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, 1995
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.
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(Exact name of registrant as specified in its charter)
Delaware 13-3032158
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1770 Kirby Parkway, Suite 300
Memphis, Tennessee 38138
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 901-759-7473
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.01 par value
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(Title of class)
Indicate by a check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period as the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information
state-ments incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held
by non-affiliates of the registrant. The aggregate market value
shall be computed by reference to the price at which the stock was
sold, as of a specified date within 60 days prior to the date of
filing.
Aggregate market value as of March 15, 1996.....$202,915,060
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, 1996................. 27,152,171 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 1996 Annual Meeting of Stockholders-Part
III.
PART I
ITEM 1. BUSINESS
GENERAL
Insituform Technologies, Inc. (the "Company") is a worldwide
provider of proprietary trenchless technologies for the
rehabilitation and improvement of sewer, water, gas and industrial
pipes. The Company's primary technology is the Insituform(R)
Process (the "Insituform Process"), a "cured-in-place,"
non-disruptive pipeline rehabilitation process that, during the
Company's most recent fiscal year, contributed approximately 71% of
the Company's revenues. The Insituform Process is based on a custom
manufactured polyester-fiber tubing, known as the Insitutube(R)
(the "Insitutube"), which forms a seamless, jointless and leakproof
"pipe within a pipe." The Company believes the repaired pipe, the
Insitupipe(R) (the "Insitupipe"), is stronger and has equal or
greater flow capacity than the original pipe.
The Insituform Process has been used successfully for
approximately 24 years in the repair of sewers, tunnels and
pipelines throughout the world. The Company believes that the
Insituform Process offers many advantages over traditional "dig and
replace" methods of pipeline replacement. Such advantages include
installation without excavation, design and application
versatility, extension of the pipeline's useful life and speed of
installation. The Company believes that, under normal conditions,
sewer pipe repaired with the Insituform Process will generally have
a useful life in excess of 50 years.
In addition to the Insituform Process, the Company offers
certain other products in trenchless applications. 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 and in situations where polyvinylchloride pipe is
preferred. The Company also exercises the exclusive rights in
substantially all of North America to the Paltem(R)-HL system and
certain other products (the "Ashimori Products"), which are in
various stages of development, under a license (the "Ashimori
License") from Ashimori Industry Co., Ltd. ("Ashimori"). The
Company's Tite Liner(R) Process (the "Tite Liner Process") and
other abrasion and corrosion protection technologies employ
diameter-reduction techniques tailored to meet the pressure pipe
rehabilitation needs of oil field, mining and industrial process
pipelines. Through its Affholder, Inc. subsidiary, the Company is
engaged in trenchless tunnelling used in the installation of new
underground services.
The Company's products are marketed to governmental and
industrial customers primarily in North America and Western Europe,
and have also been introduced in South America, Eastern Europe, the
Middle East, Australia and the Pacific Rim. In the industrial
market, the Company focuses its marketing efforts on companies in
the pulp and paper, chemical, petrochemical, food and drug, and
nuclear and utility industries.
Historically, the Company's primary business was to license
other companies to market and provide Insituform installation
services using the Company's proprietary technology in return for
royalties and product sales revenue from materials manufactured by
the Company. As a result of its acquisitions, the Company has
further integrated its business to perform the entire process of
manufacture and installation using its trenchless processes. The
Company intends to continue pursuing this integration strategy in
its principal markets. In other areas, the Company will continue to
emphasize marketing its products through license or joint venture
arrangements. The Company provides design assistance, marketing,
research and technical support to all its licensees in an effort to
stimulate demand for its products and to ensure a high standard of
quality control throughout the process.
The Company was incorporated in Delaware in 1980 under the
name Insituform of North America, Inc., in order to act as the
exclusive licensee of the Insituform Process in most of the United
States of Insituform Group Limited ("IGL"), the then owner of the
worldwide rights to the Insituform Process. Contemporaneously with
the consummation in 1992 of the Company's acquisition of IGL (the
"IGL Acquisition"), the name of the Company was changed to
Insituform Technologies, Inc.
