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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, 1998
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 statements 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, 1999.....$346,265,593
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, 1999...................25,693,103 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 1999 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 pipelines. 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 64% 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(R) 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, 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 its
licensor, 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.
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 17 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. After the tube is saturated (impregnated) with a
thermosetting resin mixture, it is installed in the host pipe by
various processes and the resin is then hardened, usually by
heating it by various means, forming a new rigid 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, 1998.
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
principally through direct installation and other construction
operations performed through wholly-owned and, in some cases,
majority-owned subsidiaries. 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. As described under "Ownership Interests in Licensees"
below, 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.
The Company's principal rehabilitation activities in North
America are conducted directly or through subsidiaries which hold
the Insituform Process and NuPipe Process rights 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 13 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 (Alberta), 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.
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 15 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 rehabilitation activities are
conducted through subsidiaries that are less than wholly-owned as
follows:
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 addition, in September 1998 the Company completed its
acquisition of 80% of the shares of Video Injection S.A. ("Video
Injection"), a French company that utilizes multifunctional
robotic devices developed by it in connection with the inspection
and repair of pipelines, for a purchase price of $5.0 million
($2.6 million of which will be paid in installments through the
second anniversary of closing). The remaining 20% of the shares is
held by the sellers, who continue to be employed by Video
Injection. On the fifth anniversary of closing (or earlier, in
specified events), the Company will purchase the remaining shares
pursuant to a formula based on Video Injection's results of
operations. See"Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and
Capital Resources."
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."
The Company's rehabilitation activities also extend to the
grant of 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 commercial-
ized 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.
Ownership Interests in Licensees
The Company, through its subsidiary, Insituform Holdings (UK)
Limited, holds one-half of the equity interest in Insituform
Rohrsanierungstechniken GmbH ("IRT"), the Company's licensee of
the Insituform and NuPipe Processes in Germany. The remaining
interest is held by Per Aarsleff A/S, a Danish contractor. 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 several 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.
In March 1999, the Company delivered notice of termination of
its joint venture with Insituform East, Inc. ("Insituform East"),
an unaffiliated licensee, which does business under the name
Midsouth Partners ("Midsouth"). Midsouth has operated under a
license from the Company with respect to the Insituform Process
covering Tennessee and portions of Mississippi and Kentucky, which
the Company has also terminated. Although the Company, directly
and through a subsidiary, holds an aggregate of 57.5% of the
interest in Midsouth, with the remaining 42.5% interest held by a
subsidiary of Insituform East, as a result of the determination in
June 1996 by an arbitration panel that the Company's subsidiary
was in default of certain obligations under Midsouth's partnership
agreement (as a result of action taken before the Company's
acquisition of such subsidiary), Insituform East was awarded
majority control of the management committee of Midsouth and
effectively determines its business strategy and its
implementation. The termination of the Midsouth joint venture
will, as set forth in the Company's notice, become effective upon
affirmation by the Delaware Court of Chancery, in proceedings
initiated by the Company, of the Company's right to terminate
Midsouth's license agreement, which by its terms may be terminated
immediately in the event any partner of Midsouth seeks its
dissolution. Insituform East has disputed the termination of both
Midsouth and its license agreement.
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 "Ownership Interests in Licensees" for a
description of 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, 1998, 1997 and 1996, respectively.
Backlog
At December 31, 1998 and 1997, 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 $109.3 million and $102.1 million,
respectively. The Company anticipates that substantially all
construction backlog recorded at December 31, 1998 will be
completed in 1999.
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, 1998, 1997 and 1996,
the Company spent approximately $5.9 million, $7.0 million and
$7.7 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, an
additional five percent of which is owned by IRT. The Company also
maintains a 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 has worked
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 should there be a need for alternative resin
sourcing. 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 2016, 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.
There can be no assurance that the validity of the Company's
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 16 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, a process 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, 1998, the Company employed 1,472
individuals. Certain of the Company's contracting operations are
parties to collective bargaining agreements covering an aggregate
of 155 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 1999.
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, 1999 the Company
---- -------------- --------------
Anthony W. Hooper 51 Chairman of the Board,
President and Chief
Executive Officer
Robert W. Affholder 63 Senior Executive Vice
President
William A. Martin 57 Senior Vice
President-Chief
Financial Officer
Robert L. Kelley 53 Vice President-General
Counsel
Carroll W. Slusher 50 Vice President-North
America
Antoine Menard 48 Vice President-Europe
Anthony W. Hooper has been Chairman of the Board of the
Company since 1997, and has been President of the Company since
1996. Mr. Hooper was previously, since 1994, Senior Vice
President-Marketing and Technology of the Company, having served
as Senior Vice President-Marketing of the Company from 1993 to
1994.
Robert W. Affholder has been Senior Executive Vice President
of the Company since 1996. Mr. Affholder was previously, since
1995, Senior Vice President-Chief Operating Officer of North
American Contracting Operations of the Company. Mr. Affholder was
President of Insituform Mid-America, Inc. ("IMA") from 1994 until
its acquisition by the Company in 1995, 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 1993 and a
Senior Vice President since 1993.
Robert L. Kelley has been Vice President and General Counsel
of the Company since 1996. Mr. Kelley was Assistant General
Counsel of Monsanto Company from prior to 1994 until joining the
Company.
Carroll W. Slusher has been Vice President-North America of
the Company since February 1999, having served as the Company's
Director of North American Pipe Rehabilitation from 1997 to 1998
and Divisional Vice President-North American Operations from 1998
until February 1999. From prior to 1994 until joining the Company,
Mr. Slusher was a regional manager with General Electric Company.
Antoine Menard has been Vice President-Europe of the Company
since February 1999, having served as the Company's Managing
Director-Europe from 1995 until that date. From prior to 1994
until joining the Company, Mr. Menard was a general manager with
the French oil group TOTAL.
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.
Since prepayment in 1997 of the industrial development bond used
to finance such facilities, 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 40 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 an industrial
development bond and secured by a mortgage on the premises and
equipment, which was prepaid in 1998.
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, Louisiana; 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 property is subject to a
mortgage.
The foregoing facilities are regarded by management as
adequate for the current and anticipated future requirements of
the Company's business.
ITEM 3. LEGAL PROCEEDINGS
Cat Proceeding. The Company, in 1990, initiated proceedings
against Cat Contracting, Inc. ("Cat"), Michigan Sewer Construction
Company, Inc. ("Michigan") and Inliner U.S.A., Inc. ("Inliner"),
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 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
U.S. District Court (the "District 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 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 those patents.
In October 1995, the District 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. Defendants filed a
notice of appeal to the United States Court of Appeals for the
Federal Circuit (the "Court of Appeals") and the Company filed a
notice of cross-appeal from the 1991 judgment.
In November 1996, the Court of Appeals 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 equivalents, holding that the District Court
had used incorrect claim construction. Accordingly, 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. The District Court, as affirmed by
the Court of Appeals in May 1997, also 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.
In September 1998, the District Court awarded the Company
approximately $21.9 million in damages for infringement for use of
both multiple cups and multiple needles, consisting of reasonable
royalties on work performed by defendants Cat, Michigan and
Inliner utilizing the Company's patented processes and enhanced
damages against Cat and Inliner for willful infringement of the
Company's serial vacuum impregnation patent and prejudgment
interest. In addition, the District Court awarded the Company
recovery of its attorney's and expert witness fees.
In September 1998, the Court of Appeals issued its opinion
affirming the December 1996 determination of the District Court
that Inliner's multiple-cup process infringed the Company's serial
vacuum impregnation patent, but reversed the lower court and ruled
that Inliner's process involving the use of multiple needles for
impregnation of cured-in-place tubes did not infringe the
Company's patent. The Company's petition to the Court of Appeals
for reconsideration of the court's determination regarding
infringement of the multiple needle impregnation method has been
denied and the District Court has permitted discovery on the
issue of when defendants and their licensees in fact ceased using
the multiple-cup impregnation method and other issues concerning
liability, which has been completed and all issues briefed. The
Company's petition for certiorari with the U.S. Supreme Court for
review of the Court of Appeals decision has been denied by the
Court.
