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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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 0-10786
INSITUFORM TECHNOLOGIES, INC.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3032158
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
702 Spirit 40 Park Drive
Chesterfield, Missouri 63005
- ---------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 314-530-8000
------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.01 par value
------------------------------------
(Title of class)
Indicate by a 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 as 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 (Section 229.405 of
this chapter) is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or
information state-ments incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [ ]
State the aggregate market value of the voting and non-
voting stock held by non-affiliates of the registrant. The
aggregate market value shall be computed by reference to the price
at which the common stock was sold, or the average bid and asked
prices of such common equity, as of a specified date within 60
days prior to the date of filing.
Aggregate market value as of March 15, 1998.....$228,062,297
Indicate the number of shares outstanding of each of the
registrant's classes of common stock as of the latest practicable
date.
Class A Common Stock, $.01 par value,
as of March 15, 1998................. 26,959,459 shares
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the documents, all or portions of which are
incorporated by reference herein, and the part of the Form 10-K
into which the document is incorporated: Proxy Statement to be
filed with respect to the 1998 Annual Meeting of Stockholders-Part
III.
PART I
ITEM 1. BUSINESS
General
Insituform Technologies, Inc. (the "Company") is a worldwide
provider of proprietary trenchless technologies for the
rehabilitation and improvement of sewer, water, gas and industrial
pipes. The Company's primary technology is the Insituform(R)
Process (the "Insituform Process"), a "cured-in-place,"
non-disruptive pipeline rehabilitation process that, during the
Company's most recent fiscal year, contributed approximately 63%
of the Company's revenues.
In addition to the Insituform Process, the Company offers
certain other products in trenchless pipeline system
rehabilitation. The Company's NuPipe(R) Process (the "NuPipe
Process"), which utilizes a "fold and formed" technology, is used
primarily to repair smaller or less damaged pipe. The Company also
exercises the exclusive rights in substantially all of North
America, and non-exclusive rights in specified other territories,
to the Paltem(R)-HL system and to the Thermopipe(TM) System (the
"Thermopipe Process").
The Company's Tite Liner(R) Process (the "Tite Liner
Process") is used to line new and existing steel pipelines.
Through its Affholder, Inc. subsidiary, the Company is engaged in
trenchless tunnelling used in the installation of new underground
pipelines.
The Company was incorporated in Delaware in 1980 under the
name Insituform of North America, Inc., in order to act as the
exclusive licensee of the Insituform Process in most of the United
States of Insituform Group Limited, the then owner of the
worldwide rights to the Insituform Process, and to license other
companies to market and provide Insituform installation services
in return for royalties and sales from materials manufactured by
the Company. Contemporaneously with the consummation in 1992 of
the Company's acquisition of IGL, the name of the Company was
changed to Insituform Technologies, Inc.
As a result of its successive licensee acquisitions, the
Company has further integrated its business to perform the entire
process of manufacture and installation using its trenchless
processes. In 1995, Insituform Mid-America, Inc. ("IMA") which,
together with its subsidiaries, was licensed to provide the
Insituform technology in all or a portion of 22 states, was merged
with a subsidiary of the Company as a result of which IMA became
a wholly-owned subsidiary of the Company (the "IMA Merger"). The
IMA Merger has been accounted for as a pooling-of-interests and,
accordingly, the consolidated financial statements for the three
years ended December 31, 1997 included in response to "Item 14.
Exhibits, Financial Statement Schedules, and Reports on Form 8-K"
for the periods prior to the IMA Merger, and (unless the context
otherwise requires) all other financial information included
herein for such periods and prior periods, include the combined
historical results of the Company and IMA.
As used in this Annual Report on Form 10-K, the term the
"Company" refers to the Company and, unless the context otherwise
requires, its direct and indirect subsidiaries. For certain
information concerning each of the Company's industry segments and
domestic and foreign operations, see Note 18 of the Notes to the
Company's Consolidated Financial Statements included in response
to "Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K," which information is incorporated herein by
reference.
This Annual Report on Form 10-K contains various forward
looking statements and information that are based on information
currently available to management and management's beliefs and
assumptions. When used in this document, the words "anticipate,"
"estimate," "believes," "plans," and similar expressions are
intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. Such statements
are subject to risks and uncertainties, and the Company's actual
results may vary materially from those anticipated, estimated or
projected due to a number of factors, including, without
limitation, the competitive environment for the Company's products
and services, the geographical distribution and mix of the
Company's work, and other factors set forth in reports and other
documents filed by the Company with the Securities and Exchange
Commission from time to time.
Technologies
Pipeline System Rehabilitation. The Insituform Process for
the rehabilitation of sewers, pipelines and other conduits
utilizes a custom-manufactured tube, or liner, made of a synthetic
fiber with a plastic coating on one side which, after
installation, becomes the new inside surface of the pipe being
rehabilitated. After the pipe is saturated (impregnated) with a
thermosetting resin, the liner is inverted into the host pipe by
various processes, and the resin is then heated by various means
until it hardens, or cures, forming a new hard pipe within a pipe.
The Company's NuPipe Process entails the manufacture of a
folded replacement pipe from a thermoplastic material which is
stored on a reel in a reduced shape. The pipe is heated at the
installation site in order to make it flexible enough to be
inserted into an existing conduit, pulled into place and then
sequentially expanded to match the existing conduit by internal
heat and pressure and progressive rounding, creating a tight fit
against the conduit being repaired.
See "Patents and Licenses" below for information concerning
the Paltem system and the Thermopipe Process, both licensed by the
Company, neither of which were material to the Company's results
of operations during the year ended December 31, 1997.
Corrosion and Abrasion Protection. The Company's Tite Liner
Process is a method of lining new and existing steel pipelines
with a corrosion and abrasion resistant polyethylene pipe.
Tunnelling. Tunnelling is a trenchless, subterranean
construction process that generally is utilized for the
construction of pipeline systems. The Company utilizes its
tunnelling machines to construct new pipes from two to fourteen-
foot diameter in size.
Rehabilitation Activities
The Company conducts its rehabilitation activities through
direct installation and other construction operations performed
through wholly-owned and, in some cases, majority-owned
subsidiaries. During the year ended December 31, 1997, such
operations accounted for approximately 92% of the Company's
consolidated revenues. In addition, in those areas of the world in
which the Company's management believes it would not be profitable
for the Company to exploit its trenchless processes directly, the
Company has granted licenses to unaffiliated companies. The
Company has also entered into joint ventures from time to time to
encourage additional royalties, sales of its products and
exploitation of its trenchless rehabilitation processes.
Direct Installation and Other Construction Activities. The
Company's direct installation operations are conducted in North
America principally through subsidiaries which hold the Insituform
Process and NuPipe Process licenses for 39 of the 50 states (and
a portion of another state), in addition to Puerto Rico and the
U.S. Virgin Islands, and all of Canada, and the rights in
substantially all of North America to the Paltem system and to the
Thermopipe Process. Outside of North America, the Company conducts
Insituform Process or NuPipe Process direct installation
operations through its subsidiaries in the United Kingdom and
France.
North American rehabilitation operations are headquartered in
Chesterfield, Missouri, with principal operations facilities
maintained in approximately thirteen locations geographically
dispersed through all major regions. European operations are
headquartered in La Courneuve, France, with regional operations
facilities located in the United Kingdom.
The worldwide rights to the Tite Liner Process are applied by
United Pipeline Systems USA, Inc. and, through its United Pipeline
division, Insituform Technologies Limited, both subsidiaries of
the Company. During 1994, Tite Liner operations commenced in Chile
through a newly-organized subsidiary, United Sistema de Tuberias
Ltda. ("United Chile"), and during 1996, through newly organized
subsidiaries in Argentina and Mexico. The Company's corrosion and
abrasion protection work is coordinated through facilities in
Durango, Colorado, with regional facilities located in Canada and
Latin America. Following consummation of the IMA Merger, and in
view of the start-up nature of operations conducted by the Company
under the UltraPipe(R) name, the Company has consolidated such
operations with IMA's larger corrosion and abrasion protection
activities.
The Company's Affholder, Inc. subsidiary, in addition to
tunnelling, offers a range of pipe rehabilitation and construction
services.
The direct installation business of the Company is
project-oriented, and contracts may be obtained through
competitive bidding, usually requiring performance at a fixed
price. The profitability of these operations to the Company
depends upon the ability to estimate costs accurately, and such
estimates may prove to be inaccurate as a result of unforeseen
conditions or events. A substantial proportion of the work on any
given project may be subcontracted out to third parties by the
Company.
Proper trenchless installation requires certain expertise
that is acquired on the job and through training, and, if an
installation is improperly performed, the Company may be required
to repair the defect, which may involve excavation. The Company,
accordingly, has incurred significant costs in establishing new
field installation crews, in training new operations personnel and
in equipping its direct installation staff. The Company generally
invoices installation revenues on a percentage-of-completion
basis. Under ordinary circumstances, collection from governmental
agencies in the United States is made within 60 to 90 days of
billing. In some cases, five to fifteen percent of the contract
value is withheld by the owner until testing is completed or the
warranty period has expired.
The Company is required to carry insurance and bonding in
connection with certain direct installation projects, and,
accordingly, maintains comprehensive insurance policies, including
workers' compensation, general and automobile liability, and
property coverage. The Company believes that it presently
maintains adequate insurance coverage for all direct installation
activities. The Company has also arranged bonding capacity for
bid, performance and payment bonds. Typically, the cost of a
performance bond is less than approximately 1% of the contract
value. The Company is required to indemnify surety companies for
any payments the sureties are required to make under the bonds.
The Company's principal direct installation and other
construction activities are conducted by direct or indirect
wholly-owned subsidiaries, except for the following subsidiaries
that are less than wholly-owned:
Subsidiary Processes Territory Interest
---------- --------- --------- --------
Insituform France Insituform France 66-2/3% of
S.A. stock(2)
United Pipeline Tite Liner Mexico(1) 55% of
de Mexico, S.A. stock(3)
_______________________
(1) Jurisdiction of incorporation.
(2) The remaining interest is held by a subsidiary of Lyonnaise des Eaux S.A.
(3) The remaining interest is held by a subsidiary of Produtos y Servicios
Miller de Mexico, S.A.
In March 1998, the Company completed the acquisition of the
entire minority interest in United Chile for an aggregate purchase
price of approximately $2.1 million. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
Licensing Operations. The Company grants licenses for the
Insituform Process and the NuPipe Process, covering exclusive and
non-exclusive territories, to licensees who provide pipeline
repair and rehabilitation services throughout their respective
licensed territories. The licenses generally grant to the licensee
the right to utilize the know-how and practice the invention of
the patent rights (where they exist) relating to the subject
process, and to use the Company's copyrights and trademarks. At
present, the Insituform Process is commercialized under license by
an aggregate of 35 unaffiliated licensees and sublicensees, and
the NuPipe Process is commercialized under license by an aggregate
of seven unaffiliated licensees.
The Company's licensees generally are obligated to pay a
royalty at a specified rate, which in many cases is subject to a
minimum royalty payment. Domestic licensees are also obligated to
pay specified royalty surcharges on their sales and contracts
outside of their licensed territories, which are then paid by the
Company to the domestic licensee in whose territory the
installation was performed. Any improvements or modifications a
licensee may make in the subject process during the term of the
license agreement becomes the property of the Company or are
licensed to the Company. Should a licensee fail to meet its
royalty obligations or other material obligations, the Company may
terminate the license. Many licensees (including the domestic
licensees), upon prior notice to the Company, may also terminate
the license for any reason. The Company may vary the agreement
used with new licensees according to prevailing conditions.
The Company has also granted an exclusive license to use the
Tite Liner Process for specified uses in much of the Middle East,
in exchange for royalty payments calculated on the basis of the
licensee's gross sales (subject to minimum payments).
Ownership Interests in Licensees. The Company, through two
subsidiaries, holds an aggregate of 57.5% of the partnership
interest in Midsouth Partners, the Company's licensee of the
Insituform and NuPipe Processes in Tennessee and portions of
Mississippi and Kentucky,with the remaining interest in Midsouth
Partners held by a subsidiary of Insituform East, Incorporated
("Insituform East"), an unaffiliated licensee. The management and
conduct of the business of Midsouth Partners is vested in a
management committee comprised of seven members. Notwithstanding
the Company's majority equity ownership interest in Midsouth
Partners, as a result of the determination in June 1996 by an
arbitration panel that one Company subsidiary was in default of
certain obligations under the partnership agreement, Insituform
East was awarded majority control of the management committee and
effectively determines the partnership's business strategy and its
implementation. Partnership interests in Midsouth Partners may not
be transferred nor may there be a change in control of any
partner, without the approval of all partners.
The Company, through its subsidiary, Insituform Holdings (UK)
Limited, holds one-half of the equity interest in Insituform
Rohrsanierungstechniken GmbH, the Company's licensee of the
Insituform and NuPipe Processes in Germany. The joint venture
partners have rights-of-first-refusal in the event either party
determines to divest its interest.
The Company holds additional ownership interests in licensees
as follows:
Licensee Processes Territory Interest
- -------- --------- --------- --------
N.V. Kumpen-Insituform Insituform Belgium, 50% joint venture
Luxembourg interest(1)
Ka-Te Insituform A.G. Insituform Switzerland, 50% joint venture
Liechtenstein and interest(2)
Voralberg, Austria
_____________________
(1) The remaining interest is held by N.V. Kumpen.
(2) The remaining interest is held by Ka-Te Holding A.G.
The Company has also entered into contractual joint ventures
in order to develop joint bids on contracts for its direct
installation business, and for tunnelling operations. The Company
continues to investigate opportunities for augmenting its business
through such arrangements.
Marketing
The Company has focused the marketing of its rehabilitation
technologies primarily on the municipal wastewater markets
worldwide, which the Company expects to remain the largest part of
its business for the foreseeable future. The Company produces
sales literature and presentations, participates in trade shows,
conducts national advertising and executes other marketing
programs for the Company's own sales force and those of
unaffiliated licensees.
As a result of its acquisitions, the Company's distribution
efforts are implemented predominantly through the direct
installation activities of its subsidiaries. See "Rehabilitation
Activities" above for a description of the Company's licensing
operations and investments in licensees. The Company's
unaffiliated licensees are responsible for marketing and sales
activities in their respective territories, and each has a staff
for that purpose.
The Company offers its corrosion and abrasion protection
technologies worldwide to line new and existing steel pipelines.
No customer accounted for more than ten percent of the
Company's consolidated revenues during the years ended December
31, 1997, 1996 and 1995, respectively.
Backlog
At December 31, 1997 and 1996, respectively, the Company
recorded backlog from construction operations (excluding projects
where the Company has been advised that it is the low bidder) in
the amounts of approximately $102.1 million and $167.6 million,
respectively. The Company anticipates that substantially all
construction backlog recorded at December 31, 1997 will be
completed in 1998.
Product Development
The Company, by utilizing its own laboratories and test
facilities and outside consulting organizations and academic
institutions, continues to develop improvements to its proprietary
processes, including the materials used and the methods of
manufacturing and installing pipe. See "Item 2. Properties" and
"Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital
Resources" for information concerning inauguration of the
Company's new research and development facility in Chesterfield,
Missouri. During the years ended December 31, 1997, 1996 and 1995,
the Company spent approximately $7.0 million, $7.7 million and
$7.6 million, respectively, on all strategic marketing and product
development activities.
Manufacturing and Suppliers
The Company maintains its principal North American liner
manufacturing facility in Batesville, Mississippi, with an
additional facility located in Memphis, Tennessee. In Europe,
Insituform Linings Plc ("Linings"), a joint venture between the
Company and five licensees, manufactures and sells linings from
its plant located in Wellingborough, United Kingdom. The Company,
through a subsidiary, owns 51% of the equity of Linings. In 1992,
the Company inaugurated its liner manufacturing facility in
Matsubuse, Japan.
