UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: June 30, 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 20785-1608
Landover, Maryland (Zip Code)
(Address of principal executive offices)
Registrant's telephone and fax numbers, including area code:
(301) 386-4100 (tel)
(301) 386-2444 (fax)
(301) 773-4560 (24-hour public information Fax Vault System)
Securities registered pursuant to Section 12(b) of the Act: None Securities
registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.04 per share
Class B Common Stock, par value $.04 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- ---------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes X No
-------- ---------
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant computed by reference to the last price at
which such stock was sold, as of September 5, 2000, was $3,448,484.
As of September 5, 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
Documents Incorporated by Reference:
None
Total number of pages of this report: 199
Index to Exhibits located at page: 40
<PAGE>
TABLE OF CONTENTS
PART I Page
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 8
Item 3. Legal Proceedings............................................. 8
Item 4. Submission of Matters to a Vote of Security Holders........... 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 10
Item 6. Selected Financial Data....................................... 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 11
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.... 14
Item 8. Financial Statements and Supplementary Data................... 14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................... 14
PART III
Item 10. Directors and Executive Officers of the Registrant............ 30
Item 11. Executive Compensation........................................ 33
Item 12. Security Ownership of Certain Beneficial Owners and Management 38
Item 13. Certain Relationships and Related Transactions................ 40
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 40
--------------------------------------------------------
CONSOLIDATED
STATEMENTS OF OPERATIONS
AND BALANCE SHEETS
Pages 16 and 17
--------------------------------------------------------
<PAGE>
PART I
Item 1. Business
(a) General Development of Business
Insituform East, Incorporated (the "Company" or "Registrant") was
organized under the laws of the State of Delaware on February 26, 1970, under
the name Universal Construction and Supply Company. Its present name was adopted
on August 24, 1978. The Company was engaged in underground conduit construction
from inception until 1974 and construction equipment rental from 1974 to 1978.
The Company then phased out these lines of business and entered into
sublicensing agreements for the Insituform(R) process, a patented technology for
reconstructing pipelines with little or no excavation. Since July 1978, the
Company and its subsidiaries have been engaged in the business of rehabilitating
underground sewers and other pipelines principally using cured-in-place pipe
("CIPP") processes, with primary revenues generating from the Company's
Insituform(R) process product line.
Between 1982 and 1986, the Company added western Pennsylvania, Ohio,
three Kentucky counties and West Virginia to its original Insituform process
licensed territory of Maryland, Virginia, the District of Columbia, Delaware and
eastern Pennsylvania.
In December 1985, Midsouth Partners was organized as a Tennessee
General Partnership and became the exclusive licensee for the Insituform process
in Tennessee, the rest of Kentucky and northern Mississippi. The Company was
assigned three representatives to a seven-member Management Committee
established to manage the business activities of the Partnership and allocated a
42.5% interest in Partnership profits and losses.
In September 1987, the Company established a branch facility in
Cincinnati, Ohio, to support operating activities in the western region of its
licensed territory. In March 1998, the Company closed its Ohio branch facility
and completed an orderly plan to transfer the functions, personnel and equipment
to the Company's Landover, Maryland headquarters facility. In March 1999, the
Company reestablished a branch facility in Cincinnati, Ohio.
In May 1989, the Company acquired an 80% interest in Try Tek Machine
Works, Inc. ("Try Tek"). Try Tek, located in Hanover, Pennsylvania, was founded
in September 1985 to custom design and build special machinery, including
machinery used to rehabilitate pipelines using CIPP processes. The Company
acquired an additional 10% interest in Try Tek in February 1993 and the
remaining 10% interest in Try Tek in March 1995.
In December 1990, the Company acquired exclusive licenses for the sale
and installation of pre-formed PVC thermoplastic pipe under the NuPipe(R)
process and trademark for a sales region identical to the territories licensed
to the Company for the Insituform process.
In September 1991, the Company added cement mortar lining of potable
water lines to its service capability. A formal plan to discontinue providing
cement mortar lining services, adopted in June 1993, was substantially completed
in June 1994.
On June 12, 1996, as a result of a default by a partner under the
Partnership Agreement, the Company was issued an arbitration award granting it
the unilateral right to appoint a Midsouth Partners Management Committee
representative in place of the defaulted partner's representative. Accordingly,
the Company obtained majority representation on the Management Committee
effective June 12, 1996.
In March 1999, Insituform Technologies, Inc. ("ITI") gave notice of a
purported termination of the Midsouth Partners partnership, purportedly
terminated Midsouth Partners' Insituform License Agreement and simultaneously
commenced litigation in the Chancery Court of Delaware to deny Midsouth Partners
any rights to further utilize CIPP rehabilitation processes as previously
practiced under such license. In April 1999, Midsouth Partners responded to the
Delaware Chancery Court litigation and filed a demand for arbitration with the
American Arbitration Association.
The Company subsequently settled its disputes with ITI concerning
Midsouth Partners under the terms of an agreement executed July 20, 1999 (the
"Midsouth Settlement Agreement") and actions before the Delaware Chancery Court
and the American Arbitration Association were dismissed. Under the terms of the
Midsouth Settlement Agreement, a wholly-owned subsidiary of the Company
purchased ITI's interests in the Midsouth Partners partnership at book value and
Midsouth Partners remained entitled to continue the business of the partnership
under its present name. The Insituform(R) License Agreement and its requirement
to pay royalties were relinquished under the settlement, henceforth permitting
direct competition between ITI and Midsouth Partners. The Midsouth Settlement
Agreement expressly provides that Midsouth Partners may utilize processes other
than the Insituform process to perform pipe rehabilitation services, and
Midsouth Partners also obtained a royalty-free non-exclusive right, without
limitation in time and within the partnership's previously licensed territory,
to continued use of the CIPP 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.
(b) Financial Information about Industry Segments
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 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.
(c) Narrative Description of Business
Insituform East, Incorporated and its subsidiaries are engaged in the
trenchless rehabilitation of underground sewers and other pipelines principally
using CIPP rehabilitation processes to produce a shape-conforming
"pipe-within-a-pipe." Since 1978, the Company has performed work in six
Mid-Atlantic states and the District of Columbia using the patented Insituform
process under territorially exclusive sublicense agreements. Utilizing other
trenchless CIPP processes, the Company's wholly-owned subsidiary, Midsouth
Partners, operates substantially without geographic restriction. The Company's
CIPP rehabilitation processes utilize custom manufactured unwoven polyester
fiber-felt tubing with an elastomeric coating on the exterior surface. The flat,
pliable tube is later impregnated with a liquid thermosetting resin and the
resin-saturated material is inserted in the pipe through an existing manhole or
other access point. Using a temporary inversion duct and cold water pressure,
the material is turned inside out as it is forced through the pipeline. When the
inverted and inflated tube is fully extended, the cold water within it is
recirculated through a heat-exchange unit. The heated water cures the
thermosetting resin to form a new, hard, jointless, impact and corrosion
resistant cured-in-place pipe within the original pipe. Lateral or side
connections are then reopened by use of a remotely controlled cutting device.
RELATIONSHIP WITH INSITUFORM TECHNOLOGIES, INC.
On December 9, 1992, Insituform Technologies, Inc. (formerly Insituform
of North America, Inc.), through its acquisition of Insituform Group, Ltd.,
N.V., acquired the worldwide patent rights for the Insituform(R) process.
Insituform East, Inc. is a sublicensee of Insituform Technologies, Inc. ("ITI")
for use of the Insituform process. The Company has entered into six sublicense
agreements with ITI which grant the Company exclusive rights to perform the
Insituform process in the designated territories of Virginia, Maryland,
Delaware, Ohio, the District of Columbia, Pennsylvania and West Virginia. The
sublicense agreements require the Company to pay ITI a royalty of 8% of the
revenue, excluding certain deductions, from all contracts using the Insituform
process, with a minimum annual royalty requirement for each licensed territory.
In the event the Company performs the Insituform process outside its exclusive
territory, the sublicense agreements require it to pay a royalty of from 8% to
12% of the gross contract price to the independent Insituform sublicensee of
such other territory in addition to all royalties due ITI.
The sublicense agreements extend for the life of the underlying patents
or patent rights, including any improvements or modifications extending such
life. The agreements may be terminated by the Company upon two calendar quarters
written notice to ITI. The agreements may only be canceled by ITI in certain
events. In addition, ITI has the right to approve the quality and specifications
of equipment and materials not purchased directly from ITI.
In 1981, the Company was assigned the rights to an agreement (the SAW
Agreement) regarding the introduction of potential Insituform process
sublicensees to ITI. The Company currently receives quarterly payments from ITI
equal to 0.5% of contract revenues from Insituform process installations in
East's licensed territory. The Company received quarterly payments from ITI
equal to 0.5% of contract revenues from Insituform process installations in the
states of New York, New Jersey, North Carolina, South Carolina, Georgia and
Alabama in connection with the introduction of former Insituform process
licensees to ITI.
On December 29, 1997, Insituform East entered into a revised supply
agreement with ITI whereby the Company committed to purchase 90% of its
Insitutube requirements from ITI for an initial five year period from January 1,
1998 to December 31, 2002. The agreement will automatically extend for one year
periods unless notice of termination is provided by either party six months
prior to the end of any such annual period.
Under the terms of the Midsouth Settlement Agreement executed July 20,
1999, Midsouth Partners became a wholly-owned subsidiary of the Company and
additionally obtained a royalty-free non-exclusive right, without limitation in
time, to continued use within the partnership's previously licensed territory of
the cured-in-place pipe processes, technique and inventions that it formerly
practiced pursuant to its since-terminated Insituform(R) License Agreement as
the same existed on July 20, 1999. The Insituform(R) License Agreement and its
requirement to pay royalties were relinquished under the settlement, henceforth
permitting direct competition between ITI and Midsouth.
Effective July 20, 1999, Midsouth Partners also executed a Felt Tube
Supply Agreement with ITI for the purchase of felt tubes to be used in CIPP
rehabilitation in the partnership's previously licensed territories of
Tennessee, most of Kentucky and northern Mississippi. The agreement, with an
initial five year term, automatically extends for successive one year periods
unless notice of termination is provided by either party six months prior to the
expiration date of the initial five year period or any such annual period
thereafter.
The Company has also entered into a license agreement with NuPipe,
Inc., a previously wholly-owned and now merged subsidiary of ITI, for the sale
and installation of pre-formed PVC thermoplastic pipe under the NuPipe process
and trademark. The Company's licensed NuPipe territory is identical to the
Company's licensed Insituform territory. The Company has committed to pay a
royalty equal to 6.75% of gross contract revenues utilizing the process and to
purchase certain installation equipment and installation materials from ITI. In
connection with the Midsouth Settlement Agreement, Midsouth Partners' NuPipe
License Agreement was relinquished effective July 20, 1999.
PATENTS
The Insituform process was developed in the United Kingdom in 1971. The
Company's rights to utilize the patents are derived from its licensor, ITI.
There are presently 76 United States patents that cover various aspects of the
Insituform process. The last patent to expire will remain in effect until 2016.
Two initial method patents relating to the Insituform process (one of which
covered material aspects of the inversion process) expired in 1994. A patent
relating to the Insitutube material will expire in May 2001 and a method patent
relating to the Insitutube saturation process expires in February 2001.
