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 has been primarily engaged in the business of rehabilitating underground sewers and other pipelines using the Insituform process.
Between 1982 and 1986, the Company added western Pennsylvania, Ohio, three Kentucky counties and West Virginia to its original Insituform 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 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 in the Insituform process. 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 an exclusive license for the sale and installation of preformed 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.
For financial reporting purposes for the fiscal year ended June 30, 1996, the Company has included its wholly-owned subsidiary corporations (collectively, "East") and its majority-controlled subsidiary partnership, MIDSOUTH Partners, in its consolidated financial statements. Prior to the fiscal year ended June 30, 1996, the Company accounted for its minority investment in MIDSOUTH Partners using the equity method.
(b) Financial Information about Industry Segments
Substantially all of the Company's revenue, operating profit and identifiable assets through June 30, 1996 are attributable to the rehabilitation and repair of underground sewers and other pipelines, the Company's only business segment.
(c) Narrative Description of Business
The Company is primarily engaged in the business of rehabilitating underground sewers and other conduits -- including waste water, storm water, and industrial process pipelines -- using the Insituform process. The Insituform process utilizes a polyester fiber-felt material, the Insitutube(R) material, coated with polyethylene and impregnated with a liquid, thermosetting resin. The Insitutube material is inserted in the pipe through an existing manhole or other access point. By use of an inversion tube and cold water pressure, the Insitutube material is forced through the pipeline, turned inside out and pressed firmly against the inner wall of the damaged pipeline. When the Insitutube material is fully extended, the cold water within the tube is recirculated through a boiler in a truck. The heated water cures the thermosetting resin to form a hard, jointless, impact and corrosion resistant Insitupipe(R) product within the original pipe. Lateral or side connections are then reopened by use of the Insitucutter(R) device, a remote-controlled cutting machine.
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 process. East and MIDSOUTH Partners are sublicensees of Insituform Technologies, Inc. ("ITI"). The Company has entered into seven sublicense agreements with ITI which grant the Company rights to perform the Insituform process in Virginia, Maryland, Delaware, Ohio, the District of Columbia, Pennsylvania, West Virginia, Tennessee, Kentucky and northern Mississippi. The Company can perform the Insituform process in other locations subject to payment of additional royalties.
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 territory, the sublicense agreements require it to pay a royalty of from 8% to 12% of the gross contract price to the independent sublicensee of such other territory, if any, 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.
On May 1, 1987, the Company entered into supply agreements with ITI whereby the Company committed to purchase 90% of its Insitutube material requirements from ITI. The agreements automatically renew annually unless notice of termination is provided by either party six months prior to the end of a renewal period. As a result of certain terms not previously being fulfilled by ITI, the Company believes it is no longer required to purchase 90% of its Insitutube material requirements from ITI under the otherwise continuing agreement. The continuing agreement currently extends through April 30, 1997.
The Company has also entered into license agreements with NuPipe, Inc., a wholly-owned subsidiary of ITI, for the sale and installation of pre-formed PVC thermoplastic pipe under the NuPipe process and trademark. 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.
TRY TEK manufactures Insitucutter devices for sale to ITI and East under an agreement with ITI, the Insitucutter patent holder. Unless otherwise terminated, this agreement will continue until April 6, 1998, the date of expiration of the Insitucutter device patent.
In 1981, the Company was assigned the rights to an agreement (the SAW Agreement) regarding the introduction of potential Insituform process sublicensees to ITI. In connection with the introduction of current Insituform process sublicensees to ITI, the Company receives quarterly payments from ITI equal to 0.5% of contract revenues from Insituform process installations in East's licensed territory and the states of New York, New Jersey, North Carolina, South Carolina, Georgia and Alabama.
PATENTS
The Insituform process was developed in the United Kingdom in 1971. The Company's rights to utilize the patents, trademarks and know-how related to the Insituform process are derived from its licensor, ITI. There are presently 56 United States patents which cover various aspects of the Insituform process and related installation techniques. The last patent to expire will remain in effect until 2014. Two initial method patents relating to the Insituform process (one of which covers material aspects of the inversion process) expired in 1994, a patent relating to the Insitutube material will expire in May 2001 and a primary method patent relating to the Insitutube saturation process expires in February 2001.
Although management of the Company believes these patents are important to the 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 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 these patents, the Company's significant installation experience with the Insituform process and its degree of market penetration in its licensed territory should enable the Company to compete effectively in the pipeline rehabilitation market in the future as older 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 65% of the Company's customers have been state and local government entities - cities, counties, state agencies and regional authorities. During the year ended June 30, 1996, Federal government contracts (collectively), a county government in the Washington, D.C. metropolitan area and a regional sanitary authority in southwest Ohio accounted for 23%, 20% and 10%, respectively, of the Company's revenues. During the year ended June 30, 1995, Federal Government contracts (collectively), a regional sanitary authority in southwest Ohio and Washington Metropolitan Area Transit Authority ("WMATA") accounted for 21%, 15% and 10%, respectively, of the Company's revenues. During the year ended June 30, 1994, Federal Government contracts (collectively) accounted for 15% of the Company's revenues.
