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, 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 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 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 Nine Months Ended March 31, 2000
and 1999 (Unaudited) 3
Condensed Consolidated Balance Sheets
March 31, 2000 and June 30, 1999 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended March 31, 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 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INSITUFORM EAST, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ -----------------------------
2000 1999 2000 1999
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 4,762,450 $ 4,993,149 $16,749,172 $16,939,195
------------ ------------ ----------- -----------
Costs and Expenses:
Cost of sales 5,298,881 5,325,240 16,293,720 15,406,481
Selling, general and administrative 972,393 1,150,464 3,104,897 3,247,946
------------ ------------ ----------- -----------
Total Costs and Expenses 6,271,274 6,475,704 19,398,617 18,654,427
------------ ------------ ----------- -----------
Loss from Operations (1,508,824) (1,482,555) (2,649,445) (1,715,232)
Investment Income 6,523 11,796 30,529 50,856
Interest Expense (86,013) (18,334) (245,732) (42,232)
Other Income 93,188 53,951 167,780 200,526
------------ ------------ ----------- -----------
Loss Before Income Taxes
and Non-owned interests (1,495,126) (1,435,142) (2,696,868) (1,506,082)
Non-owned Interests in Pretax Loss
of Midsouth Partners 0 430,060 19,889 512,408
------------ ------------ ----------- -----------
Loss Before Income Taxes (1,495,126) (1,005,082) (2,676,979) (993,674)
Credit for Income Taxes 0 (392,000) (219,000) (388,000)
------------ ------------ ----------- -----------
Net Loss $ (1,495,126) $ (613,082) $(2,457,979) $ (605,674)
============ ============ =========== ===========
Basic Loss Per Share $ (0.34) $ (0.14) $ (0.56) $ (0.14)
============ ============ =========== ===========
Diluted Loss Per Share $ (0.34) $ (0.14) $ (0.56) $ (0.14)
============ ============ =========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
INSITUFORM EAST, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
------------- -------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 525,338 $ 793,187
Accounts receivable - net of allowance
for doubtful accounts of $0 5,970,586 6,588,435
Inventories - raw materials 1,329,571 1,273,402
Prepaid and refundable income taxes 88,490 93,532
Prepaid expenses 287,393 303,752
------------- -------------
Total Current Assets 8,201,378 9,052,308
Property, Plant and Equipment - at cost less accumulated
depreciation of $16,562,331 and $15,283,598 10,665,296 11,424,630
Deferred Income Taxes - net of valuation allowance
of $825,000 and $0 0 0
Cash Surrender Value of SERP Life Insurance 174,371 73,785
Other Assets 39,674 26,000
------------- -------------
Total Assets $ 19,080,719 $ 20,576,723
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to CERBCO, Inc. $ 4,500,000 $ 1,800,000
Partner loans to Midsouth Partners 0 400,000
Accounts payable 1,400,776 1,366,483
Accrued compensation and related expenses 1,174,564 1,361,115
Income taxes payable 15,724 14,724
Current portion of capital lease obligations 31,318 42,167
------------- ------------
Total Current Liabilities 7,122,382 4,984,489
Deferred Income Taxes 0 219,000
Long-Term Capital Lease Obligations 42,677 62,662
Accrued SERP Liability 87,286 55,623
------------- ------------
Total Liabilities 7,252,345 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 8,830,173 11,288,152
------------- ------------
13,017,987 15,475,966
Less cost of 327,897 shares of common stock in treasury 1,189,613 1,189,613
------------- ------------
Total Stockholders' Equity 11,828,374 14,286,353
------------- ------------
Total Liabilities and Stockholders' Equity $ 19,080,719 $ 20,576,723
============= ============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
INSITUFORM EAST, INCORPORATED CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
----------------------------------
2000 1999
------------ -------------
Cash Flows from Operating Activities:
<S> <C> <C>
Net loss $ (2,457,979) $ (605,674)
Adjustments for noncash items included in net loss:
Depreciation and amortization 1,752,657 1,533,569
Deferred income taxes (219,000) (183,000)
Non-owned interests in loss of consolidated subsidiary (19,889) (512,408)
Accrued SERP liability 31,663 45,496
Changes in assets and liabilities:
Receivables 617,849 (1,345,594)
Inventories (56,169) (78,980)
Other current assets 21,401 (58,957)
Payables and accruals (151,258) 328,944
------------ -------------
Net cash used in operating activities (480,725) (876,604)
------------- -------------
