UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: December 31, 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 February 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
Page Reference
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Statements of Operations
Three Months and Six Months Ended December 31,
1999 and 1998 (Unaudited) 3
Condensed Consolidated Balance Sheets
December 31, 1999 and June 30, 1999 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended December 31, 1999 and 1998 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 14
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INSITUFORM EAST, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------------------------------------------
1999 1998 1999 1998
------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales $4,672,268 $5,898,104 $11,986,722 $11,946,046
---------- ---------- ----------- -----------
Costs and Expenses:
Cost of sales 4,875,453 5,030,790 10,994,839 10,081,241
Selling, general and administrative 1,022,401 1,057,656 2,132,504 2,097,482
---------- ---------- ----------- -----------
Total Costs and Expenses 5,897,854 6,088,446 13,127,343 12,178,723
---------- ---------- ----------- -----------
Earnings (Loss) from Operations (1,225,586) (190,342) (1,140,621) (232,677)
Investment Income 14,323 14,320 24,006 39,060
Interest Expense (101,498) (11,193) (159,719) (23,898)
Other Income 35,291 90,970 74,592 146,575
---------- ---------- ---------- -----------
Earnings (Loss) Before Income Taxes
and Non-owned interests (1,277,470) (96,245) (1,201,742) (70,940)
Non-owned Interests in Pretax Loss
of Midsouth Partners 0 20,725 19,889 82,348
---------- ---------- ---------- -----------
Earnings (Loss) Before Income Taxes (1,277,470) (75,520) (1,181,853) 11,408
Provision (Credit) for Income Taxes (256,000) (30,000) (219,000) 4,000
---------- ---------- ---------- -----------
Net Earnings (Loss) $(1,021,470) $ (45,520) $ (962,853) $ 7,408
============ =========== ========== ===========
Basic Earnings (Loss) Per Share $ (0.23) $ (0.01) $ (0.22) $ 0.00
=========== =========== ========== ===========
Diluted Earnings (Loss) Per Share $ (0.23) $ (0.01) $ (0.22) $ 0.00
=========== =========== ========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
INSITUFORM EAST, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
December 31, June 30,
<CAPTION> 1999 1999
-------------------------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 562,241 $ 793,187
Accounts receivable - net of allowance
for doubtful accounts of $0 5,922,490 6,588,435
Inventories - raw materials 1,211,133 1,273,402
Prepaid and refundable income taxes 88,612 93,532
Prepaid expenses 239,419 303,752
------------- -------------
Total Current Assets 8,023,895 9,052,308
Property, Plant and Equipment - at cost less accumulated
depreciation of $16,247,991 and $15,283,598 11,153,305 11,424,630
Deferred Income Taxes - net of valuation allowance
of $242,000 and $0 0 0
Cash Surrender Value of SERP Life Insurance 172,759 73,785
Other Assets 42,333 26,000
------------- -------------
Total Assets $ 19,392,292 $ 20,576,723
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to CERBCO, Inc. $ 3,800,000 $ 1,800,000
Partner loans to Midsouth Partners 0 400,000
Accounts payable 1,015,808 1,366,483
Accrued compensation and related expenses 1,076,659 1,361,115
Income taxes payable 15,724 14,724
Current portion of capital lease obligations 35,081 42,167
------------- ------------
Total Current Liabilities 5,943,272 4,984,489
Deferred Income Taxes 0 219,000
Long-Term Capital Lease Obligations 49,702 62,662
Accrued SERP Liability 75,818 55,623
------------- ------------
Total Liabilities 6,068,792 5,321,774
------------- ------------
Non-owned Interests in Consolidated Subsidiary 0 968,596
------------- ------------
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 10,325,299 11,288,152
------------- ------------
14,513,113 15,475,966
Less cost of 327,897 shares of common stock in treasury 1,189,613 1,189,613
------------- ------------
Total Stockholders' Equity 13,323,500 14,286,353
------------- ------------
Total Liabilities and Stockholders' Equity $ 19,392,292 $ 20,576,723
============= ============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
INSITUFORM EAST, INCORPORATED CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION> Six Months Ended
December 31,
-----------------------------------
1999 1998
------------- -------------
Cash Flows from Operating Activities:
<S> <C> <C>
Net earnings (loss) $ (962,853) $ 7,408
Adjustments for noncash items included in net earnings (loss):
Depreciation and amortization 1,175,641 1,010,759
Deferred income taxes (219,000) 104,000
Non-owned interests in loss of consolidated subsidiary (19,889) (82,348)
Accrued SERP liability 20,195 35,429
Changes in assets and liabilities:
Receivables 665,945 (531,257)
Inventories 62,269 (87,588)
Other current assets 69,253 28,586
Payables and accruals (634,131) (342,909)
------------- -------------
Net cash provided by operating activities 157,430 142,080
------------- -------------
Cash Flows from Investing Activities:
Purchase of remaining interests in Midsouth Partners (948,707) 0
Capital expenditures, net (900,649) (667,976)
Increase in cash surrender value of SERP life insurance (98,974) (66,789)
Increase in other assets (20,000) 0
------------- -------------
Net cash used in investing activities (1,968,330) (734,765)
------------- -------------
Cash Flows from Financing Activities:
Proceeds from line of credit advances from CERBCO, Inc. 2,400,000 0
Repayment of line of credit advances to CERBCO, Inc. (400,000) 0
Repayment of partner loans by Midsouth Partners (400,000) (250,000)
Principal payments under capital lease obligations (20,046) (16,448)
-------------- -------------
Net cash provided by (used in) financing activities 1,579,954 (266,448)
-------------- -------------
Net increase (decrease) in cash and cash equivalents (230,946) (859,133)
Cash and cash equivalents at beginning of period 793,187 2,148,511
-------------- -------------
Cash and cash equivalents at end of period $ 562,241 $ 1,289,378
============== =============
Supplemental disclosure of cash flow information:
Interest paid $ 131,906 $ 23,898
Income taxes paid (refunded) $ (5,920) $ (77,626)
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
INSITUFORM EAST, INCORPORATED
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Condensed Consolidated Financial Statements
The Condensed Consolidated Balance Sheet as of December 31, 1999, the
Condensed Consolidated Statements of Operations for the three months and six
months ended December 31, 1999 and 1998, and the Condensed Consolidated
Statements of Cash Flows for the six months ended December 31, 1999 and 1998
have been prepared by the Company without audit. The Condensed Consolidated
Balance Sheet as of June 30, 1999 (unaudited) has been derived from the
Company's June 30, 1999 audited financial statements. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows at December 31, 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 financial statements and notes
thereto included in the Company's June 30, 1999 audited financial statements.
The results of operations for the period ended December 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.; Insituform of Pennsylvania, Inc.; Midsouth L.L.C.
and Midsouth Partners (majority-controlled prior to July 20, 1999). All
significant intercompany accounts and transactions have been eliminated.
3. Computation of Net Earnings (Loss) Per Share
Basic earnings (loss) per share were computed by dividing net earnings
(loss) by the weighted average number of common shares outstanding during the
period. Weighted average shares of 4,356,862 were used in computing basic
earnings (loss) per share for the three months and six months ended December 31,
1999 and 1998.
Diluted earnings (loss) per share were 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 and 4,361,393 were used in computing diluted
earnings (loss) per share for the three months ended December 31, 1999 and 1998,
respectively. Weighted average shares of 4,356,862 and 4,359,127 were used in
computing diluted earnings (loss) per share for the six months ended December
31, 1999 and 1998, respectively.
4. Income Taxes
The calculation of the Company's Credit for Income Taxes for the six months
ended December 31, 1999, using applicable enacted federal and state rates,
resulted in a net deferred tax asset as temporary differences attributable to
operating loss carryforwards exceeded deferred tax liabilities attributable to
other temporary differences, principally the recognition of depreciation
expense. The deferred tax asset of $242,000 at December 31, 1999, has been
reduced by a valuation allowance of $242,000 because, based on the weight of
evidence available, to include the Company's pretax operating losses recognized
during the past three fiscal years, it is more likely than not that the deferred
tax asset will not be realized.
5. Acquisition of Remaining Interests 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 through July 20, 1999 were Insitu, Inc., a
wholly-owned subsidiary of the Company; Insituform Technologies, Inc. ("ITI")
and Insituform Southwest, Inc., an affiliate of ITI.
Partnership profits and losses were allocated through July 20, 1999 to the
partners as follows:
Insitu, Inc. 42.5%
Insituform Technologies, Inc. 42.5%
Insituform Southwest, Inc. 15.0%
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 the
Insituform process 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 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.