SUPPLIERS
The Company's materials and equipment are generally available from several suppliers. However, the Company believes that ITI is presently the sole source of proprietary Insitutube material and, therefore, the Company is presently dependent upon ITI for its supply of Insitutube material. 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. The Company presently maintains an annually renewed supply agreement with ITI for Insitutube material (see "Relationship with Insituform Technologies, Inc." above).
REVENUE RECOGNITION, CONTRACT AWARDS AND BACKLOG
The Company recognizes revenues using the units of completion method as pipeline sections are rehabilitated using the Insituform process. An Insituform process installation 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.
The total value of all uncompleted and multi-year contract awards from customers was approximately $5.1 million at June 30, 1996 as compared to $11.9 million at June 30, 1995. The twelve-month backlog at June 30, 1996 was approximately $4.9 million as compared to $11.5 million at June 30, 1995. June 30, 1996 backlog figures include approximately $1.8 million from MIDSOUTH Partners. MIDSOUTH Partners' backlog of approximately $4.1 million at June 30, 1995 is not included in consolidated Company backlog figures at June 30, 1995. The total value of all uncompleted and multi-year contracts at June 30, 1996 and 1995 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. Backlog figures at specific dates are not necessarily indicative of sales and earnings for future periods due to the irregular timing and receipt of larger annual term contract renewals and other large project awards.
COMPETITION
The general pipeline reconstruction, rehabilitation and repair business is highly 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.
Traditional Methods. The Insituform process conceptually competes with traditional methods of pipe rehabilitation including full replacement, point repair and sliplining. The Company believes the Insituform process usually offers a cost advantage over full replacement as well as the practical advantage of avoiding excavation. In addition, the Insituform process also offers qualitatively better rehabilitation than sliplining which may significantly reduce the diameter of the pipe. Grouting is also undertaken in the United States. The Company considers grouting a short-term repair technique and not a long-term pipeline rehabilitation solution competitive with the Insituform process. 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 introduction of alternative cured-in-place technologies, none of which the Company believes has been able to offer the quality or technical and other merits inherent in the Insituform process. The Company believes it remains the dominant provider of trenchless cured-in-place pipeline rehabilitation in its licensed territory.
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 cured-in-place Insituform process over modified sliplining techniques due to the quality and longevity of the Insitupipe product, the proven performance record of the Company's Insituform process installations over the past eighteen years, and the broader range of design alternatives available with the Insituform 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 technologically inferior modified sliplining technique to cured-in-place technology.
Other Trenchless Technologies. 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 the successful, in the ground, over twenty years proven performance of the Insituform process continues to present a significant advantage over these alternative trenchless products.
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 the Insituform process competes favorably in each of these areas with traditional replacement or repair methods. In particular, the ability to install an Insitupipe product 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 the Insitupipe product against the walls of the original pipe, the smooth finished interior reduces friction and generally increases flow capacity.
The Company believes the trenchless pipeline reconstruction marketplace is continuing to expand, enticing ever more entrants and products hoping that cheapest price alone will permit them to succeed in a market otherwise dominated by Insituform. The Company is encouraged that, in response, many of its municipal, federal government and industrial customers are increasingly implementing improved procurement specifications and product evaluation criteria emphasizing technical value instead of simply low price. The Company continues to believe that customers and consulting engineers using such improved purchasing criteria help to ensure long term solutions to their infrastructure needs by clearly differentiating proven products such as Insituform from cheaply priced trenchless substitutes with quality, technical and other risks not equally tested by time or independent third parties.
SALES AND MARKETING
East's sales and marketing effort is directed by its Vice President of Sales and Marketing. East's sales and marketing team includes five sales engineers, three primarily serving municipal customers and two primarily serving industrial market customers. MIDSOUTH Partners' sales and marketing activities are directed by the partnership Management Committee through the partnership's General Manager. MIDSOUTH Partners' sales and marketing team includes one Sales Manager and one regional sales representative. 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 produces and distributes technical video presentations, brochures and newsletters for current and prospective users of the Insituform process.
RESEARCH AND DEVELOPMENT
The Company is confident of its present capability to provide rehabilitation services to its customers primarily using the Insituform process and relies on its licensor, ITI, for major research and development projects. On a continuing basis, however, the Company expends engineering efforts to improve installation methods and design techniques for specific customer applications.