Although management of the Company believes these patents are important
to the Insituform business of the Company, there can be no assurance that the
validity of the patents will not be successfully challenged or that they are
sufficient to afford protection against another company utilizing a process
similar to the Insituform process. It is possible that the Company's Insituform
business could be adversely affected upon expiration of the patents, or by
increased competition in the event that one or more of the patents were
adjudicated to be invalid or inadequate in scope to protect the Company's
operations. Management of the Company believes, however, that while the Company
has relied on the strength and validity of Insituform patents, the Company's
other CIPP process alternatives and its significant CIPP installation experience
coupled with the Company's high degree of market recognition should enable the
Company to compete effectively in the pipeline rehabilitation market in the
future as Insituform patents expire or become obsolete.
CUSTOMERS
The Company performs services under contract with governmental
authorities, private industries and commercial entities. In each of the last
three fiscal years, more than 58% of the Company's revenues have come from state
and local government entities - cities, counties, state agencies and regional
authorities. During the year ended June 30, 2000, a county government in the
Washington, D.C. metropolitan area, Federal Government contracts (collectively),
a municipal government in Tennessee and a regional sanitary authority in
southwest Ohio accounted for 17%, 14%, 10% and 10%, respectively, of the
Company's revenues. During the year ended June 30, 1999, a county government in
the Washington D.C. metropolitan area, Federal Government contracts
(collectively) and a regional sanitary authority in southwest Ohio accounted for
18%, 12% and 11%, respectively, of the Company's revenue. During the year ended
June 30, 1998, the Perry Nuclear Power Plant project, a combined city and county
metropolitan government in Tennessee and a county government in the Washington,
D.C. metropolitan area accounted for 19%, 12% and 12%, respectively, of the
Company's revenue.
SUPPLIERS
The Company's materials and equipment are generally available from
several suppliers. Although the Company believes that ITI is presently the sole
source of proprietary Insitutube material, the Company is aware of other
suppliers of felt tube materials and other materials used in CIPP
rehabilitation. The Company presently relies upon ITI for its supply of
Insitutube(R) material for its Insituform process product line.
During the last three years the Company has not experienced any
difficulty in obtaining adequate supplies of Insitutube material from ITI and,
subject to ITI's right to approve the quality and specifications of material not
purchased from ITI, the Company has the right to substitute an alternate
polyester fiber-felt or other tube material available in the marketplace. In
connection with the Midsouth Settlement Agreement effective July 20, 1999,
Midsouth Partners is no longer an Insituform process licensee and therefore no
longer subject to ITI approval for the use of alternate installation materials.
Midsouth Partners does purchase felt tube materials from suppliers other than
ITI.
REVENUE RECOGNITION, CONTRACT AWARDS AND BACKLOG
The Company recognizes revenues using the units of completion method as
pipeline sections are rehabilitated using CIPP processes. Installations are
generally performed between manholes or similar access points within a
twenty-four hour period. A rehabilitated pipeline section is considered
completed work and is generally billable to the customer. In most cases,
contracts consisting of individual line sections have a duration of less than
one year.
The Company's total backlog value of all uncompleted and multi-year
contract awards was approximately $27.1 million at June 30, 2000 as compared to
$31.1 million at June 30, 1999. The twelve-month backlog at June 30, 2000 was
approximately $15.2 million as compared to $13.5 million at June 30, 1999. The
total backlog value of all uncompleted and multi-year contracts at June 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.
COMPETITION
The general pipeline reconstruction, rehabilitation and repair business
is significantly competitive. The Company faces conceptual and practical
competition both from a number of contractors employing traditional methods of
pipeline replacement and repair and from contractors offering alternative
trenchless products and technologies, including cured-in-place pipeline ("CIPP")
technology.
Traditional Methods. CIPP processes conceptually compete with
traditional methods of pipe rehabilitation including full replacement, point
repair and sliplining. The Company believes CIPP processes usually offer a cost
advantage over full replacement as well as the practical advantage of avoiding
excavation. In addition, CIPP processes also offer qualitatively better
rehabilitation than sliplining which may significantly reduce the diameter of
the pipe. Grouting is also undertaken in the United States, but the Company
considers grouting a short-term repair technique and not a long-term pipeline
rehabilitation solution competitive with CIPP processes. As a practical matter,
competition for the Company typically begins at the point an end user has
conceptually determined to employ trenchless technology over traditional
rehabilitation methods involving substantial excavation.
Trenchless Cured-in-Place Technologies. Over the years, the Company has
witnessed a continuing stream of entrants into the CIPP marketplace, few of
which the Company believes are able to offer the quality or technical capability
of the Company. The Company believes it remains the dominant provider of
trenchless cured-in-place pipeline rehabilitation in its Insituform licensed
territory and believes there is significant potential into the future for
Midsouth Partners using the alternative CIPP processes available.
Modified Sliplining Techniques. Several modified sliplining techniques
have been introduced in the trenchless marketplace to include the use of "fold
and formed" thermoplastic pipe. The NuPipe product offered by the Company is a
folded thermoplastic product installed using modified sliplining techniques. The
Company believes that the majority of customers will select the CIPP processes
over modified sliplining techniques due to the quality and longevity of the CIPP
product, the proven performance record of the Company's CIPP process
installations over the past twenty-two years, and the broader range of design
alternatives available with a CIPP process. The Company does offer its NuPipe
product to customers in situations where, for budget restraints or other
reasons, customers or consulting engineers will accept a modified sliplining
technique technologically inferior to cured-in-place technology.
Other Trenchless Competition. The Company is aware of a number of other
trenchless technologies both under development and from time to time introduced
into the marketplace with mixed results. The Company believes that its
significant years of proven performance continue to present a significant CIPP
capability advantage over alternative trenchless products and newer entrants.
The principal areas of competition in general pipeline reconstruction,
rehabilitation and repair include the quality of the work performed, the ability
to provide a long-term solution to the pipeline problems rather than a
short-term repair, the amount of disruption to traffic and commercial activity
and the price. The Company believes that CIPP processes compete favorably in
each of these areas with traditional replacement or repair methods. In
particular, the ability to install CIPP products with little or no excavation at
prices typically at or below traditional open trench replacement methods is of
substantial competitive advantage. Further, and despite a small reduction in
pipe diameter resulting from the installation of a CIPP product against the
walls of the original pipe, the smooth finished interior reduces friction and
generally increases flow capacity.
SALES AND MARKETING
The Company's sales and marketing effort is directed by its Vice
President of Sales and Marketing. The Company's sales and marketing group
includes three sales representatives assigned to serve the Company's municipal,
Federal Government and industrial market customers. Sales and marketing
personnel are full-time employees compensated through a combination of salary
and bonus. The Company also participates in seminars and trade shows, and
provides promotional materials to current and prospective users of CIPP
processes.
RESEARCH AND DEVELOPMENT
The Company is confident of its present capability to provide pipeline
rehabilitation services to its customers primarily using CIPP processes.
Insituform East relies on its Insituform process licensor, ITI, for major
research and development of the Company's Insituform process product line. On a
continuing basis, however, the Company expends engineering efforts to improve
CIPP installation methods and design techniques for specific customer
applications.
GOVERNMENTAL REGULATIONS
The Company does not anticipate any material impediments in the use of
CIPP processes arising from existing or future regulations or requirements,
including those regulating the discharge of materials into the environment.
EMPLOYEES
At June 30, 2000, the Company employed 155 full-time personnel.
Item 2. Properties
The Company owns four buildings totaling 76,700 square feet situated on
a 15.45 acre site in the Ardwick Industrial Park, Prince George's County,
Maryland. This facility houses the maintenance, operations, marketing,
administration and executive offices of the Company.
The Company also owns 13,885 square feet of land in Hanover,
Pennsylvania. Try Tek's manufacturing, administration and storage facilities are
housed in three buildings totaling 6,139 square feet at this site.
The Company leases a 15,000 square foot facility in Knoxville,
Tennessee to serve Midsouth Partners customers in the southeastern United
States.
The Company also leases a 5,460 square foot facility in Cincinnati,
Ohio to serve East's customers in the western region of its licensed territory.
Item 3. Legal Proceedings
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 and to
practice CIPP rehabilitation process methods, 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 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
(a) Market Information
(i) Common Stock
The Company's Common Stock is traded in the over-the-counter market and
is included in the National Association of Securities Dealers ("NASD") Nasdaq
SmallCap Market . Holders of Common Stock have one vote per share on all matters
on which stockholders are entitled to vote together. Prior to May 12, 1999, the
Company's Common Stock was traded on the Nasdaq National Market System. The
shift to the Nasdaq SmallCap Market was implemented because the Company's market
size did not permit continued maintenance under the rules of the larger National
Market System. Quotations for such shares are reported in the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system under
the trading symbol INEI.
The following table shows the range of bid quotations for each quarter
in the two year period ended June 30, 2000 as reported by NASDAQ:
Bid Prices* For Common Stock
-----------------------------------------------------------
Quarter Ended High Low
1998
September 30 $2.38 $2.13
December 31 $2.25 $1.00
1999
March 31 $2.25 $0.75
June 30 $1.44 $1.00
September 30 $1.75 $1.25
December 31 $1.81 $0.88
2000
March 31 $2.00 $1.25
June 30 $1.75 $1.25
------------------------------
* Bid prices reflect interdealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
(ii) Class B Common Stock
There is no public trading market for shares of the Company's Class B
Common Stock. Holders of shares of Class B Common Stock have ten votes per share
on all matters, with the exception of voting power to elect directors. With
respect to the election of directors, holders of Class B Common Stock, voting
separately as a class, are entitled to elect the remaining directors after
election of not less than 25% of the directors by the holders of shares of
Common Stock, voting separately as a class. Shares of Class B Common Stock are
convertible at any time to shares of Common Stock on a share-for-share basis.
(b) Holders
As of September 5, 2000, there were 566 shareholders of record of
Common Stock and 7 shareholders of record of Class B Common Stock.
(c) Dividends
The Company did not declare any cash dividends to its Common Stock or
Class B Common Stock shareholders during the fiscal years ended June 30, 2000
and 1999, primarily as a result of negative operating results experienced during
the period.
The declaration of any future dividends will be determined by the Board
of Directors based upon conditions then existing, including the Company's
operating results, financial condition, capital requirements and other factors.
While there can be no assurances as to the declaration of any future dividends,
it is presently contemplated that declaration of any future dividends will be
considered on an annual basis. In addition, it is expected that any future cash
dividends would have a record date of June 30th and a payment date of July 15th.
Item 6. Selected Financial Data
The selected financial data set forth below should be read in
conjunction with the Company's financial statements and related notes included
elsewhere in this report.