While raw materials used in the Company's Insituform products
are typically available from multiple sources, the Company's
historical practice has been to purchase materials from a limited
number of suppliers. The Company maintains its own felt
manufacturing facility contiguous to its Insitutube manufacturing
facility in Batesville, and purchases substantially all of its
fiber requirements from one source, alternate vendors of which the
Company believes are readily available. Although it is working
with one vendor to develop a uniform and standard resin to source
substantially all of its resin requirements, the Company believes
that resins are also readily available from a number of major
corporations. The Company believes that the sources of supply in
connection with its Insituform operations are adequate for its
needs.
The Company has entered into a supply agreement with an
unaffiliated party, under which the Company will purchase the
thermoplastic pipe to satisfy the substantial portion of its
NuPipe requirements, subject to automatic annual renewal periods
and to minimum purchases by the Company. The Company believes that
alternative sources of supply for its pipe requirements in
connection with the NuPipe Process are available. If the Company
were unable to obtain its NuPipe requirements under its existing
third party arrangements, the Company might be adversely affected
until arrangements with alternative sources are formulated.
The Company sells liners and related products utilized in the
Insituform Process, and the thermoplastic pipe utilized in the
application of the NuPipe Process, to its licensees, in the case
of domestic licenses pursuant to fixed-term supply contracts.
The Company manufactures certain equipment used in its
corrosion and abrasion protection operations, and, in connection
with any licenses to unaffiliated parties, will sell such
equipment to its licensees.
Patents and Licenses
The Company currently holds 64 patents in the United States
relating to the Insituform Process, the last to expire of which
will remain in effect until 2015, and has obtained patent
protection in its principal overseas markets covering aspects of
the Insituform Process. These patents cover certain aspects of the
Insituform Process including the manufacture of liners, the resin
saturation process and the process of reconstructing the pipeline.
Two of the significant patents relating to the Insituform Process,
covering, respectively, the curing of a resin-impregnated tube and
material aspects of the inversion process, have expired where
previously in effect.
The specifications and/or rights granted in relation to each
patent will vary from jurisdiction to jurisdiction. In addition,
as a result of differences in the nature of the work performed and
in the climate of the countries in which the work is carried out,
not every licensee uses each patent, and the Company does not
necessarily seek patent protection for all of its inventions in
every jurisdiction in which it does business.
Although 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. The
Company's business could be adversely affected 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 or upon expiration of the patents. The
Company believes, however, that while the Company has relied on
the strength and validity of its patents, the Company's long
experience with the Insituform Process, its continued commitment
to support and develop the Insituform Process, the strength of its
trademarks, and its degree of market penetration, should enable
the Company to continue to compete effectively in the pipeline
rehabilitation market.
Ten patents covering the NuPipe Process or the materials used
in connection with the NuPipe Process have been issued in the
United States. The Company holds patents in connection with the
NuPipe Process in 21 other countries.
The Company believes that the success of its corrosion and
abrasion protection operations will depend primarily upon its
proprietary know-how and its marketing and sales skills.
Pursuant to a license from Ashimori Industry Co., Ltd.
("Ashimori"), the Company holds the exclusive rights to use the
patents, trademarks and know-how related to the Paltem-HL system,
a process for rehabilitating pressure pipes, and certain other
products which are in various stages of development, for
substantially all of North America. In March 1998, the license was
amended to extend to additional non-exclusive territories in the
eastern hemisphere and Latin America. Ashimori is entitled to
receive ongoing royalties at specified rates on installations and
sales of liners. The license extends for an initial term through
2009 and automatically is renewed for successive one-year terms
unless the Company gives notice of non-renewal at least 90 days
prior to the end of a term. In the event annual minimum royalties
are not met, Ashimori has the right to render the agreement non-
exclusive and, in the event minimum royalties are not met for two
consecutive years, to terminate the agreement.
Under a license from Angus Fire Armour Limited ("Angus"), the
Company holds exclusive rights for the United States and Canada,
and non-exclusive rights in Mexico and certain territories in the
eastern hemisphere, to use the patents, trademarks and know-how
related to the Thermopipe Process, which the Company intends to
introduce for rehabilitating potable water and other aqueous fluid
pipes. Angus has the option under the license to convert the
exclusive rights to non-exclusive rights in those territories
where the Company does not meet certain minimum purchases of
Thermopipe liner. The license extends for an initial term of five
years and is renewable by the Company for an additional five year
term, subject to termination in the event of specified defaults.
After payment of an initial license fee, no further royalties are
due under the license.
Competition
The pipeline reconstruction, rehabilitation and repair
business is highly competitive, and the Company competes against
many companies, some of which have far greater financial resources
and experience than the Company. Accordingly, there can be no
assurance as to the success of the Company's processes in
competition with such companies and alternative technologies for
pipeline rehabilitation.
In each of its rehabilitation markets, the Company currently
faces competition from more conventional methods, including: (i)
total replacement, which is the excavation and replacement of an
entire section of pipe; (ii) point repair, which is the
replacement of cracked or structurally failed sections of pipes by
actual excavation and replacement; (iii) sliplining, which is the
insertion of a smaller pipe within an existing deteriorated pipe;
and (iv) the placement of gelatinous material, hydraulic cement,
or other acceptable material in defective pipes to repair leaks
and prevent infiltration in gravity sewers.
In addition, the Company faces competition from other
trenchless processes throughout the world. In the United States,
the Company faces competition from several cured-in-place
processes and, outside of the United States, from additional
cured-in-place processes currently in regional use. The Company
also faces competition from several fold and formed thermoplastic
processes. Several companies offer in-place polyethylene lining
systems which compete with the Company's abrasion and corrosion
protection technologies. The Company's trenchless processes may
also encounter competition from alternative trenchless approaches
such as pipe bursting and other methods.
The Company's tunnelling operation competes with utility
contracting firms throughout North America.
Seasonality
Although the Company's operations can be affected by severe
weather, for the past five years seasonal variation in work
performed has not had a material effect on the Company's
consolidated results of operations.
Employees
As of December 31, 1997, the Company employed 1,420
individuals. Certain of the Company's contracting operations are
parties to collective bargaining agreements covering an aggregate
of 244 employees. The Company generally considers its relations
with its employees to be good.
Government Regulation
The Company and its licensees are required to comply with all
national, state and local statutes, regulations and ordinances,
including those disclosure and filing requirements relating to the
grant of licenses. In addition, the Company's direct installation
and other construction operations, and those of its licensees, may
have to comply with relevant code specifications, permit
requirements, and bonding and insurance requirements as well as
with fire regulations relating to the storage, handling and
transporting of flammable materials. The Company's manufacturing
facilities, as well as its direct installation operations and
those of its licensees, are subject to state and national
environmental protection regulations, none of which presently has
any material effect on the Company's capital expenditures,
earnings or competitive position in connection with the Company's
present business. However, while the Company's direct installation
operations have established monitoring programs relating to the
use of solvents, further restrictions could be imposed on the use
of solvents or the thermosetting resins used in the Insituform
Process. The Company believes that it is in material compliance
with environmental laws and regulations applicable to it.
The use of both thermoplastics and thermosetting resin
materials in contact with drinking water is strictly regulated in
most countries. In the United States, a consortium led by NSF
International ("NSF"), under arrangements with the United States
Environmental Protection Agency (the "EPA"), establishes minimum
requirements for the control of potential human health effects
from substances added indirectly to water via contact with
treatment, storage, transmission and distribution system
components, by defining the maximum permissible concentration of
materials which may be leached from such components into drinking
water, and methods for testing them. In February 1996, the Paltem-
HL and Frepp processes under license from Ashimori were certified
by the NSF for use in drinking water systems, followed in April
1997 by certification by the NSF of the Insituform pressure pipe
liner for such use. The Thermopipe product also has NSF approval.
The NSF assumes no liability for use of any products, and the
NSF's arrangements with the EPA do not constitute the EPA's
endorsement of the NSF, the NSF's policies or its standards.
Because of the need for dedicated equipment in connection with use
of these products in drinking water applications, and the time
required for the marketing process, the Company does not expect
meaningful revenues from drinking water rehabilitation at least
through 1998.
Executive Officers
The executive officers of the Company, and their respective
ages and positions with the Company, are as follows:
Age at Position with
Name March 15, 1998 the Company
---- -------------- --------------
Anthony W. Hooper 50 Chairman of the Board,
President and Chief
Executive Officer
Jerome Kalishman 70 Vice Chairman of the
Board
Robert W. Affholder 62 Senior Executive Vice
President
William A. Martin 56 Senior Vice
President-Chief
Financial Officer
Robert L. Kelley 52 Vice President-General
Counsel
Anthony W. Hooper has been Chairman of the Board of the
Company since June 1997, and has been President of the Company
since November 1996. Mr. Hooper was previously, since August 1994,
Senior Vice President-Marketing and Technology of the Company,
having served as Senior Vice President-Marketing of the Company
from November 1993 to that date. From 1992 until joining the
Company, Mr. Hooper was President of Huyck Formex/Weavexx
Corporation, a North Carolina industrial textile and process
equipment manufacturer and subsidiary of BTR, Inc.
Jerome Kalishman has been Vice Chairman of the Board of the
Company since June 1997, and held such position from October 1995
until November 1996. Mr. Kalishman served as Chairman of the Board
of the Company from November 1996 until June 1997. Prior to the
IMA Merger and since prior to 1992, Mr. Kalishman was Chairman of
the Board and Chief Executive Officer of IMA.
Robert W. Affholder has been Senior Executive Vice President
of the Company since August 1996. Mr. Affholder was previously,
since October 1995, Senior Vice President-Chief Operating Officer
of North American Contracting Operations of the Company. Mr.
Affholder was President of IMA from 1994 to October 1995 and from
prior to 1992 to 1993, and was Vice Chairman of IMA from 1993 to
1995.
William A. Martin has been Chief Financial Officer of the
Company since 1988, a Vice President from 1989 to January 1993 and
a Senior Vice President since January 1993.
Robert L. Kelley has been Vice President of the Company since
June 1996, having joined the Company as General Counsel in the
prior month. Mr. Kelley was Assistant General Counsel of Monsanto
Company from prior to 1992 until joining the Company.
ITEM 2. PROPERTIES
The Company's executive offices, located in Chesterfield,
Missouri, a suburb of St. Louis, at 702 Spirit 40 Park Drive, are
leased from an unaffiliated party through May 31, 2002.
The Company maintains a liner fabrication facility and
contiguous felt manufacturing facility in Batesville, Mississippi.
The industrial development bond used to finance such facilities
was prepaid in February 1997. The property remains leased to the
Company under arrangements that provide for the Company's purchase
option at (subsequent to such prepayment) nominal value.
The Company's manufacturing facilities in Memphis, Tennessee
are located on land sub-leased from an unaffiliated entity for an
initial term of forty years expiring on December 31, 2020. The
cost of the building, together with certain machinery and
equipment, was financed from the sale of a $1.5 million industrial
development bond and secured by a mortgage on the premises and
equipment.
Linings (a 51%-owned subsidiary) owns certain premises
comprising its liner manufacturing facility, located in
Wellingborough, England. The Company leases additional
manufacturing space in Matsubuse, Japan.
In March 1998, the Company inaugurated a new research and
development facility owned by it and adjacent to its installation
operations in Chesterfield, comprising approximately 59,500 square
feet of space.
In support of its direct installation operations, the Company
owns or leases facilities in the United States, Europe and Latin
America, the principal sites of which currently are in
Chesterfield, Missouri, Charlton, Massachusetts, Jacksonville,
Florida, Birmingham, Alabama, Hammond, Indiana, Lemont, Illinois,
Owosso, Michigan, Houston, Texas, Wichita, Kansas, Santa Fe
Springs, California, Salem, Oregon, Edmonton, Alberta, Surrey,
British Columbia, Ossett, United Kingdom, Antofagasta, Chile and
Villahermosa, Mexico. The Ossett and Jacksonville properties are
subject to mortgages.
The foregoing facilities are regarded by management as
adequate for the current and anticipated future requirements of
the Company's business. In order to rationalize the Company's
operations combined as a result of the IMA Merger, the Company may
seek to relocate certain operations.
ITEM 3. LEGAL PROCEEDINGS
Cat Proceeding. The Company, in 1990, initiated proceedings
against Cat Contracting, Inc., et. al. in the United States
District Court for the Southern District of Texas, Houston
Division (Civil Action No. H-90-1690)(the "Cat Proceeding"),
alleging infringement of certain of the Insituform patents in
connection with conduit relining work performed in Houston by
licensees of Kanal Sanierung Hans Muller GmbH & Co. In such
proceeding, defendants asserted counterclaims alleging that the
suit had been brought in bad faith, that the Company had engaged
in certain antitrust violations and further that the Company had
engaged in unfair competition.
In 1991, the jury rendered its verdict finding that defendants
had infringed the Insituform patents at issue and that such
patents were not invalid. In response to defendants' request, the
court declined to declare such patents invalid and further
declined to disturb the jury's verdict rejecting defendant's
counterclaims that the suit had been brought in bad faith and
defendant's claims that plaintiffs had engaged in unfair
competition. The court did, however, grant the defendants' motion
for a new trial on the matter of whether defendants had infringed
certain of the Insituform patents under the doctrine of
equivalents, setting aside that portion of the jury's verdict; and
granted defendants judgment notwithstanding the jury verdict on
the issue of literal infringement of that patent.
In October 1995, the court held the mandated new trial and
ruled that defendants' serial vacuum impregnation processes
infringed the Company's patent under the doctrine of equivalents.
The court further issued a permanent injunction against
defendants' use of the processes covered by such patent and
ordered a trial on the issue of damages, the amount of which had
yet to be determined. Defendants filed a notice of appeal to the
United States Court of Appeals for the Federal Circuit and the
Company filed a notice of cross-appeal from the 1991 judgment.
In November 1996, the Court of Appeals for the Federal Circuit
affirmed the District Court in declining to declare the Company's
serial vacuum impregnation patent invalid and found that the
jury's rejection of defendants' challenge to the validity of that
patent was supported by the evidence. The Court of Appeals further
affirmed the District Court's grant to defendants of judgment
notwithstanding the jury verdict on the issue of the literal
infringement of the patent, and vacated the District Court's
finding of infringement under the doctrine of equivalency, holding
that the District Court had used incorrect claim construction. The
Court of Appeals remanded the case to the District Court for new
findings on the infringement issue. In March 1997, defendants
sought a writ of certiorari from the U.S. Supreme Court to review
that ruling, which was denied by the Court.
In December 1996, the District Court issued its new findings
under the guidelines suggested by the Court of Appeals and again
found that both of the processes employed by defendants infringed
the Company's serial vacuum impregnation patent. In January 1997
defendants appealed from those findings, as well as from the
refusal of the District Court to consider allegedly new evidence
on the issue of equivalency. That appeal has been fully briefed
and is awaiting argument. The District Court, as affirmed by the
Court of Appeals in May 1997, has denied defendants' February 1996
motion for a partial new trial, which alleged that the Company
gave false testimony at the 1991 trial and sought dismissal of the
action and monetary sanctions.
The damages portion of the Cat Proceeding was tried before the
District Court in September 1997. The parties now await the
District's Court's decision as to the amount of damages due to the
Company as a result of defendant's infringement of the Company's
serial vacuum impregnation patent during the period of 1989-90
through October 1995.
Additional Texas Proceeding. In October 1996, two of the
defendants in the Cat Proceeding filed a separate action in the
District Court against the Company and Insituform East,
Incorporated (Inliner U.S.A. and Cat Contracting, Inc. v.