Cash Flows from Investing Activities:
Purchase of remaining interests in Midsouth Partners (948,707) 0
Capital expenditures, net (986,997) (1,671,538)
Increase in cash surrender value of SERP life insurance (100,586) (69,533)
Increase in other assets (20,000) 0
------------ -------------
Net cash used in investing activities (2,056,290) (1,741,071)
------------ -------------
Cash Flows from Financing Activities:
Proceeds from line of credit advances from CERBCO, Inc. 3,100,000 1,500,000
Repayment of line of credit advances to CERBCO, Inc. (400,000) (300,000)
Loans to Midsouth Partners from
non-owned interests - 200,000
Repayment of partner loans by Midsouth Partners (400,000) (250,000)
Principal payments under capital lease obligations (30,834) (25,313)
------------ -------------
Net cash provided by financing activities 2,269,166 1,124,687
------------ -------------
Net decrease in cash and cash equivalents (267,849) (1,492,988)
Cash and cash equivalents at beginning of period 793,187 2,148,511
------------ -------------
Cash and cash equivalents at end of period $ 525,338 $ 655,523
============ =============
Supplemental disclosure of cash flow information:
Interest paid $ 213,569 $ 42,232
Income taxes paid (refunded) $ (6,042) $ (76,197)
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, 2000, the
Condensed Consolidated Statements of Operations for the three months and nine
months ended March 31, 2000 and 1999, and the Condensed Consolidated Statements
of Cash Flows for the nine months ended March 31, 2000 and 1999 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 March 31, 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, 1999 Annual Report on Form 10-K. The
results of operations for the periods ended March 31, 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 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 Loss Per Share
Basic loss per share was computed by dividing net loss by the weighted
average number of common shares outstanding during the period. Weighted average
shares of 4,356,862 were used in computing basic loss per share for the three
months and nine months ended March 31, 2000 and 1999.
Diluted loss per share was computed by dividing net 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 loss per share for the three months and
nine months ended March 31, 2000 and 1999.
4. Income Taxes
The calculation of the Company's Credit for Income Taxes for the nine
months ended March 31, 2000, 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 $825,000 at March 31, 2000, has been reduced
by a valuation allowance of $825,000 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.
<PAGE>
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 Nine Months Ended
March 31, March 31,
------------------------------ ----------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 4,762,450 $4,993,149 $16,749,172 $16,939,195
Net Loss $ (1,495,126) $ (875,142) $(2,477,868) $ (919,082)
Net Loss Per Share:
Basic $(0.34) $(0.20) $(0.57) $(0.21)
Diluted $(0.34) $(0.20) $(0.57) $(0.21)
</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. Notes Payable
The Company maintains an 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 due on demand with interest
payable monthly at the commercial bank prime lending rate. This facility, which
is available for an indefinite period, was increased from $3,000,000 to
$4,500,000 on August 12, 1999 in connection with the Companys' acquisition of
remaining partnership interests in Midsouth Partners. This facility was
increased from $4,500,000 to $6,000,000 on March 10, 2000 in connection with
additional anticipated cash requirements associated with continuing losses from
operations. During the three months ended March 31, 2000, the previously
unsecured facility was converted to a secured facility collateralized by
substantially all tangible and intangible assets owned by the Company.
7. 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 for financial reporting purposes.
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 -$1,495,126 (-$0.34 per
share) on sales of $4.8 million for the third quarter of fiscal 2000 ended March
31, 2000, producing a consolidated net loss of -$2,457,979 (-$0.56 per share) on
sales of $16.7 million for the first nine months of fiscal 2000. In the previous
year, the Company recognized a net loss of -$613,082 (-$0.14 per share) on sales
of $5.0 million for the third quarter of fiscal 1999 and a net loss of -$605,674
(-$0.14 per share) on sales of $16.9 million for the first nine months. The
Company attributed its negative fiscal 2000 cumulative results primarily to a
significant decrease in immediately workable backlog during the second and third
quarters of the fiscal year.