The Company is unable to estimate what effect the findings in
discovery will have on the District Court's damage award, but the
result may be a substantial reduction in the amount of the damages
ultimately awarded to the Company. In addition, the Company is
unable to predict the likelihood of any recovery from defendants
of amounts ultimately awarded or whether defendants will elect to
appeal any decision awarding damages.
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 alleged 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 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 granting 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. Although the court denied
the Company's motion as to the antitrust claims of complementary
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.
In their third amended complaint, plaintiffs alleged 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 sought compensatory
and punitive damages. The District Court dismissed, under the
doctrine of res adjudicata, plaintiffs' allegations that the
Company had commenced the patent infringement proceedings with
knowledge that the subject patent was invalid. The District Court
also dismissed certain other claims of plaintiffs and held that
plaintiffs had failed to plead a case with respect to the balance
of its allegations. Following the District Court's acceptance of
plaintiffs' third amended complaint in June 1998, a joint notice
of dismissal executed by all parties was filed and, the District
Court issued its order of dismissal. Plaintiffs thereafter filed
a motion to withdraw the voluntary dismissal motion, which the
court rejected in July 1998.
In the interim, on June 30, 1998 plaintiffs refiled, as a new
suit, their third amended complaint, including Insituform Gulf
South, Inc., a subsidiary of the Company, as a defendant in
addition to the original defendants (Inliner U.S.A. and CAT
Contracting, Inc. v. Insituform Technologies, Inc., Insituform
Gulf South, Inc. and Insituform East, Inc. [Civil Action
H-98-20651] in the United States District Court for the Southern
District of Texas, Houston Division). Plaintiffs repeat their
previous allegations that defendants conspired to exercise
monopoly power under Sections 1 and 2 of the Sherman Act and/or
acted in concert to restrain trade in an unlawful manner under
Sections 1 and 2 of the Sherman Act, that defendants have engaged
in a pattern of discriminatory pricing and subsidization
specifically designed to eliminate a competitor and/or lessen
competition in violation of Section 2 of the Clayton Act, that
defendants have made false and misleading statements about the
plaintiffs and its products in violation of Section 43(a) of the
Lanham Act, and that defendants have engaged in tortious
interference with plaintiffs' business and relationships with its
licensees so as to constitute business disparagement. The Company
intends vigorously to continue to contest plaintiffs' claims.
Discovery in this matter has commenced.
AM-Liner Proceeding. In December 1998, the United States
District Court for the Northern District of California issued a
favorable judgment and permanent injunction in certain patent
infringement proceedings brought by the Company against AM-Liner
USA, Inc. ("AM-Liner"), American Pipe & Plastics Inc. ("APP") and
J.F. Pacific Liners, Inc. (Civil Action No. C95-01511 CAL). The
court found that APP's method of installing folded and formed
plastic pipe practiced by AM-Liner and its licensees literally
infringes certain of the NuPipe patents and, in addition to
injunctive relief against AM-Liner, APP and their licensees which
bars them from using their patented processes, awarded damages to
the Company in the amount of $3.1 million plus interest and costs.
In January 1999, the court conditionally stayed the injunction
with respect to work commenced or to commence before February 1,
upon posting of security by defendants in an amount equal to
damages per foot awarded by the court, and in February 1999
defendants filed a notice of appeal from the earlier judgment and
submitted a bond in the amount of the award and costs as security.
The Company is unable to predict the likelihood of any recovery
from defendants of amounts awarded.
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
Not applicable.
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,
1996, 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
------ ---- ---
1998
First Quarter $11.50 $ 7.75
Second Quarter 14.25 10.63
Third Quarter 15.75 11.88
Fourth Quarter 14.50 9.25
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
As of March 15, 1999, the number of record holders of the
Company's Common Stock was 1,432.
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 10 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 acquisition of IMA, 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,
-----------------------------------------------------
1998 1997 1996 1995(1) 1994(2)
----- ---- ---- ------- -------
(in thousands, except per share amounts)
INCOME STATEMENT DATA:
Revenues.................. $300,958 $320,640 $289,933 $ 272,203 $ 223,171
Operating income.......... 38,688 25,030 14,346 11,750(3) 29,232
Income (loss) from
continuing operations.... 17,887 9,644 4,492 (966)(4) 15,667
Net income (loss)......... 17,887 9,419 4,492 (966) 14,503
Basic and diluted earnings
(loss) per share:
Income (loss) from
continuing operations... .66 .36 .17 (.04) .57
Net income (loss)......... .66 .35 .17 (.04) .53(5)
BALANCE SHEET DATA:
Working capital........... 121,956 114,283 78,876 69,538 46,403
Current assets............ 170,105 161,273 130,372 120,711 106,926
Property and equipment.... 56,421 57,983 57,266 59,773 51,471
Total assets.............. 304,608 297,852 265,502 260,300 227,627
Long-term debt............ 112,131 111,440 82,384 82,813 47,347
Total liabilities......... 161,395 162,705 136,664 137,845 110,310
Total common stock and
other stockholders'
equity.................. 139,505 131,502 123,203 116,810 114,880
___________________
(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) Reflects $6.5 million in costs associated with the acquisition of IMA, 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.
(4) 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.
(5) The Company recorded a fourth quarter 1994 charge resulting from the abandonment of
efforts to find a purchaser for, and shut down of, its division engaged in the offsite
rehabilitation of downhole tubulars for the oil and gas industry.
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, 1998, 1997 and 1996, approximately
63.8%, 62.5% and 69.7%, respectively, of the Company's consolidated
revenues related to the Insituform Process.
RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared to Year Ended
December 31, 1997
Total rehabilitation revenues decreased 6.1% to $301.0 million
from $320.6 million in 1997. The principal reason for the decline
was decreased volume from the Company's corrosion and abrasion
operations in the United States and Latin America of $23.0 million.
The Company's pipe rehabilitation operations also experienced an
overall decline in revenues due to the elimination of non-core
projects, such as cleaning and inspection. For the year ended
December 31, 1998, as a result of the management committee
composition of Midsouth, the Company accounted for its investment
therein on an equity basis, which resulted in revenue of
$0.5 million in 1998, compared to $2.1 million in 1997, during
which Midsouth's results were consolidated with the Company prior
to April 1997. The Company's revenues were bolstered by increased
Insituform product sales and steel pipe sales from the Company's
corrosion and abrasion operations. Fluctuations in currency
exchange rates did not have a material impact on revenues in 1998.
The Company's gross profit from rehabilitation activities
increased 5.7% to $99.9 million from $94.5 million in 1997,
primarily due to improved gross profit from the Company's North
American and European pipeline rehabilitation operations. This
improvement was offset somewhat by a decrease in gross profit from
the Company's corrosion and abrasion operations due to the revenue
volume decrease. The overall gross profit margin for 1998 was 33.2%
compared to 29.5% in 1997, primarily due to improvements made in
productivity and efficiency in the Company's pipeline
rehabilitation operations. Much of this improvement came as a
result of extensive reorganization during 1997, where management
rationalized field crews and equipment throughout the organization.
In addition, in 1998 proportionately more projects with favorable
margins were undertaken, as a result of the elimination of lower
margin non-core projects such as cleaning and inspection, which was
coupled with improved pricing on core pipeline rehabilitation
projects.
In 1998, selling, administrative and general expenses
decreased 4.3% to $55.3 million from $57.8 million in 1997. 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. These decreases were offset by
increases in spending related to information systems, and patent
related activities. As a percentage of revenues, selling,
administrative and general expenses increased in 1998 to 18.4% from
18.0% in 1997. This increase was primarily attributable to lower
revenue volume in 1998.
In 1998, strategic marketing and product development costs
decreased 15.7% to $5.9 million from $7.0 million in 1997. This
decrease was primarily attributable to controlled spending in
marketing, along with decreased personnel in engineering, offset
somewhat by increased spending in research and development.