Insituform Technologies, Inc. and Insituform East, Inc. [Civil
Action No. H96-3627]) alleging, among other matters, that the
Company had commenced the Cat Proceeding with knowledge that the
Company's serial impregnation patent was invalid and gave false
testimony in the Cat Proceeding. The suit further alleges that the
Company committed various infractions of the antitrust laws,
including conduct by the Company constituting unreasonable
restraints of trade and monopolization of its market, in violation
of Sections 1 and 2 of the Sherman Act, made false or misleading
representations in violation of Sections 1 and 2 of the Sherman
Act, made false or misleading representations in violation of
Section 43(a) of the Lanham Act, and engaged in other anti-
competitive practices in violation of Texas state law, and seeks
compensatory and punitive damages.
The Company has denied the allegations, raised affirmative
defenses, and filed a motion to dismiss regarding certain of the
antitrust claims. In August 1997, the District Court issued its
Memorandum and Order in which it granted the Company's motion to
dismiss as to claims arising out of the Cat Proceeding, as well as
Noerr-Pennington immunity for the patent litigation in the Cat
Proceeding and the obtaining of certain product standards, among
other matters, and dismissed plaintiffs claims that the
acquisition by the Company of a number of its licensees
constituted anti-competitive practices. The court further ordered
plaintiffs to refile an amended complaint alleging with factual
particularity any timely claims for tortious interference with
business and contractual relations, as well as facts demonstrating
certain antitrust injury and Section 43(a) Lanham Act claims of
misrepresentation. Although the court denied the Company's motion
as to the antitrust claims of complimentary bidding, bid rigging,
and predatory pricing, the court ordered the plaintiffs to refile
an amended complaint alleging with factual particularity any
timely claims for tortious interference with business and
contractual relations, true "sham" efforts to manipulate
municipalities for exclusionary purposes, antitrust injury in
regard to acts of complementary bidding, bid rigging and predatory
price fixing, and Section 43(a) Lanham Act claim of
misrepresentation.
Plaintiffs motion to file an amended complaint purporting to
add a subsidiary of the Company, Insituform Gulf South, Inc., as
a defendant has been denied by the court. In its third amended
complaint, plaintiffs allege that the Company committed various
violations of the antitrust laws, including conduct by the Company
constituting unreasonable restraints of trade and monopolization
of its market in violation of Sections 1 and 2 of the Sherman Act,
violations of Section 2 of the Clayton Act, made false or
misleading representations in violation of Section 43(a) of the
Lanham Act, tortious interference and business disparagement, and
seeks compensatory and punitive damages. No discovery has been
conducted to date. A scheduling order has been entered with trial
currently set for November 1998.
Western Slopes Utilities. In October 1996, Western Slope
Utilities, Inc., which utilizes a serial impregnation process
licensed from Inliner U.S.A., one of the defendants in the Cat
Proceeding, commenced an action against the Company in the United
States District Court for the District of Colorado (Western Slope
Utilities, Inc. v. Insituform Technologies, Inc. and Insituform
(Netherlands) B.V. [Civil Action No. 96-N-2394]), seeking, among
other things, a judgment declaring the Company's serial
impregnation patent invalid, unenforceable and not infringed by
plaintiff's current activities, and injunctive relief enjoining
the Company from charging plaintiff or any of its customers or
suppliers with infringing that patent. This case has been
transferred to the United States District Court for the Southern
District of Texas, and plaintiff's application for writ of
mandamus with the United States Court of Appeals for the Federal
Circuit contesting the transfer order has been denied. In August
1997, the Company filed a motion to dismiss and, in the
alternative, a motion for summary judgment dismissing plaintiff's
declaratory judgment claims. Plaintiff has acquiesced in the
Company's motion to dismiss the declaratory judgment claims and
the court has consented and ordered those claims dismissed.
Accordingly, the only remaining issues in the suit entail claims
under Section 43(a) of the Lanham Act and tortious interference
with business relationships under state law.
LaRoche Industries. In February 1998, a settlement was
reached in LaRoche Industries, Inc. v. Affholder, Inc. (Civil
Action 96-3487(L)), pending in the United States District Court
for the Eastern District of Louisiana. Claims that Affholder, Inc.
and United Pipeline Systems USA, Inc., both subsidiaries of the
Company, had performed negligent rehabilitation work on and had
employed defective materials in repair of a brine line were
dismissed. The Company's payments to plaintiff under the
settlement had been fully reserved.
Other. The Company is involved in certain additional
litigation incidental to the conduct of its business and affairs.
Management does not believe that the outcome of any such
litigation will have a material adverse effect on the financial
condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On October 8, 1997, the Company convened its Annual
Meeting of Stockholders (the "Annual Meeting").
(b) Not applicable because (i) proxies for the Annual Meeting
were solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934 together with the Company's Proxy Statement
dated August 25, 1997 (the "1997 Proxy Statement"); (ii) there was
no solicitation in opposition to management's nominees as listed
in the 1997 Proxy Statement and (iii) all of such nominees were
elected.
(c) At the Annual Meeting, the stockholders voted in favor of
a proposal to approve an amendment of the Certificate of
Incorporation of the Company to amend Article SIXTH in order to
eliminate the three-year staggered terms of the directors and to
provide for a new procedure to fill vacancies on the Board of
Directors. The holders of 21,618,768 shares voted in favor of, the
holders of 241,244 shares voted against, the holders of 104,923
shares abstained and there were 335,076 broker non-votes with
respect to approval of such proposal.
At the Annual Meeting, the stockholders voted in favor of a
proposal to approve an amendment to Article III, Section 2, of the
By-Laws of the Company in order to reduce the size of the Board of
Directors to eight, with an automatic adjustment to nine upon
appointment of an additional director. The holders of 21,640,228
shares voted in favor of, the holders of 335,611 shares voted
against, the holders of 104,483 shares abstained and there were
219,689 broker non-votes with respect to approval of such
proposal.
At the Annual Meeting, the stockholders voted in favor of
management's nominees for election as directors of the Company.
The holders of 21,982,887 shares voted in favor of, and holders of
317,124 shares withheld their vote for, the election of Robert W.
Affholder; the holders of 22,000,949 shares voted in favor of, and
holders of 299,062 shares withheld their vote for, the election of
Paul A. Biddelman; the holders of 22,001,099 shares voted in favor
of, and holders of 298,912 shares withheld their vote for, the
election of Stephen P. Cortinovis; the holders of 21,996,324
shares voted in favor of, and holders of 303,687 shares withheld
their vote for, the election of Anthony W. Hooper; the holders of
21,993,723 shares voted in favor of, and holders of 306,288 shares
withheld their vote for, the election of Jerome Kalishman; the
holders of 21,999,245 shares voted in favor of, and holders of
300,766 shares withheld their vote for, the election of Silas
Spengler; the holders of 22,002,095 shares voted in favor of, and
holders of 297,916 shares withheld their vote for, the election of
Russell B. Wight, Jr.; and the holders of 22,001,749 shares voted
in favor of, and holders of 298,262 shares withheld their vote
for, the election of Sheldon Weinig.
(d) The terms of the Company's settlement agreement dated
July 25, 1997 with the Dissident Group (as defined therein) and
the additional incumbents on its Board of Directors are contained
under the caption "IV. Settlement Agreement" contained in the 1997
Proxy Statement, the pertinent information of which is
incorporated herein by reference.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
(a) The Company's class A common stock, $.01 par value
("Common Stock"), is traded in the over-the-counter market under
the symbol "INSUA." The following table sets forth the range of
quarterly high and low sales prices commencing after December 31,
1995, as reported on The Nasdaq Stock Market. Quotations represent
prices between dealers and do not include retail mark-ups,
mark-downs or commissions.
Period High Low
------ ---- ---
1997
First Quarter $ 7.88 $5.50
Second Quarter 6.75 5.38
Third Quarter 9.25 5.88
Fourth Quarter 10.19 7.38
Period High Low
------ ---- ---
1996
First Quarter $12.00 $9.38
Second Quarter 13.38 7.63
Third Quarter 8.00 6.13
Fourth Quarter 8.38 6.38
As of March 15, 1998, the number of record holders of the
Company's Common Stock was 1,703.
Holders of Common Stock are entitled to receive dividends
as and when they may be declared by the Company's Board of
Directors. The Company has never paid a cash dividend on the
Common Stock. The Company's present policy is to retain earnings
to provide for the operation and expansion of its business.
However, the Company's Board of Directors will review the
Company's dividend policy from time to time and will consider the
Company's earnings, financial condition, cash flows, financing
agreements and other relevant factors in making determinations
regarding future dividends, if any. Under the terms of certain
debt arrangements to which the Company is a party, the Company is
subject to certain limitations in paying dividends. See Note 8 of
the Notes to the Company's Consolidated Financial Statements
included in response to "Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity," which information is incorporated herein by
reference.
(b) Not applicable.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below have been
derived from the Company's consolidated financial statements
referred to under "Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K" of this Annual Report on Form
10-K, and previously published historical financial statements not
included in this Annual Report on Form 10-K. In October 1995, the
Company consummated the IMA Merger, which the Company has
accounted for as a pooling-of-interests and, accordingly, the
historical financial statements of the combining companies have
been retroactively combined (after adjustments to eliminate
intercompany balances and transactions, and to conform reporting
periods and accounting methods) as if the companies had operated
as a single entity for the periods presented. Certain historical
financial data of IMA have been reclassified to conform to the
Company's accounting policies. The selected financial data set
forth below should be read in connection with "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's consolidated financial
statements, including the notes thereto, referred to herein.
Unaudited
Year Ended December 31,
-----------------------------------------------------
1997 1996 1995(1) 1994(2) 1993(3)
---- ------- ------- ------- -------
(in thousands, except per share amounts)
INCOME STATEMENT DATA:
Revenues.................. $320,640 $289,933 $ 272,203 $ 223,171 $151,622
Operating income.......... 25,030 14,346 11,750(4) 29,232 15,107
Income (loss) from
continuing operations.... 9,644 4,492 (966)(5) 15,667 9,734
Net income (loss)......... 9,419 4,492 (966) 14,503 7,487
Basic and diluted earnings
(loss) per share:
Income (loss) from
continuing operations... .36 .17 (.04) .57 .36
Net income (loss)......... .35 .17 (.04) .53(6) .28(6)
BALANCE SHEET DATA:
Working capital........... 114,283 78,876 69,538 46,403 40,724
Current assets............ 161,273 130,372 120,711 106,926 81,102
Property and equipment.... 57,983 57,266 59,773 51,471 40,407
Total assets.............. 297,852 265,502 260,300 227,627 177,010
Long-term debt............ 111,440 82,384 82,813 47,347 36,297
Redeemable preferred
stock.................... -- -- -- -- 157
Total liabilities......... 162,705 136,664 137,845 110,310 77,108
Total common stock and
other stockholders'
equity.................. 131,502 123,203 116,810 114,880 100,106
___________________
(1) In 1995, the Company consummated the acquisition of the pipeline rehabilitation
business of Enviroq Corporation, which has been accounted for under the purchase
method of accounting.
(2) In 1994 the Company consummated the acquisition of Gelco Services, Inc. and
affiliates, which has been accounted for under the purchase method of accounting.
(3) In 1993 the Company consummated the acquisitions of Naylor Industries, Inc. and
Insituform Midwest, Inc., which have been accounted for under the purchase method of
accounting.
(4) Reflects $6.5 million in costs associated with the IMA Merger, which have been charged
to operations primarily in the fourth quarter of 1995, and a pre-tax charge in the
amount of $8.1 million for restructuring costs, primarily for consolidation of
corrosion and abrasion protection operations, rationalization of Canadian operations
to one facility, elimination of duplicative management positions, relocation of
certain domestic employees and functions, and termination of construction of proposed
manufacturing capacity.
(5) In 1995 the Company settled certain outstanding litigation for a cash payment of $3.2
million and issuance of 30,000 shares of its Common Stock, resulting in an after-tax
charge against earnings of approximately $2.2 million.
(6) In December 1993 the Company determined to discontinue the operations of its division
engaged in the offsite rehabilitation of downhole tubulars for the oil and gas
industry. As a result, the Company recorded a fourth quarter 1993 charge to write down
the division's assets to their estimated net realizable values and to accrue for
operating losses during the anticipated phase-out period. The statement of operations
and balance sheets have been restated to reflect continuing operations. The Company
also recorded a fourth quarter 1994 charge resulting from the abandonment of efforts
to find a purchaser for, and shut down of, such division.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's rehabilitation revenues derive primarily from
direct installation and other contracting activities, generated by
the Company's subsidiaries operating in the United States, Canada,
France, the United Kingdom, Chile, Argentina and Mexico, and
include product sales to, and royalties and license fees paid by,
the Company's 35 unaffiliated Insituform licensees and sub-
licensees and its seven unaffiliated NuPipe licensees. During the
three years ended December 31, 1997, 1996 and 1995, approximately
62.5%, 69.7% and 71.2%, respectively, of the Company's
consolidated revenues related to the Insituform Process.
The Company was incorporated in Delaware in 1980 in order to
act as the exclusive licensee of the Insituform Process in most of
the United States. In October 1995, the Company consummated the
IMA Merger, which has been accounted for as a pooling-of-
interests. Under the pooling-of-interests method of accounting,
the historical financial statements of the combining companies are
retroactively combined (after adjustments to eliminate
intercompany balances and transactions, and to conform accounting
methods) as if the companies had operated as a single entity. The
Company's acquisition in April 1995 of the pipeline rehabilitation
business of Enviroq Corporation (the "Enviroq Acquisition"), and
its November 1995 acquisition of the FormaPipe division of
Waterflow Services Limited, have been accounted for under the
purchase method of accounting, so that the results of the acquired
companies are included in the Company's historical results of
operations from the consummation of such transactions,
respectively.
Fluctuations in the exchange rates between the United States
dollar and the currencies of other countries in which the Company
operates or has licensees may have an impact on the Company's
consolidated results during the relevant reporting period. The
Company intends to manage any such foreign currency exposure in
the context of discrete commercial transactions and, when
appropriate, to offset such exposure in whole or in part by
entering into foreign currency forward contracts, in order to
reduce the impact of such fluctuations on results of operations.
The Company does not anticipate that the circumstances in which
such hedging activity would be appropriate will have a material
effect on the Company's liquidity.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended
December 31, 1996
Total rehabilitation revenues increased 10.6% to $320.6
million from $289.9 million in 1996. The primary reason for the
increase was increased volume from the Company's corrosion and
abrasion operations in the United States and Latin America. This
increase was offset slightly by lower volume from the Company's
North American and European pipeline rehabilitation operations,
primarily due to the elimination of non-core projects, such as
cleaning and inspection. In addition, since April 1997, the
Company has accounted for its investment in Midsouth Partners on
an equity basis as a result of the composition of its management
committee; prior to such date, the Company recorded $1.8 million
of revenue in 1997, compared to $7.0 million in 1996. Fluctuations
in currency exchange rates did not have a material impact on
revenues in 1997.
The Company's gross profit from rehabilitation activities
increased 6.5% to $94.5 million from $88.7 million in 1996. This
increase was primarily due to increased revenue, offset slightly
by lower margins. The overall gross margin achieved in 1997 was
29.5% versus 30.6% in 1996. This decrease was primarily due to
increased volume from the Company's corrosion and abrasion
operations, which traditionally carry lower margins than the
Company's pipeline rehabilitation operations.
Selling administrative and general expenses decreased 4.0% to
$57.8 million from $60.2 million in 1996. This decrease was due to
cost savings gained from the reorganization of the Company's
pipeline rehabilitation operations through elimination of
positions, facilities, and realignment of responsibilities, along
with the consolidation of the Company's headquarters in
Chesterfield. This was offset slightly by increased overhead costs
related to the buildup of personnel for the Company's corrosion
and abrasion operations in Latin America. As a percentage of
revenues, selling, administrative and general expenses decreased
to 18.0% from 20.8% in 1996. This decrease was primarily
attributable to economies of scale resulting from increased
volume, along with the decrease in costs as a result of
reorganization.