<TABLE>
<CAPTION>
(in thousands, except per share and return on equity amounts)
Years Ended June 30,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
SUMMARY OF OPERATIONS:
<S> <C> <C> <C> <C> <C>
Sales $ 22,422 $ 23,315 $23,891 $ 26,542 $ 30,471
Gross Profit $ 1,107 $ 1,698 $ 2,700 $ 4,119 $ 8,182
Earnings (loss) before income taxes $ (2,980) $ (1,829) $ (545) $ (888) $ 2,753
Net earnings (loss) $ (2,761) $ (1,116) $ (332) $ (544) $ 1,679
Net earnings (loss) per share $ (0.63) $ (0.26) $ (0.08) $ (0.12) $ 0.38
Weighted average number of shares 4,357 4,357 4,357 4,357 4,420
Dividends declared per share:
Common Stock $ - $ - $ - $ 0.06 $ 0.06
Class B Common Stock $ - $ - $ - $ 0.06 $ 0.06
FINANCIAL POSITION:
Working capital $ 1,253 $ 4,068 $ 6,952 $ 7,641 $ 8,709
Total assets $ 18,066 $ 20,577 $20,952 $ 23,065 $ 23,189
Long-term debt $ 43 $ 63 $ 105 $ 139 $ 113
Stockholders' equity $ 11,525 $ 14,286 $15,402 $ 15,734 $ 16,539
Book value per share $ 2.65 $ 3.28 $ 3.53 $ 3.61 $ 3.79
OTHER:
Average stockholders' equity
[Weighted average equity during the year
exclusive of current earnings (loss)] $ 14,286 $ 15,402 $15,734 $16,531 $ 15,107
Return on equity
[Net earnings (loss) divided by average
stockholders' equity as defined above] (19.3%) (7.2%) (2.1%) (3.3%) 11.1%
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview and Outlook
The Company reported a consolidated net loss of -$2,761,306 (-$0.63 per
share) on sales of $22.4 million for the fiscal year ended June 30, 2000. In the
previous year, the Company reported a consolidated net loss of -$1,115,534
(-$0.26 per share) on sales of $23.3 million. The Company attributed its
unfavorable fiscal 2000 results primarily to a significant decrease in
immediately workable backlog from October 1999 through May 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 present and expected immediately workable
backlog of customer orders, the Company currently anticipates modest but
positive operating results for the first quarter ending September 30, 2000. The
combination of a favorable mix of work and a consistently high volume of
immediately workable backlog will be required to sustain positive operating
results for 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 ITI's most recent December
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 litigation is currently scheduled for July 31, 2001.
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 in fiscal 2000,
the Company embarked on an aggressive cost reduction program to return the
Company to positive operating results in fiscal 2001. As noted earlier, the
Company currently anticipates modest but positive operating results for the
first quarter of fiscal 2001 ending September 30, 2000. 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:
<TABLE>
<CAPTION>
Key Statistics: 2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Sales (100%) $22,421,875 $23,315,198 $23,891,215
Gross profit 5% 7% 11%
Selling, general and administrative expenses 18% 19% 19%
Net earnings (loss) (12%) (5%) (1%)
</TABLE>
The Company's primary source of revenue is from the rehabilitation and
reconstruction of sewers and other underground conduits using CIPP
rehabilitation processes. Although the Company does rehabilitate pipelines using
other rehabilitation processes, custom design and build special machinery and
perform manhole rehabilitation and pipeline cleaning and television inspection
services, over 89% of the Company's revenues for the years ended June 30, 2000,
1999 and 1998 came from contracts with customers to rehabilitate existing
pipelines using CIPP processes.
Consolidated sales decreased $900,000 (4%) from $23.3 million in fiscal
1999 to $22.4 million in fiscal 2000, primarily as a result of significant
decreases in immediately workable backlog from October 1999 through May 2000.
Consolidated sales decreased $600,000 (2.5%) from $23.9 million in
fiscal 1998 to $23.3 million in fiscal 1999, primarily as a result of
significant revenues from the Perry Nuclear project recognized during the first
quarter of fiscal 1998.
The Company varies its prices according to pipe sizes and other contract
conditions. Additionally, the Company has generally incorporated anticipated
cost increases resulting from inflation, ranging from 2% to 5% during the past
three years, into its contract prices. As a result, inflation has not had a
significant impact on the Company's revenues and operating results.
The Company's gross profit as a percentage of sales revenues was 5%, 7%
and 11% for fiscal 2000, 1999 and 1998, respectively. The decrease in fiscal
2000 gross profit margin as compared to fiscal 1999 is due primarily to
increased semi-fixed costs incurred during fiscal 2000 to support increased
productive capacity, to include support costs associated with the Company's Ohio
branch office reestablished in March 1999. The decrease in fiscal 1999 gross
profit margin as compared to fiscal 1998 is due primarily to acceptance of
additional job completion costs on several incomplete projects and an increase
in discounted sales.
Selling, general and administrative expenses decreased $434,866 in
fiscal 2000 as compared to fiscal 1999, primarily as a result of cost reduction
measures implemented during fiscal 2000 plus the impact of additional legal
costs associated with the future of Midsouth Partners incurred during fiscal
1999.
Selling, general and administrative expenses decreased $100,318 in
fiscal 1999 as compared to fiscal 1998 primarily as a result of reduced costs to
support decreased production activities more than offsetting additional legal
costs associated with the future of Midsouth Partners.
Interest expense increased $259,360 from $85,013 for the year ended
June 30, 1999 to $344,373 for the year ended June 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 year ended June 30, 2000.
The credit for income taxes of $219,000 for fiscal 2000 is 7% of the
pretax loss of -$2,980,306 as the credit calculated using applicable enacted
federal and state tax rates of 39% of the pretax loss was reduced by a $943,000
valuation allowance recorded against the deferred tax asset during the year. The
credit for income taxes for fiscal 1999 and fiscal 1998 was calculated using
applicable tax rates of 39% of the pretax loss.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
Key Statistics: 2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Working Capital $1,253,130 $4,067,819 $6,952,085
Current Ratio 1.2 to 1 1.8 to 1 3.5 to 1
Cash provided by (used in) Operations $252,260 $(800,306) $1,365,245
Capital Expenditures $1,156,897 $2,425,409 $1,695,586
</TABLE>
During the fiscal year ended June 30, 2000, $252,260 in cash was
provided by the Company's operating activities, primarily as a result of the
Company's $2.8 million net loss for the year being more than offset by $2.3
million in depreciation and amortization not requiring the outlay of cash and a
$1.1 million decrease in Accounts Receivable. The Company's working capital
position remains adequate with working capital of $1.25 million and a current
ratio of 1.2 to 1 at June 30, 2000.
Capital expenditures during fiscal 2000, 1999 and 1998 included
purchases of vehicles and production equipment to expand, upgrade and improve
the Company's production capabilities and purchases of vehicles and production
equipment to replace aging units.
The Company maintains a $6,000,000 intercompany revolving line of
credit with its parent corporation, CERBCO, Inc. At June 30, 2000, the Company
had an outstanding balance of $3,900,000 against this intercompany line.
During the year ended June 30, 2000, the Company received $3.7 million
in proceeds from line of credit advances from CERBCO, Inc. In addition to
capital expenditures, 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 $1.6 million to repay line of credit advances
during fiscal 2000.
The Company anticipates that increased production levels in the future
will require additional working capital. 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 7a. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
See financial statements and supplementary financial information
following Item 9 below.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Insituform East, Incorporated
We have audited the accompanying consolidated balance sheets of Insituform East,
Incorporated and subsidiaries as of June 30, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Insituform East, Incorporated and
subsidiaries as of June 30, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2000, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
McLean, Virginia
September 22, 2000
<PAGE>
<TABLE>
INSITUFORM EAST, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
<S> <C>
Years Ended June 30,
-------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------
<S> <C> <C> <C>
Sales $22,421,875 $23,315,198 $23,891,215
------------------ ------------------- ------------------
Costs and Expenses:
Cost of sales 21,314,391 21,617,623 21,190,803
Selling, general and administrative 4,063,768 4,498,634 4,598,952
------------------ ------------------- ------------------
Total Costs and Expenses 25,378,159 26,116,257 25,789,755
------------------ ------------------- ------------------
Loss from Operations (2,956,284) (2,801,059) (1,898,540)
Investment Income 47,012 65,750 71,199
Interest Expense (344,373) (85,013) (77,203)
Other Income 253,450 261,324 333,235
------------------ ------------------- ------------------
Loss Before Income Taxes and Non-owned
Interests (3,000,195) (2,558,998) (1,571,309)
Non-owned Interests in Pretax Loss of Midsouth
Partners 19,889 730,464 1,026,402
------------------ ------------------- ------------------
Loss Before Income Taxes (2,980,306) (1,828,534) (544,907)
Credit for Income Taxes 219,000 713,000 213,000
------------------ ------------------- ------------------
Net Loss $(2,761,306) $(1,115,534) $ (331,907)
================== =================== ==================
Basic Loss Per Share $ (0.63) $ (0.26) $ (0.08)
================== =================== ==================
Diluted Loss Per Share $ (0.63) $ (0.26) $ (0.08)
================== =================== ==================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
INSITUFORM EAST, INCORPORATED
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30,
--------------------------------------
2000 1999
--------------------------------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 571,874 $ 793,187
Accounts receivable:
Due from customers 5,400,317 6,514,843
Other 61,120 73,592
Inventories 1,421,104 1,273,402
Prepaid and refundable income taxes 22,895 93,532
Prepaid expenses 175,010 303,752
------------------- -----------------
Total Current Assets 7,652,320 9,052,308
Property, Plant and Equipment, at cost less accumulated depreciation 10,231,632 11,424,630
Deferred Income Taxes - net of valuation allowance of
$943,000 and $0 - -
Cash Surrender Value of SERP Life Insurance 166,055 73,785
Other Assets 15,567 26,000
------------------- -----------------
Total Assets $18,065,574 $20,576,723
=================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to CERBCO, Inc. $ 3,900,000 $ 1,800,000
Partner loans to Midsouth Partners - 400,000
Accounts payable 1,278,760 1,366,483
Accrued compensation and related expenses 1,180,253 1,361,115
Income taxes payable 10,000 14,724
Current portion of capital lease obligations 30,177 42,167
------------------- -----------------
Total Current Liabilities 6,399,190 4,984,489
Deferred Income Taxes - 219,000
Long Term Capital Lease Obligations 42,584 62,662
Accrued SERP Liability 98,753 55,623
------------------- -----------------
Total Liabilities 6,540,527 5,321,774
------------------- -----------------
Non-owned Interests in Consolidated Subsidiary - 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 8,526,846 11,288,152
------------------- -----------------
12,714,660 15,475,966
Less cost of 327,897 shares of common stock in treasury 1,189,613 1,189,613
------------------- -----------------
Total Stockholders' Equity 11,525,047 14,286,353
------------------- -----------------
Total Liabilities and Stockholders' Equity $18,065,574 $20,576,723
=================== =================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
INSITUFORM EAST, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000, 1999, and 1998
<CAPTION>
$.04 Par Value Total
$.04 Par Value Class B Common Additional Retained Common Stock in Stockholders'
Common Stock Stock Paid-in Capital Earnings Treasury Equity
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - July 1, 1997 $175,486 $11,904 $4,000,424 $12,735,593 $(1,189,613) $15,733,794
Net loss for the year - - - (331,907) - (331,907)
-----------------------------------------------------------------------------------------------------
Balance - June 30, 1998 175,486 11,904 4,000,424 12,403,686 (1,189,613) 15,401,887
Net loss for the year - - - (1,115,534) - (1,115,534)
-----------------------------------------------------------------------------------------------------
Balance - June 30, 1999 175,486 11,904 4,000,424 11,288,152 (1,189,613) 14,286,353
Net loss for the year - - - (2,761,306) - (2,761,306)
-----------------------------------------------------------------------------------------------------