In 1997, the Company recorded in operating expense an unusual
item of $4.0 million for employee severance and costs of moving
employees and offices related to the restructuring of its corporate
headquarters and related facilities, which did not recur in the
current year. In addition, the Company recorded $0.6 million (prior
to any effect of taxes) in non-recurring expenses attendant to
activities leading to the settlement of a proxy contest attendant
to the annual stockholders meeting initiated by a group that
included two directors of the Company.
Interest expense in 1998 increased 3.4% to $9.1 million from
$8.8 million in 1997, due primarily to the effect of borrowings
resulting from the senior note financing completed in February
1997. See "Liquidity and Capital Resources" below.
Other income increased in 1998 to $2.3 million from $0.6
million in 1997, due principally to increased investment income of
$1.3 million, resulting from more invested cash and cash
equivalents in 1998.
In 1998, taxes on income increased 84.5% to $13.1 million from
$7.1 million in 1997, due principally to an increase in income
before taxes on income of $14.9 million. The Company's 1998
effective tax rate was 41.1%, as compared to 41.7% in 1997. This
decrease was principally due to a more favorable mix of income
generated in jurisdictions with lower tax rates in 1998 compared to
1997. As indicated in Note 15 of the Notes to Consolidated
Financial Statements included in response to "Item. 14 Exhibits,
Financial Statement Schedules and Reports on Form 8-K", the 1998
and 1997 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
was classified as extraordinary in the Company's results of
operations for 1997.
As a result of the foregoing, net income for 1998 increased
90% to $17.9 million, representing a 5.9% return on revenue,
compared to $9.4 million for 1997, when a 2.9% return on revenue
was achieved. The Company also achieved a substantial improvement
in return on average stockholders' equity of 13.2% for 1998 as
compared to 7.4% for 1997.
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 principal 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
accounted for its investment in Midsouth 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. Such amount also included $0.6 million
incurred in settlement of the proxy contest attendant to the annual
stockholders meeting. 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 $8.8 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.
Taxes on income increased 42.0% to $7.1 million from $5.0
million in 1996 due principally 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 15 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. Net
income in 1997 represented a 2.9% return on revenue, compared to
1.5% in the prior year. Net income in 1997 represented a 7.4%
return on stockholders equity, compared to 3.6% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the balance of cash, U.S. Treasury
bills, and short-term investments was $76.9 million, compared to
$45.7 million at December 31, 1997. The increase in cash and cash
equivalents in 1998 resulted from the Company's continued strong
positive generation of cash from operating activities, amounting to
$55.6 million in 1998 compared to $27.2 million in 1997, and a
decrease in capital spending in 1998 to $13.4 million from $16.6
million in 1997, offset by a stock repurchase program undertaken in
1998, in which $9.8 million was spent. Working capital was $122.0
million at December 31, 1998 compared to $114.3 million at December
31, 1997.
The principal reason for the favorable increase in cash from
operations, to $55.6 million in 1998 compared to $27.2 million in
the prior year, was increased net income of $8.5 million compared
to the prior year, along with a favorable change in operating
assets and liabilities of $17.8 million, compared to an unfavorable
change in 1997 of $2.6 million. Trade receivables, together with
costs and estimated earnings in excess of billings and retainage
under construction contracts, decreased 16.1% to $74.4 million from
$88.7 million at December 1997, primarily attributable to stronger
management control over collections and, to a lesser extent,
decreased revenue volume in 1998. The collection cycle for
construction receivables is generally longer than that of 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 $13.4 million in 1998, compared to
$16.6 million in 1997. Capital expenditures generally reflect
replacement equipment required by the Company's contracting
operations. During 1997, capital expenditures also reflected
approximately $3.5 million related to moving the Company's
corporate headquarters to Chesterfield and approximately $2.9
million for construction of the Company's new research and
development center, projects that were completed during 1998 with
an additional cost of approximately $0.5 million.
While the Company expects that routine capital spending will
continue at the current level in the foreseeable future, 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 expenditures of approximately $1.6 million in connection
with the installation of an electronic data collection system in
each of the Company's North American rehabilitation operations
during the course of 1999, of which $1.0 million was spent as of
the end of 1998, and continual accounting system upgrades and
modifications. See "Year 2000" below for information concerning the
impact of year 2000 issues on the Company's operations.
Financing activities used $11.2 million in 1998, as compared
to cash provided of $23.4 million in 1997. In July 1998, the
Company announced that its Board of Directors had authorized the
repurchase of up to 2,700,000 shares of the Company's Common Stock,
to be made from time to time over the next five years in open
market transactions. The amount and timing of purchases will be
dependent upon a number of factors, including the price and
availability of the Company's shares, general market conditions and
competing alternative uses of funds, and may be discontinued at any
time. During the year ended December 31, 1998, the Company spent
$9.8 million for the repurchase of 735,900 shares. The repurchased
shares will be held as treasury stock.
In February 1997, the Company completed the sale, in a private
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. In 1998,
the Company made principal payments totaling $1.8 million relating
to the Company's existing debt.
The Senior Notes 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.
In August 1997, the Company entered into a credit agreement
(the "Credit Agreement"), whereby, as amended effective in
September 1998, the lender will make available to the Company,
until September 1, 2001 (the "Maturity Date"), a revolving credit
line of up to $20,000,000 aggregate principal amount for working
capital and permitted acquisitions, including $10,000,000 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 note purchase agreements pursuant to which the Senior
Notes were acquired, and the Credit Agreement, 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, 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. The 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 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, $1.0 million of which was paid
in connection with closing, $0.6 million of which is due at the
first anniversary of closing, and the remainder of which is due on
the second anniversary of closing. In September 1998, the Company
completed its acquisition of 80% of the shares of Video Injection.
The purchase price for the Initial Shares was $5.0 million, $2.4
million of which was paid at closing, $1.3 million of which is due
on the first anniversary of closing and $1.3 million of which is
due on the second anniversary of closing, such additional
installments secured by the Company's letter of credit
arrangements. On the fifth anniversary of closing (or earlier, in
specified events), the Company will purchase the remaining 20% of
the shares of Video Injection pursuant to a formula based on Video
Injection's results of operations.
In February 1999, the Company offered $2.50 for each share of
outstanding common stock and Class B common stock of Insituform
East (an aggregate of 4,356,862 shares of which were outstanding on
February 1, 1999). In March 1999, the Company withdrew its offer
after not receiving any substantive response from Insituform East.
See "Item 1. Business-Ownership Interests in Licensees" for
information describing the Company's notice of termination of its
joint venture with Insituform East which does business under the
name Midsouth Partners.
Management believes its current working capital will be
adequate to meet its requirements for the foreseeable future.
YEAR 2000
The "year 2000" problem relates to computer systems that have
time and date-sensitive programs that were designed to read years
beginning with "19," but may not properly recognize the year 2000.
If a computer system or software application used by the Company or
a third party dealing with the Company fails because of the
inability of the system or application to properly read the year
"2000," the results may adversely affect the Company.
Accordingly, the Company is reviewing its internal computer
programs and systems to ensure year 2000 compliance. During the
year ended December 31, 1998, the Company established project teams
to address year 2000 risks facing the Company, and its customers
and suppliers, and engaged an internationally-recognized consulting
firm to assist the team with implementing programs addressing
preparedness of the Company. The project team is coordinating the
identification and implementation of changes to computer hardware
and software applications that will attempt to ensure the
availability and integrity of the Company's information systems.
The project team is also reviewing and analyzing voice and data
communications systems, building systems, manufacturing and
operations equipment with embedded components (including HVAC,
security and fire protection), and field operations equipment to
ensure the reliability of operational systems and manufacturing
processes, both in North America and in Europe.