Strategic marketing and product development costs decreased
10.0% to $7.0 million from $7.7 million in 1996. This decrease was
primarily attributable to controlled spending in advertising and
research projects, along with decreased personnel in industrial
marketing.
During 1997, the Company charged to earnings $4.6 million in
unusual expenses related to further reorganization of the
Company's pipeline rehabilitation operations and the Company's
headquarters. The expenses primarily consist of severance, moving
costs of employees and office equipment, and costs related to
exiting facilities and markets. In 1996, the unusual expenses of
$6.5 million relate to the Company's rationalization of
rehabilitation operations, as described below.
Interest expense increased 40.3% to $8.7 million from $6.2
million in 1996, due primarily to increased debt principal of
approximately $23 million from the senior notes financing
completed in February 1997. See "Liquidity and Capital Resources"
below.
Taxes on income increased 42.0% to $7.1 million from $5.0
million 1996 due primarily to an increase in income before taxes
on income of $7.5 million from 1996, offset by a decrease in the
effective tax rate to 41.7% from 53.0% in 1996. As indicated in
Note 16 of the Notes to Consolidated Financial Statements included
in response to "Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K", the 1997 and 1996 effective tax rates
were higher than the United States federal statutory rate,
primarily due to non-deductibility of goodwill amortization
associated with acquisitions, which is generally not deductible
for tax purposes, and the effect of foreign income earned taxed at
higher rates.
In February 1997, as a result of the closing of the Company's
senior note financing, certain previous debt facilities were
retired. Costs of $0.4 million ($0.2 million after-tax benefits)
associated with these debt facilities which were capitalized, such
as commitment fees and legal costs, were written off. This expense
has been classified as an extraordinary item in the Company's
results of operations for 1997.
As a result of the foregoing, net income for 1997 was $9.4
million, an increase of $4.9 million from net income in 1996.
Year Ended December 31, 1996 Compared to Year Ended December
31, 1995
Rehabilitation revenues increased 6.5% to $289.9 million from
$272.2 million in the prior year, primarily as a result of the
April 1995 Enviroq Acquisition (and the consequent consolidation
of Midsouth Partners), in addition to revenue increases in United
Kingdom operations which primarily reflect the acquisition of the
FormaPipe business in November 1995. Fluctuations in currency
exchange rates of the Japanese yen, British pound sterling, French
franc and Canadian dollar to the United States dollar negatively
impacted revenues by approximately $1.2 million in 1996.
In 1996, gross profit from rehabilitation activities
decreased 1.3% to $88.7 million from $89.9 million in 1995,
primarily due to lower margins achieved by newly-acquired
subsidiaries. In addition, there was an increase in 1996 in
worldwide volume of the Company's corrosion and abrasion
operations, which carry lower margins than those of the Company's
pipeline rehabilitation operations.
In 1996, selling, administrative and general expenses
increased 7.5% to $60.2 million, compared to $56.0 million in
1995. This increase is due, in large part, to the incremental
costs of operations for recently acquired entities of $1.0 million
(of which $0.3 million related to incremental goodwill and non-
compete amortization). Other increases were attributable to added
personnel costs in the Company's pipeline rehabilitation
operations, principally in the areas of industrial sales, and
operations and project management.
Strategic marketing and product development costs did not
materially change between 1995 and 1996.
In 1996, the Company recognized $6.5 million in unusual items
in connection with the Company's rationalization of its
contracting operations. These consisted primarily of: (i) the
write-off of certain assets associated with the use of the
Company's Paltem product line in the gas distribution main
installation market (approximately $3.6 million), (ii) charges
related to the disposition of excess facilities (approximately
$1.4 million), and (iii) costs related to reorganization of North
American contracting operations (approximately $1.5 million). In
1995, the Company recognized merger and restructuring costs of
approximately $14.5 million in connection with the IMA Merger,
completed in October 1995. These included transaction costs
related to the merger of $6.5 million, which were primarily
attributable to investment banking fees, legal and accounting
fees, filing fees, and management travel costs and a charge for
approximately $8.1 million relating to restructuring costs.
In 1996, other income increased to $1.3 million from a $1.7
million expense in 1995, primarily due to a 1995 charge to
earnings of $3.6 million during the second quarter as a result of
the settlement of a pending shareholder class action lawsuit which
entailed a cash payment to class members in the amount of $3.2
million and the issuance of 30,000 shares of Common Stock.
In 1996, interest expense decreased 3.1% to $6.2 million from
$6.4 million in 1995, due primarily to reduced principal of the
Company's indebtedness and lower interest rates in 1996.
Taxes on income increased to $5.0 million from $4.0 million
in 1995 as a result of an increase of $5.8 million in income
before taxes on income, offset by a decrease in the effective tax
rate to 53.0% from 109.8% in 1995. As indicated in Note 16 of the
Notes to Consolidated Financial Statements included in response to
"Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K," the 1996 and 1995 effective tax rates were higher than
the United States federal statutory rate, primarily due to the
non-deductibility of goodwill amortization associated with the
recent acquisitions, which is generally not deductible for tax
purposes. The 1995 effective rate was also affected by certain
merger costs which were capitalized for tax purposes.
As a result of the foregoing, net income for 1996 was $4.5
million, an increase of $5.5 million from net income in 1995.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had $45.7 million in cash,
U.S. Treasury bills, and short-term investments, as compared to
$13.5 million at December 31, 1996. Cash and cash equivalents
increased by the amount of $32.2 million, primarily as a result of
the Company's completion in February 1997 (the "Senior Note
Closing") of the sale, in a private placement transaction, of $110
million principal amount of its 7.88% Senior Notes, Series A, due
February 14, 2007 (the "Senior Notes"), approximately $85 million
of which was applied at closing to the refinancing of outstanding
indebtedness of the Company and the remainder of which was applied
to short-term investments. The Company's working capital ratio was
3.4-to-1.0 at December 31, 1997 representing an increase from 2.5-
to-1.0 from December 31, 1996.
Operations provided cash of $27.2 million in 1997, as
compared to $28.2 million in 1996. The decline was primarily due
to slightly unfavorable changes in operating assets and
liabilities. Trade receivables, together with costs and estimated
earnings in excess of billings and retainage under construction
contracts, increased 4.8% to $88.7 million from $84.6 million in
1996, primarily attributable to an increase in revenue volume
during 1997. The collection cycle for construction receivables is
generally longer than for the Company's manufacturing and royalty
operations due to provisions for retainage, often 5% to 15% of the
contract amount, as well as the slow internal review processes
often employed by the construction subsidiaries' municipal
customers. In the United States retainage receivables are
generally received within 60 to 90 days after the completion of a
contract.
Capital expenditures were $16.6 million in 1997, compared to
$18.2 million in 1996. Capital expenditures generally reflect
replacement equipment required by the Company's contracting
subsidiaries. During the second quarter of 1997, the Company
commenced combination of its corporate headquarters, engineering
and development center, and North American contracting
headquarters in new facilities located in Chesterfield. The cost
of moving employees and offices was estimated at $3.5 million,
including severance of approximately $1.0 million. In the second
quarter the Company incurred approximately $0.8 million and
accrued an additional $2.5 million; in the third and fourth
quarters $2.3 million was spent and applied to the accrual. The
remaining accrual will be applied to costs to be incurred over the
remaining phases of combination of facilities and employees. In
addition, during 1997 the Company commenced the construction of
its new research and development facility. The total cost of such
facility is estimated at $3.5 million, of which $2.9 has been
incurred through December 31, 1997.
The Company has several information system improvement
initiatives underway that will require increased expenditures
during the next several years. These initiatives, which began
principally in 1997, include an improved data collection system
from our field contracting units, and continual accounting system
upgrades and modifications. The Company has assessed and continues
to assess the impact of the year 2000 issues on its operations.
Management believes that all system modifications necessary will
be completed well before the year 2000, and spending on
modifications will not have a significant impact on the Company's
operations.
Financing activities provided $23.4 million in cash in 1997,
as compared to cash used of $6.1 million in 1996. This difference
is primarily related to cash generated from the Senior Notes of
approximately $25 million in February 1997, as compared to 1996,
in which the Company made net principal payments totalling $1.2
million relating to the Company's prior existing credit facility
with SunTrust Bank, Nashville, N.A. ("SunTrust") and repayment of
other subsidiary debt of $4.7 million.
At December 31, 1996, $76.3 million was outstanding under the
Company's credit agreement (the "SunTrust Credit Agreement") with
SunTrust, as agent, and a group of participating lenders (the
"Lenders"), which provided for advances by the Lenders on a
revolving basis aggregating up to $105 million (including a $5
million standby letter of credit facility). Interest on
indebtedness under the SunTrust Credit Agreement was payable at a
rate per annum selected by the Company as either SunTrust's prime
rate plus a margin of up to .25% in the event certain financial
ratios were not maintained, or an adjusted LIBOR rate, plus a
margin ranging from 1.00% to 1.75%, depending on the maintenance
of certain financial ratios. At the Senior Note Closing, all
outstanding indebtedness to the Lenders under the Credit Agreement
($76.2 million), and outstanding indebtedness owed to SunTrust
under an industrial revenue bond encumbering the Company's
Batesville facility ($3.3 million), was prepaid.
At the Senior Note Closing, the Company also prepaid recorded
amounts outstanding under the Company's senior subordinated note
acquired by Hanseatic Corporation in July 1993, which required
quarterly payments of interest at 8.5% per annum. Warrants with
respect to 350,877 shares of Common Stock issued in connection
with such note remain exercisable, at the election of the holder,
through July 25, 1998, at a price per share of Common Stock of
$14.25, and such shares are entitled to demand and incidental
registration rights.
The Senior Notes issued by the Company in February 1997
mature on February 14, 2007, and bear interest, payable semi-
annually in August and February of each year, at the rate per
annum of 7.88%. Each year, from February 2001 to February 2006,
inclusive, the Company will be required to make principal payments
of $15.7 million, together with an equivalent payment at maturity.
The Senior Notes may be prepaid at the Company's option, in whole
or in part, at any time, together with a make whole premium, and
upon specified change in control events each holder has the right
to require the Company to purchase its Senior Note without any
premium thereon.
The note purchase agreements pursuant to which the Senior
Notes were acquired obligate the Company to comply with certain
financial ratios and restrictive covenants that, among other
things, place limitations on operations and sales of assets by the
Company or its subsidiaries, and limit the ability of the Company
to incur further secured indebtedness and liens and of
subsidiaries to incur indebtedness, and, in the event of default
under the Senior Notes, limit the ability of the Company to pay
cash dividends or make other distributions to the holders of its
capital stock or to redeem such stock. Such agreements also
obligate the Company's subsidiaries to provide guarantees to
holders of the Senior Notes if guaranties are delivered by them to
specified other lenders. To the extent not utilized to refinance
indebtedness of the Company at the Senior Note Closing, proceeds
of the sale of the Senior Notes are available for general
corporate purposes, including possible acquisitions of products,
technologies and businesses and repurchases of Common Stock. The
Company has not reached any determination with respect to any such
transaction, and there can be no assurance that any such
transaction will be undertaken.
Effective August 20, 1997, the Company entered into a Loan
Agreement dated such date (the "NationsBank Credit Agreement")
with NationsBank, N.A. ("NationsBank"), whereby NationsBank will
make available to the Company, until September 1, 2000 (the
"Maturity Date"), a revolving credit line of up to $20,000,000
aggregate principal amount for working capital and permitted
acquisitions, including $5,000,000 available for standby and
commercial letters of credit. Interest on outstanding advances
accrues, at the election of the Company, at either the lender's
prime rate, payable monthly, or its LIBOR rate, plus a margin
ranging from .5% to 1.5% depending on the maintenance of certain
financial ratios, payable at the end of selected interest periods
(from one to six months). Outstanding principal is subject to
repayment on the Maturity Date, except that advances for permitted
acquisitions must be repaid within six months after disbursement.
The NationsBank Credit Agreement obligates the Company to
comply with certain financial ratios and restrictive covenants
that, among other things, prohibit dividends and stock repurchases
in the event of loan defaults, place limitations on operations and
sales of assets by the Company and its subsidiaries and limit the
ability of the Company and its subsidiaries to incur further
secured indebtedness and liens and of subsidiaries to incur
additional indebtedness. The NationsBank Credit Agreement also
obligates certain of the Company's domestic subsidiaries to
guaranty the Company's obligations, as a result of which the same
subsidiaries have also delivered their guaranty with respect to
the Senior Notes.
In October 1997, the Company completed payment of certain
secured notes issued in connection with the acquisition in October
1994 of all of the outstanding stock of Gelco and affiliates,
aggregating $1.4 million, representing net current liabilities of
the acquired companies to related parties and a portion of working
capital at closing.
In March 1998, the Company completed the acquisition of the
entire minority interest in United Chile for an aggregate purchase
price of approximately $2.1 million, $1 million of which was paid
in connection with closing, $.6 million of which is due at the
first anniversary of closing, and the remainder of which is due on
the second anniversary of closing.
Management believes its current working capital will be
adequate to meet its requirements for the foreseeable future.
RECENTLY ISSUED ACCOUNTING STANDARDS
In the first quarter of 1997, the Financial Accounting
Standards Board (the "Board") issued Statement of Financial
Accounting Standards No. 128, Earnings Per Share ("SFAS 128"),
effective for financial statements for both interim and annual
periods ending after December 15, 1997. The new standard replaces
the provisions prescribed by the Accounting Principles Board
Opinion 15, simplifying earnings per share calculations and
requiring further disclosures. In addition, the Board also issued
Statement of Financial Accounting Standards No. 129, Disclosure of
Information about Capital Structure ("SFAS 129"), effective for
financial statements for periods ending after December 15, 1997.
SFAS 129 continues the existing requirements to disclose pertinent
rights and privileges of all securities other than ordinary common
stock, but expands the number of companies subject to the
requirements. The provisions of SFAS 128 and SFAS 129, and its
adoption thereof, did not have a material effect on the Company's
financial statements.
In 1998, the Company will adopt the provisions of SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related
Information." The Company does not believe the adoption of these
standards will have a material effect on the Company's financial
statement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For information concerning this item, see "Item 14.
Exhibits, Financial Statement Schedules, and Reports on Form 8-K,"
which information is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable. The Company has filed a Current Report
on Form 8-K dated July 17, 1996 reporting, under "Item 4. Changes
in Registrant's Certifying Accountant" thereunder, the engagement
of Arthur Andersen LLP as the Company's independent accountant in
substitution for BDO Seidman, LLP.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning this item, see "Item 1.
Business-Executive Officers" and the Proxy Statement to be filed
with respect to the 1998 Annual Meeting of Stockholders (the "1998
Proxy Statement"), which information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
For information concerning this item, see the 1998 Proxy
Statement, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
For information concerning this item, see the 1998 Proxy
Statement, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning this item, see the 1998 Proxy
Statement, which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The consolidated financial statements filed in this
Annual Report on Form 10-K are listed in the attached Index to
Consolidated Financial Statements and Schedules.
2. Financial Statement Schedules:
No Financial Statement Schedules are included herein
because they are not required or are not applicable or the
required information is contained in the consolidated financial
statements or notes thereto.
3. Exhibits:
The exhibits required to be filed as part of this Annual
Report on Form 10-K are listed in the attached Index to Exhibits.
(b) Current Reports on Form 8-K:
During the quarter ended December 31, 1997, the
Company did not file a Current Report on Form 8-K.