Balance - June 30, 2000 $175,486 $11,904 $4,000,424 $8,526,846 $(1,189,613) $11,525,047
=====================================================================================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
INSITUFORM EAST, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended June 30,
---------------------------------------------------
2000 1999 1998
---------------------------------------------------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net loss $(2,761,306) $(1,115,534) $ (331,907)
Adjustments for noncash items included in net loss:
Depreciation and amortization 2,303,959 2,114,673 2,112,006
Deferred income taxes (219,000) (696,000) (159,000)
Non-owned interests in loss of consolidated subsidiary (19,889) (730,464) (1,026,402)
Accrued SERP Liability 43,130 55,623 -
Changes in assets and liabilities
Receivables 1,126,998 (1,408,413) 1,502,105
Inventories (147,702) 108,459 156,156
Other current assets 199,379 675,940 (56,072)
Payables and accruals (273,309) 195,410 (831,641)
---------------- ---------------- ----------------
Net cash provided by (used in) operating activities 252,260 (800,306) 1,365,245
---------------- ---------------- ----------------
Cash Flows from Investing Activities:
Purchase of remaining interests in Midsouth Partners (948,707) - -
Capital expenditures (1,156,897) (2,425,409) (1,695,586)
Increase in cash surrender value of SERP life insurance (92,270) (73,785) -
Capital contributions to Midsouth Partners by non-owned
interests - - 276,000
Increase in other assets (20,000) - -
Disposal of equipment, net 87,086 28,797 170,950
---------------- ---------------- ----------------
Net cash used in investing activities (2,130,788) (2,470,397) (1,248,636)
---------------- ---------------- ----------------
Cash Flows from Financing Activities:
Proceeds from line of credit advances from CERBCO, Inc. 3,700,000 2,100,000 2,600,000
Repayment of line of credit advances to CERBCO, Inc. (1,600,000) (300,000) (2,600,000)
Dividends paid - - (261,412)
Loans to Midsouth Partners from non-owned interests - 400,000 250,000
Repayment of partner loans by Midsouth Partners (400,000) (250,000) -
Proceeds from bank line of credit advances - - 1,800,000
Repayment of line of credit advances to bank - - (1,800,000)
Principal payments under capital lease obligations (42,785) (34,621) (28,538)
----------------
---------------- ----------------
Net cash provided by (used in) financing activities 1,657,215 1,915,379 (39,950)
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents (221,313) (1,355,324) 76,659
Cash and cash equivalents at beginning of year 793,187 2,148,511 2,071,852
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 571,874 $ 793,187 $2,148,511
================ ================ ================
Supplemental disclosure of cash flow information:
Interest paid $ 312,969 $ 85,013 $ 77,203
Income taxes refunded $ (65,913) $ (582,561) $ (160,487)
Supplemental schedule of noncash investing and financing activities:
Capital equipment acquired under capital lease obligations $ 10,717 $ - $
-
See notes to consolidated financial statements
</TABLE>
<PAGE>
INSITUFORM EAST, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2000, 1999, AND 1998
1. Summary of Significant Accounting Policies
Business Operations
Insituform East, Incorporated (the "Company") and its subsidiaries are
engaged in the trenchless rehabilitation of underground sewers and other
pipelines using cured-in-place pipe ("CIPP") rehabilitation processes to produce
a shape-conforming "pipe-within-a-pipe." Since 1978, the Company has performed
work in six Mid-Atlantic States and the District of Columbia using the patented
Insituform(R) process under territorially exclusive sublicense agreements as
explained in Note 8. Utilizing other trenchless CIPP processes, the Company's
wholly-owned subsidiary, Midsouth Partners, operates from and after July 20,
1999 substantially without geographic restriction.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Insituform Ohio, Inc., Insitu, Inc.,
Midsouth, LLC, Try Tek Machine Works, Inc. and Insituform of Pennsylvania, Inc.
(collectively, "East"). The consolidated financial statements also include the
accounts of Midsouth Partners, the Company's wholly-owned subsidiary partnership
(majority-controlled prior to July 20, 1999). All significant intercompany
accounts and transactions have been eliminated.
Revenue Recognition
The Company recognizes revenue using the units of completion method as
pipeline sections are rehabilitated. Installation of CIPP products is generally
performed between manholes or similar access points within a twenty-four hour
period. A rehabilitated pipeline section is considered completed work and is
generally billable to the customer. In most cases, contracts consisting of
individual line sections have a duration of less than one year.
Cash and Cash Equivalents
Cash and cash equivalents consist of checking accounts and temporary
investments in repurchase agreements, money market funds, certificates of
deposit and U.S. Treasury instruments. Cash equivalents are stated at cost plus
accrued interest which approximates market. For purposes of the consolidated
statements of cash flows, the Company considers only highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
Inventories
Inventories are stated at the lower of cost (determined by the
first-in, first-out method) or market. Substantially all inventories consist of
raw materials utilized in CIPP rehabilitation processes.
Depreciation and Amortization
Property and equipment placed in service after December 31, 1981 is
depreciated using the straight-line method over the estimated useful lives.
Property and equipment placed in service before January 1, 1982, other than
office furniture and equipment, is depreciated using the double-declining
balance method. The useful lives for buildings and improvements range from
twenty to forty years. The useful lives for vehicles, production equipment and
office furniture and equipment range from three to ten years.
Ordinary maintenance and repairs are expensed as incurred while major
renewals and betterments are capitalized. Upon sale or retirement of property
and equipment, the cost and accumulated depreciation are removed from the
respective accounts and any gain or loss recognized.
Income Taxes
The Company provides for federal and state income taxes at the
statutory rates in effect on taxable income. Deferred income taxes result
primarily from the temporary differences in recognizing net operating loss
carryforwards, depreciation, contract revenues, compensated absences and the
results of operations of Midsouth Partners for tax and financial reporting
purposes.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, and for hedging activities by requiring that all
derivatives be recognized in the balance sheet and measured at fair value. The
Company has determined that the adoption of SFAS No. 133 will not have a
significant effect on its financial statement presentation or disclosures, or on
its results of operations and financial position. SFAS No. 133 is effective for
fiscal years beginning after June 15, 2000.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB Opinion No. 25, which clarifies the
application of APB Opinion No. 25, Accounting for Stock Issued to Employees for
certain issues ("Opinion No. 25"). The Interpretation clarifies (a) the
definition of "employee" for purposes of applying Opinion 25, (b) the criteria
for determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. The Interpretation was effective
July 1, 2000, but certain conclusions cover specific events occurring after
December 15, 1998 or January 12, 2000, for which the effects are recognized on a
prospective basis from July 1, 2000. The adoption of this Interpretation had no
impact on the Company's financial position or results of operations.
2. Accounts Receivable
Accounts receivable due from customers consists of amounts due for
completed work, net of an allowance for doubtful accounts of $-0- both at June
30, 2000 and at June 30, 1999. Other accounts receivable includes expense
advances to officers and employees of $11,931 and $14,467 at June 30, 2000 and
1999, respectively.
3. 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, LLC, 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, 1999 and
July 1, 1998, are as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------
2000 1999
---- ----
<S> <C> <C>
Sales $22,421,875 $23,315,198
Net Loss $(2,781,195) $(1,626,998)
Net Loss Per Share
Basic $(0.64) $(0.37)
Diluted $(0.64) $(0.37)
</TABLE>
4. Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
June 30,
------------------------------------------
2000 1999
------------------ ------------------
<S> <C> <C>
Land and improvements $ 2,018,587 $ 2,018,587
Buildings and improvements 5,934,177 5,615,186
Vehicles and production equipment 13,330,849 13,303,716
Small tools, radios and machine shop equipment 4,637,721 4,466,896
Office furniture and equipment 1,300,945 1,209,718
Leasehold improvements 97,906 94,125
------------------ ------------------
27,320,185 26,708,228
Less accumulated depreciation 17,088,553 15,283,598
------------------ ------------------
Property, plant and equipment, at cost less accumulated
depreciation $10,231,632 $11,424,630
================== ==================
</TABLE>
The Company incurred repair and maintenance costs of $1,143,449,
$1,028,106, and $742,308 for the years ended June 30, 2000, 1999, and 1998,
respectively.
5. 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 Company's acquisition of
remaining partnership interests in Midsouth Partners. This facility was
increased from $4,500,00 to $6,000,000 on March 10, 2000 in connection with
additional anticipated cash requirements associated with continuing losses from
operations. At this time, the previously unsecured facility was converted to a
secured facility collateralized by substantially all tangible and intangible
assets owned by the Company.
The Company maintained a $3,000,000 Revolving Line of Credit facility
with a commercial bank. This facility was available to the Company through
February 28, 1999. Due to a change in loan terms sought by the commercial bank,
the Company let this facility lapse on its expiration date.
6. Leases
The Company leases production and computer equipment from unrelated
parties. These leases are classified as capital leases. The net book value of
equipment under capital lease at June 30, 2000 is $38,043. A schedule of minimum
lease payments and the present value of minimum lease payments for these leases
at June 30, 2000 is as follows:
Minimum lease payments:
Year Ending June 30,
2001 43,844
2002 38,968
2003 10,134
---------------
Total minimum lease payments 92,946
Less amount representing interest 20,185
---------------
Present value of minimum lease payments 72,761
Less current portion 30,177
---------------
Long-term capital lease obligations $42,584
===============
Midsouth Partners leases operations facilities in Nashville and
Knoxville, Tennessee. East leases an operations facility in Cincinnati, Ohio.
The Company leases equipment on a short-term basis for specific contract
requirements. The Company's rental expense for leased equipment and facilities
charged to operations was $267,377, $162,750 and $452,292 for the years ended
June 30, 2000, 1999, and 1998, respectively. These leases are classified as
operating leases. The Company has committed to make minimum lease payments of
$72,036 on noncancelable operating leases during the years ending June 30, 2001
and 2002 and minimum lease payments of $31,524 and $18,561 on noncancelable
operating leases during the years ending June 30, 2003 and 2004, respectively.
7. Income Taxes
A reconciliation of income tax computed at the statutory Federal rate
to the provision (credit) for income taxes included in the consolidated
statements of operations is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate: 34% 34% 34%
=== === ===
Income tax expense (benefit) computed at the statutory
Federal rate $(1,013,300) $(621,700) $(185,265)
State income tax expense (benefit), net of Federal tax
benefit (expense) (170,600) (112,600) (45,776)
Non-deductible expenses 21,900 21,300 18,041
Valuation allowance 943,000 - -
---------- ---------- ----------
Provision (credit) for income taxes $(219,000) $(713,000) $(213,000)
========== ========== ==========
Effective tax rate 7% 39% 39%
== === ===
</TABLE>
The credit for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended June 30,
---------------- -------------- --------------
2000 1999 1998
---- ---- ----
Current
<S> <C> <C> <C>
Federal $ 0 $ (15,000) $ (47,000)
State 0 (2,000) (7,000)
-------------- ------------ -------------
0 (17,000) (54,000)
-------------- ----------- ------------
Deferred
Federal (191,000) (607,000) (139,000)
State (28,000) (89,000) (20,000)
----------- ------------ ------------
(219,000) (696,000) (159,000)
---------- ----------- -----------
Total $(219,000) $(713,000) $(213,000)
========== ========== ==========
</TABLE>
The calculation of the Company's Credit for Income Taxes for the year
ended June 30, 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 $943,000 at June 30, 2000, has been reduced by a valuation
allowance of $943,000 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.