The project team has identified the Company sites and entities
that may harbor assets at risk, collecting pertinent information,
establishing year 2000 disposition strategies and assessing and
reporting risks. The Company's manufacturing system has been
modified so as to achieve year 2000 compliance in all material
respects, and the Company has identified additional systems that
will be replaced by year end. The Company's project team provides
consulting services where needed in the areas of project planning
and estimating, testing and technical issues, and runs remedial
projects as appropriate.
The Company also faces risk to the extent that suppliers of
products, services and systems purchased by the Company and others
with whom the Company transacts business on a worldwide basis do
not comply with year 2000 requirements. Principal areas of the
Company's review are banking systems (and the effects on
receivables, payables and payroll), telecommunications, suppliers
to the Company's manufacturing and operating units (such as felt
and resin), transportation systems (both inbound and outbound), and
customer information systems for order placement and release and
payment of invoices. The Company's project team has initiated
formal communications with representatives from significant outside
parties that transact with the Company to determine the extent to
which the Company is vulnerable to failure by them to remediate
their own year 2000 issues. In the case of suppliers to the
Company's manufacturing and operating units, verification will
include site visits. The Company's strategy will entail proactive
compliance assessment in the case of these parties when
appropriate, as well as maintaining paper records of transactions
when advisable and inventory stocks of key materials.
The Company expects to complete its year 2000 compliance
program during 1999 and, based on information collected, presently
believes that any significant issues within its own operations and
facilities will be addressed in a timely manner. However, while the
Company has not identified material difficulties presented by its
suppliers or in its financial or communications support that are
not being addressed, and while the estimated cost of the Company's
efforts is not expected to be material to the Company's financial
position or any year's results of operations, there can be no
assurance to this effect.
Based on management's current assessment that no material
exposure to significant business interruption exists, the Company
has not adopted any formal contingency plan in the event its year
2000 project is not completed in a timely manner, or in the event
unforeseen difficulties arise. The Company will appropriately
modify its strategy as additional circumstances come to its
attention, but there can be no assurance that the Company will
timely identify and remediate all significant year 2000 problems,
and that remedial efforts will not involve significant time and
expense, or that such problems will not have a material adverse
effect on the Company's business, results of operations or
financial position.
MARKET RISK
The Company conducts its rehabilitation activities on a
worldwide basis, giving rise to exposures related to changes in
foreign currency exchange rates. For example, foreign currency
exchange rate movements may create a degree of risk to the
Company's operations by affecting: (i) the U.S. dollar value of
sales made in foreign currencies, and (ii) the U.S. dollar value of
costs incurred in foreign currencies. In addition, the Company is
exposed to market risks related to changes in interest rates. The
Company's objective is to minimize the volatility in earnings and
cash flow from these risks.
The Company has selectively used, and will continue to use,
forward exchange contracts in order to manage its currency
exposure. Forward exchange contracts are executed by the Company
only with large, reputable banks and financial institutions and are
denominated in currencies of major industrial countries. Given its
assessment of such risk, the Company has not deemed it necessary to
offset any interest rate exposure. Furthermore, the Company does
not enter into transactions involving derivative financial
instruments for speculative trading purposes.
Based on the Company's overall currency exchange rate and
interest rate exposure at December 31, 1998, a ten percent
weakening in the U.S. dollar across all currencies or ten percent
increase in interest rates would not have a material impact on the
financial position, results of operations or cash flows of the
Company. These effects of hypothetical changes in currency exchange
rates and in interest rates, however, ignore other effects the same
movement may have arising from other variables, and actual results
could differ from the sensitivity calculations of the Company. The
Company regularly assesses these variables, establishes policies
and business practices to protect against the adverse effects of
foreign currency and interest rate fluctuations and does not
anticipate any material losses generated by these risks.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
For information concerning this item, see "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations-Market Risk," which information is
incorporated herein by reference.
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.
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 1999 Annual Meeting of Stockholders (the "1999
Proxy Statement"), which information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
For information concerning this item, see the 1999 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 1999 Proxy
Statement, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning this item, see the 1999 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, 1998, the
Company did not file a Current Report on Form 8-K. The Company
filed Current Reports on Form 8-K dated, respectively, February 16,
1999, March 2, 1999 and March 10, 1999 reporting its subsequently
withdrawn offer to acquire Insituform East, and its termination of
the Midsouth license. No financial statements were filed as part of
any such report.
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 26, 1999 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 26, 1999
Officer and Director
s/William A. Martin
- -----------------------
William A. Martin Principal Financial March 26, 1999
and Accounting Officer
s/Robert W. Affholder
- -----------------------
Robert W. Affholder Director March 26, 1999
s/Paul A. Biddelman
- -----------------------
Paul A. Biddelman Director March 26, 1999
s/Stephen P. Cortinovis
- -----------------------
Stephen P. Cortinovis Director March 26, 1999
s/Thomas Kalishman
- -----------------------
Thomas Kalishman Director March 26, 1999
s/Silas Spengler
- -----------------------
Silas Spengler Director March 26, 1999
s/Sheldon Weinig
- -----------------------
Sheldon Weinig Director March 26, 1999
s/Russell B. Wight, Jr.
- -----------------------
Russell B. Wight, Jr. Director March 26, 1999
s/Alfred L. Woods
- -----------------------
Alfred L. Woods Director March 26, 1999
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants............ F-2
Report of Management................................. F-3
Consolidated Balance Sheets, December 31,
1998 and 1997...................................... F-4
Consolidated Statements of Operations for
each of the three years in the period
ended December 31, 1998............................ F-5
Consolidated Statements of Stockholders'
Equity for each of the three years in
the period ended December 31, 1998................. F-6
Consolidated Statements of Cash Flows
for each of the three years in the
period ended December 31, 1998..................... F-7
Notes to Consolidated Financial Statements........... F-9
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, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended
December 31, 1998. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 17, 1999
F-2
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and
objectivity of financial information included in this annual
report. The financial statements have been prepared in
conformity with generally accepted accounting principles applied
on a consistent basis.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts.
Although the financial statements reflect all available
information and management's judgment and estimates of current
conditions and circumstances, and are prepared with the
assistance of specialists within and outside the Company, actual
results could differ from those estimates.
Management has established and maintains an internal control
structure to provide reasonable assurance that assets are
safeguarded against loss from unauthorized use or disposition,
that the accounting records provide a reliable basis for the
preparation of financial statements and that such financial
statements are not misstated due to material fraud or error.
Internal controls include the careful selection of associates,
the proper segregation of duties and the communication and
application of formal policies and procedures that are consistent
with high standards of accounting and administrative practices.
An important element of this system is a comprehensive internal
audit program.
Management continually reviews, modifies and improves its systems
of accounting and controls in response to changes in business
conditions and operations and in response to recommendations in
the reports prepared by the independent public accountants and
internal auditors.
Management believes that it is essential for the Company to
conduct its business affairs in accordance with the highest
ethical standards and in conformity with the law. This standard
is described in the Company's policies on business conduct, which
are publicized throughout the Company.
Anthony W. Hooper William A. Martin
Chairman, President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
F-3
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED BALANCE SHEETS -- AS OF DECEMBER 31, 1998 AND 1997
(In thousands, except share information)
ASSETS 1998 1997
- ------ ---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 76,904 $ 45,734
Trade receivables, less allowance for doubtful
accounts of $2,909 and $2,587 52,280 58,660
Retainage under construction contracts 12,368 14,480
Costs and estimated earnings in excess of billings 9,792 15,551
Inventories 11,282 12,214
Prepaid expenses and other 7,479 14,634
--------- ---------
Total current assets 170,105 161,273
--------- ---------
PROPERTY AND EQUIPMENT, less accumulated depreciation 56,421 57,983
--------- ---------
OTHER ASSETS:
Goodwill, less accumulated amortization of
$14,951 and $12,483, respectively 56,504 54,133
Patents and patent applications, less accumulated
amortization of $5,159 and $4,496 11,172 11,610
Investments in licensees and affiliated companies 5,234 5,499
Noncompete agreements, less accumulated amortization
of $5,324 and $4,282 851 1,744
Other 4,321 5,610
--------- ---------
Total other assets 78,082 78,596
--------- ---------
Total assets $ 304,608 $ 297,852
========= =========
The accompanying notes are an integral part of these balance sheets.