GOVERNMENTAL REGULATIONS
The Company does not anticipate any material impediments in the use of the Insituform process arising from existing or future regulations or requirements, including those regulating the discharge of materials into the environment.
EMPLOYEES
At June 30, 1996, the Company employed 189 full-time personnel, including 46 employees of MIDSOUTH Partners.
Item 2.
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. After completing construction of a 31,700 square foot Maintenance and Shop building in fiscal 1990, the Company renovated and expanded its warehousing, production capabilities and administration and executive offices during fiscal 1991 and 1992.
The Company also leases a 13,000 square foot branch facility in the Cincinnati, Ohio metropolitan area to service operations in the western region of its licensed territory.
TRY TEK owns 13,885 square feet of land in Hanover, Pennsylvania, with 6,139 square feet of manufacturing, administration and storage facilities housed in three buildings.
MIDSOUTH Partners leases a 15,000 square foot facility in Knoxville, Tennessee to serve its customers in Tennessee, Kentucky and northern Mississippi.
Item 3.
Item 3. Legal Proceedings
Not applicable.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5.
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") National Market System ("NMS"). Holders of Common Stock have one vote per share on all matters on which stockholders are entitled to vote together. 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, 1996 as reported by NASDAQ:
(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 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 3, 1996, there were 826 shareholders of record of Common Stock and 7 shareholders of record of Class B Common Stock.
(c) Dividend Policy
On June 10, 1996 and June 9, 1995, 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, 1996 and 1995, payable July 15, 1996 and July 14, 1995, respectively.
On June 10, 1994, the Company declared cash dividends of five cents per share on its shares of Common Stock and five cents per share on its shares of Class B Common Stock to its shareholders of record at the close of business on June 30, 1994, payable July 15, 1994.
The declaration of any future dividends will be determined by the Board of Directors based upon conditions then existing, including the Company's earnings, 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 dividends will be declared annually with a record date of June 30th and a payment date of July 15th.
Item 6.
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.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview and Outlook
The Company reported net earnings of $1,678,557 ($0.38 per share)on $30.5 million in sales, an 11% return on equity, for the Company's fiscal year ended June 30, 1996. The Company recognized net earnings of $2,120,108 ($0.48 per share) on sales of $21.6 million, a 16% return on equity, for the Company's fiscal year ended June 30, 1995. The apparent 41% jump in annual sales is principally attributable to initiation, in fiscal 1996, of the inclusion of MIDSOUTH Partners contract revenues in consolidated sales totals. Independent of partnership revenues, East sales increased 4% from fiscal 1995 to fiscal 1996. The Company attributed its 21% decrease in comparable fiscal year net earnings to the combination of adverse sales volume during the last six months of fiscal 1996 due to harsh winter weather conditions and lower backlog levels, reduced margins on contracts performed by MIDSOUTH Partners and increased semi-fixed operating costs associated with expanded East production capabilities.
The fiscal 1996 change in consolidated reporting arises from a change in control of MIDSOUTH Partners (also trading as Insituform MIDSOUTH), whereby the Company obtained majority representation on the partnership Management Committee as a result of a June 12, 1996 arbitration award. The change in control does not change the Company's unaltered 42.5% equity share in partnership earnings and, therefore, financial consolidation of the Company's now majority-controlled subsidiary partnership has no affect on the previous, current or future share of contribution by MIDSOUTH Partners to the overall net earnings of the Company. The Company's investment in MIDSOUTH Partners is accounted for using the equity method in prior years.
While there can be no assurances regarding future operating performance, based on the volume and mix of the Company's present and expected backlog of customer orders, the less favorable results experienced during the last two quarters of fiscal 1996 are presently anticipated to extend or expand through the first quarter of fiscal 1997. However, the Company presently believes that anticipated increases in immediately workable backlog should result in favorable results over the remaining three quarters of fiscal 1997.
The principal factor affecting the Company's future performance remains the volatility of earnings as a function of sales volume at normal margins. Accordingly, because a substantial portion of the Company's costs are semi-fixed in nature, earnings can, at times, be severely reduced or eliminated during periods of either depressed sales at normal margins or material increases in discounted sales, even where total revenues may experience an apparent buoyancy or growth from the addition of discounted sales undertaken from time to time for strategic reasons. Conversely, at normal margins, increases in period sales typically leverage positive earnings significantly.