At June 30, 2000, the Company has net operating loss carryforwards of
approximately $4,805,000 available to reduce future federal tax liabilities.
Approximately $1,821,000 and $2,984,000 of available net operating loss
carryforwards will expire in 2019 and 2020, respectively.
The primary components of temporary differences which give rise to the
Company's net deferred tax asset (liability) at June 30, 2000 and 1999 are
presented below:
<TABLE>
<CAPTION>
June 30,
-------------------------------------
Deferred Tax Assets: 2000 1999
---- ----
<S> <C> <C>
Net operating loss carryforwards $1,858,000 $729,000
Deferred compensation 17,000 19,000
Other 55,000 104,000
Valuation allowance (943,000) -
--------- ----------
Total Deferred Tax Assets 987,000 852,000
Deferred Tax Liability:
Depreciation (987,000) (1,071,000)
--------- -----------
Net Deferred Tax Asset (Liability) $ - $ (219,000)
========== ===========
</TABLE>
8. Commitments and Contingencies
License Agreements
East has entered into six sublicense agreements with Insituform
Technologies, Inc.("ITI") which grant East the right to perform the Insituform
process in Maryland, Virginia, Delaware, the District of Columbia, Pennsylvania,
Ohio, West Virginia, and three Kentucky counties. The agreements are for the
life of the patents or the patent rights unless sooner terminated by a specified
action of East or ITI. The agreements specify that a royalty equal to 8% of the
gross contract price of all contracts performed by East utilizing the process,
less certain fees, be paid to ITI.
Midsouth Partners entered into a sublicense agreement with ITI which
granted Midsouth Partners the right to perform the Insituform process in
Tennessee, most of Kentucky and northern Mississippi under terms similar to
East's sublicense agreements discussed above. In connection with the Midsouth
Settlement Agreement, Midsouth Partners' Insituform License Agreement and its
requirement to pay royalties were relinquished effective July 20, 1999.
East has also entered into a license agreement for identical
territories with NuPipe, Inc., a wholly-owned subsidiary of ITI, for the sale
and installation of pre-formed PVC thermoplastic pipe under the NuPipe(R)
process and trademark. East has committed to pay royalty equal to 6.75% of gross
contract revenues utilizing the NuPipe process and to purchase certain
installation equipment and installation materials from NuPipe, Inc.
Midsouth Partners entered into a license agreement with NuPipe, Inc.
for the sale and installation of pre-formed thermoplastic pipe under the NuPipe
process and trademark in Tennessee, most of Kentucky and northern Mississippi
under terms similar to East's license agreement discussed above. In connection
with the Midsouth Settlement Agreement, Midsouth Partners' NuPipe License
Agreement and its requirement to pay royalties were relinquished effective July
20, 1999.
The East agreements obligate the Company to pay minimum annual
royalties during the terms of the agreements unless waived upon approval of the
Company's marketing and sales plans for licensed processes by ITI. Payments of
minimum annual royalties for East for the years ended June 30, 1999 and 1998
have been waived by ITI. Payments of minimum annual royalties for Midsouth
Partners for the years ended December 31, 1998 and 1997 were also waived by ITI.
During the year ended June 30, 2000, the Company incurred $1,215,929 in royalty
expense, to include $220,806 in minimum annual royalties not waived by ITI.
During the years ended June 30, 1999 and 1998, the Company incurred royalty
expenses of $1,244,954 and $1,409,696 respectively. East has not received a
waiver of minimum annual royalties for the year ending June 30, 2001.
Supply Agreements
On December 29, 1997, East entered into a supply agreement with ITI
whereby East committed to purchase 90% of its Insitutube requirements from ITI
for an initial five year period from January 1, 1998 to December 31, 2002. The
agreement will automatically extend for one year periods unless notice of
termination is provided by either party six months prior to the end of any such
annual period.
Effective July 20, 1999, Midsouth Partners executed a Felt Tube Supply
Agreement with ITI for the purchase of felt tubes to be used in CIPP pipe
rehabilitation in the partnership's previously licensed territories of
Tennessee, most of Kentucky and northern Mississippi. The agreement, with an
initial five year term, automatically extends for successive one year periods
unless notice of termination is provided by either party six months prior to the
expiration date of the initial five year period or any such annual period
thereafter.
Pending Litigation
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 and to
practice CIPP rehabilitation process methods, such event could have a material
adverse effect on the future financial position of the Company.
Other Contingent Liabilities
The Company performs services for the U.S. Government under contracts
which are subject to audit and potential adjustment. Contract revenues are
recorded in amounts which are expected to be realized at contract completion
upon final settlement with U.S. Government representatives.
The Company is a party, both as plaintiff and defendant, to claims and
litigation arising from and in the ordinary course of its business. While it is
not possible at this time to establish the ultimate amount of liability, if any,
associated with pending claims or such litigation, management of the Company is
of the opinion that the aggregate amount of any such liability will not have a
material adverse effect on the financial position of the Company.
9. Stockholders' Equity
The Company has two classes of Common Stock, which are designated as
Common Stock and Class B Common Stock. Shares of Class B Common Stock are
convertible at any time into shares of Common Stock on a share-for-share basis.
Shares of Class B Common Stock have ten votes per share on all matters with the
exception of voting power to elect directors. With respect to election of
directors, holders of shares of Class B Common Stock, voting separately as a
class, are entitled to elect the remaining directors after election of not less
than 25% of the directors by the holders of shares of Common Stock, voting
separately as a class.
On June 19, 1997, the Company declared cash dividends of six cents per
share on its shares of Common Stock and six cents per share on its shares of
Class B Common Stock to its shareholders of record at the close of business on
June 30, 1997, payable July 15, 1997.
At June 30, 2000, the Company held 327,897 shares of its Common Stock
in Treasury at an average price of $3.63 per share.
10. Profit Sharing Plans
East and Midsouth Partners maintain separate profit sharing retirement
plans for all employees meeting certain minimum eligibility requirements who are
not covered by collective bargaining agreements. Contributions are determined
annually by the Company. During the years ended June 30, 2000, 1999, and 1998,
the Company recognized profit sharing expense of $14,834, $243,123 and $47,739,
respectively.
11. Supplemental Executive Retirement Plan
On January 1, 1998, the Company established an unfunded supplemental
executive retirement plan ("SERP") for three of its executive officers who are
not otherwise participants in the parent company SERP. The expense for this plan
was $48,695, $59,673 and $17,715 for the fiscal years ended June 30, 2000, 1999
and 1998, respectively.
On July 1, 1998, the Company established a trust to facilitate the
payment of benefits under the plan. Funds in the trust are invested in variable
life insurance policies on the lives of two of the three plan-covered officers.
One of the three officers did not qualify for such insurance and, therefore, any
premature death of this officer prior to retirement would result in an
accelerated recognition by the Company of his unaccrued plan benefits. Assets of
the trust are subject to the claims of the Company's creditors in the event of
bankruptcy or insolvency.
12. Net Loss Per Share
Basic loss per share was computed by dividing net loss by the weighted
average number of common shares outstanding during the period. Weighted average
shares of 4,356,862 were used in computing basic loss per share for the years
ended June 30, 2000, 1999, and 1998.
Diluted loss per share was computed by dividing net loss by the
weighted average number of common shares outstanding including common stock
equivalents from dilutive stock options. Weighted average shares of 4,356,862
were used in computing diluted loss per share for the years ended June 30, 2000,
1999, and 1998.
13. Stock Options
The Company maintains four stock option plans. All grants of options
are made at the market price of the Company's Common Stock at the date of the
grant and are exercisable at the date of the grant.
On December 10, 1999, the shareholders of the Company adopted the
Insituform East, Incorporated 1999 Employee Stock Option Plan. Under the terms
of this plan, 350,000 shares of Common Stock have been reserved for certain
full-time employees of the Company. No options reserved under the terms of this
plan had been granted at June 30, 2000.
On December 10, 1999, the shareholders of the Company adopted the
Insituform East, Incorporated 1999 Board of Directors Stock Option Plan. Under
the terms of this plan, up to 525,000 shares of Common Stock have been reserved
for the Directors of the Company. If not exercised, option shares granted under
this plan will expire five years from the date of the grant.
On December 9, 1994, the shareholders of the Company adopted the
Insituform East, Incorporated 1994 Board of Directors Stock Option Plan. Under
the terms of this plan, up to 525,000 shares of Common Stock have been reserved
for the Directors of the Company. If not exercised, option shares granted under
this plan will expire five years from the date of the grant.
On December 1, 1989, the shareholders of the Company adopted the
Insituform East, Incorporated 1989 Board of Directors Stock Option Plan. Under
the terms of this plan, up to 525,000 shares of Common Stock have been reserved
for the Directors of the Company. The final 60,000 option shares granted
December 10, 1993 at a per share exercise price of $2.44 expired December 10,
1998.
The following summary sets forth the activity under the 1999 and 1994
Board of Directors Plans during the past three years:
<TABLE>
<CAPTION>
1999 Board of Directors 1994 Board of Directors
Stock Option Plan Stock Option Plan
----------------------------------- -----------------------------------
Average Price Average Price
Shares Per Share Shares Per Share
Outstanding
<S> <C> <C> <C> <C> <C>
July 1, 1997 0 $ 0 315,000 $ 3.16
Granted 0 0 105,000 2.47
Exercised 0 0 0 0
Expired 0 0 0 0
----------- ------------
Outstanding
June 30, 1998 0 0 420,000 2.98
Granted 0 0 105,000 1.14
Exercised 0 0 0 0
Expired 0 0 0 0
----------- --------------
Outstanding
June 30, 1999 0 0 525,000 2.62
Granted 105,000 1.33 0 0
Exercised 0 0 0 0
Expired (15,000) 1.33 (165,000) 2.62
-------- ----------
Outstanding
June 30, 2000 90,000 $1.33 360,000 $ 2.61
======= =======
</TABLE>
The Company adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS No. 123") during the year ended June 30, 1997. As allowed under
provisions of SFAS 123, the Company will continue to measure compensation cost
for employee stock-based compensation plans using the intrinsic value based
method of accounting prescribed by the Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees. As such, the Company is required
under SFAS No. 123 to make pro forma disclosures of net earnings (loss) and net
earnings (loss) per share as if the fair value-based method of accounting had
been applied.
Summary information for stock options granted during the years ended
June 30, 2000, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Date of grant 12/10/99 12/11/98 12/12/97
Option shares granted 105,000 105,000 105,000
Per share exercise price $1.33 $1.14 $2.47
Fair value per option share $0.77 $0.43 $0.94
</TABLE>
The fair value of options granted during the years ended June 30, 2000,
1999 and 1998 was estimated on the dates of the grants using the binomial
option-pricing model using the following assumptions:
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 5.30% 4.58% 4.69%
Expected option term 5 years 5 years 5 years
Expected stock price volatility 63% 38% 38%
Expected dividend yield 0% 1% 1%
</TABLE>
If compensation costs for the Company's stock option grants had been
determined using the fair value-based method of accounting per SFAS 123, the
Company's pro forma net earnings (loss) and pro forma net earnings (loss) per
share for the years ended June 30, 2000, 1999 and 1998 would be as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
2000 1999 1998
----------------- ----------------- ----------------
Net earnings (loss):
<S> <C> <C> <C>
As reported $(2,761,306) $(1,115,534) $ (331,907)
Pro forma $(2,842,077) $(1,145,612) $ (397,349)
Basic Net earnings (loss) per share:
As reported $ (0.63) $ (0.26) $ (0.08)
Pro forma $ (0.65) $ (0.26) $ (0.09)
Diluted Net earnings (loss) per share:
As reported $ (0.63) $ (0.26) $ (0.08)
Pro forma $ (0.65) $ (0.26) $ (0.09)
</TABLE>
14. 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.