Effective July 20, 1999, the Company; through its wholly-owned subsidiary,
Midsouth, L.L.C.; acquired the remaining 57.5% interests in Midsouth Partners
previously held by ITI and Insituform Southwest, Inc. for $948,707, the book
value of their respective partnership accounts on July 20, 1999. The acquisition
was accounted for as a purchase. Partnership pretax earnings and losses
attributable to these interests, previously allocated to non-owned interests in
consolidation, have been allocated to the Company subsequent to July 20, 1999.
Unaudited pro forma results of operations, assuming acquisition of the
remaining interests in Midsouth Partners had occurred as of July 1, 1998, are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 4,672,268 $5,898,104 $11,986,722 $11,946,046
Net Earnings $ (1,021,470) $ (56,245) $ (982,742) $ (40,940)
Net Earnings per Share:
Basic $(0.23) $(0.01) $(0.23) $(0.01)
Diluted $(0.23) $(0.01) $(0.23) $(0.01)
</TABLE>
This pro forma information does not purport to be indicative of the results
that actually would have been recognized if the operations had been combined
during the periods presented and is not intended to be a projection of future
results.
6. Segment Reporting Information
In connection with the Company's acquisition of the remaining interests in
Midsouth Partners, the Company has determined that, subsequent to July 20, 1999,
the Company's operating activities consist of one reportable operating segment,
the trenchless rehabilitation of deteriorated sewers and other underground
pipelines principally using cured-in-place pipe ("CIPP") rehabilitation
processes. Prior to July 20, 1999, the Company's operating activities consisted
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. Since July 20,
1999, management and financial activities previously reported separately for
Midsouth Partners have been consolidated under East's management. In addition,
the former geographic segregation of rehabilitation services related to
separately licensed geographic territories for East and Midsouth Partners is no
longer applicable to the Company's consolidated rehabilitation activities.
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 -$1,021,470 (-$0.23 per
share) on sales of $4.7 million for the second quarter of fiscal 2000 ended
December 31, 1999, producing a consolidated net loss of -$962,853 (-$0.22 per
share) on sales of $12.0 million for the first six months of fiscal 2000. In the
previous year, the Company recognized a net loss of -$45,520 (-$0.01 per share)
on sales of $5.9 million for the second quarter of fiscal 1999 and net earnings
of $7,408 ($0.00 per share) on sales of $11.9 million for the first six months.
The Company attributed its negative fiscal 2000 results to a significant
decrease in immediately workable backlog during the second quarter of the fiscal
year compounded by actions taken during the first nine months of calendar 1999
to increase future productive capacity.
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 immediately workable
backlog of customer orders, the Company presently anticipates improved but
marginal operating results for the third quarter of fiscal 2000, with fourth
quarter and subsequent operating results significantly dependent upon growth and
availability of immediately workable backlog. An improved immediately workable
backlog level at the outset of the third quarter of fiscal 2000 was initially
offset by severe winter weather conditions experienced in January 2000.
As reported in the Company's December 9, 1999 press release, the Company's
Insituform Process licensor and former partner in the Midsouth Partners
partnership, Insituform Technologies, Inc. ("ITI"), has once again initiated
litigation against the Company. This litigation again appears targeted by ITI to
usurp for itself both the Company's legitimate competitive rights as a licensee
and competitive rights acquired pursuant to the Midsouth Settlement Agreement.
While the ultimate outcome of this newest litigation cannot be determined at
this time, the Company intends to continue to exercise both its and its
subsidiary's existing rights to expand offered cured-in-place pipe
rehabilitation processes in the trenchless pipeline rehabilitation marketplace.
The Company's total backlog value of all uncompleted and multi-year
contract awards was approximately $30.5 million at December 31, 1999 as compared
to $26.4 million at December 31, 1998. The twelve-month backlog at December 31,
1999 was approximately $11.4 million as compared to $13.0 million at December
31, 1998. The total backlog value of all uncompleted and multi-year contracts at
December 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, "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.
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 capabilities.
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 capabilities continue 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
Three Months Ended December 31, 1999 Compared with Three Months Ended
December 31, 1998
The Company reported a consolidated net loss of -$1,021,470 (-$0.23 per
share) on sales of $4.7 million for the second quarter of fiscal 2000 ended
December 31, 1999, as compared to a net loss of -$45,520 (-$0.01 per share) on
sales of $5.9 million for the second quarter of fiscal 1999 ended December 31,
1998. The Company attributed its negative second quarter fiscal 2000 results to
a significant decrease in immediately workable backlog compounded by actions
taken during the first nine months of calendar 1999 to increase future
productive capacity.