The Company believes the trenchless pipeline reconstruction marketplace is continuing to expand, thereby enticing, however, the entry of ever more imitations and substitute products hoping that cheap price alone may permit them to succeed in a market otherwise dominated by Insituform. In those limited markets where the cheapest priced product may be deemed technically "good enough," Insituform is at a disadvantage. Strategic participation undertaken by the Company in this market share segment to preserve competitive presence, usually at levels materially below normal margins, necessarily dilutes the overall margin performance of the Company. However, a majority of the Company's customers already use or are implementing improved procurement specifications and contract award evaluation criteria emphasizing technical value instead of simply low price. In a value and quality based market, Insituform remains at a distinct advantage. As customers and consulting engineers increasingly rely on quality based purchasing criteria to help ensure long term solutions to their infrastructure needs, they help clearly differentiate proven products such as Insituform from cheaply priced trenchless substitutes with technical, performance and installation risks not equally tested by time or independent third parties.
The Company's primary source of revenue is from the rehabilitation and reconstruction of sewers and other underground conduits using the patented Insituform process. Although the Company does rehabilitate pipelines using the NuPipe process, does custom design and build special machinery and does perform manhole rehabilitation and pipeline cleaning and television inspection services exclusive of the Insituform process, over 95% of the Company's revenues for the years ended June 30, 1996, 1995 and 1994 came from contracts with customers to rehabilitate existing pipelines using the Insituform process.
Sales increased almost $8.9 million (41%) from $21.6 million in fiscal 1995 to $30.5 million in fiscal 1996 primarily as a result of including MIDSOUTH Partners contract revenues in the fiscal 1996 consolidated sales total. Comparable period East sales increased 4% primarily as a result of expanded production capacity and high levels of workable backlog during the first six months of fiscal 1996.
Sales increased $6.8 million (46%) from $14.8 million for the year ended June 30, 1994 to $21.6 million for the year ended June 30, 1995. Improved fiscal 1995 sales performance was due in part to expanded production capabilities and in part to higher utilization of all installation resources throughout the year. Sales volume increases were achieved in the Company's municipal, Federal government and industrial market sectors.
Although Insituform prices vary for Insitutube sizes and other contract conditions, 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 net earnings.
The Company's gross profit as a percentage of sales revenues was 27%, 30% and 22% for fiscal 1996, 1995 and 1994, respectively. The decrease in fiscal 1996 gross profit margin as compared to fiscal 1995 is primarily a result of increased semi-fixed operating costs associated with expanded East production capabilities in fiscal 1996 and reduced margins on MIDSOUTH Partners Insituform contracts. The increase in fiscal 1995 gross profit margin as compared to fiscal 1994 is due primarily to the absorption of semi-fixed operating costs over increased sales in fiscal 1995.
Selling, general and administrative expenses increased 26% in fiscal 1996 compared to fiscal 1995 primarily as a result of the inclusion of selling, general and administrative expenses of MIDSOUTH Partners in fiscal 1996. Selling, general and administrative costs increased 16% in fiscal 1995 as compared to fiscal 1994 primarily as a result of costs associated with increased production activities.
The Company's equity in the unconsolidated earnings of MIDSOUTH Partners operations was $738,798 and $154,786 for fiscal 1995 and 1994, respectively. During the years ended June 30, 1995 and 1994, MIDSOUTH Partners recognized sales revenues of $8.9 million and $6.2 million, respectively. The Company's equity in MIDSOUTH Partners' earnings increased 377% from fiscal 1994 to fiscal 1995 primarily as a result of increased sales and improved gross profit margins. The 44% increase in sales was due in part to maintaining consistently high production levels throughout the year and increased sales to Federal government customers. The Partnership's gross profit margin as a percentage of sales increased from 21% in fiscal 1994 to 31% in fiscal 1995 due in part to improved production efficiency, the mix of contracts performed and the absorption of semi-fixed operating costs over increased sales.
During the fiscal year ended June 30, 1996, $3,876,283 in cash was provided by the Company's operating activities, due in part to the consolidation of MIDSOUTH Partners, the Company's net earnings for the year and $1.6 million in depreciation and amortization expenses included in net earnings that did not require the outlay of cash. Due in part to the consolidation of MIDSOUTH Partners, the Company's cash position increased $1.4 million, improving working capital to $8.7 million with a current ratio of 3.6 to 1 at June 30, 1996.
Capital expenditures during fiscal 1996, 1995 and 1994 included purchases of vehicles and equipment to upgrade and improve the Company's production capabilities and to replace aging units. Fiscal 1996 and 1995 capital expenditures also included purchases of vehicles and equipment to expand production capabilities.
During fiscal 1996, 1995 and 1994, the Company declared cash dividends of $261,412, $261,412 and $217,843, respectively. The Company also received a $123,250 cash distribution from MIDSOUTH Partners in fiscal 1995.