The Company's sales to foreign countries, consisting of equipment and
parts used in the Insituform process manufactured by East's Try Tek Machine
Works subsidiary and sold through ITI to ITI's foreign affiliates and licensees,
were $49,529, $89,356 and $178,782 for the years ended June 30, 2000, 1999, and
1998, respectively.
15. Significant Customers
The Company performs services under contract with governmental
authorities, private industries and commercial entities. In each of the last
three fiscal years, more than 58% of the Company's revenues have come from state
and local government entities - cities, counties, state agencies and regional
authorities. During the year ended June 30, 2000, a county government in the
Washington, D.C. metropolitan area, Federal Government contracts (collectively),
a municipal government in Tennessee and a regional sanitary authority in
southwest Ohio accounted for 17%, 14%, 10% and 10%, respectively, of the
Company's revenue. During the year ended June 30, 1999, a county government in
the Washington, D.C. metropolitan area, Federal Government contracts
(collectively) and a regional sanitary authority in southwest Ohio accounted for
18%, 12% and 11%, respectively, of the Company's revenue. During the year ended
June 30, 1998, the Perry Nuclear Power Plant project, a combined city and county
metropolitan government in Tennessee and a county government in the Washington,
D.C. metropolitan area accounted for 19%, 12% and 12%, respectively, of the
Company's revenue.
16. Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data for the years ended June 30, 2000 and
1999 are presented in the following table.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------
September 30, December 31, March 31, June 30,
1999 1999 2000 2000
------------------- ------------------- ------------------ -------------------
Year Ended June 30, 2000
<S> <C> <C> <C> <C>
Sales $7,314,454 $ 4,672,268 $ 4,762,450 $5,672,703
Gross Profit (Loss) $1,195,068 $ (203,185) $ (536,431) $ 652,032
Net Earnings (Loss) $ 58,617 $(1,021,470) $(1,495,126) $ (303,327)
Net Earnings (Loss) Per Share $ 0.01 $ (0.23) $ (0.34) $ (0.07)
Three Months Ended
------------------------------------------------------------------------------
September 30, December 31, March 31, June 30,
1998 1998 1999 1999
------------------- ------------------- ------------------ -------------------
Year Ended June 30, 1999
Sales $6,047,942 $ 5,898,104 $4,993,149 $ 6,376,003
Gross Profit (Loss) $ 997,491 $ 867,314 $ (332,091) $ 164,861
Net Earnings (Loss) $ 52,928 $ (45,520) $ (613,082) $ (509,860)
Net Earnings (Loss) Per Share $ 0.01 $ (0.01) $ (0.14) $ (0.12)
</TABLE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth the name, age, principal occupation,
business experience and directorship history of the directors and executive
officers of Insituform East, Incorporated. Directors of the Company are elected
at the Annual Meeting of Stockholders, except that vacancies and newly created
directorships may be filled by the directors then in office. Each director holds
office until his successor is elected and qualified or until his earlier
resignation or removal. Messrs. Trent H. Ralston and William "Will" C. Willis,
Jr. were elected by the Board to fill existing Board vacancies on September 8,
2000.
The individuals listed in the table who were executive officers but not
directors of the Company throughout fiscal year 2000 are Raymond T. Verrey, John
F. Mulhall, Gregory Laszczynski and Robert F. Hartman. Each officer holds office
until his successor is elected and qualified or until his earlier resignation or
removal.
<TABLE>
<CAPTION>
First Became Class of Common Stock For
Name, Age, Principal Occupation, Business Experience and Directorships A Director Which Elected
----------------------------------------------------------------------- --------------- -------------------------------
<S> <C> <C>
George Wm. Erikson, Age 58 1/ 1984 Class B Common Stock
Chairman, member of the Chief Executive Officer Committee and General
Counsel since 1986, Chairman of the Board of Directors from 1985
to 1986; CERBCO, Inc. -- Chairman, General Counsel and Director
since 1988; CERBERONICS, Inc. -- Vice Chairman since 1988,
Chairman from 1979 to 1988, Secretary from 1976 to 1988, General
Counsel since 1976 and Director since 1975; Capitol Office
Solutions, Inc. -- Chairman, General Counsel and Director from
1987 to June 30, 1997.
Robert W. Erikson, Age 55 1/ 1985 Class B Common Stock
President since September 1991, Vice Chairman and member of the Chief
Executive Officer Committee since 1986, Vice Chairman of the
Board of Directors from 1985 to 1986; CERBCO, Inc. -- President,
Vice Chairman and Director since 1988; CERBERONICS, Inc. --
Chairman since 1988, President from 1977 to 1988 and Director
since 1974; Capitol Office Solutions, Inc. -- Vice Chairman and
Director from 1987 to June 30, 1997; Director of The Palmer
National Bank from 1983 to 1996, and Director of its successor,
The George Mason Bank, N.A., until June, 1997.
Webb C. Hayes, IV, Age 52 3/ 1994 Class B Common Stock
Managing Director of Private Client Services at Friedman, Billings,
Ramsey Group, Inc.; Director and Vice Chairman of United Bank
from June 1997 to May 1999; Director and Executive Vice President
of George Mason Bankshares, Inc. and Chairman, President and CEO
of The George Mason Bank, N.A., from 1996 to 1997; Chairman of
the Board of Palmer National Bancorp., Inc. and The Palmer
National Bank from 1985 to 1996, President and Chief Executive
Officer from 1983 to 1996; Director of CERBCO, Inc. since 1991;
Director of Capitol Office Solutions, Inc. from 1992 to June 30,
1997; Director of the Federal Reserve Bank of Richmond from 1992
to 1995.
Paul C. Kincheloe, Jr., Age 59 1994 Class B Common Stock
Practicing attorney and real estate investor since 1967; Partner in
the law firm of Kincheloe and Schneiderman since 1983; Director
of CERBCO, Inc. since 1991; Director of Capitol Office Solutions,
Inc. from 1992 to June 30, 1997; Director of Herndon Federal
Saving & Loan from 1970 to 1983; Director of First Federal
Savings & Loan of Alexandria from 1983 to 1989.
Trent H. Ralston, Age 62 2/ 2000 Class B Common Stock
Independent business consultant since 1999; President of TRB Specialty
Rehabilitation, Inc. from 1985 to 1999; Executive Vice President
and Chief Executive Officer of Technical Grouting Services, Inc.
from 1980 to 1985; Director of the North American Society for
Trenchless Technology (NASTT) from 1993 to 1999, Chairman in
1999, past Chairman in 2000; Director of the National Association
of Sewer Service Companies (NASSCO) in 1990 and from 1993 to
1994, President in 1992.
Thomas J. Schaefer, Age 62 2/ 3/ 1981 Common Stock
Independent private investor since 1995; President, Chief Executive
Officer and Director of Columbia First Bank, N.A. from 1988 to
1995; President and Chief Executive Officer of Signet Bank, N.A.
from 1981 to 1988 and Director of Signet Bank, N.A. from 1978 to
1988; Director of CERBCO, Inc. from July 1990 to November 1990.
William "Will" C. Willis, Jr., Age 47 2/ 2000 Common Stock
Director, President and CEO of Global Technovations, Inc. since 1997,
Chairman of the Board since 1998; Chairman of Willis & Associates
from 1995 to 1997; President and COO of MBf USA, Inc. from 1994
to 1995; President and CEO of Insituform Technologies, Inc. from
1990 to 1993; President of The Paper Art Company, Inc., a
division of The Mennen Company, from 1985 to 1990.
Raymond T. Verrey, Age 54
Vice President, Treasurer and Chief Financial Officer since 1988,
Principal Accounting Officer since 1987; employed by Touche Ross
& Co. from 1975 to 1987, serving as an Audit Manager from 1981 to
1987.
John F. Mulhall, Age 54
Vice President of Sales and Marketing since 1988, Director of Sales
and Marketing from 1987 to 1988; employed by Translogic
Corporation, a material conveying system manufacturer, from 1972
to 1987, serving as Eastern Regional Manager from 1979 to 1987.
Gregory Laszczynski, Age 46
Vice President of Operations since 1989, Director of Operations from
1987 to 1989; employed by FMC Corporation from 1984 to 1987,
serving as a Project Engineer.
Robert F. Hartman, Age 53
Vice President of Administration and Secretary since 1991; Vice
President and Controller of CERBCO, Inc. since 1988, Secretary
since 1991, Treasurer and Chief Financial Officer since 1997;
Vice President and Treasurer of CERBERONICS, Inc. since 1988;
employed by Dynamac International, Inc. from 1985 to 1988,
serving as Controller; employed by CERBERONICS, Inc. from 1979 to
1985, serving as Vice President and Treasurer from 1984 to 1985.
1/ Messrs. George Wm. Erikson and Robert W. Erikson are brothers.
2/ Member of Audit Committee.
3/ Member of Stock Option Committee.
</TABLE>
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers and beneficial owners of greater than 10
percent of any class of the Company's equity securities ("Reporting Persons") to
file with the Securities and Exchange Commission initial reports of ownership
and reports of changes in ownership of the Company's equity securities. To the
best of the Company's knowledge, based solely on its review of the copies of
such reports furnished to the Company during and with respect to the fiscal year
ended June 30, 2000, all Section 16(a) filing requirements applicable to
Reporting Persons were complied with during the fiscal year.
Item 11. Executive Compensation
GENERAL
Pursuant to the Company's By-laws, the Chief Executive Officer
Committee (the "CEOC") -- consisting of the Chairman, the Vice Chairman, the
President, and such other officers of the Corporation as may from time to time
be determined by the Board -- performs the functions of the Chief Executive
Officer of the Company. Since August 30, 1991, the CEOC has consisted of George
Wm. Erikson, Chairman, and Robert W. Erikson, Vice Chairman and President.
The Company does not have a compensation committee. The CEOC, with the
annual review and oversight of the Board, determines the compensation for all
officers of the Company except the members of the CEOC. The Board as a whole
considers compensation arrangements proposed by and for members of the CEOC,
and, pursuant to the By-laws, is the ultimate determiner of compensation
arrangements for members of the CEOC. When considering CEOC compensation
arrangements, Board review may be conducted with or without the presence (or
participation) of the CEOC members who are also members of the Board as the
Board deems appropriate under the circumstances. Resolutions of the Board
altering CEOC compensation arrangements, in any material way, are voted upon by
the Board with such CEOC members abstaining. A second vote is then taken with
all directors participating.