Sales decreased $1.2 million (21%) from $5.9 million for the three months
ended December 31, 1998 to $4.7 million for the three months ended December 31,
1999, due primarily to a significant decrease in immediately workable backlog
during the current quarter.
Cost of sales decreased 3% in the second quarter of fiscal 2000 as compared
to the second quarter of fiscal 1999. As a result, gross profit (loss) as a
percentage of sales decreased from a gross profit of 15% for the second quarter
of fiscal 1999 to a gross profit (loss) of (4%) for the second quarter of fiscal
2000. This decrease is due primarily to increased semi-fixed costs incurred
during the second quarter of fiscal 2000 to support increased productive
capacity, to include support costs associated with the Company's Ohio branch
office reestablished in March 1999.
Selling, general and administrative expenses decreased $35,255 (3%) for the
second quarter of fiscal 2000 as compared to the second quarter of fiscal 1999,
primarily as a result of reduced costs associated with consolidation of the
management and financial activities of Midsouth Partners under East's
management.
Interest expense increased $90,305 from $11,193 for the second quarter of
fiscal 1999 to $101,498 for the second quarter of fiscal 2000 primarily as a
result of interest expense incurred on intercompany Notes Payable to CERBCO,
Inc.
Other income decreased $55,679 from $90,970 for the three months ended
December 31, 1998 to $35,291 for the three months ended December 31, 1999
primarily as a result of decreased SAW payments from ITI.
The credit for income taxes of $256,000 for the three months ended December
31, 1999, is 20% of the pretax loss of -$1,277,470, as the credit calculated
using applicable enacted federal and state tax rates of 39% of the pretax loss
was reduced by a $242,000 valuation allowance recorded against the deferred tax
asset during the period.
Six Months Ended December 31, 1999 Compared with Six Months Ended December 31,
1998
The Company recognized a consolidated net loss of -$962,853 (-$0.22 per
share) on sales of $12.0 million for the first six months of fiscal 2000 ended
December 31, 1999 as compared to consolidated net earnings of $7,408 ($0.00 per
share) on sales of $11.9 million for the first six months of fiscal 1999 ended
December 31, 1998. The Company attributed its negative fiscal 2000 results to a
significant decrease in immediately workable backlog during the second quarter
of the fiscal year compounded by actions taken during the first nine months of
calendar 1999 to increase future productive capacity.
Sales increased $41,000 (0%) from $11,946,000 for the six months ended
December 31, 1998 to $11,987,000 for the six months ended December 31, 1999 as
increased sales in the Company's licensed Insituform territory during the first
quarter of fiscal 2000 offset a significant decrease in immediately workable
backlog during the second quarter of fiscal 2000.
Cost of sales increased 9% for the first six months of fiscal 2000 as
compared to the first six months of fiscal 1999. As a result, gross profit as a
percentage of sales decreased from a gross profit of 16% for the first six
months of fiscal 1999 to a gross profit of 8% for the first six months of fiscal
2000. This decrease is due primarily to increased semi-fixed costs incurred
during the first six months of fiscal 2000 to support increased productive
capacity, to include support costs associated with the Company's Ohio branch
office reestablished in March 1999.
Selling, general and administrative expenses increased $35,022 (2%) for the
first six months of fiscal 2000 as compared to the first six months of fiscal
1999, due in part to additional legal costs associated with the future of
Midsouth Partners.
Interest expense increased $135,821 from $23,898 for the first six months
of fiscal 1999 to $159,719 for the first six months of fiscal 2000 primarily as
a result of interest expense incurred on intercompany Notes Payable to CERBCO,
Inc.
Other income decreased $71,983 from $146,575 for the six months ended
December 31, 1998 to $74,592 for the six months ended December 31, 1999
primarily as a result of reduced SAW payments from ITI.
The credit for income taxes of $219,000 for the six months ended December
31, 1999, is 19% of the pretax loss of -$1,181,853 as the credit calculated
using applicable enacted federal and state tax rates of 39% of the pretax loss
was reduced by a $242,000 valuation allowance recorded against the deferred tax
asset during the period.
Financial Condition
During the six months ended December 31, 1999, the Company's operating
activities provided $157,430 in cash, due primarily to the impact of $1,175,641
in Depreciation and Amortization expense included in the Company's net loss that
did not require the outlay of cash more than offsetting the Company's net loss
of -$962,853. In addition, the impact of a $665,945 decrease in Accounts
Receivable was substantially offset by a $634,131 decrease in Payables and
Accruals.