The Company maintains a $3,000,000 unsecured bank line of credit to meet the Company's short-term cash flow requirements. The Company anticipates that expanding production capabilities and improving operational performance in the future will require additional capital expenditures. Management believes that cash flow from future operations, existing working capital, the available line of credit and the unencumbered real and personal property owned by the Company provide adequate resources to finance the cash requirements of future capital expenditures.
Item 8.
Item 8. Financial Statements and Supplementary Data
See pages 14 through 27, infra.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
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, 1996 and 1995, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1996. 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 generally accepted auditing standards. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Washington, D.C. September 20, 1996
INSITUFORM EAST, INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1. Summary of Significant Accounting Policies
Business Operations
Insituform East, Incorporated (the "Company"), operating pursuant to sublicense agreements as explained in Note 9, is primarily engaged in the rehabilitation of underground sewers and other pipelines using the patented Insituform(R) process. The process involves installing a cured-in-place Insitupipe(R) product inside existing pipelines.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Insituform Ohio, Inc., Insitu, Inc,. TRY TEK Machine Works, Inc. (majority-owned prior to March 31, 1995) and Insituform of Pennsylvania, Inc. (collectively, "East"). The consolidated financial statements as of June 30, 1996 and for the year then ended also include the accounts of MIDSOUTH Partners, the Company's majority-controlled subsidiary Partnership. All significant intercompany accounts and transactions have been eliminated. The Company's investment in MIDSOUTH Partners as of June 30, 1995 and for each of the two years in the period ended June 30, 1995 is accounted for using the equity method.
Revenue Recognition
The Company recognizes revenue using the units of completion method as pipeline sections are rehabilitated using the Insituform process. Installation of the Insitutube(R) product 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 the Insituform process.
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 depreciation, contract revenues, compensated absences, the estimated loss on disposal of cement mortar lining service capability 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.
New Accounting Standards
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), issued by the Financial Accounting Standards Board is effective for transactions entered into in fiscal years that begin after December 15, 1995. The disclosure requirements of SFAS No. 123 are also effective for financial statements for fiscal years beginning after December 15, 1995. The new standard encourages entities to adopt a fair value method of accounting for employee stock-based compensation plans. As allowed under the provisions of SFAS No. 123, the Company intends to 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 would be required to provide pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. Thus, adoption during the fiscal year ending June 30, 1997, should have no effect 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 $12,856 and $25,000 at June 30, 1996 and June 30, 1995, respectively. Other accounts receivable includes expense advances to officers and employees of $10,498 and $9,880 at June 30, 1996 and 1995, respectively.
3. Investment in MIDSOUTH Partners
MIDSOUTH Partners was organized as Insituform MIDSOUTH, a Tennessee general partnership, in December 1985 with the Company as a general partner. MIDSOUTH Partners is the exclusive licensee for the Insituform process and NuPipe process in Tennessee, Kentucky (excluding Boone, Kenton and Campbell counties) and northern Mississippi. The Partnership's general partners at June 30, 1996 are Insitu, Inc., a wholly-owned subsidiary of the Company; E-Midsouth, Inc., an affiliate of Insituform Technologies, Inc. ("ITI"); and Insituform California, Inc., also an affiliate of ITI.
Management and conduct of the business of MIDSOUTH Partners is vested in a Management Committee. The seven-member Partnership Management Committee consisted of four Insitu, Inc. representatives, two E-Midsouth, Inc. representatives and one Insituform California, Inc. representative at June 30, 1996. The Company did not have majority representation on the Partnership Management Committee prior to a June 12, 1996 arbitration award, which, in connection with a default of the Partnership Agreement by E-Midsouth, Inc., granted Insitu, Inc. the unilateral right to appoint an additional Management Committee member in place of an E-Midsouth, Inc. representative.
Partnership profits and losses are allocated to the partners as follows:
Insitu, Inc. 42.5% E-Midsouth, Inc. 42.5% Insituform California, Inc. 15.0%
During the three years ended June 30, 1996, the Company received $46,800 annually for accounting and administrative services provided to MIDSOUTH Partners.
The Company and Insituform Southeast Corp., both affiliates of general partners, have each unconditionally committed to advance funds to MIDSOUTH Partners, up to a maximum of $250,000 each, with interest payable at Chase Manhattan Bank's Prime Lending Rate. These commitments currently extend through December 31, 1996.
4. Property, Plant and Equipment
The Company incurred repair and maintenance costs of $1,021,845, $789,144 and $532,664 for the years ended June 30, 1996, 1995 and 1994, respectively.
5. Discontinued Operations
The Company adopted a formal plan to discontinue providing cement mortar lining services on June 11, 1993. This plan included declining to bid on future cement mortar lining contracts, fulfilling existing commitments and selling remaining equipment and materials associated with this service capability. The Company substantially completed two existing contracts in progress and sold substantially all remaining equipment and materials during the year ended June 30, 1994. Sales revenues from cement mortar lining activities for the year ended June 30, 1994 was $1,080,773. This amount is not included in sales in the accompanying Consolidated Statements of Earnings.