SUMMARY COMPENSATION
The following table sets forth information concerning the compensation
paid by the Company to each of the named executive officers for the fiscal years
ended June 30, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
---------------------------------
Annual Compensation Awards Payouts
--------------------------------------------------
Name and Principal Fiscal Salary Bonus Other Annual Total Annual Restricted Securities LTIP All Other
Position Year ($) ($) Compensation Compensation Stock Underlying Payouts Compensation
($) 2/ ($) Awards ($) Options/ ($) ($) 3/
SARs (#)
----------------------- -------- ---------- -------- -------------- --------------- ----------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
George Wm. Erikson 2000 $223,106 $0 $0 $223,106 $0 15,000 $0 $3,540
Chairman & General 1999 216,607 0 0 216,607 0 15,000 0 $15,476
Counsel 1/ 1998 215,030 0 0 215,030 0 15,000 0 4,745
Robert W. Erikson 2000 $223,106 $0 $0 $223,106 $0 15,000 $0 $1,140
President 1/ 1999 216,607 0 0 216,607 0 15,000 0 13,076
1998 215,030 0 0 215,030 0 15,000 0 2,345
John F. Mulhall 2000 $130,532 $0 $0 $130,532 $0 0 $0 $1,552
Vice President of 1999 126,729 0 0 126,729 0 0 0 10,308
Sales & Marketing 1998 125,806 12,000 0 137,806 0 0 0 2,573
Gregory Laszczynski 2000 $142,055 $0 $0 $142,055 $0 0 $0 $3,177
Vice President of 1999 137,917 0 0 137,917 0 0 0 12,878
Operations 1998 136,913 17,000 0 153,913 0 0 0 4,535
Raymond T. Verrey 2000 $106,780 $0 $0 $106,780 $0 0 $0 $2,297
Vice President & 1999 103,670 0 0 103,670 0 0 0 8,776
Chief Financial 1998 102,915 1,000 0 103,915 0 0 0 2,840
Officer
Robert F. Hartman 2000 $94,962 $0 $0 $94,962 $0 0 $0 $1,004
Vice President of 1999 92,195 0 0 92,195 0 0 0 7,626
Administration & 1998 91,524 2,000 0 93,524 0 0 0 2,874
Secretary
1/ The Company's Chief Executive Officer Committee, consisting of the Chairman
and the President, exercises the duties and responsibilities of the Chief
Executive Officer of the Company.
2/ None of the named executive officers received perquisites or other personal
benefits in excess of the lesser of $50,000 or 10% of his total salary and
bonus.
3/ Contributions to the Insituform East, Incorporated Employee Advantage Plan,
as described on page 34.
</TABLE>
COMPENSATION PURSUANT TO PLANS
Insituform East, Incorporated Employee Advantage Plan
The Company maintains a noncontributory profit sharing (retirement)
plan, the Insituform East, Incorporated Employee Advantage Plan (the "IEI
Advantage Plan"), in which all employees not covered by a collective bargaining
agreement and employed with the Company for at least one year are eligible to
participate. No employee is covered by a collective bargaining agreement. The
IEI Advantage Plan is administered by the Company's Board of Directors which
determines, at its discretion, the amount of the Company's annual contribution.
The Insituform East Board of Directors can authorize a contribution, on behalf
of the Company, of up to 15% of the compensation paid to participating employees
during the year. The plan is integrated with Social Security. Each participating
employee is allocated a portion of the Company's contribution based on the
amount of that employee's compensation plus compensation above FICA limits
relative to the total compensation paid to all participating employees plus
total compensation paid above FICA limits. Discretionary amounts allocated under
the IEI Advantage Plan begin to vest after three years of service (at which time
20% vests) and are fully vested after seven years of service. No contribution
was authorized for the fiscal year ended June 30, 2000.
The IEI Advantage Plan also includes a salary reduction profit sharing
feature under Section 401(k) of the Internal Revenue Code. Each participant may
elect to defer a portion of his compensation by any whole percentage from 2% to
16% subject to certain limitations. As mandated by the plan, the Company
contributes an employer matching contribution equal to 25% of the participant's
deferred compensation up to a maximum of 1.5% of the participant's total paid
compensation for the fiscal year. Participants are 100% vested at all times in
their deferral and employer matching accounts. During the fiscal year ended June
30, 2000, the Company made the following contributions for the Company's
officers:
<TABLE>
<CAPTION>
Names and Capacities in Which Contributions for Vested Percent
Cash Contributions Were Made Fiscal Year 2000 as of 6/30/00
---------------------------- ---------------- -------------
<S> <C> <C>
George Wm. Erikson, Chairman $2,400 100%
Robert W. Erikson, President 0 100%
John F. Mulhall, Vice President of Sales & Marketing 663 100%
Gregory Laszczynski, Vice President of Operations 2,169 100%
Raymond T. Verrey, Vice President & Chief Financial Officer 1,630 100%
Robert F. Hartman, Vice President of Administration & Secretary 337 100%
All Executive officers as a group (6 persons) $7,199 N/A
1/ Total contributions to employees of $78,810 include Insituform East's
matching contribution of $54,760 and reallocated amounts totaling $24,050
forfeited by former participants who terminated employment with Insituform
East during fiscal year 2000.
</TABLE>
Insituform East, Incorporated Supplemental Executive Retirement Plan
During fiscal year 1998, the Company entered into Supplemental
Executive Retirement Agreements with Messrs. John Mulhall, Gregory Laszczynski
and Raymond Verrey pursuant to a Supplemental Executive Retirement Plan (the
"IEI SERP"). Each agreement provides for monthly retirement benefits of 25% of
the executive's final aggregate monthly salary from the Company as defined in
and limited by the executive's agreement. Each covered executive's benefit under
the plan is payable in equal monthly amounts for the remainder of the covered
executive's life beginning as of any date on or after his 62nd birthday (at the
covered executive's election) but not before his termination of service.
Payments under the SERP are not subject to any reduction for Social Security or
any other offset amounts but are subject to Social Security and other applicable
tax withholding.
To compute the monthly retirement benefits, the percentage of final
monthly salary is multiplied by a ratio (not to exceed 1) of:
the completed years (and any fractional year) of employment by
the Company after 1997 to the total number of years (and any
fractional year) of employment by the Company after 1997 that
the executive would have completed if he had continued in
employment to age 65.
In the case of Messrs. Mulhall and Laszczynski, if the executive dies
prior to retirement, the executive's beneficiary will receive a pre-retirement
death benefit under a split-dollar insurance arrangement. The executive's
beneficiary will receive a one-time lump sum payment in the amount of $700,000.
In the case of Mr. Verrey, the executive's beneficiary will receive a
pre-retirement death benefit of 25% of the executive's final monthly salary for
180 months. If any executive dies after commencement of the payment of
retirement benefits, but before receiving 180 monthly payments, the executive's
beneficiary will continue to receive payments until the total payments received
by the executive and/or his beneficiary equal 180.
The SERP is technically unfunded, except as described below. The
Company will pay all benefits from its general revenues and assets. To
facilitate the payment of benefits and provide the executives with a measure of
benefit security without subjecting the SERP to various rules under the
Employment Retirement Income Security Act of 1974, the Company has established
an irrevocable trust called the Insituform East, Incorporated Supplemental
Executive Retirement Trust. This trust is subject to the claims of the Company's
creditors in the event of bankruptcy or insolvency. The trust has purchased life
insurance on the lives of Messrs. Mulhall and Laszczynski to provide for
financial obligations under the plan. Assets in the trust consist of the cash
surrender values of the executive life insurance policies and are carried on the
Company's balance sheet as assets. The trust will not terminate until
participants and beneficiaries are no longer entitled to benefits under the
plan. Upon termination, all assets remaining in the trust will be returned to
the Company.
The following table sets forth the annual retirement benefits that
would be received under the SERP at various compensation levels after the
specified years of service:
<TABLE>
<CAPTION>
Pension Plan Table Where Formula Provides 25% of Compensation 1/
------------------------------------------------------------- -
Years of Service (Under Plan)
----------------- ---------------- ----------------- ---------------- ---------------
(Final) Remuneration 15 20 25 30 35
-------------------- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C>
50,000 11,719 12,500 12,500 12,500 12,500
75,000 17,578 18,750 18,750 18,750 18,750
100,000 23,438 25,000 25,000 25,000 25,000
125,000 30,925 31,250 31,250 31,250 31,250
150,000 30,925 36,420 37,500 37,500 37,500
175,000 30,925 36,420 40,211 43,750 43,750
200,000 30,925 36,420 40,211 44,396 49,017
250,000 30,925 36,420 40,211 44,396 49,017
300,000 30,925 36,420 40,211 44,396 49,017
350,000 30,925 36,420 40,211 44,396 49,017
400,000 30,925 36,420 40,211 44,396 49,017
1/ Assumes at the time the Plan was established (i) the individual is age 50,
(ii) maximum covered compensation is $100,000 and is increased 2% (
compounded annually) each year of service after 1997, and (iii) retirement
is effective at age 65.
</TABLE>
Each executive's covered compensation under the SERP is equal to his
final base salary as defined in and limited by the executive's agreement. The
maximum covered compensation for each executive is his salary as of December 31,
1997, increased 2% annually beginning in 1998.
The following table sets forth information concerning vested annual
benefits as of June 30, 2000 for the three executives covered by the SERP:
<TABLE>
<CAPTION>
Years of Credited Current Annual Vested Vested
Name Service Under Plan Covered Compensation Percentage Annual Benefit
---- ------------------ -------------------- ---------- --------------
<S> <C> <C> <C> <C>
John F. Mulhall 3 $ 131,798 21.43% $ 7,061
Gregory Laszczynski 3 $ 143,434 13.64% $ 4,891
Raymond T. Verrey 3 $ 107,817 21.43% $ 5,776
</TABLE>
1999 Board of Directors' Stock Option Plan
The Company adopted, with stockholder approval at the 1999 Annual
Meeting of Stockholders, the Insituform East, Incorporated 1999 Board of
Directors Stock Option Plan. The purpose of the plan is to promote the growth
and general prosperity of the Company by permitting 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. The term of the plan is for ten years, unless terminated sooner by
the Board of Directors. The plan is administered and options are granted by the
Board of Directors. Under the terms of this plan, up to 525,000 shares of Common
Stock have been reserved for the Directors of the Company.
Each grant of options under the plan will entitle each director to whom
such options are granted the right to purchase 15,000 shares of the Company's
Common Stock at a designated option price, anytime and from time to time, within
five years from the date of grant. Options are granted under the 1999 Board of
Directors Stock Option Plan each year for five years to each member of the Board
of Directors serving as such on the date of grant; i.e., for each director
serving for five years, a total of five options covering in the aggregate 75,000
shares of Common Stock (subject to adjustments upon changes in the capital
structure of the Company), over a five year period.
On December 10, 1999, options on a total of 105,000 shares of Common
Stock were granted to directors of the Company (options on 15,000 shares to each
of seven directors) at a per share price of $1.328. No options available under
this plan were exercised by directors of the Company during fiscal year 2000.
1994 Board of Directors' Stock Option Plan
Insituform East adopted, with stockholder approval at the 1994 Annual
Meeting of Stockholders, the Insituform East, Incorporated 1994 Board of
Directors Stock Option Plan (the "IEI 1994 Directors' Plan"). The purpose of
this plan is the same as the IEI 1999 Directors' Plan. The term of the plan is
for ten years, unless terminated sooner by the Board of Directors. Options were
first granted to directors on December 9, 1994 and each of the four succeeding
Board of Directors meetings following the Annual Meetings of Stockholders in
1995, 1996, 1997 and 1998. Each grant of options under the plan entitles each
director to whom such options were granted the right to purchase 15,000 shares
of Insituform east's Common Stock at a designated option price, any time and
from time to time, within five years from the date of grant. Although no further
options are anticipated to be granted under this plan, options previously
granted, and which have not already been exercised or expired, will remain in
effect until exercise or expiration, whichever comes first. No options available
under the plan were exercised by directors of Insituform East during fiscal year
2000. Under the terms of this plan, up to 360,000 shares of Insituform East
Common Stock remain reserved for the directors of Insituform East.