The Company maintains an unsecured intercompany line of credit with CERBCO,
Inc. This line of credit was increased from $3,000,000 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. The Company received $2.4 million in proceeds from line of credit
advances from CERBCO, Inc. during the three months ended September 30, 1999.
During the first six months of fiscal 2000, the Company expended $948,707 to
purchase remaining interests in Midsouth Partners, $400,000 to repay partner
loans to Midsouth Partners by former partners and $900,649 for installation
equipment and other capital additions. The Company repaid $400,000 in
intercompany line of credit advances to CERBCO, Inc. during the three months
ended December 31, 1999. The Company's financial liquidity remained adequate
with working capital of $2.1 million and a current ratio of 1.35 at December 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, the remaining commitment available from the Company's
intercompany line of credit 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 have been generally referred to as "Year 2000 Issues."
The Company implemented plans to address Year 2000 issues. Primary areas of
focus included 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. The Company expended $30,000 in implementation costs through December
31, 1999. Because the Company's primary products and services neither include
nor rely upon computerized components, the Company concluded that there were no
additional contingencies associated with actual or implied warranties related to
its products and services resulting from Year 2000 issues.
Subsequent to December 31, 1999, the Company has not experienced any
difficulties with its information technology systems or its non-information
technology systems resulting from Year 2000 issues. In addition, the Company is
not aware of any disruptions experienced by its vendors, suppliers or major
customers associated with Year 2000 readiness. As a result, the Company has not
been required to implement any element of its contingency plan in order to
conduct normal business operations in the Year 2000.
The Company will continue to monitor the Year 2000 readiness of its
vendors, suppliers and major customers. The Company has not incurred any
material expenditures subsequent to December 31, 1999, and does not presently
anticipate any significant future costs related to maintaining Year 2000
compliance.
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
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 sought 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.
On January 7, 2000, in response to a stipulation of dismissal filed on
December 1, 1999, this lawsuit was dismissed with prejudice with each party
bearing its own costs. In connection with this dismissal, Defendants and
Plaintiffs executed a Release and Settlement Agreement dated November 29, 1999,
in which Plaintiffs released Defendants from any and all claims and damages
relating to the lawsuit.
Dispute with ITI - United States District Court
On December 3, 1999, Insituform Technologies, Inc. ("ITI") and its
Netherlands affiliate filed a lawsuit in the United States District Court for
the Middle District of Tennessee against the Company, the Company's wholly-owned
Midsouth Partners subsidiary and other Company affiliates. ITI takes the
position in the suit that all CIPP processes are derivative of the Insituform
Process and that neither the Company nor Midsouth Partners can utilize other
CIPP processes without utilizing ITI's intellectual property and trade secrets.
ITI seeks to enjoin the Company and Midsouth Partners from utilizing other CIPP
processes. In the alternative, ITI seeks a declaration that the Company and
Midsouth Partners must pay ITI a cross-over royalty for any CIPP work performed
in "Insituform Owner Reserved Territories." ITI seeks a declaration that the
Company and Midsouth Partners are in breach of the Settlement Agreement. ITI
seeks injunctive relief and unspecified damages.
On January 18, 2000 the Company filed its Answer to ITI's Complaint. In its
Answer, the Company responded to the allegations contained in ITI's complaint
and presented counterclaims against ITI whereby the Company, among other things,
seeks declaratory judgments of the Court reaffirming various provisions of the
existing Midsouth Settlement Agreement and particularly reaffirming the right of
Midsouth Partners to utilize CIPP rehabilitation processes other than the
Insituform process. The Company seeks unspecified damages from ITI in its
counterclaims.
The ultimate outcome and consequences 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 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 and to practice CIPP rehabilitation process
methods, such unforeseen 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 4. Submission of Matters to a Vote of Security Holders
Pursuant to a proxy solicitation dated November 8, 1999, the Company held
its Annual Meeting of Stockholders Friday, December 10, 1999. In addition to the
uncontested election of the directors of the Company, the stockholders voted on
a proposal to approve the 1999 Board of Directors' Stock Option Plan and a
proposal to approve the 1999 Employee Stock Option Plan.