6. Notes Payable
The Company maintains a $3,000,000 Revolving Line of Credit facility with a bank. This facility, currently available to the Company through December 31, 1997, is reviewed annually. Interest on borrowings against this facility is payable monthly at the bank's prime rate. Loans against this facility are unsecured; however, the Company is required to comply quarterly with financial liquidity, net worth, tangible net worth and debt to equity leverage covenants.
7. Leases
MIDSOUTH Partners leases mobile production equipment from an unrelated party. These leases are classified as capital leases. The net book value of equipment under capital lease at June 30, 1996 is $137,397. A schedule of minimum lease payments and the present value of minimum lease payments for these leases at June 30, 1996 is as follows:
The Company leases operations facilities in Knoxville, Tennessee and Cincinnati, Ohio. The Company also leases equipment on a short-term basis for specific contract requirements. Rental expense for leased equipment and facilities charged to operations was $361,184, $377,555 and $226,598 for the years ended June 30, 1996, 1995 and 1994, respectively. These leases are classified as operating leases. The Company has committed to make minimum lease payments of $72,464, $53,127 and $44,069 on noncancelable operating leases during the years ending June 30, 1997, 1998 and 1999, respectively.
8. Income Taxes
A reconciliation of income tax computed at the statutory Federal rate to the provision for income taxes included in the consolidated statements of earnings is as follows:
9. Commitments and Contingencies
License Agreements
The Company has entered into seven sublicense agreements with Insituform Technologies, Inc. ("ITI") which grant the Company rights to perform the Insituform process in Maryland, Virginia, Delaware, the District of Columbia, Pennsylvania, Ohio, West Virginia, Kentucky, Tennessee and Northern Mississippi. The agreements are for the life of the patents or the patent rights unless sooner terminated by a specified action of the Company or ITI. The agreements specify that a royalty equal to 8% of the gross contract price of all contracts performed by the Company utilizing the process, less certain fees, be paid to ITI.
The Company has also entered into license agreements 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. The Company 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.
The agreements also 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, 1997 and 1996 have been waived by ITI. Payments of minimum annual royalties for MIDSOUTH Partners for the years ended December 31, 1996 and 1995 have been waived by ITI. During the years ended June 30, 1996, 1995 and 1994, the Company incurred royalty expense of $1,846,932, $1,354,163 and $919,732, respectively.
Supply Agreements
The Company entered into supply agreements with ITI committing East and MIDSOUTH Partners to purchase 90% of its Insitutube material requirements from ITI. As a result of certain terms not previously fulfilled by ITI, the Company believes it is no longer required to purchase 90% of its Insitutube material requirements from ITI under the otherwise continuing agreements. These agreements, which presently extend through April 30, 1997, are renewable annually unless notice of termination is provided by either party six months prior to the end of the current renewal period. During the three years ended June 30, 1996, the Company purchased substantially all of its Insitutube from ITI.
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 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 effect on the financial position of the Company.
10. 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 10, 1996, 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, 1996, payable July 15, 1996.
On June 9, 1995, 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, 1995, payable July 14, 1995.
On June 10, 1994, the Company declared cash dividends of five cents per share on its shares of Common Stock and five cents per share on its shares of Class B Common Stock to its shareholders of record at the close of business on June 30, 1994, payable July 15, 1994.
At June 30, 1996, the Company held 327,897 shares of its Common Stock in Treasury at an average price of $3.63 per share.
11. 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, 1996, 1995 and 1994, the Company recognized profit sharing expense of $263,722, $183,489 and $84,775, respectively. Fiscal 1996 profit sharing expense consisted of $198,844 for East and $64,878 for MIDSOUTH Partners.
12. Net Earnings Per Share
Net earnings per share is based on the weighted average number of common shares outstanding including common stock equivalents from dilutive stock options. Weighted average shares of 4,419,636, 4,376,993 and 4,359,748 were used in computing earnings per share for the years ended June 30, 1996, 1995 and 1994, respectively.
13. Stock Options
The Company maintains three 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.
On May 20, 1985, the Board of Directors adopted the Insituform East, Incorporated Employee Stock Option Plan, which was ratified by the shareholders in February 1986. Under the terms of this plan, 350,000 shares of Common Stock were reserved for certain full-time employees of the Company. This plan automatically terminated on February 17, 1996.
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.
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.