POWER OF ATTORNEY
The registrant and each person whose signature appears
below hereby appoint Anthony W. Hooper, William A. Martin, and
Robert L. Kelley as attorneys-in-fact with full power of
substitution, severally, to execute in the name and on behalf of
the registrant and each such person, individually and in each
capacity stated below, one or more amendments to the annual report
which amendments may make such changes in the report as the
attorney-in-fact acting deems appropriate and to file any such
amendment to the report with the Securities and Exchange
Commission.
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.
Dated: March 30, 1998 INSITUFORM TECHNOLOGIES, INC.
By s/Anthony W. Hooper
--------------------------------
Anthony W. Hooper
President and Chief Executive
Officer
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 Date
s/Anthony W. Hooper
- -----------------------
Anthony W. Hooper Principal Executive March 30, 1998
Officer and Director
s/William A. Martin
- -----------------------
William A. Martin Principal Financial March 30, 1998
and Accounting Officer
s/Robert W. Affholder
- -----------------------
Robert W. Affholder Director March 30, 1998
s/Paul A. Biddelman
- -----------------------
Paul A. Biddelman Director March 30, 1998
s/Stephen P. Cortinovis
- -----------------------
Stephen P. Cortinovis Director March 30, 1998
s/Jerome Kalishman
- -----------------------
Jerome Kalishman Director March 30, 1998
s/Silas Spengler
- -----------------------
Silas Spengler Director March 30, 1998
s/Sheldon Weinig
- -----------------------
Sheldon Weinig Director March 30, 1998
s/Russell B. Wight, Jr.
- -----------------------
Russell B. Wight, Jr. Director March 30, 1998
s/Alfred L. Woods
- -----------------------
Alfred L. Woods Director March 30, 1998
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Certified Public
Accountants........................................ F-2
Consolidated Balance Sheets, December 31,
1997 and 1996.................................... F-4
Consolidated Statements of Operations for
each of the three years in the period
ended December 31, 1997............................ F-6
Consolidated Statements of Stockholders'
Equity for each of the three years in
the period ended December 31, 1997................. F-7
Consolidated Statements of Cash Flows
for each of the three years in the
period ended December 31, 1997..................... F-8
Notes to Consolidated Financial Statements........... F-10
No Financial Statement Schedules are included herein because
they are not required or not applicable or the required information
is contained in the consolidated financial statements or notes
thereto.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Insituform Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of
Insituform Technologies, Inc. and subsidiaries (a Delaware
corporation) as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and
cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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, the financial statements referred to above present
fairly, in all material respects, the financial position of
Insituform Technologies, Inc. and subsidiaries as of December 31,
1997 and 1996, and the results of their operations and their cash
flows for the years then ended, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
March 4, 1998
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Insituform Technologies, Inc.:
We have audited the accompanying consolidated statements of
operations, stockholders' equity, and cash flows of Insituform
Technologies, Inc. and subsidiaries for the year ended
December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audit.
We conducted our audit 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
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the results of
operations and cash flows of Insituform Technologies, Inc. and
subsidiaries for the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
BDO SEIDMAN, LLP
Memphis, Tennessee
March 8, 1996, except for
Note 13 which is as of
March 26, 1997
F-3
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS--AS OF DECEMBER 31, 1997 AND 1996
(in thousands, except share information)
ASSETS 1997 1996
------ -------- --------
CURRENT ASSETS:
Cash and cash equivalents, restricted
$-0- and $573, respectively $ 45,734 $ 13,476
Trade receivables, less allowance for
doubtful accounts of $2,587 and $1,031 58,660 52,030
Costs and estimated earnings in excess
of billings 15,551 20,127
Retainage under construction contracts 14,480 12,456
Refundable income taxes 2,517 4,141
Inventories 12,214 15,781
Deferred income taxes 5,439 4,651
Prepaid expenses and other 6,678 7,710
-------- --------
Total current assets 161,273 130,372
-------- --------
PROPERTY AND EQUIPMENT,
less accumulated depreciation 57,983 57,266
-------- --------
OTHER ASSETS:
Goodwill, less accumulated amortization
of $12,483 and $9,837, respectively 54,133 56,943
Patents and patent applications, less
accumulated amortization of $4,496
and $3,889, respectively 11,610 10,049
Investments in licensees and affiliated
companies 5,499 3,137
Noncompete agreements, less accumulated
amortization of $4,282 and $3,327,
respectively 1,744 2,699
Other 5,610 5,036
-------- --------
Total other assets 78,596 77,864
-------- --------
Total assets $297,852 $265,502
======== ========
(Continued on the following page)
F-4
(in thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------------------------------ -------- --------
CURRENT LIABILITIES:
Notes payable to banks $ 1,231 $ 1,387
Accounts payable and accruals 41,698 40,578
Income taxes payable 3,172 2,801
Current maturities of long-term debt 889 6,730
-------- --------
Total current liabilities 46,990 51,496
LONG-TERM DEBT, less current maturities 111,440 82,384
DEFERRED INCOME TAXES 3,258 1,700
OTHER LIABILITIES 1,017 1,084
-------- --------
Total liabilities 162,705 136,664
-------- --------
MINORITY INTERESTS 3,645 5,635
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 17)
STOCKHOLDERS' EQUITY:
Preferred stock, undesignated, $.10 par-
shares authorized 2,000,000; none out-
standing - -
Common stock, $.01 par- shares authorized
40,000,000; shares outstanding 27,214,718
and 27,144,331 272 271
Additional paid-in capital 68,119 67,824
Retained earnings 68,468 59,049
-------- --------
136,859 127,144
Treasury stock - 255,801 shares (3,269) (3,269)
Cumulative foreign currency translation
adjustments (2,088) (672)
-------- --------
Total stockholders' equity 131,502 123,203
-------- --------
Total liabilities and stockholders' equity $297,852 $265,502
======== ========
The accompanying notes are an integral part of these balance sheets
F-5
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------- ------- -------
(In thousands, except
per share amounts)
REHABILITATION REVENUES $ 320,640 $ 289,933$ 272,203
--------- ------------------
OPERATING COSTS AND EXPENSES:
Cost of rehabilitation 226,152 201,219 182,286
Selling, administrative and general 57,845 60,181 55,990
Strategic marketing and product
development 7,007 7,689 7,636
Unusual items 4,606 6,498 14,541
--------- ------------------
TOTAL OPERATING COSTS AND EXPENSES 295,610 275,587 260,453
--------- ------------------
OPERATING INCOME 25,030 14,346 11,750
--------- ------------------
OTHER INCOME (EXPENSE):
Interest expense (8,750) (6,223) (6,393)
Other 647 1,290 (1,727)
--------- ------------------
TOTAL OTHER INCOME (EXPENSE) (8,103) (4,933) (8,120)
--------- ------------------
INCOME BEFORE TAXES ON INCOME 16,927 9,413 3,630
TAXES ON INCOME 7,067 4,985 3,987
--------- ------------------
INCOME (LOSS) BEFORE MINORITY INTERESTS
AND EQUITY IN EARNINGS 9,860 4,428 (357)
MINORITY INTERESTS (519) (377) (1,275)
EQUITY IN EARNINGS OF AFFILIATED COMPANIES 303 441 666
--------- ------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 9,644 4,492 (966)
EXTRAORDINARY ITEM- Loss on early
retirement of debt (net of income tax
benefits) (225) - -
--------- ------------------
NET INCOME (LOSS) $ 9,419 $ 4,492$ (966)
========= ==================
BASIC AND DILUTED EARNINGS (LOSS)
PER SHARE OF COMMON STOCK AND
COMMON STOCK EQUIVALENTS:
Income (loss) before extraordinary item$ .36$ .17$ (.04)
Extraordinary loss, net of income
tax benefits (.01) - -
--------- ------------------
Net income (loss) $ .35 $ .17$ (.04)
========= ==================
F-6
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Cumulative
Foreign
Common Stock Additional Currency
----------------- Paid-In Retained Treasury Translation
Shares Amount Capital Earnings Stock Adjustments
-------- -------- ----------- -------- -------- -----------
(In thousands, except number of shares)
BALANCE,
December 31, 1994 26,711,031 $267 $63,270 $56,262 $ - $(1,733)
Net Loss for the year - - - (966) - -
Issuance of common
stock upon exercise
of options, including
income tax benefit of
$530 393,909 4 4,157 - - -
Dividends declared - - - (739) - -
Other - - - - - (88)
---------- ---- ------- ------- -------- -------
BALANCE,
December 31, 1995 27,104,940 271 67,427 54,557 - (1,821)
Net income for the year - - - 4,492 - -
Issuance of common
stock upon exercise
of options, including
income tax benefit of
$15 9,391 - 76 - - -
Stock issued in con-
junction with liti-
gation settlement 30,000 - 321 - - -
Foreclosure of note
receivable from
affiliates - - - - (3,269) -
Other - - - - - 1,149
---------- ---- ------- ------- -------- -------
BALANCE,
December 31, 1996 27,144,331 271 67,824 59,049 (3,269) (672)
Net income for the year - - - 9,419 - -
Issuance of common
stock upon exercise
of options 70,387 1 295 - - -
Other - - - - - (1,416)
---------- ---- ------- ------- -------- -------
BALANCE,
December 31, 1997 27,214,718 $272 $68,119 $68,468 $(3,269) $(2,088)
========== ==== ======= ======= ======== =======
(Continued on the following page)
F-7
/TABLE
Unrealized Notes
Holding Receivable Total
Gains on From Stockholders'
Investments Affiliates Equity
----------- ---------- -------------
(In thousands, except number of shares)
BALANCE,
December 31, 1994 $ 438 $(3,624) $114,880
Net Loss for the year - - (966)
Issuance of common
stock upon exercise
of options, including
income tax benefit of
$530 - - 4,161
Dividends declared - - (739)
Other (438) - (526)
----- ------- --------
BALANCE,
December 31, 1995 - (3,624) 116,810
Net income for the year - - 4,492
Issuance of common
stock upon exercise
of options, including
income tax benefit of
$15 - - 76
Stock issued in con-
junction with liti-
gation settlement - - 321
Foreclosure of note
receivable from
affiliates - 3,624 355
Other - - 1,149
----- ------- --------
BALANCE,
December 31, 1996 - - 123,203
Net income for the year - - 9,419
Issuance of common
stock upon exercise
of options - - 296
Other - - (1,416)
----- ------- --------
BALANCE,
December 31, 1996 $ 0 $ 0 $131,502
===== ======= ========
The accompanying notes are an integral part of these statements
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------- ------- -------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 9,419 $ 4,492 $ (966)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities-
Minority interests in net income 519 377 1,275
Provision for unusual items (891) 2,381 4,123
Depreciation and amortization 19,240 19,180 16,799
Other 1,095 1,909 424
Deferred income taxes 728 (279) (1,246)
Equity in earnings of affiliated
companies (303) (441) (666)
Changes in operating assets and
liabilities, net of effects of
businesses purchased-
Receivables (5,805) (8,217) (972)
Inventories 2,766 (15) (4,106)
Prepaid expenses and other 1,032 2,510 (4,084)
Other assets (526) 609 123
Accounts payable and accruals (2,097) 5,571 (3,795)
Income taxes 1,995 78 (5,268)
-------- -------- --------
Net cash provided by operating
activities 27,172 28,155 1,641
-------- -------- --------
Net cash used by discontinued
operations - - (500)
-------- -------- --------
Net cash provided by operations 27,172 28,155 1,141
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (16,552) (18,187) (16,497)
Proceeds from (investments in) licensees
and affiliated companies 140 (1,141) 445
Patents and patent application
expenditures (2,227) (1,772) (1,445)
Purchases of businesses, net of cash
acquired - - (18,885)
Proceeds on disposal of property and
equipment 426 780 2,506
Other - - (790)
-------- -------- --------
Net cash used in investing activities (18,213) (20,320) (34,666)
(Continued on the following page)
F-8
1997 1996 1995
------- ------- -------
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock $ 296 $ 61 $ 3,631
Proceeds from long-term debt 110,515 5,868 40,812
Principal payments on long-term debt (87,105) (11,775) (9,439)
Minority interests (178) (562) (155)
Increase (decrease) in short-term
borrowings (124) 333 (7,293)
Dividends paid - - (1,476)
-------- -------- --------
Net cash provided (used) by financing
activities 23,404 (6,075) 26,080
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (105) 300 191
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS FOR THE YEAR 32,258 2,060 (7,254)
CASH AND CASH EQUIVALENTS, beginning of year 13,476 11,416 18,670
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 45,734 $ 13,476 $ 11,416
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for-
Interest (net of amount capitalized) $ 5,849 $ 7,478 $ 6,165
Income taxes 1,686 4,864 8,265
NONCASH INVESTING AND FINANCING ACTIVITIES:
Deferred consideration for intangible
assets acquired $ - $ - $ 1,000
Additional paid-in capital increased by
reduction in income taxes payable for
tax benefit arising from exercise of
stock options - 15 530
Deferred consideration for businesses
acquired - - 3,000
Treasury stock acquired in connection
with foreclosure of director note
receivable - 3,624 -
Tax benefit arising from foreclosure
of director note receivable - 760 -
The accompanying notes are an integral part of these statements.
F-9
/TABLE
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS:
Insituform Technologies, Inc. (a Delaware corporation) and
subsidiaries (collectively, the "Company" or "ITI") is a worldwide
provider of proprietary trenchless technologies for the
rehabilitation and improvement of sewer, water, gas and industrial
pipes. The Company's primary technology is the Insituform(R)
Process, a "cured-in-place" pipeline rehabilitation process. The
Company's Tite Liner(R) Process is a method of lining steel lines
with a corrosion and abrasion resistant pipe. Through its
Affholder, Inc. subsidiary, the Company is engaged in trenchless
tunneling used in the installation of new underground services.
2. SUMMARY OF ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries, including a 51% owned
United Kingdom subsidiary, Insituform Linings, Plc., a 60% owned
Chilean subsidiary, United Sistema de Tuberias, Ltda., a 55% owned
Mexican subsidiary, United Pipeline de Mexico, S.A. and a 66%
owned French subsidiary, Insituform France, S.A. All intercompany
balances, transactions and stockholdings are eliminated.
Accounting Estimates
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 and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Business Acquisitions
The accounts and operations of business acquired in exchange for
common stock, and which were accounted for as poolings of
interests, are included in the financial statements as if they had
always been subsidiaries.
The net assets of businesses acquired and accounted for using the
purchase method of accounting are recorded at their fair values at
the acquisition dates, and the financial statements include their
operations only from those dates. Any excess of acquisition costs
F-10
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
over the fair value of net assets acquired is included in the
balance sheet as goodwill.
Taxes on Income
The Company provides for estimated income taxes payable or
refundable on current year income tax returns as well as the
estimated future tax effects attributable to temporary differences
and carryforwards, based upon enacted tax laws and tax rates.
U.S. and foreign income taxes are not provided on undistributed
earnings of foreign subsidiaries where it is the Company's
intention to indefinitely reinvest such earnings in the
subsidiary's operations and not to transfer them in a taxable
transaction.
Foreign Currency Translation
Results of operations for foreign entities are translated using
the average exchange rates during the period. Assets and
liabilities are translated to U.S. dollars using the exchange
rates in effect at the balance sheet date, and the related
translation adjustments are reported as a separate component of
stockholders' equity.
Cash and Cash Equivalents
The Company classifies highly liquid investments with original
maturities of 90 days or less as cash equivalents.
Fair Value of Financial Instruments
Recorded book values are reasonable estimates of fair value for
cash and cash equivalents, receivables and accounts payable.
Current market values for debt instruments with fixed interest
rates are estimated based upon borrowing rates currently available
to the Company for loans with similar terms.