F-4
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED BALANCE SHEETS -- AS OF DECEMBER 31, 1998 AND 1997
(In thousands, except share information)
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------ ---- ----
CURRENT LIABILITIES:
Current maturities of long-term debt and $ 2,918 $ 2,120
notes payable
Accounts payable and accruals 45,231 44,870
--------- ---------
Total current liabilities 48,149 46,990
LONG-TERM DEBT, less current maturities 112,131 111,440
DEFERRED INCOME TAXES - 3,258
OTHER LIABILITIES 1,115 1,017
--------- ---------
Total liabilities 161,395 162,705
--------- ---------
MINORITY INTERESTS 3,708 3,645
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, undesignated, $.10 par shares
authorized 2,000,000; none outstanding - -
Common stock, $.01 par shares authorized 40,000,000;
shares outstanding 27,302,304 and 27,214,718 273 272
Additional paid-in capital 68,931 68,119
Retained earnings 86,355 68,468
--------- ---------
155,559 136,859
Treasury stock 991,701 and 255,801 shares (13,097) (3,269)
Cumulative foreign currency translation adjustments (2,957) (2,088)
--------- ---------
Total stockholders' equity 139,505 131,502
--------- ---------
Total liabilities and stockholders' equity $ 304,608 $ 297,852
========= =========
The accompanying notes are an integral part of these balance sheets.
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands, except per share amounts)
1998 1997 1996
---- ---- ----
REHABILITATION REVENUES $ 300,958 $ 320,640 $ 289,933
--------- --------- ---------
COST OF REHABILITATION 201,056 226,152 201,219
--------- --------- ---------
GROSS PROFIT 99,902 94,488 88,714
--------- --------- ---------
OPERATING COSTS AND EXPENSES:
Selling, administrative and general 55,305 57,845 60,181
Strategic marketing and product development 5,909 7,007 7,689
Unusual items - 4,606 6,498
--------- --------- ---------
TOTAL OPERATING COSTS AND EXPENSES 61,214 69,458 74,368
--------- --------- ---------
OPERATING INCOME 38,688 25,030 14,346
--------- --------- ---------
OTHER (EXPENSE) INCOME:
Interest expense (9,099) (8,750) (6,223)
Other 2,270 647 1,290
--------- --------- ---------
TOTAL OTHER EXPENSE (6,829) (8,103) (4,933)
--------- --------- ---------
INCOME BEFORE TAXES ON INCOME 31,859 16,927 9,413
TAXES ON INCOME 13,079 7,067 4,985
--------- --------- ---------
INCOME BEFORE MINORITY INTERESTS AND
EQUITY IN EARNINGS 18,780 9,860 4,428
MINORITY INTERESTS (849) (519) (377)
EQUITY IN (LOSSES) EARNINGS OF AFFILIATED
COMPANIES (44) 303 441
--------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 17,887 9,644 4,492
EXTRAORDINARY ITEM - Loss on early
retirement of debt (net of income tax
benefits of $142) - (225) -
--------- --------- ---------
NET INCOME $ 17,887 $ 9,419 $ 4,492
========= ========= =========
EARNINGS (LOSS) PER SHARE OF COMMON STOCK
AND COMMON STOCK EQUIVALENTS:
Net income per common share basic-
Income before extraordinary item $ .67 $ .36 $ .17
Extraordinary loss, net of income
tax benefits - (.01) -
--------- --------- ---------
Net income per common share
basic $ .67 $ .35 $ .17
========= ========= =========
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands, except per share amounts)
(continued)
1998 1997 1996
---- ---- ----
Net income per common share
dilutive-
Income before extraordinary item $ .66 $ .36 $ .17
Extraordinary loss, net of income
tax benefits - (.01) -
--------- --------- ---------
Net income per common share -
dilutive $ .66 $ .35 $ .17
========= ========= =========
The accompanying notes are an integral part of these statements.
F-5
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands, except number of shares)
Common Stock Additional
---------------- Paid-In Retained Treasury
Shares Amount Capital Earning Stock
------ ------ ------- -------- --------
BALANCE, December 31, 1995 27,104,940 $ 271 $ 67,427 $ 54,557 $ -
Net income - - - 4,492 -
Issuance of common stock upon exercise
of options, including income tax
benefit of $15 9,391 - 76 - -
Stock issued in conjunction with
litigation settlement 30,000 - 321 - -
Foreclosure of note receivable from
affiliates - - - - (3,269)
Cumulative foreign currency translation
adjustment - - - - -
---------- ----- -------- -------- ------
BALANCE, December 31, 1996 27,144,331 271 67,824 59,049 (3,269)
Net income - - - 9,419 -
Issuance of common stock upon exercise
of options 70,387 1 295 - -
Cumulative foreign currency translation
adjustment - - - - -
---------- ----- -------- -------- ------
BALANCE, December 31, 1997 27,214,718 272 68,119 68,468 (3,269)
Net income - - - 17,887 -
Issuance of common stock upon exercise
of options 87,586 1 812 - -
Common stock repurchased - - - - (9,828)
Cumulative foreign currency translation
adjustment - - - - -
---------- ----- -------- -------- ------
BALANCE, December 31, 1998 27,302,304 $ 273 $ 68,931 $ 86,355 (13,097)
========== ===== ======== ======== =======
The accompanying notes are an integral part of these statements.
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands, except number of shares)
(CONTINUED)
Cumulative
Foreign Notes
Currency Receivable Total
Translation From Stockholders' Comprehensive
Adjustments Affiliates Equity Income
----------- ---------- ------------- ------------
BALANCE, December 31, 1995 $(1,821) $ (3,624) $116,810 $ -
Net income - - 4,492 4,492
Issuance of common stock upon
exercise of options, including
income tax benefit of $15 - - 76 -
Stock issued in conjunction with
litigation settlement - - 321 -
Foreclosure of note receivable from
affiliates - 3,624 355 -
Cumulative foreign currency
translation adjustment 1,149 - 1,149 1,149
-------- ------- ------- -------
BALANCE, December 31, 1996 (672) - 123,203 $ 5,641
======== ======= ======= =======
Net income - - 9,419 $ 9,419
Issuance of common stock upon
exercise of options - - 296 -
Cumulative foreign currency
translation adjustment (1,416) - (1,416) (1,416)
-------- ------- ------- -------
BALANCE, December 31, 1997 (2,088) - 131,502 $ 8,003
======== ======= ======= =======
Net income - - 17,887 $17,887
Issuance of common stock upon
exercise of options - - 813 -
Common stock repurchased - - (9,828) -
Cumulative foreign currency
translation adjustment (869) - (869) (869)
-------- ------- -------- -------
BALANCE, December 31, 1998 $(2,957) $ - $139,505 $17,018
======== ======= ========= =======
The accompanying notes are an integral part of these statements.