The following summary sets forth the activity under the 1989 and 1994 Board of Directors Plans and 1985 Employee Stock Option Plan during the past three years:
14. 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 65% of the Company's customers have been state and local government entities - cities, counties, state agencies and regional authorities. During the year ended June 30, 1996, Federal government contracts (collectively), a county government in the Washington, D.C. metropolitan area and a regional sanitary authority in southwest Ohio accounted for 23%, 20% and 10%, respectively, of the Company's revenues. During the year ended June 30, 1995, Federal Government contracts (collectively), a regional sanitary authority in southwest Ohio and Washington Metropolitan Area Transit Authority ("WMATA") accounted for 21%, 15% and 10%, respectively, of the Company's revenues. During the year ended June 30, 1994, Federal Government contracts (collectively) accounted for 15% of the Company's revenues.
15. Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data for the years ended June 30, 1996 and 1995 are presented in the following table. Sales and Gross Profit figures for the first three quarters of the Company's fiscal year ended June 30, 1996 have been restated to include the operations of the Company's majority-controlled subsidiary partnership, MIDSOUTH Partners, beginning July 1, 1995.
PART III
Item 10.
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. The directors elected at the Company's next Annual Meeting of Stockholders will serve subject to the By-Laws and until their successors have been duly elected and qualified.
The individuals listed below who were executive officers but not directors of the Company throughout fiscal 1996 are Raymond T. Verrey, John F. Mulhall, Gregory Laszczynski and Robert F. Hartman.
Holders of shares of Class B Common Stock 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. The following list designates those directors elected by holders of shares of Common Stock and those directors elected by holders of shares of Class B Common Stock.
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, 1996, all Section 16(a) filing requirements applicable to Reporting Persons were complied with during the fiscal year.
Item 11.
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 and the President, and such other officers of the Corporation as may from time to time be determined by the Board -- performs the function 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 circumstance. Resolutions of the Board determining CEOC compensation arrangements are voted upon by the Board with such CEOC members abstaining. A second vote is then taken with all directors participating.
SUMMARY COMPENSATION
CASH COMPENSATION PURSUANT TO PLANS
Insituform East, Incorporated Employee Advantage Plan
Insituform East 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 Insituform East 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 Insituform East Board of Directors which determines, at its discretion, the amount of Insituform East's annual contribution. The Insituform East Board of Directors can authorize a contribution, on behalf of Insituform East, 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 Insituform East'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. Amounts allocated under the IEI Advantage Plan begin to vest after three years of service (at which time 20% of the contribution paid vests) and are fully vested after seven years of service.
The IEI Advantage Plan 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. During the fiscal year ended June 30, 1996, Insituform East contributed 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.
1985 Employee Stock Option Plan
The Company adopted, with stockholder approval at the 1985 Annual Meeting of Stockholders, the Insituform East, Incorporated 1985 Employee Stock Option Plan. This plan automatically terminated on February 17, 1996. The purpose of the plan was to advance the growth and development of the Company by affording an opportunity to 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 was employed on a full-time basis was eligible for participation. The plan was administered by the Stock Option Committee consisting of Messrs. Thomas J. Schaefer, Jack Massar and Webb C. Hayes, IV.
During fiscal year 1996, no options were granted to executive officers of the Company. All options granted under this plan in past years had expired prior to June 30, 1996.
1989 Board of Directors Stock Option Plan
The Company adopted, with stockholder approval at the 1989 Annual Meeting of Stockholders, the Insituform East, Incorporated 1989 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 Plan is administered by the Board of Directors. Options were first granted to directors on December 1, 1989 and at each of the four succeeding Board of Directors meetings following the Annual Meetings of Stockholders in 1990, 1991, 1992 and 1993. No further options are anticipated to be granted under this plan.
Each grant of options under the plan entitles each director to whom such options were 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 previously granted, which have not already been exercised or expired, will remain in effect until exercise or expiration, whichever comes first. The Plan will terminate in 1999, unless terminated sooner by the Board of Directors. Under terms of this plan, 180,000 shares of Common Stock remain reserved for the directors of the Company.
No options available under this plan were granted to or exercised by directors of the Company during fiscal year 1996.
1994 Board of Directors Stock Option Plan
The Company adopted, with stockholder approval at the 1994 Annual Meeting of Stockholders, the Insituform East, Incorporated 1994 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 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 1994 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 8, 1995, 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 $4.2188. No options available under this plan were exercised by directors of the Company during fiscal year 1996.
OPTIONS/SAR GRANTS
No option of Stock Appreciation Right grants were made to any of the named executive officers during fiscal year 1996 under the 1985 Employee Stock Option Plan or the 1989 Board of Directors Stock Option Plan. The following table sets forth information concerning options granted to each of the named executive officers, who are also directors, during fiscal year 1996 under the 1994 Board of Directors Stock Option Plan.
