth Partners has violated the Lanham Act and the Tennessee Model Trademark
Act; (iii) that Midsouth Partners is no longer entitled to exploit the
Insituform process, to use certain tube labeled with the name "Insituform," and
to continue buying tube from ITI as provided in the Settlement Agreement, and
(iv) that the Settlement Agreement is or can be terminated. ITI also seeks a
declaration that the right of the Company and its subsidiaries to perform
certain subcontract work for Midsouth Partners pursuant to the Settlement
Agreement is or can be terminated and that the other provisions of the
Settlement Agreement remain in full force and effect. In addition, ITI seeks
unspecified damages.
ITI also contends that the various license agreements between the
Company and ITI bar the Company from exploiting the Insituform process, using
the Insituform trademark, or practicing any CIPP techniques outside of the
Company's territories without payment of the appropriate cross-over royalty and
regular royalty totaling 20% (except as otherwise provided by the Settlement
Agreement) and that these restrictions extend to Midsouth Partners as well,
because Midsouth Partners and the Company are allegedly alter egos of one
another. ITI contends that the Company is using Midsouth Partners to practice
CIPP rehabilitation processes outside of the territory provided for in the
Settlement Agreement and that the failure to pay a royalty and cross-over
royalty constitutes a breach of the Company's obligations under its license
agreements with ITI. ITI seeks a declaration that the Company and Midsouth
Partners must pay ITI a royalty and cross-over royalty totaling 20% (except as
otherwise provided by the Settlement Agreement) for any CIPP work performed in
these so-called "Insituform Owner Reserved Territories." ITI also seeks damages
in the form of any and all unpaid royalties and cross-over royalties that are
allegedly owed.
In addition, ITI seeks a declaration that it is no longer obligated to
make payments to the Company under its August 4, 1980 agreement with the
Company's predecessor-in-interest (the "SAW Agreement"), under which ITI agreed
to pay the Company's predecessor-in-interest for recruiting potential licensees
of the Insituform process. ITI contends that its acquisition or merger of
several such licensees has extinguished its obligations under the SAW Agreement
to pay the Company, which was assigned the right to receive payments for such
licensees in April 1981.
Trial is currently scheduled for July 31, 2001, and discovery is
underway. The Company has counterclaimed for a determination in its favor that
all of its practices are lawful and in accord with existing agreements. The
Company seeks unspecified damages from ITI in its counterclaims. The ultimate
outcome of this suit cannot be ascertained at this time.
While it is not possible at this time to establish the ultimate amount
of liability, if any, associated with this suit, it is the opinion of the
management of the Company that the aggregate amount of any such liability will
not have a material adverse effect on the financial position of the Company.
Conversely, in the opinion of management, in the unforeseen event that the
plaintiffs/counter-defendants substantially prevailed on their claims against
the Company and its subsidiary Midsouth Partners, including the restriction or
elimination of Midsouth Partners existing rights to expand nationally or to
practice any CIPP rehabilitation process methods without payment of royalty and
cross-over royalty to ITI, such event could have a material adverse effect on
the future financial position of the Company.
Other
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
None
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: November 7, 2000 /s/ Robert W. Erikson
---------------------------------------
Robert W. Erikson
President
Date: November 7, 2000 /s/ Raymond T. Verrey
---------------------------------------
Raymond T. Verrey
Chief Financial Officer