F-6
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,887 $ 9,419 $ 4,492
Adjustments to reconcile net income to net
cash provided by operating activities-
Minority interests in net income 849 519 377
Depreciation and amortization 19,095 19,240 19,180
Other (627) 1,095 1,909
Deferred income taxes 1,174 728 (279)
Equity in earnings (losses) of affiliated
companies 44 (303) (441)
Changes in operating assets and liabilities,
net of effects of businesses purchased-
Receivables 13,247 (5,805) (8,217)
Inventories 1,049 2,766 (15)
Prepaid expenses and other 1,770 1,032 2,510
Other assets 999 (526) 609
Accounts payable and accruals 69 (993) 8,030
-------- --------- -------
Net cash provided by operating
activities 55,556 27,172 28,155
-------- --------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (13,416) (16,552 (18,187)
Proceeds from (investments in) licensees
and affiliated companies 236 140 (1,141)
Patents and patent application expenditures (425) (2,227) (1,772)
Purchases of businesses, net of cash acquired (1,451) - -
Proceeds on disposal of property and equipment 1,738 426 780
-------- --------- -------
Net cash used in investing activities (13,318) (18,213) (20,320)
-------- --------- -------
(Continued on the following page)
F-7
1998 1997 1996
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock $ 813 $ 296 $ 61
Purchases of treasury stock (9,828) - -
Proceeds from long-term debt 124 110,515 5,868
Principal payments on long-term debt (1,776) (87,105) (11,775)
Minority interests - (178) (562)
(Decrease) increase in short-term borrowings (565) (124) 333
-------- ------ -------
Net cash (used in) provided by
financing activities (11,232) 23,404 (6,075)
-------- ------ -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 164 (105) 300
-------- ------ -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 31,170 32,258 2,060
CASH AND CASH EQUIVALENTS, beginning of year 45,734 13,476 11,416
-------- ------ -------
CASH AND CASH EQUIVALENTS, end of year $ 76,904 $ 45,734 $ 13,476
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for-
Interest $ 9,115 $ 5,849 $ 7,478
Income taxes 13,223 1,686 4,864
NONCASH INVESTING AND FINANCING ACTIVITIES:
Additional paid-in capital increased by
reduction in income taxes payable for tax
benefit arising from exercise of stock
options $ - $ - $ 15
Deferred consideration for businesses acquired 3,671 - -
Treasury stock acquired in connection with
foreclosure of director note receivable - - 3,624
Tax benefit arising from foreclosure of
director note receivable - - 760
Stock issued in conjunction with litigation
settlement - - 321
The accompanying notes are an integral part of these statements.
F-8
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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) (Tite Liner) 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 55%
owned Mexican subsidiary, United Pipeline de Mexico, S.A.; a 66%
owned French subsidiary, Insituform France, S.A. and an 80%
owned French subsidiary, Video Injection SA. 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 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 from those dates. Any excess of
acquisition costs over the fair value of net assets acquired is
included in the balance sheet as goodwill.
F-9
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
greater than 20% but less than 50% are accounted for on the
equity method. In addition, the Company has accounted for its
interest in Midsouth Partners, a domestic partnership 57-1/2%
owned by the Company, on the equity method, as a consequence of
Midsouth's management in a seven-member management committee
controlled by the minority partner.
Inventories
Inventories are valued at the lower of cost (first-in,
first-out) or market.
F-10
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.
Long-Lived Assets
The Company reviews for impairment of long-lived assets whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recovered from their undiscounted
future cash flows.
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
Earnings per share has been calculated using the following share
information:
F-11
1998 1997 1996
---- ---- ----
Weighted average number of common
shares used for Basic EPS 26,777,879 26,926,148 27,036,008
Effect of dilutive stock options
and warrants 280,180 46,900 76,838
---------- ---------- ----------
Weighted average number of common
shares and dilutive potential
common stock used in diluted EPS 27,058,059 26,973,048 27,112,846
========== ========== ==========
New Accounting Pronouncement
The Company intends to adopt SFAS 133, "Accounting for
Derivative Instrument and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments
and hedging activities in fiscal 2000. The Company believes
that SFAS 133 will not have a material impact on its results of
operations or financial position.
Reclassifications
Certain prior year amounts in the consolidated financial
statements have been reclassified to conform to the current year
presentation.
3. BUSINESS ACQUISITIONS:
In March 1998, the Company concluded the acquisition of the
entire minority interest in its Chilean subsidiary for an
aggregate price of approximately $2.1 million, $1.0 million of
which was paid in cash at closing, $0.6 million of which is due
at the first anniversary of closing, and the remainder of which
is due on the second anniversary of closing. The acquisition
resulted in additional goodwill of $1.3 million and a reduction
of minority interest of $0.8 million.
In September 1998, the Company completed its acquisition of 80%
of the shares (the "Initial Shares") of Video Injection SA
("Video Injection"), a French company that utilizes
multifunctional robotic devices developed in connection with the
inspection and repair of pipelines. The purchase price for the
Initial Shares was 28,000,000FF ($5.0 million), 13,500,000FF
($2.4 million) of which was paid in cash at closing, 7,020,000FF
($1.3 million) of which is due on the first anniversary of
closing and 7,480,000FF ($1.3 million) of which is due on the
second anniversary of closing, such additional installments are
secured by the Company's letter of credit arrangements. On the
fifth anniversary of closing (or earlier, in specified events),
the Company will purchase the remaining 20% of the shares of
Video Injection pursuant to a formula based on Video Injection's
F-12
results of operations. The Company has obtained noncompetition
agreements from the two principals of Video Injection (who
remain employed by Video Injection) that extend three years
beyond the period of employment. The purchase price was
allocated between tangible assets of $.8 million and goodwill of
$4.2 million.
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 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. The Company and
Messrs. Kalishman and Affholder subsequently 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.
5. ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Activity in the allowance for doubtful accounts is summarized as
follows for the years ended December 31 (in thousands):
F-13
1998 1997 1996
------- ------- -------
Balance, at beginning of period $ 2,587 $ 1,031 $ 974
Charged to expense 1,679 1,658 289
Uncollected balances written off,
net of recoveries (1,357) (102) (232)
-------- ------- -------
Balance, at end of period $ 2,909 $ 2,587 $ 1,031
======= ======= =======
6. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS:
Costs and estimated earnings on uncompleted contracts consist of
the following at December 31 (in thousands):
1998 1997
------- -------
Costs incurred on uncompleted contracts $ 111,204 $123,808
Estimated earnings 38,460 33,985
--------- --------
149,664 157,793
Less - Billings to date (145,278) (144,794)
--------- --------
$ 4,386 $ 12,999
========= ========
Included in the accompanying balance sheets:
Costs and estimated earnings in excess of
billings $ 9,792 $ 15,551
Billings in excess of costs and estimated
earnings on uncompleted contracts (Note 11) (5,406) (2,552)
--------- --------
$ 4,386 $ 12,999
========= ========
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):
F-14
1998 1997
--------- ---------
Raw materials $ 1,542 $ 2,127
Work-in-process 2,959 2,896
Finished products 1,144 1,177
Construction materials 5,637 6,014
--------- ---------
$ 11,282 $ 12,214
========= =========
8. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31
(in thousands):
1998 1997
--------- ---------
Land and land improvements $ 2,621 $ 2,659
Buildings and improvements 21,928 15,824
Machinery and equipment 81,283 82,630
Furniture and fixtures 8,883 8,820
Autos and trucks 4,822 2,456
Construction in progress 3,731 5,987
--------- ---------
123,268 118,376
Less- Accumulated depreciation (66,847) (60,393)
--------- ---------
$ 56,421 $ 57,983
========= =========
9. INVESTMENTS IN LICENSEES AND AFFILIATED COMPANIES:
Investments in licensees and affiliated companies consist of the
following at December 31 (in thousands):
1998 1997
--------- ---------
Insituform Rohrsanierungstechnik
GmbH (50%) $ 3,120 $ 2,855
Midsouth Partners (57-1/2%) 1,836 2,217
Other 50% owned joint ventures 278 427
--------- ---------
$ 5,234 $ 5,499
========= =========
Beginning in April 1997, the Company began accounting for its
investment in Midsouth Partners on the equity method, as a
consequence of the composition of Midsouth's management
committee to include a majority of members named by the minority
partner.