The purpose of the 1999 Board of Directors' Stock Option Plan is to promote
the growth and general prosperity of the Company, through the granting of
options to purchase shares of its Common Stock, to attract and retain the best
available persons as members of the Company's Board of Directors with an
additional incentive for such persons to contribute to the success of the
Company. Options may be issued for a maximum of 525,000 shares of Common Stock
under the plan, subject to adjustment upon changes in the capital structure of
the Company.
The purpose of the 1999 Employee Stock Option Plan is to promote the growth
and general prosperity of the Company, by permitting key management employees of
the Company and of any wholly-owned subsidiary to purchase shares, through the
grant and exercise of options, of the Company's Common Stock. It is anticipated
that the plan will serve as an incentive to such key employees to maximize their
efforts on the Company's behalf. The Company will reserve 350,000 shares of
Common Stock for issuance upon the exercise of stock options granted under the
plan, subject to adjustment upon changes in the capital structure of the
Company.
The results of the voting on these proposals are as follows:
1. Proposal No. 1: To elect directors of the Corporation
<TABLE>
<CAPTION>
Class of Common Stock Number of Shares
Name of Director For Which Nominated For Against Withheld
---------------- ------------------- --- ------- --------
<S> <C> <C> <C>
Calvin G. Franklin Common Stock 3,356,123 0 534,195
Thomas J. Schaefer Common Stock 3,358,003 0 532,315
George Wm. Erikson Class B Common Stock 296,141 0 0
Robert W. Erikson Class B Common Stock 296,141 0 0
Webb C. Hayes, IV Class B Common Stock 296,141 0 0
Paul C. Kincheloe, Jr. Class B Common Stock 296,141 0 0
Jack Massar Class B Common Stock 296,141 0 0
</TABLE>
2. Proposal No. 2: To Approve the 1999 Board of Directors' Stock Option
Plan
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
Class of Common Stock Shares Votes Shares Votes Shares Vote
--------------------- --------- --------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Common 1,753,215 1,753,215 753,452 753,452 24,135 24,135
Class B Common 296,141 2,961,410 0 0 0 0
--------- --------- ------- ------- ------ ------
Total 2,049,356 4,714,625 753,452 753,452 24,135 24,135
========= ========= ======= ======= ====== ======
</TABLE>
3. Proposal No. 3: To Approve the 1999 Employee Stock Option Plan
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
Class of Common Stock Shares Votes Shares Votes Shares Vote
--------------------- --------- --------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Common 1,936,261 1,936,261 575,604 575,604 18,937 18,937
Class B Common 296,141 2,961,410 0 0 0 0
--------- --------- ------- ------- ------ ------
Total 2,232,402 4,897,671 575,604 575,604 18,937 18,937
========= ========= ======= ======= ====== ======
</TABLE>
<PAGE>
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
December 31, 1999. This Report on Form 8-K, filed December 10, 1999, reported on
Item 5. Other Events. This report includes a press release dated December 9,
1999 reporting Insituform Technologies, Inc. ("ITI") and its Netherlands'
affiliate filed a suit (the "Complaint") on December 3, 1999, in the United
States District Court for the Middle District of Tennessee, against the Company,
its wholly-owned subsidiary Midsouth Partners and other affiliates of the
Company. A copy of the Complaint is also included in this report. No financial
statements were filed with the 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 February 11, 2000 /s/ Robert W. Erikson
----------------- ----------------------
Robert W. Erikson
President
Date February 11, 2000 /s/ Raymond T. Verrey
----------------- ----------------------
Raymond T. Verrey
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
UNAUDITED BALANCE SHEET AS OF DECEMBER 31, 1999, AND THE COMPANY'S UNAUDITED
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 562,241
<SECURITIES> 0
<RECEIVABLES> 5,922,490
<ALLOWANCES> 0
<INVENTORY> 1,211,133
<CURRENT-ASSETS> 8,023,895
<PP&E> 27,401,296
<DEPRECIATION> 16,247,991
<TOTAL-ASSETS> 19,392,292
<CURRENT-LIABILITIES> 5,943,272
<BONDS> 0
<COMMON> 187,390
0
0
<OTHER-SE> 13,136,110
<TOTAL-LIABILITY-AND-EQUITY> 19,392,292
<SALES> 11,986,722
<TOTAL-REVENUES> 11,986,722
<CGS> 10,994,839
<TOTAL-COSTS> 10,994,839
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 159,719
<INCOME-PRETAX> (1,181,853)
<INCOME-TAX> (219,000)
<INCOME-CONTINUING> (962,853)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (962,853)
<EPS-BASIC> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