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
continuing negative operating results for the fourth quarter of fiscal 2000,
with fiscal 2001 operating results significantly dependent upon growth and
availability of immediately workable backlog.
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 acquired pursuant to the Midsouth Settlement Agreement. While the
ultimate outcome of the December litigation cannot be determined at this time,
the Company intends to continue to exercise its rights under its license
agreements with ITI to expand the market for the Insituform Process within its
exclusively licensed territory, while Midsouth Partners intends to expand its
offering of pipeline rehabilitation processes outside its former territory.
The Company's total backlog value of all uncompleted and multi-year
contract awards was approximately $28.7 million at March 31, 2000 as compared to
$23.9 million at March 31, 1999. The twelve-month backlog at March 31, 2000 and
March 31, 1999 was approximately $10.4 million. The total backlog value of all
uncompleted and multi-year contracts at March 31, 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 is
embarking on an aggressive cost reduction program. The Company intends going
forward to provide a range of customer service and quality in response to market
demand, including being the efficient low-cost provider where product price is
the predominantly controlling procurement factor.
Results of Operations
Three Months Ended March 31, 2000 Compared with Three Months Ended
March 31, 1999
The Company reported a consolidated net loss of -$1,495,126 (-$0.34 per
share) on sales of $4.8 million for the third quarter of fiscal 2000 ended March
31, 2000, as compared to a 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. The
Company attributed its negative third quarter fiscal 2000 results primarily to a
significant decrease in immediately workable backlog during the quarter.
With respect to comparable period operating results, third quarter fiscal
2000 operating results were significantly affected by recognition of 100% of the
operating results of Midsouth Partners after July 20, 1999 and the valuation
allowance recorded against the tax provision calculated at statutory rates. The
Company's -$1,435,142 Loss Before Income Taxes and Non-owned Interests for the
three months ended March 31, 1999 was reduced by the $430,060 allocation of
Midsouth Partners pretax loss to non-owned interests and the $392,000 Credit for
Income Taxes.
Sales decreased $200,000 (5%) from $5.0 million for the three months ended
March 31, 1999 to $4.8 million for the three months ended March 31, 2000, due
primarily to a significant decrease in immediately workable backlog during the
current quarter.
Cost of sales decreased $26,359 (0.5%) in the third quarter of fiscal 2000
as compared to the third quarter of fiscal 1999. As a result, gross profit
(loss) as a percentage of sales decreased from a gross profit (loss) of (7%) for
the third quarter of fiscal 1999 to a gross profit (loss) of (11%) for the third
quarter of fiscal 2000. This decrease is due primarily to increased semi-fixed
costs incurred during the third 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 $178,071 (13%) for
the third quarter of fiscal 2000 as compared to the third quarter of fiscal
1999, primarily as a result of reduced legal costs. Additional legal costs were
incurred during the third quarter of fiscal 1999 in connection with litigation
initiated by ITI against the Company and Midsouth Partners.
Interest expense increased $67,679 from $18,334 for the third quarter of
fiscal 1999 to $86,013 for the third quarter of fiscal 2000 primarily as a
result of interest expense incurred on intercompany Notes Payable to CERBCO,
Inc.
Other income increased $39,237 from $53,951 for the three months ended
March 31, 1999 to $93,188 for the three months ended March 31, 2000 primarily as
a result of insurance recoveries more than offsetting the impact of decreased
SAW payments from ITI for the three months ended March 31, 2000.
No provision (credit) for income taxes was recorded for the three months
ended March 31, 2000, as the $583,000 credit calculated using applicable enacted
federal and state tax rates of 39% of the pretax loss was reduced by an equal
$583,000 valuation allowance recorded against the deferred tax asset during the
period.
Nine Months Ended March 31, 2000 Compared with Nine Months Ended March 31, 1999
The Company recognized a consolidated net loss of -$2,457,979 (-$0.56 per
share) on sales of $16.7 million for the first nine months of fiscal 2000 ended
March 31, 2000 as compared to 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. The Company attributed its negative fiscal 2000 cumulative
results primarily to a significant decrease in immediately workable backlog
during the second and third quarters of the fiscal year.