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE
All option or Stock Appreciation Right grants made under the 1985 Employee Stock Option Plan had expired prior to fiscal year 1996. No option or Stock Appreciation Right grants made under the 1989 and 1994 Board of Directors Stock Option Plans to any of the named executive officers were exercised during fiscal year 1996. 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, 1996.
LONG-TERM INCENTIVE PLAN AWARDS
The Company does not have a long-term incentive plan.
DEFINED BENEFIT OR ACTUARIAL PLANS
The Company does not have any defined benefit or actuarial plans.
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 services as directors but are eligible with all other directors to participate in the 1989 Board of Directors Stock Option Plan and the 1994 Board of Directors Stock Option Plan, as described under the section entitled "Compensation Pursuant to Plans." All directors of the Company are reimbursed for Company travel-related expenses.
Mr. Jack Massar, a director of the Company since 1991, has a consulting agreement with the Company. Mr. Massar received $48,600 from the Company for services rendered pursuant to this agreement during fiscal year 1996. Mr. Massar is also reimbursed for travel-related expenses in connection with services performed under this agreement.
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 exceeding $100,000.
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 President, respectively, participate in and during fiscal 1996 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 1996 participated in deliberations of the CERBCO, Inc. Board of Directors concerning executive officercompensation for CERBCO, Inc.
Mr. Robert W. Erikson served, during fiscal 1996, as a member of the Compensation Committee of the Board of Directors of The Palmer National Bank. Mr. Webb C. Hayes, IV, a director of the Company and director of CERBCO, Inc. who participates in, and during fiscal 1996 participated in, deliberations of the Company's Board of Directors and the CERBCO, Inc. Board of Directors concerning executive officer compensation for the Company and CERBCO, Inc., respectively, was Chairman of the Board and an executive officer of The Palmer National Bank. Palmer National Bancorp, Inc., parent of The Palmer National Bank, was acquired by George Mason Bankshares, Inc. in May 1996. The Palmer National Bank was subsequently renamed George Mason Bank, N.A. Since May 1996, Mr. Erikson no longer participates in compensation matters affecting Mr. Hayes.
Item 12.
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 September 3, 1996.
(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 the Record Date, and with respect to all directors and officers of the Company as a group.
(c) Changes in Control
None.
Item 13.
Item 13. Certain Relationships and Related Transactions
(a) Transactions with Management and Others
Not applicable.
(b) Certain Business Relationships
Mr. Thomas J. Schaefer, a director of the Company since 1981, was President, Chief Executive Officer and a Director of Columbia First Bank. The Company maintained a commercial banking relationship with Columbia First Bank including a $3,000,000 revolving line of credit during fiscal 1996 until Columbia First Bank was acquired by First Union National Bank on November 3, 1995. Management of the Company believes that Columbia First Bank's fees for commercial banking services were competitive with fees charged by other area banks.
(c) Indebtness of Management
Not applicable.
(d) Transactions with Promoters
Not applicable.
PART IV
Item 14.
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a) 1. Financial Statements included under Part II, Item 8: Pages
Independent Auditors' Report on Financial Statements 14 Consolidated Statements of Earnings 15 Consolidated Balance Sheets 16 Consolidated Statements of Stockholders' Equity 17 Consolidated Statements of Cash Flows 18 Notes to Consolidated Financial Statements 19 - 27
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 Number* Pages
10.1 Loan Agreement dated July 1, 1996 between the Company 38-41 and First Union National Bank of Virginia (the "Bank") evidencing the Company's $3,000,000 Line of Credit facility with the Bank.
10.2 Promissory Note dated July 1, 1996 between the Company 42-46 and First Union National Bank of Virginia executed in connection with extension of the Company's $3,000,000 Line of Credit facility to December 31, 1997.
11.0 Statement re computation of per share earnings 47
23.0 Independent Auditors' Consent 48
27.0 Financial Data Schedule 49
* 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, 1996.
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
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 Chairman Director and Principal Executive Officer September 20, 1996
/s/ ROBERT W. ERIKSON Robert W. Erikson President Director and Principal Executive Officer September 20, 1996
/s/ CALVIN G. FRANKLIN Calvin G. Franklin Director September 20, 1996
/s/ WEBB C. HAYES, IV Webb C. Hayes, IV Director September 20, 1996
/s/ PAUL C. KINCHELOE, JR. Paul C. Kincheloe, Jr. Director September 20, 1996
/s/ JACK MASSAR Jack Massar Director September 20, 1996
/s/ THOMAS J. SCHAEFER Thomas J. Schaefer Director September 20, 1996
/s/ RAYMOND T. VERREY Principal Accounting Officer, September 20, 1996 Raymond T. Verrey Principal Financial Officer Vice President and Chief Financial Officer