Investments
Corporate investments are carried at cost if ownership is less
than 20% and on the equity method if the Company's ownership
interest is 20% and greater, but not exceeding 50%. Investments
in partnerships for which the Company's ownership interest is not
greater than 50% are accounted for on the equity method. In
addition, the Company accounts for its interest in Midsouth
Partners, a domestic partnership 57-1/2% owned by the Company, on
F-11
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
the equity method, as a consequence of Midsouth's management
composition being vested in a seven member management committee
controlled by the minority partner. The minority partner was
granted majority control following a determination by an
arbitration panel that one Company subsidiary was in default of
certain obligations under the partnership agreement. Intercompany
profits and losses are eliminated for those investments carried on
the equity method.
Inventories
Inventories are valued at the lower of cost (first-in, first-out)
or market. Maintenance and office supplies are not inventoried.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation on
property and equipment is computed using the straight-line method
over the following estimated useful lives:
Years
Land improvements 15-20
Buildings and improvements 5-40
Machinery and equipment 4-10
Furniture and fixtures 3-10
Autos and trucks 3-10
Intangibles
The Company amortizes goodwill over periods not in excess of 25
years on the straight-line basis. Noncompete agreements are
amortized on a straight-line basis over the term of the applicable
agreements.
Patent costs are amortized on a straight-line basis over the
statutory life, normally not exceeding 20 years. Certain of the
Company's patents related to the Insituform process have expired
in many countries, including the United States.
The Company's management continually evaluates the market coverage
and earnings capacity of its acquires and its patented processes
to determine if the unamortized balances can be recovered from
their undiscounted future cash flows.
F-12
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
Royalty Revenues and License Fees
Royalty revenues are accrued as earned in accordance with the
provisions of the license agreements and are recorded based upon
reports submitted by the licensees. License fees are recognized
as revenues when all material services have been substantially
performed.
Construction and Installation Revenues
Construction and installation revenues are recognized using the
percentage-of-completion method. Contract costs include all
direct material and labor costs and those indirect costs related
to contract performance, such as indirect labor, supplies, tools
and equipment costs. Changes in estimated total contract costs
are recognized in the period they are determined. Where a
contract loss is forecast, the full amount of the anticipated loss
is recognized in the period the loss is determined.
Earnings Per Share
In the first quarter of 1997, the Financial Accounting Standards
Board ("the Board") issued Statement of Financial Accounting
Standard No. 128, Earnings Per Share ("SFAS 128"), effective for
financial statements for both interim and annual periods ending
after December 15, 1997. The new standard replaced the provisions
provided by Accounting Principles Board Opinion 15, simplifying
earnings per share calculations and requiring further disclosures.
Earnings per share amounts for the years ended December 31, 1996
and 1995, respectively, have been recalculated to give effect to
the application of SFAS 128. The effect of restatement had no
material effect on either year.
Earnings per share has been calculated as follows:
F-13
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
---- ---- ----
Weighted average number of
common shares used for
Basic EPS 26,926,148 27,036,008 26,902,321
Effect of dilutive stock
options and warrants 46,900 76,838 - (a)
---------- ---------- ----------
Weighted average number of
common shares and dilutive
potential common stock used
in diluted EPS 26,973,048 27,112,846 26,902,321
========== ========== ==========
(a) In 1995, the Company reported a net loss. Therefore, all
stock options and warrants were antidilutive.
Reclassifications
Certain prior year amounts in the consolidated financial
statements have been reclassified to conform to the 1997
presentation.
3. BUSINESS ACQUISITIONS:
Insituform Mid-America, Inc.
On October 25, 1995, the Company completed the acquisition (the
"IMA Merger") of Insituform Mid-America, Inc. ("IMA") through the
merger into IMA of the Company's wholly owned subsidiary, ITI
Acquisition Corp. As a result, IMA became a wholly owned
subsidiary of the Company. The Company issued an aggregate of
12,450,896 shares of common stock to all prior holders of IMA's
Class A common stock, subsequent to the conversion, in accordance
with its terms, of all shares of IMA Class B common stock into IMA
Class A common stock.
The IMA Merger has been accounted for using the pooling-of-
interests method of accounting and, accordingly, the accompanying
consolidated financial statements give retroactive effect to the
acquisition, as if the companies had always operated as a single
entity.
F-14
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
Combined and separate results of the Company and IMA are as
follows (in thousands):
ITI IMA Eliminations Combined
--- --- ------------ --------
January 1, 1995, to
October 25, 1995:
Revenues $141,381 $94,341 $(10,617) $225,105
Net income 6,312 4,142 - 10,454
Enviroq
On April 18, 1995, the Company acquired the pipeline
rehabilitation business of Enviroq Corporation ("Enviroq"),
including Enviroq's Insituform process business conducted by its
Insituform Southeast, Inc. subsidiary in Alabama, Florida,
Georgia, North Carolina and South Carolina, through the merger
into Enviroq of a wholly owned subsidiary of the Company. This
acquisition has been accounted for using the purchase method of
accounting.
The base purchase price of $18,250,000 (including $3,000,000 in
payment of a five-year covenant not to compete) was paid
$15,250,000 in cash and $3,000,000 in a five-year subordinated
promissory note. In March 1996, as a result of demands for
payment and ensuing litigation, the Company discharged its
obligation under such note and under arrangements to pay $1
million in consulting fees over five years, and settled such
litigation for the aggregate amount of $3.1 million and the
release of other claims.
The following table presents summarized consolidated unaudited pro
forma results of operations for 1995 as if the Enviroq acquisition
had occurred at the beginning of 1995. These pro forma results
are provided for comparative purposes only and do not purport to
be indicative of the results which would have been obtained if
these acquisitions had been effected on the dates indicated or
which may be obtained in the future.
Year Ended December 31, 1995 (in thousands)
------------------------------------------
Total revenues $282,742
Net loss (1,709)
Basic and diluted loss per share (.06)
F-15
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
Other
During 1995, the Company also completed two smaller acquisitions.
On February 16, 1995, the Company acquired 66% of the common stock
of Insituform France, S.A., a newly formed subsidiary of its
former French licensee, for approximately $1,463,000.
Additionally, on November 30, 1995, the Company completed the
acquisition of the UK-based Formapipe Division of Water Flow
Services Limited, for $4,308,000.
4. UNUSUAL ITEMS:
In 1997, the Company recorded $4.0 million in costs related to
further reorganization of pipeline rehabilitation operations and
corporate headquarters. These costs consisted primarily of
severance, employee moving costs and expenses related to existing
facilities and markets.
In June 1997, a group, including Jerome Kalishman and Robert
Affholder, both directors of the Company, filed an amended
Schedule 13D pursuant to the Securities and Exchange Act of 1934
which stated that it was the intention of Messrs. Kalishman and
Affholder to propose a slate of individuals to run for election to
the Board of Directors of the Company at its 1997 annual meeting
of stockholders in opposition to the slate proposed by the Company
in its original proxy statement. On July 25, 1997, the Company
and Messrs. Kalishman and Affholder entered into a settlement
agreement to resolve the outstanding proxy contest. The Company
incurred costs of $0.6 million (prior to any effect of taxes)
related to legal and proxy solicitation expenses.
In 1996, the Company recorded $6.5 million in costs related to the
ongoing rationalization of pipeline rehabilitation operations.
These costs consisted principally of the write-off of certain
assets of the Paltem product line ($3.6 million), charges related
to the disposition of excess facilities ($1.4 million), and costs
related to reorganization of the North American contracting
operations ($1.5 million).
The write-off of the Paltem product line includes $2.8 million of
manufacturing and installation equipment that related specifically
to the gas distribution main installation market, which the
Company has decided not to pursue. The Paltem product line may,
however, be used in other markets.
F-16
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
Costs related to the IMA Merger of approximately $6.48 million
were charged to expense, primarily during the fourth quarter of
1995. (See Note 16 for information regarding the related impact
on taxes on income.) The Company also recorded a pretax charge of
approximately $8.06 million in the fourth quarter of 1995 for
restructuring costs, including the consolidation of corrosion and
abrasion protection operations under the Tite Liner process and
the abandonment of certain assets related to the UltraPipe Process
(approximately $2.6 million), the rationalization of certain
Canadian operations to one facility in Edmonton (approximately
$0.5 million), the elimination of certain duplicative management
positions (approximately $0.8 million), the relocation of certain
domestic employees and functions ($1.7 million) and the
termination of construction on IMA's new manufacturing facility in
Chesterfield, Missouri ($1.8 million).
5. ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Activity in the allowance for doubtful accounts is summarized as
follows for the years ended December 31 (in thousands):
1997 1996 1995
---- ---- ----
Balance, at beginning of period $ 1,031 $ 974 $ 637
Charged to expense 1,658 289 657
Uncollected balances written off,
net of recoveries (102) (232) (320)
------- ------ -----
Balance, at end of period $ 2,587 $1,031 $ 974
======= ====== =====
6. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS:
Costs and estimated earnings on uncompleted contracts consist of
the following at December 31 (in thousands):
F-17
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1997 1996
---- ----
Costs incurred on uncompleted contracts $ 123,808 $ 105,109
Estimated earnings 33,985 17,097
--------- ---------
157,793 122,206
Less-Billings to date (144,794) (103,098)
--------- ---------
$ 12,999 $ 19,108
========= =========
Included in the accompanying balance sheets:
Costs and estimated earnings in
excess of billings $ 15,551 $ 20,127
Billings in excess of costs and
estimated earnings on uncompleted
contracts (Note 12) (2,552) (1,019)
--------- ---------
$ 12,999 $ 19,108
========= =========
Costs and estimated earnings in excess of billings represent work
performed which either due to contract stipulations or lacking
contractual documentation needed, could not be billed.
Substantially all unbilled amounts are expected to be collected
within one year.
7. INVENTORIES:
Inventories are summarized as follows at December 31 (in
thousands):
1997 1996
---- ----
Raw materials $ 2,127 $ 968
Manufactured components 2,222 1,921
Work-in-process 674 1,289
Finished products 2,565 1,988
Construction materials 4,626 9,615
-------- -------
$ 12,214 $15,781
======== =======
F-18
/TABLE
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
8. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31
(in thousands):
1997 1996
---- ----
Land and land improvements $ 2,659 $ 2,667
Buildings and improvements 15,824 15,715
Machinery and equipment 82,630 77,608
Furniture and fixtures 8,820 8,796
Autos and trucks 2,456 2,647
Construction in progress 5,987 1,730
-------- --------
118,376 109,163
Less- Accumulated depreciation (60,393) (51,897)
-------- --------
$ 57,983 $ 57,266
======== ========
9. INVESTMENTS IN LICENSEES AND AFFILIATED COMPANIES:
Investments in licensees and affiliated companies consist of the
following at December 31 (in thousands):
1997 1996
---- ----
Insituform Rohrsanierungstechnik
GmbH (50%) $ 2,855 $ 2,800
Midsouth Partners (57-1/2%) 2,217 -
Other 50% owned joint ventures 427 337
------- -------
$ 5,499 $ 3,137
======= =======
Beginning in April 1997, the Company began accounting for its
investment in Midsouth Partners on the equity method, as a
consequence of Midsouth's management committee comprised of a
majority of members named by the minority partner.
F-19
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
10. NOTES PAYABLE TO BANKS:
Effective August 20, 1997, the Company entered into a Loan
Agreement dated such date (the "Credit Agreement") with
NationsBank, N.A. ("NationsBank"), whereby NationsBank will make
available to the Company, until September 1, 2000 (the "Maturity
Date"), a revolving credit line of up to $20,000,000 aggregate
principal amount for working capital and permitted acquisitions,
including $5,000,000 available for standby and commercial letters
of credit, of which $3,466,000 was outstanding at December 31,
1997. Interest on outstanding advances accrues, at the election
of the Company, at either the Lender's prime rate, payable
monthly, or its LIBOR rate, plus a margin ranging from .5% to 1.5%
depending on the maintenance of certain financial ratios, payable
at the end of selected interest periods (from one to six months).
Outstanding principal is subject to repayment on the Maturity
Date, except that advances for permitted acquisitions must be
repaid within six months after disbursement.
The Credit Agreement obligates the Company to comply with certain
financial ratios and restrictive covenants that, among other
things, prohibit dividends and stock repurchases in the event of
loan defaults, place limitations on operations and sales of assets
by the Company and its subsidiaries, and limit the ability of the
Company and its subsidiaries to incur further secured indebtedness
and liens and of subsidiaries to incur additional indebtedness.
The Credit Agreement also obligates certain of the Company's
domestic subsidiaries to guarantee the Company's obligations, as
a result of which the same subsidiaries have also delivered their
guaranty with respect to the Senior Notes described in Note 11.
Insituform Technologies Limited (formerly Insituform Permaline
Limited) ("ITL") has a line of credit and overdraft facility of
pounds sterling 473,000 (US$781,000) with National Westminister
Bank Plc ("NatWest") which bears interest at NatWest's base rate
(7.25% at December 31, 1997) plus 2.0%. The facility is available
through July 1998, and is secured by ITL's real property and the
Company's guarantee. At December 31, 1997 and 1996, respectively,
pounds sterling -0- and pounds sterling 473,000 (US$800,000) were
outstanding under this facility.
Insituform France SA has a line of credit and overdraft facility
of FF5,750,000 (US $956,000) with Societe Generale which bears
interest at LIBOR plus 0.6% to 1.0%; this facility is available
through April 2001 and is secured by a company guarantee. At
December 31, 1997 and 1996, respectively, FF1,908,000 (US$317,000)
and FF2,829,000 (US$545,000) were outstanding under this facility.
F-20
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
11. LONG-TERM DEBT:
Long-term debt consists of the following at December 31 (in
thousands):
1997 1996
---- ----
LONG-TERM DEBT:
7.88% senior notes, payable in $15,715
annual installments beginning February
2001 through 2007, with interest payable
semiannually $110,000 $ -
SunTrust facilities, retired in February 1997 - 76,275
8.5% senior subordinated note, payable in
$1,000 installments annually each July 1998
through 2001, with the entire remaining
balance due in July 2002 with interest
quarterly (net of unamortized discount
of $211 and $270), retired in February
1997 - 4,789
Industrial revenue bond, quarterly
payments ranging from $85 to $170
through January 2004, with interest
at 90% of prime (prime was 8.25% at
December 31, 1996), retired in February
1997 - 3,356
DEFERRED PURCHASE CONSIDERATION:
Promissory notes to affiliates of former
shareholders of Gelco companies, payable
in two equal installments in October 1996
and 1997, with interest payable quarterly
at lesser of prime or LIBOR + 2.75%
(prime was 8.25% at December 31, 1996) - 1,425
OTHER NOTES 2,329 3,269
-------- --------
112,329 89,114
Less- Current maturities (889) (6,730)
-------- --------
$111,440 $ 82,384
======== ========
On February 14, 1997, the Company completed a $110 million private
debt offering of 7.88% Senior Notes due February 14, 2007 ("Senior
Notes"). Interest is payable semiannually in August and February
of each year, and each year, from February 2001 to February 2006,
inclusive, the Company is required to make principal repayments of
$15,715,000, together with an equivalent payment at maturity. The
Senior Notes may be prepaid at the Company's option, in whole or
F-21
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
in part, at any time, together with a make-whole premium, and upon
specified change in control events each holder has the right to
require the Company to purchase its Senior Note without any
premium thereon. The agreements obligate the Company to comply
with certain financial ratios and restrictive covenants that,
among other things, place limitations on operations and sales of
assets by the Company or its subsidiaries, and limit the ability
of the Company to incur further secured indebtedness and liens.
Such agreements also obligate the Company's subsidiaries to
provide guarantees to the holders of the Senior Notes if
guaranties are given by them to certain other lenders.
Prior to its prepayment in February 1997, the SunTrust facility
was due to mature in October 2000, with installments based on a
five-year amortization schedule, commencing December 31, 1997.