Sales decreased $200,000 (1%) from $16.9 million for the nine months ended
March 31, 1999 to $16.7 million for the nine months ended March 31, 2000 as
increased sales in the Company's licensed Insituform territory during the first
quarter of fiscal 2000 were more than offset by significant decreases in
immediately workable backlog during the second and third quarters of fiscal
2000.
Cost of sales increased 6% for the first nine months of fiscal 2000 as
compared to the first nine months of fiscal 1999. As a result, gross profit as a
percentage of sales decreased from a gross profit of 9% for the first nine
months of fiscal 1999 to a gross profit of 3% for the first nine months of
fiscal 2000. This decrease is due primarily to increased semi-fixed costs
incurred during the first nine 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 decreased $143,049 (4%) for
the first nine months of fiscal 2000 as compared to the first nine months of
fiscal 1999, due in part to additional legal costs associated with the future of
Midsouth Partners incurred during the third quarter of fiscal 1999.
Interest expense increased $203,500 from $42,232 for the first nine months
of fiscal 1999 to $245,732 for the first nine months of fiscal 2000 primarily as
a result of interest expense incurred on intercompany Notes Payable to CERBCO,
Inc.
Other income decreased $32,746 from $200,526 for the nine months ended
March 31, 1999 to $167,780 for the nine months ended March 31, 2000 primarily as
a result of reduced SAW payments from ITI more than offsetting the impact of
third quarter fiscal 2000 insurance recoveries.
The credit for income taxes of $219,000 for the nine months ended March 31,
2000, is 8% of the pretax loss of -$2,676,979 as the credit calculated using
applicable enacted federal and state tax rates of 39% of the pretax loss was
reduced by a $825,000 valuation allowance recorded against the deferred tax
asset during the period.
Financial Condition
During the nine months ended March 31, 2000, the Company used $480,725 in
cash in its operating activities primarily as a result of the Company's
$2,457,979 net loss being only partially offset by the impact of $1,752,657 in
Depreciation and Amortization expense included in the Company's net loss that
did not require the outlay of cash. In addition, the impact of a $617,849
decrease in Accounts Receivable was substantially offset by a $219,000 decrease
in Deferred Income Taxes and a $151,258 decrease in Payables and Accruals.
The Company maintains an 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 and increased from $4,500,000 to $6,000,000 on March 10, 2000
to finance additional anticipated cash requirements associated with continuing
operating losses. The Company received $3.1 million in proceeds from line of
credit advances from CERBCO, Inc. during the nine months ended March 31, 2000.
During the first nine 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 $986,997 for installation
equipment and other capital additions. The Company also repaid $400,000 in
intercompany line of credit advances to CERBCO, Inc. during the period. The
Company's financial liquidity remained adequate with working capital of $1.08
million and a current ratio of 1.15 at March 31, 2000.
The Company anticipates that increased production levels and continuing
operating losses in the future will require additional cash outlays. 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 the 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.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Dispute with ITI - United States District Court
As previously reported, 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 Midsouth 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INSITUFORM EAST, INCORPORATED
-----------------------------
(Registrant)
Date May 12, 2000 /s/ Robert W. Erikson
------------ ----------------------
Robert W. Erikson
President
Date May 12, 2000 /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, 2000, AND THE COMPANY'S UNAUDITED
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 525,338
<SECURITIES> 0
<RECEIVABLES> 5,970,586
<ALLOWANCES> 0
<INVENTORY> 1,329,571
<CURRENT-ASSETS> 8,201,378
<PP&E> 27,227,627
<DEPRECIATION> 16,562,331
<TOTAL-ASSETS> 19,080,719
<CURRENT-LIABILITIES> 7,122,382
<BONDS> 0
<COMMON> 187,390
0
0
<OTHER-SE> 11,640,984
<TOTAL-LIABILITY-AND-EQUITY> 19,080,719
<SALES> 16,749,172
<TOTAL-REVENUES> 16,749,172
<CGS> 16,293,720
<TOTAL-COSTS> 16,293,720
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 245,732
<INCOME-PRETAX> (2,676,979)
<INCOME-TAX> (219,000)
<INCOME-CONTINUING> (2,457,979)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,457,979)
<EPS-BASIC> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