10. LONG-TERM DEBT AND NOTES PAYABLE:
Long-term debt consists of the following at December 31 (in
thousands):
F-15
1998 1997
--------- ---------
LONG-TERM DEBT:
7.88% senior notes, payable in $15,715
annual installments beginning February
2001 through 2007, with interest payable
semiannually $ 110,000 $ 110,000
DEFERRED PURCHASE CONSIDERATION:
Promissory notes to minority owners of
Video Injection, payable in two
installments of FF 7.0 million
($1.2 million) and FF 7.5 million
($1.3 million) on the first and second
anniversaries of closing, secured by
letter of credit arrangements 2,566 -
Promissory notes to former minority owners
of United Sistema de Tuberias Ltda., due
in two installments of $0.6 million and
$0.5 million on the first and second
anniversaries of closing 1,105 -
OTHER NOTES 681 2,329
--------- ---------
114,352 112,329
Less- Current maturities (2,221) (889)
--------- ---------
$ 112,131 $ 111,440
========= =========
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 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 Notes 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 guarantees are given by them to
certain other lenders.
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.
F-16
Costs of approximately $400,000 ($225,000 after tax) associated
with a prior credit facility were written off and have been
classified as an extraordinary item in the 1997 results of
operations.
At December 31, 1998 and 1997, the estimated fair value of the
Company's long-term debt was approximately $111.6 million and
$118.1 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
------------------------ --------
1999 $ 2,221
2000 2,131
2001 15,715
2002 15,715
2003 15,715
After 2003 62,855
---------
Total $ 114,352
=========
Effective August 20, 1997, the Company entered into a Loan
Agreement dated such date (the "Credit Agreement") with
NationsBank, N.A. ("NationsBank"), whereby, as amended effective
September 15, 1998, NationsBank will make available to the
Company, until September 1, 2001 (the "Maturity Date"), a
revolving credit line of up to $20,000,000 aggregate principal
amount for working capital and permitted acquisitions, including
$10,000,000 available for standby and commercial letters of
credit, of which $5,774,000 was outstanding at December 31, 1998.
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
guarantees with respect to the Senior Notes.
F-17
The Company has various lines of credit related to its foreign
entities. These lines are secured by a parent company guarantee
and, in some cases, the entities' real property. Total amounts
outstanding at December 31, 1998 and 1997, were $697,000 and
$1,231,000, respectively.
11. ACCOUNTS PAYABLE AND ACCRUALS:
Accounts payable and accruals consist of the following at
December 31 (in thousands):
1998 1997
---- ----
Accounts payable - trade $ 13,471 $ 8,071
Compensation and profit sharing 10,515 11,466
Billings in excess of costs and earnings 5,406 2,552
Interest 3,219 3,232
Accrued litigation and fees 1,914 2,778
Merger and restructuring 1,827 2,464
Taxes 920 3,172
Other 7,959 11,135
-------- -------
$ 45,231 $44,870
======== =======
12. STOCKHOLDERS' EQUITY:
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 1,850,000 and 1,000,000
shares of common stock, respectively. 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 four or five year period and have an
expiration date of up to five or ten years after grant.
The Company applies APB Opinion No. 25, in accounting for stock
option grants. 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 1998, 1997 and
1996, respectively: expected volatility of 46%, 45% and 44%;
risk-free interest rates of 5.1%, 5.8% and 6.1%; 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):
F-18
1998 1997 1996
-------- -------- --------
Net income:
As reported $ 17,887 $ 9,419 $ 4,492
Pro forma 16,833 8,867 4,116
Basic earnings per share:
As reported .67 .35 .17
Pro forma .63 .33 .15
Diluted earnings per share:
As Reported .66 .35 .17
Pro forma .62 .33 .15
Based on the Black-Scholes option-pricing model, the weighted
average fair value of options granted in 1998, 1997 and 1996 was
$6.48, $4.16 and $3.84, 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, 1998:
Options Outstanding Options Exercisable
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Price 1998 Life Price 1998 Price
- -------------- ------------- ----------- -------- -------------- --------
$ 4.32 to 9.79 825,757 6.3 years $ 8.34 581,317 $ 8.17
$10.00 to $15.00 676,010 5.1 years $13.15 511,960 $13.03
--------- ---------
1,501,767 5.8 years $10.51 1,093,277 $10.45
========= =========
Changes in options outstanding are summarized as follows:
Weighted
Average
Exercise
Shares Price
-------- --------
Balance, December 31, 1995 1,414,115 $12.90
Granted 325,000 $ 9.14
Exercised (9,316) $ 7.92
Canceled (132,420) $15.02
--------- ------
Balance, December 31, 1996 1,597,379 $12.22
Granted 568,900 $ 8.75
Exercised (70,387) $ 4.24
Canceled (235,885) $11.18
--------- ------
F-19
Balance, December 31, 1997 1,860,007 $11.59
Granted 306,000 $13.68
Exercised (87,586) $ 9.28
Canceled (576,654) $15.87
Balance, December 31, 1998 1,501,767 $10.51
=========
At December 31, 1998, 2,850,000 shares of common stock were
reserved pursuant to stock option plans.
13. RELATED-PARTY TRANSACTIONS:
During the three years ended December 31, 1998, the Company
leased tunnelling equipment from a partnership whose partners
consisted of two officers and directors of the Company, one of
whom is now deceased. All transactions were made at arm's
length. During 1998, 1997 and 1996, the Company paid the
partnership $481,000, $317,000 and $384,575, respectively, under
such arrangements.
14. OTHER INCOME (EXPENSE):
Other income (expense) is comprised of the following at December
31 (in thousands):
1998 1997 1996
------ ------ ------
Investment income $ 3,130 $ 1,842 $ 1,059
Provision for excess equipment - (722) -
Other (860) (473) 231
------- -------- -------
$ 2,270 $ 647 $ 1,290
======= ======== =======
15. TAXES ON INCOME:
Income (loss) from continuing operations before taxes on income is
as follows for the years ended December 31 (in thousands):
1998 1997 1996
------ ------ ------
Domestic $25,803 $ 9,432 $10,182
Foreign 6,056 7,495 (769)
------- ------- -------
Total $31,859 $16,927 $ 9,413
======= ======= =======
Provisions for taxes on income from continuing operations consist
of the following components for the years ended December 31 (in
thousands):
F-20
1998 1997 1996
------ ------ -------
Current:
Federal $ 6,730 $ 2,498 $ 2,968
Foreign 3,848 3,519 1,708
State 1,327 280 735
------- ------- -------
11,905 6,297 5,411
------- ------- -------
Deferred:
Federal 1,031 900 1,334
Foreign (76) (302) (569)
State 219 172 (243)
Adjustments to beginning of year
valuation allowance - - (948)
------- ------- -------
1,174 770 (426)
------- ------- -------
Total taxes on income $13,079 $ 7,067 $ 4,985
======= ======= =======
A reconciliation between the U.S. federal statutory tax rate and
the effective tax rate follows:
1998 1997 1996
------ ------ -------
Income taxes at U.S. federal
statutory tax rate 35.0% 34.0% 34.0%
Increase (decrease) in taxes
resulting from:
State income taxes, net of
federal income tax benefit 3.2 1.1 2.6
Tax amortization of intangibles (2.6) (4.7) (8.4)
Goodwill amortization 2.3 3.2 8.2
Effect of foreign income taxed
at foreign rates .3 3.0 7.4
Other 2.9 5.1 9.2
---- ---- ----
Total taxes on income 41.1% 41.7% 53.0%
==== ==== ====
Net deferred taxes consist of the following at December 31 (in
thousands):
1998 1997
---- ----
DEFERRED INCOME TAX ASSETS:
Foreign tax credits and net
operating loss carryforwards $ 6,123 $ 5,276
Accrued losses and nondeductible
reserves 2,160 3,350
Accrued compensation 1,799 1,570
Restructuring provision 219 1,056
Other 1,918 991
------- -------
Total deferred income tax assets 12,219 12,243
------- -------
F-21
DEFERRED INCOME TAX LIABILITIES:
Depreciation (5,268) (4,041)
Patent defense cost (1,833) (1,643)
Other (1,044) (1,112)
------- -------
Total deferred income tax liabilities (8,145) (6,796)
------- -------
DEFERRED TAX ASSET VALUATION ALLOWANCE (3,066) (3,266)
------- -------
Net deferred income tax assets $1,008 $2,181
======= =======
Realization of the deferred tax asset 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.