Interest on indebtedness under the facility was payable at either
(i) SunTrust's prime rate, plus a margin of up to .25% in the
event certain financial ratios were not maintained, or (ii) an
adjusted LIBOR rate, plus a margin ranging from 1.00% to 1.75%,
depending on the maintenance of certain financial ratios. Up to
$5 million under the credit facility was available to be borrowed
from SunTrust pursuant to a "swing line facility," which accrued
interest at a rate per annum equal to 0.5% below SunTrust's prime
rate. Such facility obligated the Company to comply with certain
financial ratios and restrictive covenants that, among other
things, limited the ability of the Company and its subsidiaries to
incur indebtedness, pay dividends, make loans and encumber any
properties, and required guarantees of certain domestic
subsidiaries. Essentially all of the Company's retained earnings
at December 31, 1996 were restricted under such covenants.
Prior to its prepayment in February 1997, the 8.5% senior
subordinated note was subordinated in right to the Company's bank
and other institutional financing and to deferred consideration
incurred in connection with business acquisitions. As discussed
in Note 13, warrants to purchase 350,877 unregistered shares of
Common Stock were also issued to the lender. The note was
prepayable at the Company's option, at premiums until July 1998
ranging from 3% to 1% of the amount prepaid. The subordinated
note also restricted the Company's ability to pay dividends and
repurchase outstanding common stock.
Prior to its prepayment in February 1997, the industrial revenue
bond was subject to call by the holder, an institutional
purchaser, in 1999 or each year thereafter until maturity.
Property and equipment with a net book value of approximately
F-22
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
$3,500,000 was pledged to collateralize these bonds. These bonds
also restricted the Company's ability to pay dividends.
Debt issuance costs of $891,000 incurred in connection with the
private debt offering were recorded as deferred charges and will
be amortized over the life of the Senior Notes. The net proceeds
were used to repay existing indebtedness (approximately $85
million), as discussed above, and for general corporate purposes.
Costs of approximately $400,000 ($225,000 after tax) associated
with the prior credit facility were written off and have been
classified as an extraordinary item in the 1997 results of
operations.
At December 31, 1997 and 1996, the estimated fair value of the
Company's long-term debt was approximately $118.1 million and $89
million, respectively.
Principal payments required to be made for each of the next five
years and thereafter are summarized as follows (in thousands):
Years ending December 31 Amount
1998 $ 889
1999 684
2000 349
2001 15,920
2002 15,917
After 2002 78,570
--------
Total $112,329
========
12. ACCOUNTS PAYABLE AND ACCRUALS:
Accounts payable and accruals consist of the following at
December 31 (in thousands):
F-23
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1997 1996
---- ----
Accounts payable - trade $ 8,071 $ 17,108
Compensation and profit sharing 11,466 6,759
Interest 3,232 225
Merger and restructuring 2,464 2,840
Accrued litigation and fees 2,778 1,180
Bank overdrafts - 3,369
Billings in excess of costs and
earnings 2,552 1,019
Other 11,135 8,078
--------- --------
$ 41,698 $ 40,578
========= ========
13. STOCKHOLDERS' EQUITY:
In accordance with accounting for a pooling-of-interests, all
prior period stockholders' equity accounts have been restated to
give effect to the IMA Merger described in Note 3.
Stock Option Plan
Under the 1992 Employee Stock Option Plan and Director Stock
Option Plan (the "Plans"), the Company may grant options to its
employees and directors not to exceed 1,000,000 and 500,000 shares
of common stock, respectively. In January 1998, the Company's
Board of Directors approved an increase in such authorization to
1,850,000 and 1,000,000 shares, respectively, subject to
stockholder approval. The plans are administered by the Board of
Directors which determines the timing of awards, individuals to be
granted awards, the number of options to be awarded and the price,
vesting schedule and other conditions of the options. The
exercise price of each option typically equals the market price of
the Company's stock on the date of grant and, therefore, the
Company generally makes no charge to earnings with respect to
these options. Options generally vest over a five year period and
have an expiration date of up to 10 years after grant.
Prior to the IMA Merger, IMA had granted options to certain
officers, directors and employees to acquire IMA Class A common
shares. In connection with the IMA Merger, all outstanding IMA
options as of the date of the acquisition, became options to
purchase that number of shares of ITI Common Stock that would have
F-24
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
been received had the options been exercised prior to the IMA
Merger. Dividends reflected in the statements of stockholders'
equity reflect those which had been declared on the IMA common
shares prior to the IMA Merger.
The Company applies APB Opinion No. 25, and related
interpretations in accounting for stock option grants.
Accordingly, no compensation cost has been recognized in the
statements of operations for this stock option plan. In
accordance with SFAS No. 123, the Company has estimated the fair
value of each option grant using the Black-Scholes option-pricing
model. The following weighted average assumptions were used for
the grants in 1997, 1996 and 1995, respectively: expected
volatility of 45%, 44% and 48%; risk-free interest rates of 5.8%,
6.1% and 6.2%; expected lives of five years and no dividends. Had
compensation cost for the stock options granted been determined
based on their fair value at the grant dates, the Company's net
income and earnings per share would have been reduced to the pro
forma amounts indicated below (in thousands, except per share
amounts):
1997 1996 1995
---- ---- ----
Net income (loss):
As reported $9,419 $4,492 $ (966)
Pro forma 8,867 4,116 (1,015)
Basic and diluted earnings (loss)
per share:
As reported .35 .17 (.04)
Pro forma .33 .15 (.04)
Based on the Black-Scholes option-pricing model the weighted
average fair value of options granted in 1997, 1996 and 1995 was
$4.16, $3.84 and $5.91, respectively, for options granted at the
market price. In 1996, for options granted above market price,
the fair value was $1.82. The following table summarizes
information about options outstanding at December 31, 1997:
F-25
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at December Contractual Exercise at December Exercise
Prices 31, 1997 Life Price 31, 1997 Price
- -------- ----------- --------- -------- ----------- --------
$2.61 to $9.79 911,697 7.7 years $ 8.41 394,829 $ 8.37
$11.09 to $16.25 866,605 2.3 years $ 14.33 773,855 $ 14.40
$25.00 48,125 - $ 25.00 48,125 $ 25.00
------- -------
1,826,427 4.9 years $ 11.66 1,216,809 $ 12.86
========= =========
Changes in options outstanding are summarized as follows:
Weighted
Average
Exercise
Shares Price
------ --------
Balance, December 31, 1994 1,687,300 $14.80
Granted 398,210 $12.00
Exercised (393,909) $ 9.27
Canceled (292,666) $16.61
---------
Balance, December 31, 1995 1,398,935 $13.00
Granted 325,000 $ 9.14
Exercised (9,316) $ 7.92
Canceled (132,420) $15.02
---------
Balance, December 31, 1996 1,582,199 $11.37
Granted 568,900 $ 8.75
Exercised (70,387) $ 4.24
Canceled (254,285) $11.18
---------
Balance, December 31, 1997 1,826,427 $11.66
=========
F-26
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 1993, the Company issued to Hanseatic Corporation warrants
to purchase 350,877 unregistered shares of Common Stock in
connection with the issuance of subordinated debt (see Note 11).
The warrants are exercisable at $14.25 per share and expire on
July 26, 1998. Paul Biddelman, a director of the Company, is an
officer of Hanseatic.
At December 31, 1997, 2,300,113 shares of Common Stock were
reserved pursuant to stock option plans and warrants.
14. RELATED PARTY TRANSACTIONS:
On July 3, 1992, Ringwood Limited ("Ringwood"), and Douglas K.
Chick and Brian Chandler, both directors of the Company, entered
into an agreement whereby Ringwood executed to the Company a
secured, nonrecourse promissory note (the "Note") in the amount of
$3,624,000 which bore interest at Citibank's prime rate plus
2-1/2%, was originally due July 3, 1995, and was secured by a
pledge (the "Pledge") to the Company by Ringwood and Messrs. Chick
and Chandler of 255,801 shares (the "Shares") of the Company's
stock beneficially owned by them.
On May 21, 1995, the Company extended the maturity date of the
Note to July 3, 1996 (the "Maturity Date"), and in December 1995
the interest payment otherwise due in January 1996 was postponed
to be due on a date (the "Extension Date") no later than 30 days
after the date of first publication of the Company's operating
results covering at least a 30-day period after the consummation
of the IMA Merger. At the Extension Date, Ringwood had defaulted
in the payment to the Company of its interest payment postponed as
aforesaid, and on the Maturity Date had defaulted in payment of
the principal amount of the Note. Effective in August 1996, the
Company foreclosed on the Shares in full satisfaction of the
obligation of Ringwood and Messrs. Chick and Chandler under the
Note and the Pledge. The amount of the Note plus accrued interest
to the date of foreclosure has been recorded in treasury stock.
Krugman Chapnick and Grimshaw LLP provides legal services to the
Company. The Company paid Krugman Chapnick and Grimshaw LLP,
$664,000, $815,000 and $1,766,000 in 1997, 1996 and 1995,
respectively, for legal services provided, together with
reimbursement of out-of-pocket expenses of $141,000, $151,000 and
$248,000, respectively. James D. Krugman, a partner at Krugman
Chapnick and Grimshaw LLP, was a director of the Company prior to
October 1997.
F-27
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. OTHER INCOME (EXPENSE):
Other income (expense) is comprised of the following at December
31 (in thousands):
1997 1996 1995
---- ---- ----
Investment income $ 1,842 $ 1,059 $ 1,177
Litigation settlement (Note 17) - - (3,547)
Casualty gain - - 722
Reserve for excess equipment (722) - -
Other (473) 231 (79)
------- ------- -------
$ 647 $ 1,290 $(1,727)
======= ======= =======
16. TAXES ON INCOME:
Net deferred tax assets consist of the following at December 31 (in
thousands):
1997 1996
---- ----
DEFERRED INCOME TAX ASSETS:
Net operating loss carryforwards $ 5,276 $ 5,527
Foreign tax credit carryforwards - 828
Accrued compensation 1,570 1,005
Inventory valuation 675 752
Accrual for pending litigation
and claims 159 356
Restructuring provision 1,056 2,580
Accrued contingencies 1,545 236
Allowance for doubtful accounts 609 50
Accrued losses on incomplete
contracts 362 -
other 991 821
------- -------
Gross deferred income tax assets 12,243 12,155
VALUATION ALLOWANCE (3,266) (3,056)
------- -------
Total deferred income tax assets 8,977 9,099
------- -------
F-28
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997 1996
---- ----
DEFERRED INCOME TAX LIABILITIES:
Depreciation (4,041) (4,219)
Patent defense cost (1,643) (905)
Other (1,112) (1,024)
------- -------
Total deferred income tax
liabilities (6,796) (6,148)
------- -------
Net deferred income tax assets $ 2,181 $ 2,951
======= =======
The Company has recorded deferred tax assets of $2,181,000
reflecting the benefit of $5,276,000 in loss carryforwards.
Realization is dependent upon generating sufficient taxable income
in the applicable jurisdictions and, in some instances, prior to
the expiration of the carryforwards. Although realization is not
assured, management believes it is more likely than not that all
of the deferred tax assets will be realized. The amount of the
deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income
during the carryforward periods, as applicable are reduced.
Income (loss) from continuing operations before taxes on income is
as follows for the years ended December 31 (in thousands):
1997 1996 1995
---- ---- ----
Domestic $ 9,432 $10,182 $ 1,897
Foreign 7,495 (769) 1,733
------- ------- -------
Totals $16,927 $ 9,413 $ 3,630
======= ======= =======
Provisions for taxes on income from continuing operations consist
of the following components for the years ended December 31 (in
thousands):
F-29
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997 1996 1995
---- ---- ----
Current:
Federal $ 2,498 $ 2,968 $ 1,225
Foreign 280 1,708 2,154
State 3,519 735 827
------- ------- -------
6,297 5,411 4,206
------- ------- -------
Current tax benefit related to
exercise of stock options - - 530
------- ------- -------
Deferred:
Federal 900 1,334 (622)
Foreign (302) (569) (54)
State 172 (243) (73)
Adjustments to beginning of year
valuation allowance - (948) -
------- ------- -------
770 (426) (749)
------- ------- -------
Total taxes on income $ 7,067 $ 4,985 $ 3,987
======= ======= =======
A reconciliation between the U.S. federal statutory tax rate and the
effective tax rate follows:
1997 1996 1995
---- ---- ----
Income taxes at U.S. federal
statutory tax rate 34.0% 34.0% 34.0%
Increase (decrease) in taxes
resulting from:
State income taxes, net of federal
income tax benefit 1.1 2.6 13.7
Tax amortization of intangibles (4.7) (8.4) (21.5)
Tax benefit not currently recognizable
on losses of subsidiaries - - 10.0
Merger costs capitalized for tax
purposes - - 59.1
Goodwill amortization 3.2 8.2 18.3
Effect of foreign income taxed at
foreign rates 3.0 7.4 (4.4)
Other 5.1 9.2 0.6
---- ---- ----
Total taxes on income 41.7% 53.0% 109.8%
==== ==== =====
F-30
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subject to the future taxable income on certain of the Company's
subsidiaries, the Company has available tax operating loss
carryforwards as follows:
Expiration
Jurisdiction Amount Date
- ------------ ------ ----------
(in thousands)
United Kingdom $10,843 Indefinite
France 254 2001-2002
Puerto Rico 1,779 2000-2003
U.S. State 11,967 2004-2010
U.S. Federal 2,924 2001-2011
17. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases a number of its administrative operations
facilities under noncancellable operating leases expiring at
various dates through 2020. In addition, the Company also leases
certain construction and automotive equipment on a multiyear,
monthly or daily basis. Rent expense under all operating leases
for 1997, 1996 and 1995 was $9,960,000, $8,837,000 and $6,000,000,
respectively.
At December 31, 1997, the future minimum lease payments required
under the noncancellable operating leases were as follows (in
thousands):
Year Ending December 31 Minimum Lease Payments
1998 $ 3,079
1999 2,264
2000 1,419
2001 807
2002 520
After 2002 840
---------
Total $ 8,929
=======
Minimum payments have not been reduced by minimum sublease rentals
of $635,000 due in the future under noncancelable subleases.
F-31
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employment Agreements
The Company and certain of its subsidiaries have employment
contracts with various officers with remaining terms ranging from
six months to three years at amounts approximating their current
levels of compensation. The Company's minimum aggregate
commitment at December 31, 1997, under such contracts was
approximately $2,791,000.
On June 19, 1997, the Company entered into severance agreements
with Anthony W. Hooper, William A. Martin and Robert L. Kelley
which provide that, subsequent to the occurrence of specified
events during a period of three years after the date of such
agreements, if the employment of such officer is terminated
without "cause" or such officer resigns with "good reason" (as
those terms are defined under such agreements), or such officer
resigns for any reason during a 30-day period following the
anniversary of the specified events, such officer is entitled to
the benefits set forth in the agreement. The election of two
members of the Board of Directors in October 1997 outside of the
procedure provided under the Company's merger agreement with IMA
was one of the specified events. The benefits to which each
officer would be entitled upon severance from the Company as
aforesaid include an amount, payable within 30 days after
severance, equal to three times compensation (including base
salary and bonus, as defined, and accrued retirement benefits)
plus amounts to cover any excise tax due, if any, and coverage for
a period of three years under the Company's welfare plans (or
equivalent coverage).
Litigation
On May 23, 1995, the Company, notwithstanding its belief that it
had defenses to plaintiff's claim that were well grounded in fact
and law, settled a stockholder class action against the Company
arising from the acquisition of Insituform Group Limited in
December 1992. The Company made a cash payment to class members
in the amount of $3.2 million and (in January 1996) issued to
class members 30,000 shares of the Company's class A common
stock.