1999 Employee Stock Option Plan
The Company adopted, with stockholder approval at the 1999 Annual
Meeting of Stockholders, the Insituform East, Incorporated 1999 Employee Stock
Option Plan. The purpose of the Plan is to advance the growth and development of
the Company by affording an opportunity to full-time employees of the Company to
purchase shares of the Company's Common stock and to provide incentives for them
to put forth maximum efforts for the success of the Company's business. Any
employee of the Company who is employed on a full time basis is eligible for
participation. The Plan is administered by the Incentive Stock Option Plan
Committee consisting of Messrs. Thomas J. Schaefer and Webb C. Hayes, IV.
No options were granted to or exercised by executive officers of the
Company under this plan during the fiscal year ended June 30, 2000.
OPTIONS/SAR GRANTS
The following table sets forth information concerning options granted
to each of the named executive officers, who are also directors, during fiscal
year 2000 under the 1999 Board of Directors Stock Option Plan:
<TABLE>
<CAPTION>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Potential Realized Value at
Assumed Annual Rates of Stock
Individual Grants Price Appreciation for Option Term
----------------------------------------------------- ----------------------------------
% of Total Options/SARs Exercised or
Options/SARs Granted to Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Share) Date 5% ($) 10% ($)
--------------------------- -------------- ------------------------- -------------- -- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
George Wm. Erikson 15,000 1/ 14% $1.32 12/10/04 $5,505 $12,165
Robert W. Erikson 15,000 1/ 14% $1.32 12/10/04 $5,505 $12,165
1/ Option grants under the 1999 Board of Directors Stock Option Plan, as described on page 36.
</TABLE>
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE TABLE
No option or Stock Appreciation Right grants made under the 1999 or
1994 Board of Directors Stock Option Plans to any of the named executive
officers were exercised during fiscal year 2000. The following table sets forth
information concerning option or stock appreciation right grants held by each of
the named executive officers, who are also directors, as of June 30, 2000:
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number of Securities Underlying Value of Unexercised
Unexercised Options/SARs at In the Money Options/SARs
Fiscal Year-End (#) at Fiscal Year-End ($)
------------ --------------- ------------ ---------------
Shares
Acquired on Value
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
--------------------------- -------------- -------------- ------------ --------------- -- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
George Wm. Erikson 0 $0 75,000 1/ 0 $6,108 $0
Robert W. Erikson 0 $0 75,000 1/ 0 $6,108 $0
1/ Options exercisable under the IEI 1999 and1994 Board of Directors Stock
Option Plans, as described on page 36.
</TABLE>
REPRICING OF OPTIONS/SARs
The Company did not adjust or amend the exercise price of stock options
or SARs previously awarded to any of the named executive officers during fiscal
year 2000.
LONG-TERM INCENTIVE PLAN AWARDS
The Company does not have any long-term incentive plans.
DEFINED BENEFIT OR ACTUARIAL PLANS
The Company maintains a defined benefit plan called the Insituform
East, Incorporated Supplemental Executive Retirement Plan to provide annual
retirement benefits to covered executives. See "Compensation Pursuant to Plans"
as to the basis upon which benefits under the plan are computed.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
There are no employment contracts between the Company and any named
executive officer. There are no arrangements between the Company and any named
executive officer, or payments made to an executive officer, that resulted, or
will result, from the resignation, retirement or other termination of employment
with the Company, in an amount that exceeded $100,000.
COMPENSATION OF DIRECTORS
Non-officer directors of the Company are paid an annual fee of $5,000
plus $1,000 for each meeting of the Board of Directors, and each committee
meeting, attended in person. Meetings attended by telephone are compensated at
the rate of $200. Directors who are salaried employees receive no remuneration
for their service as directors but are eligible with all other directors to
participate in the 1999 and 1994 Board of Directors' Stock Option Plans, as
described under the section entitled "Compensation Pursuant to Plans." All
directors of the Company are reimbursed for Company travel-related expenses.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Company's Board of Directors does not have a Compensation
Committee; the Board of Directors serves in that capacity. Messrs. George Wm.
Erikson and Robert W. Erikson, both members of the Board of Directors and
executive officers of the Company, holding the offices of Chairman & General
Counsel and of President, respectively, participate in, and during fiscal year
2000 participated in, deliberations of the Board of Directors concerning
executive officer compensation.
Messrs. George Wm. Erikson and Robert W. Erikson are both members of
the Board of Directors and executive officers of CERBCO, Inc. In their capacity
as directors of CERBCO, Inc., they participate in, and during fiscal year 2000
participated in, deliberations of the CERBCO, Inc. Board of Directors concerning
executive officer compensation for CERBCO, Inc.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
The following information is furnished with respect to each person or
entity who is known to the Company to be the beneficial owner of more than five
percent of any class of the Company's voting securities as of June 30, 2000:
<TABLE>
<CAPTION>
Amount & Nature of
Name & Address of Beneficial Owner Title of Class Beneficial Ownership Percent of Class
--------------------------------------- ---------------------------- -------------------------- ----------------------
<S> <C> <C> <C> <C>
CERBCO, Inc. Common Stock 1,412,850 34.8% 1/
3421 Pennsy Drive Class B Common Stock 296,141 99.5% 1/
Landover, MD 20785
George Wm. Erikson 2/
CERBCO, Inc.
3421 Pennsy Drive
Landover, MD 20785
Robert W. Erikson 2/
CERBCO, Inc.
3421 Pennsy Drive
Landover, MD 20785
1/ Through its ownership of such percentages of the outstanding shares of
Common Stock and Class B Common Stock, CERBCO, Inc. is entitled to cast
62.2% of all votes entitled to be cast on matters on which holders of
shares of both classes of the Company's common stock vote together.
2/ Messrs. George Wm. Erikson and Robert W. Erikson own 44.9% and 39.5%,
respectively, of the outstanding shares of Class B Common Stock of CERBCO,
Inc. On the basis of their stockholdings and management positions in
CERBCO, Inc., they could act together to control either the disposition or
the voting of the shares of the Company's Common Stock or Class B Common
Stock held by CERBCO, Inc. Messrs. George Wm. Erikson and Robert W. Erikson
are brothers.
</TABLE>
(b) Security Ownership of Management
The following information is furnished with respect to all directors of
the Company who were the beneficial owners of any shares of the Company's Common
Stock or Class B Common Stock as of June 30, 2000, and with respect to all
directors and officers of the Company as a group:
<TABLE>
<CAPTION>
Amount & Nature of Beneficial Ownership
---------------------------------------
Name of Beneficial Owner Title of Class Owned Outright Exercisable Options Percent of Class
----------------------------- ----------------------------- ---------------- -------------------- --------------------
<S> <C> <C> <C> <C>
George Wm. Erikson 1/ Common Stock 16,500 75,000 2.0%
Robert W. Erikson 1/ Common Stock 0 75,000 1.7%
Webb C. Hayes, IV Common Stock 0 75,000 1.7%
Paul C. Kincheloe, Jr. Common Stock 0 75,000 1.7%
Thomas J. Schaefer Common Stock 0 75,000 1.7%
All directors and officers Common Stock 17,000 375,000 8.7%
as a group (9 persons, Class B Common Stock 0 0 0.0%
including those named above)
1/ Messrs. George Wm. Erikson and Robert W. Erikson own 44.9% and 39.5%,
respectively, of the outstanding shares of Class B Common Stock of CERBCO,
Inc. On the basis of their stockholdings and management positions in
CERBCO, Inc., they could act together to control either the disposition or
the voting of the shares of the Company's Common Stock or Class B Common
Stock held by CERBCO, Inc. Messrs. George Wm. Erikson and Robert W. Erikson
are brothers.
</TABLE>
(c) Changes in Control
None
Item 13. Certain Relationships and Related Transactions
(a) Transactions with Management and Others
Not applicable.
(b) Certain Business Relationships
Not applicable.
(c) Indebtedness of Management
Not applicable.
(d) Transactions with Promoters
Not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements included under Part II, Item 8: Pages
Independent Auditors' Report on Financial Statements 15
Consolidated Statements of Operations 16
Consolidated Balance Sheets 17
Consolidated Statements of Stockholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20-30
2. Financial Statement Schedules:
All schedules are omitted because they are not required,
inapplicable or the information is otherwise shown in the
financial statements or the notes thereto.
3. Exhibits:
Exhibit Pages
Number*
3.1 Restated Certificate of Incorporation
of the Company 43-51
3.2 By-Laws of the Company 52-65
10.1 Insituform Process Sub-License Agreement -
Maryland, Virginia, D.C. Territory 66-76
10.2 Insituform Process Sub-License Agreement -
Delaware, Eastern Pennsylvania Territory 77-91
10.3 Insituform Process Sub-License Agreement -
Western Pennsylvania Territory 92-110
10.4 Insituform Process Sub-License Agreement -
Northern Ohio Territory 111-129
10.5 Insituform Process Sub-License Agreement -
Southern Ohio Territory 130-148
10.6 Insituform Process Sub-License Agreement -
West Virginia Territory 149-166
10.7 Insituform Tube Supply Agreement 167-176
10.8 SAW Agreement 177-178
10.9 IEI 1999 BOD Stock Option Plan 179-182
10.10 IEI 1999 Employee Stock Option Plan 183-190
10.11 SERP Contract with Officers 191-195
11.0 Statement re computation of per share earnings 196
21.0 Subsidiaries of the Registrant 197
23.0 Independent Auditors' Consent 198
27.0 Financial Data Schedule 199
------------
* The Exhibit Number used refers to the appropriate
subsection in paragraph (b) of Item 601 of
Regulation S-K.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended June 30, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INSITUFORM EAST, INCORPORATED
/s/ George Wm. Erikson
George Wm. Erikson
Chairman
September 25, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature & Title Capacity Date
/s/ George Wm. Erikson
---------------------------------------------
George Wm. Erikson Director and September 25, 2000
Chairman Principal Executive Officer
/s/ Robert W. Erikson
---------------------------------------------
Robert W. Erikson Director and September 25, 2000
President Principal Executive Officer
/s/ Webb C. Hayes, IV
---------------------------------------------
Webb C. Hayes, IV Director September 25, 2000
/s/ Paul C. Kincheloe, Jr.
---------------------------------------------
Paul C. Kincheloe, Jr. Director September 25, 2000
---------------------------------------------
Trent H. Ralston Director September 25, 2000
/s/ Thomas J. Schaefer
---------------------------------------------
Thomas J. Schaefer Director September 25, 2000
/s/ Will Willis, Jr.
---------------------------------------------
William "Will" C. Willis, Jr. Director September 25, 2000
/s/ Raymond T. Verrey
---------------------------------------------
Raymond T. Verrey Principal Accounting Officer, September 25, 2000
Vice President and Principal Financial Officer
Chief Financial Officer