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 $11,475 Indefinite
France 254 2001-2002
U.S. State 9,154 2004-2010
U.S. Federal 1,426 2001-2011
16. 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 leases
certain construction and automotive equipment on a multiyear,
monthly or daily basis. Rent expense under all operating leases
for 1998, 1997 and 1996 was $6,135,000, $9,960,000 and
$8,837,000, respectively.
At December 31, 1998, the future minimum lease payments required
under the noncancellable operating leases were as follows (in
thousands):
F-22
Year Ending December 31 Minimum Lease Payments
----------------------- ----------------------
1999 $ 3,405
2000 2,419
2001 1,678
2002 1,018
2003 509
After 2003 686
-------
Total $ 9,715
=======
Minimum payments have not been reduced by minimum sublease
rentals of $364,000 due in the future under noncancelable
subleases.
Litigation
The Company is involved in certain 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.
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 $2,885,000, $2,496,000 and $2,447,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
In addition, certain foreign subsidiaries maintain various other
defined contribution retirement plans. Company contributions to
such plans for the years ended December 31, 1998, 1997 and 1996,
were $103,000, $132,000 and $107,000, respectively.
17. SEGMENT AND GEOGRAPHIC INFORMATION:
During the fourth quarter of 1998, the Company adopted SFAS 131,
"Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 establishes standards for reporting
information about operating segments in annual financial
statements and requires selected information about operating
segments in interim financial reports issued to stockholders.
It also establishes standards for related disclosures about
products and services, and geographic areas. Operating segments
are defined as components of an enterprise about which separate
F-23
financial information is available and utilized by economic
decision-makers in deciding how to allocate resources and in
assessing performance.
The Company has principally three operating segments:
rehabilitation, tunnelling and corrosion and abrasion operations
(Tite Liner). These operating units represent strategic
business units that offer distinct products and services and
serve different markets.
The following disaggregated financial results have been prepared
using a management approach, which is consistent with the basis
and manner with which management internally disaggregates
financial information for the purpose of assisting in making
internal operating decisions. The Company evaluates performance
based on standalone operating income.
There were no customers which accounted for more than 10% of the
Company's revenues during the three years ended December 31,
1998.
Financial information by segment is as follows at December 31
(in thousands):
1998 1997 1996
------- ------- --------
Revenues:
Rehabilitation $ 225,192 $ 228,072 $ 237,635
Tite Liner 43,430 62,353 28,649
Tunneling 32,336 30,215 23,649
--------- --------- ---------
Total revenues $ 300,958 $ 320,640 $ 289,933
========= ========= =========
Operating income:
Rehabilitation $ 33,439 $ 15,206 $ 9,608
Tite Liner 2,181 7,831 1,440
Tunneling 3,068 1,993 3,298
--------- --------- ---------
Total operating income $ 38,688 $ 25,030 $ 14,346
========= ========= =========
Total assets:
Rehabilitation $ 170,289 $ 155,118 $ 155,442
Tite Liner 25,566 34,419 26,908
Tunneling 15,914 14,189 14,869
Corporate 92,839 94,126 68,283
--------- --------- ---------
Total assets $ 304,608 $ 297,852 $ 265,502
========= ========= =========
Financial information by geographic area is as follows at
December 31 (in thousands):
F-24
1998 1997 1996
------- ------- --------
Revenues:
United States $ 220,090 $ 225,642 $ 221,334
Europe 32,986 31,216 32,411
South America 19,033 27,205 7,895
Canada 17,850 23,386 15,423
Asia 8,899 9,842 6,858
Other 2,100 3,349 6,012
--------- --------- ---------
Total revenues $ 300,958 $ 320,640 $ 289,933
========= ========= =========
Operating income:
United States $ 30,155 $ 17,227 $ 13,012
Europe 5,473 1,355 (1,288)
South America 736 1,909 (991)
Canada 1,294 3,724 2,066
Asia 1,395 401 386
Other (365) 414 1,161
--------- --------- ---------
Total operating income $ 38,688 $ 25,030 $ 14,346
========= ========= =========
Total assets:
United States $ 226,851 $ 228,102 $ 204,308
Europe 45,906 33,272 32,611
South America 10,518 12,093 6,263
Canada 16,868 20,179 18,541
Asia 4,048 3,541 3,073
Other 417 665 706
--------- --------- ---------
Total assets $ 304,608 $ 297,852 $ 265,502
========= ========= =========
<\TABLE.
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
(In thousands, except per share data)
1st 2nd 3rd 4th
Year ended December 31, 1998:
Revenues $63,760 $75,501 $81,047 $80,650
Operating income 7,017 9,254 11,784 10,633
Net income 3,046 4,409 5,566 4,866
Basic and diluted earnings
per share .11 .16 .21 .18
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 per
share:
Income before extraordinary item .05 .01 .16 .14
Extraordinary loss (.01) - - -
Net income .04 .01 .16 .14
(a) See Note 4 for information relative to unusual charges recorded in 1997.
F-25
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.
10.1 - Note Purchase Agreements dated as of
February 14, 1997 among the Company
and, respectively, each of the lenders
(the "Noteholders") 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 to the
Noteholders, and Intercreditor Agreement
dated as of August 20, 1997 among NationsBank,
N.A. and the Noteholders (Incorporated by
reference to Exhibit 10(a) to the Quarterly
Report on Form 10-Q for the quarter ended
September 30, 1997).
10.2 - Supplement No. 1 dated as of March 31, 1998 to
Intercreditor Agreement among NationsBank,
N.A. and the Noteholders, together with
Guaranty Agreement dated as of March 31,
1998 by Insituform Southwest, Inc. to the
Noteholders.
- ----------------------
(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 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) (Continued)
10.3 - 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 to NationsBank, N.A. 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) and Amendment
No. 1 to Loan Agreement (Incorporated by
reference to Exhibit 10.5 to the Annual Report
on Form 10-K for the year ended December 31, 1997).
10.4 - Amendment No. 2 to Loan Agreement dated as of
September 15, 1998 between NationsBank, N.A. and
the Company, together with Joinder to Unlimited
Guaranty and Contribution Agreement dated as of
March 31, 1998 by Insituform Southwest, Inc. to
NationsBank, N.A.
10.5 - 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).
- ----------------------
(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 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) (Continued)
10.6 - 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)
10.7 - Employment Letter dated July 15, 1998
between the Company and Anthony W.
Hooper (Incorporated by reference to
Exhibit 10.1 to the Quarterly Report on
Form 10-Q for the quarter ended September
30, 1998).(3)
10.8 - 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)
10.9 - Amendment No. 1 dated as of October 25,
1998 to Employment Agreement between the
Company and Robert W. Affholder.(3)
10.10 - Letter agreement dated as of February 9,
1999 between the Company and Thomas N.
Kalishman.(3)
10.11 - 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).(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 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) (Continued)
10.12 - Letter agreement dated as of October 9,
1998 between the Company and William A.
Martin, together with notice of even
date therewith from Mr. Martin to the
Company.(3)
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 - Severance Agreement dated as of March 14,
1999 between the Company and Robert L.
Kelley, together with letter agreements
dated, respectively, November 6, 1998
and December 18, 1998 between the Company
and Mr. Kelley and notice dated as of
October 9, 1998 from Mr. Kelley to the
Company.(3)
10.15 - 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).
10.16 - 1992 Employee Stock Option Plan of the
Company (Incorporated by reference to
Exhibit 10.17 to the Annual Report on Form
10-K for the year ended December 31, 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 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) (Continued)
10.17 - 1992 Director Stock Option Plan of the
Company (Incorporated by reference to
Exhibit 10.18 to the Annual Report on Form
10-K for the year ended December 31, 1997).(3)
10.18 - 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)
10.19 - Senior Management Voluntary Deferred
Compensation Plan of the Company.(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).(3)
21 - Subsidiaries of the Company.
23 - Consent of Arthur Andersen 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.
- ----------------------
(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 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