The Company is involved in certain additional litigation
incidental to the conduct of its business. In the Company's
opinion, none of these proceedings will have a material adverse
effect on the Company's financial position, results of operations
and liquidity. The financial statements include the estimated
amounts of liabilities that are likely to be incurred from these
and various other pending litigation and claims.
F-32
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Retirement Plans
The Company maintains profit sharing/401(k) plans which cover
substantially all eligible domestic employees. Company profit
sharing contributions are discretionary. Under the terms of its
401(k) features, the plan also provides for the Company to
contribute 100% of the participating employee's contribution up to
3% of the employee's salary, and 50% of the next 2% of the
employee's salary. Total contributions to the domestic plans were
$2,496,000, $2,447,000 and $1,401,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
In addition, certain foreign subsidiaries maintain various other
defined contribution retirement plans. Company contributions to
such plans for the years ended December 31, 1997, 1996 and 1995,
were $132,000, $107,000 and $136,000, respectively.
18. SEGMENT AND GEOGRAPHIC INFORMATION:
The Company's continuing operations include the following
reportable segments:
"Pipeline Technology" - includes licensing, selling and servicing
trenchless, on-site pipeline reconstruction technology and
products.
"Construction" - includes the installation of trenchless pipeline
reconstruction materials as well as nontrenchless pipeline
construction.
Operating profit (loss) by business segment and by geographic area
are defined as revenues less operating costs and expenses. Income
and expense not allocated to business segments or geographic areas
include investment income and corporate expenses.
Identifiable assets are those assets used exclusively in the
operations of each business segment or geographic area, or which
are allocated, when used jointly. Corporate assets are
principally comprised of cash equivalents and investments.
Financial information by industry segment is as follows at
December 31 (in thousands):
F-33
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997 1996 1995
------- ------- -------
(In thousands, except
per share amounts)
PIPELINE TECHNOLOGY:
Revenues-
Unaffiliated companies $ 25,730 $ 21,735 $ 25,299
Intersegment 45,235 51,420 45,582
-------- -------- --------
Total revenues 70,965 73,155 70,881
-------- -------- --------
Operating income 13,099 18,428 16,642
Identifiable assets 35,960 25,494 29,699
Capital expenditures 754 2,133 750
Depreciation and amortization 1,828 1,628 1,569
CONSTRUCTION:
Revenues $294,910 $268,198 $246,904
Operating income 25,222 7,908 5,479
Identifiable assets 218,517 218,096 211,543
Capital expenditures 15,618 15,881 15,557
Depreciation and amortization 16,945 17,141 14,961
ELIMINATIONS AND CORPORATE ITEMS:
Revenues $(45,235) $(51,420)$(45,582)
Operating loss (13,291) (11,990) (10,371)
Identifiable assets 43,375 21,912 19,058
Capital expenditures 180 173 190
Depreciation and amortization 467 411 269
CONSOLIDATED:
Revenues $320,640 $289,933 $272,203
Operating income 25,030 14,346 11,750
Identifiable assets 297,852 265,502 260,300
Capital expenditures 16,552 18,187 16,497
Depreciation and amortization 19,240 19,180 16,799
Financial information by geographic area is as follows at
December 31 (in thousands):
1997 1996 1995
------- ------- -------
UNITED STATES:
Revenues-
Unaffiliated companies $227,900 $220,848 $202,555
Between geographic areas 37,515 43,986 40,243
-------- -------- --------
Total revenues 265,415 264,834 242,798
-------- -------- --------
Operating income 26,965 19,291 11,055
Identifiable assets 231,212 204,598 202,165
F-34
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997 1996 1995
------- ------- -------
(In thousands, except
per share amounts)
EUROPEAN COMMUNITY:
Revenues-
Unaffiliated companies $ 31,226 $ 32,934 $ 21,566
Between geographic areas 4,928 4,516 2,325
-------- -------- --------
Total revenues 36,154 37,450 23,891
-------- -------- --------
Operating income 2,738 4,018 8,253
Identifiable assets 26,109 29,533 20,959
CANADA:
Revenues-
Unaffiliated companies $ 23,386 $ 16,955 $ 28,620
Between geographic areas 1,338 1,305 1,617
-------- -------- --------
Total revenues 24,724 18,260 30,237
-------- -------- --------
Operating income 5,521 2,179 1,674
Identifiable assets 20,179 18,541 21,233
OTHER FOREIGN:
Revenues-
Unaffiliated companies $ 38,128 $ 19,196 $ 19,462
Between geographic areas 1,536 1,613 1,397
-------- -------- --------
Total revenues 39,664 20,809 20,859
-------- -------- --------
Operating income (loss) 3,097 848 430
Identifiable assets 16,074 10,155 8,968
ELIMINATIONS AND CORPORATE ITEMS:
Revenues-
Between geographic areas $(45,317) $(51,420)$(45,582)
Operating loss (13,291) (11,990) (9,662)
Identifiable assets 4,278 2,675 6,975
CONSOLIDATED:
Revenues $320,640 $289,933 $272,203
Operating income 25,030 14,346 11,750
Identifiable assets 297,852 265,502 260,300
F-35
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
1st 2nd 3rd 4th
--- --- --- ---
(In thousands, except per
share data)
Year ended December 31, 1997:
Revenues $77,082 $75,316 $85,490 $82,752
Operating income 4,050 2,513 9,666 8,801(a)
Income before extraordinary item 1,306 214 4,282 3,842
Extraordinary loss (225) - - -
Net income 1,081 214 4,282 3,842(a)
Basic and diluted earnings (loss)
per share:
Income before extraordinary item .05 .01 .16 .14
Extraordinary loss (.01) - - -
Net income .04 .01 .16 .14
Year ended December 31, 1996:
Revenues $68,110 $71,769 $70,647 $79,407
Operating income (loss) 5,180 7,489 6,625 (4,948)(a)
Net income (loss) 2,250 3,830 3,416 (5,004)(a)
Basic and diluted earnings (loss)
per share .08 .14 .13 (.19)
(a) See Note 4 for information relative to unusual charges recorded in 1997
and 1996.
F-36
INDEX TO EXHIBITS(1)(2)
3.1 - Certificate of Incorporation of the
Company (Incorporated by reference to
Exhibit 3(a) to the Quarterly Report
on Form 10-Q for the quarter ended
September 30, 1997).
3.2 - By-Laws of the Company (Incorporated
by reference to Exhibit 3(b) to the
Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997).
10.1 - Agreement and Plan of Merger dated as of
May 23, 1995 among the Company, ITI
Acquisition Corp. and Insituform Mid-
America, Inc. (Incorporated by reference
to Exhibit 5(a) to the Current Report on
Form 8-K dated May 23, 1995).
10.2 - Merger Agreement dated as of November 2,
1994 by and among Insituform Mid-America,
Inc., IMA Merger Sub, Inc., Enviroq
Corporation and New Enviroq Corporation
(Incorporated by reference to Exhibit 10(a)
to the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995).
____________________
1 The Company's current, quarterly and annual reports are filed
with the Securities and Exchange Commission under file no. 0-
10786
2 Pursuant to Reg. Section 229.601, does not include certain
instruments with respect to long-term debt of the Company and
its consolidated subsidiaries not exceeding 10% of the total
assets of the Company and its subsidiaries on a consolidated
basis. The Company undertakes to furnish to the Securities and
Exchange Commission, upon request, a copy of all long-term
debt instruments not filed herewith.
E-1
INDEX TO EXHIBITS(1)(2)
10.3 - Note Purchase Agreements dated as of
February 14, 1997 among the Company
and, respectively, each of the lenders
listed therein (Incorporated by reference
to Exhibit 10.6 to the Annual Report on
Form 10-K for the year ended December 31,
1996), together with First Amendment
dated as of August 20, 1997, Guaranty
Agreement dated as of August 20, 1997
by each of the subsidiaries named
therein, and Intercreditor Agreement dated
as of August 20, 1997 among NationsBank,
N.A. and such lenders (Incorporated by
reference to Exhibit 10(a) to the Quarterly
Report on Form 10-Q for the quarter ended
September 30, 1997).
10.4 - Loan Agreement dated as of August 20, 1997
between NationsBank, N.A. and the Company
together with Unlimited Guaranty dated as
of August 20, 1997 by each of the subsidiaries
named therein and Contribution Agreement dated
August 20, 1997 between NationsBank, N.A.
and such guarantors (Incorporated by reference
to Exhibit 10(b) to the Quarterly Report on
Form 10-Q for the quarter ended September 30,
1997).
10.5 - Amendment No. 1 to Loan Agreement dated as of
August 20, 1997 between NationsBank, N.A. and
the Company.
____________________
1 The Company's current, quarterly and annual reports are filed
with the Securities and Exchange Commission under file no. 0-
10786
2 Pursuant to Reg. Section 229.601, does not include certain
instruments with respect to long-term debt of the Company and
its consolidated subsidiaries not exceeding 10% of the total
assets of the Company and its subsidiaries on a consolidated
basis. The Company undertakes to furnish to the Securities and
Exchange Commission, upon request, a copy of all long-term
debt instruments not filed herewith.
E-2
INDEX TO EXHIBITS(1)(2)
10.6 - Agreement dated July 25, 1997 among Jerome
Kalishman, Nancy F. Kalishman, Robert W.
Affholder, Xanadu Investments L.P., The
Jerome and Nancy Kalishman Family Fund,
Paul A. Biddelman, Stephen P. Cortinovis,
Anthony W. Hooper, Silas Spengler, Sheldon
Weinig and Russell B. Wight, Jr. (Incorporated
by reference to Exhibit 99.1 to the Current
Report on Form 8-K dated July 25, 1997),
together with Amendment No. 1 thereto (Incor-
porated by reference to Exhibit 10(d) to the
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997).
10.7 - Letter Agreement dated November 18, 1996
between the Company and Anthony W.
Hooper (Incorporated by reference to
Exhibit 10.13 to the Annual Report on
Form 10-K for the year ended December
31, 1996).
10.8 - Severance Agreement dated as of June 19,
1997 between the Company and Anthony W.
Hooper (Incorporated by reference to
Exhibit 10(a) to the Quarterly Report
on Form 10-Q for the quarter ended
June 30, 1997).(3)
_________________
1 The Company's current, quarterly and annual reports are filed
with the Securities and Exchange Commission under file no. 0-
10786
2 Pursuant to Reg. Section 229.601, does not include certain
instruments with respect to long-term debt of the Company and
its consolidated subsidiaries not exceeding 10% of the total
assets of the Company and its subsidiaries on a consolidated
basis. The Company undertakes to furnish to the Securities and
Exchange Commission, upon request, a copy of all long-term
debt instruments not filed herewith.
3 Management contract or compensatory plan or arrangement.
E-3
INDEX TO EXHIBITS(1)(2)
10.9 - Agreement dated October 25, 1995 between
the Company and Jerome Kalishman
(Incorporated by reference to Exhibit
2(b) to the Current Report on Form 8-K
dated October 25, 1995), together with
Amendment dated November 18, 1996 (In-
corporated by reference to Exhibit 10.11
to the Annual Report on Form 10-K for
the year ended December 31, 1996) and
Amendment No. 2 dated October 8, 1997
(Incorporated by reference to the
Quarterly Report on Form 10-Q for the
quarter dated September 30, 1997).(3)
10.10 - Consulting Agreement dated October 25,
1995 between the Company and Jerome
Kalishman (Incorporated by reference to
Exhibit 2(c) to the Current Report on
Form 8-K dated October 25, 1995).(3)
10.11 - Employment Agreement dated October 25,
1995 between the Company and Robert
W. Affholder (Incorporated by reference
to Exhibit 2(d) to the Current Report
on Form 8-K dated October 25, 1995).(3)
10.12 - Severance Agreement dated as of June 19,
1997 between the Company and William A.
Martin (Incorporated by reference to
Exhibit 10(b) to the Quarterly Report
on Form 10-Q for the period ended
June 30, 1997).(1)
_________________
1 The Company's current, quarterly and annual reports are filed
with the Securities and Exchange Commission under file no. 0-
10786
2 Pursuant to Reg. Section 229.601, does not include certain
instruments with respect to long-term debt of the Company and
its consolidated subsidiaries not exceeding 10% of the total
assets of the Company and its subsidiaries on a consolidated
basis. The Company undertakes to furnish to the Securities and
Exchange Commission, upon request, a copy of all long-term
debt instruments not filed herewith.
3 Management contract or compensatory plan or arrangement.
E-4
INDEX TO EXHIBITS(1)(2)
10.13 - Severance Agreement dated as of June 19,
1997 between the Company and Robert L.
Kelley (Incorporated by reference to
Exhibit 10(c) to the Quarterly Report
on Form 10-Q for the period ended
June 30, 1997).(3)
10.14 - Registration Rights Agreement dated as
of October 19, 1992, among the Company,
Interstate Properties, and the Ringwood
Group consisting of Parkwood Limited,
as trustee of the Anthony Basmadjian
"P" Settlement, Barford, as trustee of
the Anthony Basmadjian Settlement,
Ringwood Limited, Brian Chandler and
Douglas K. Chick (Incorporated by
reference to Exhibit 10.54 of Registra-
tion Statement on Form S-4 No. 33-53772).
10.15 - Registration Rights Agreement dated as of
September 1, 1995 among the Company,
Xanadu Investments L.P. and Robert W.
Affholder (Incorporated by reference to
Exhibit 10.29 of Registration Statement
on Form S-4 No. 33-62677).
10.16 - Equipment Lease dated as of October 10,
1989 between A-Y-K-E Partnership and
Affholder, Inc. (Incorporated by reference
to Exhibit 10.20 to the Annual Report on
Form 10-K for the year ended December 31,
1995).
_________________
1 The Company's current, quarterly and annual reports are filed
with the Securities and Exchange Commission under file no. 0-
10786
2 Pursuant to Reg. Section 229.601, does not include certain
instruments with respect to long-term debt of the Company and
its consolidated subsidiaries not exceeding 10% of the total
assets of the Company and its subsidiaries on a consolidated
basis. The Company undertakes to furnish to the Securities and
Exchange Commission, upon request, a copy of all long-term
debt instruments not filed herewith.
3 Management contract or compensatory plan or arrangement.
E-5
INDEX TO EXHIBITS(1)(2)
10.17 - 1992 Employee Stock Option Plan of the
Company.(1)
10.18 - 1992 Director Stock Option Plan of the
Company.(3)
10.19 - Insituform Mid-America, Inc. Stock Option
Plan, as amended (Incorporated by reference
to Exhibit 4(i) to the Registration
Statement on Form S-8 No. 33-63953).(3)
10.20 - Form of Directors' Indemnification
Agreement (Incorporated by reference
to Exhibit 10.47 to the Annual Report
on Form 10-K for the year ended
December 31, 1988).(1)
21 - Subsidiaries of the Company.
23.1 - Consent of Arthur Andersen LLP.
23.2 - Consent of BDO Seidman, LLP.
24 - Power of Attorney (See "Power of
Attorney" in the Annual Report on
Form 10-K).
27 - Financial Data Schedule, which is
submitted electronically to the
Securities and Exchange Commission
for information only and not filed.
99 - Pages 6 through 9 of the Company's Proxy
Statement dated August 25, 1997 (In-
corporated by reference to Exhibit 99
to the Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997).
________________
1 The Company's current, quarterly and annual reports are filed
with the Securities and Exchange Commission under file no. 0-
10786
2 Pursuant to Reg. Section 229.601, does not include certain
instruments with respect to long-term debt of the Company and
its consolidated subsidiaries not exceeding 10% of the total
assets of the Company and its subsidiaries on a consolidated
basis. The Company undertakes to furnish to the Securities and
Exchange Commission, upon request, a copy of all long-term
debt instruments not filed herewith.
3 Management contract or compensatory plan or arrangement.
E-6