As described below under "IMA Merger," in October 1995
Insituform Mid-America, Inc. ("IMA") was merged with a subsidiary
of the Company as a result of which IMA became a wholly-owned
subsidiary of the Company (the "IMA Merger"). The IMA Merger and
the IGL Acquisition have each been accounted for as a pooling-of-
interests and, accordingly, the consolidated financial statements
included in response to "Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K" for the periods prior to the
transactions, respectively, and (unless the context otherwise
requires) all other financial information included herein for such
periods include the combined historical results of the Company and,
respectively, IMA and IGL. The following acquisitions by the
Company, together with those of IMA, during the past five years
have been accounted for under the purchase method of accounting, so
that the results of the acquired companies are included in the
Company's historical results of operations from the consummation of
such transactions, respectively:
Date Company Acquired Principal Business
November 1995 FormaPipe Division, cured-in-place pipe-
Waterflow Services Limited line rehabilitation,
United Kingdom
April 1995 Enviroq Corporation<F1> Insituform and NuPipe
(pipeline rehabilitation licensee, southeast
business, including U.S. territories
Insituform Southeast, Inc.)
February 1995 Insituform France S.A.<F2> Insituform licensee,
France
October 1994 Gelco Services, Inc. and Insituform and NuPipe
affiliated entities licensee, Pacific
Northwest territories
July 1993 Insituform Midwest, Inc. Insituform and NuPipe
licensee, midwestern
territories
July 1993 Naylor Industries, Inc. Insituform and NuPipe
(parent of Insituform licensee, Gulf coast
Gulf South, Inc.) territories
December 1992 H.T. Schneider, Inc. Insituform and NuPipe
(parent of Insituform of licensee, New England
New England, Inc.)
December 1992 Insituform Canada Limited<F3>Insituform and NuPipe
licensee, Canada<F4>
November 1992 Pipeline Rehabilitation Paltem licensee
Systems, Inc.
October 1991 United Pipeline Systems, Tite Liner installer,
Inc. (including stock Canada
of United Corrosion Cor-
poration, its parent)
April 1991 Insituform Southwest<F5> Insituform and NuPipe
licensee, south-
western U.S.
territories
March 1991 United Pipeline Systems Tite Liner installer,
USA, Inc. U.S.
___________________
<FN>
<F1> renamed IMA Merger Sub, Inc. ("Enviroq")
<F2> two-thirds of stock acquired
<F3> remaining 49% minority interest acquired
<F4> effective October 1995, Insituform Canada Limited divested its
open-
cut sewer and water pipeline construction and rehabilitation
operations
<F5> remaining two-thirds interest acquired
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 16 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.
IMA MERGER
On October 25, 1995 (the "Effective Time"), pursuant to the
provisions of an Agreement and Plan of Merger dated as of May 23,
1995 (the "IMA Merger Agreement") among the Company, ITI
Acquisition Corp., a wholly-owned subsidiary of the Company ("ITI
Sub"), and IMA, ITI Sub merged into and with IMA as a result of
which IMA became a wholly-owned subsidiary of the Company. IMA's
operations historically have entailed the application of various
trenchless and other technologies to solve problems requiring
rehabilitation, new construction and improvement of pipeline
systems, including sewers, industrial waste lines, slurry lines and
oil field and industrial process pipelines. IMA, together with its
subsidiaries, is licensed by the Company to provide the Insituform
technology in all or a portion of 22 states, Puerto Rico and the
U.S. Virgin Islands, and holds the Ashimori License and the
worldwide rights to the Tite Liner Process. Rehabilitation process
revenues, primarily derived by IMA from the Insituform Process as
a licensee of the Company, accounted for approximately 68% of IMA's
contract revenues during its last full fiscal year reported prior
to the Effective Time.
In accordance with the terms of the IMA Merger, holders of the
class A common stock, $.01 par value (the "IMA Class A Common
Stock"), of IMA became entitled to receive 1.15 shares of the class
A common stock, $.01 par value (the "ITI Common Stock"), of the
Company for each share of IMA Class A Common Stock held. Prior to
the consummation of the IMA Merger, each share of the class B
common stock, $.01 par value (the "IMA Class B Common Stock"), of
IMA was converted into one share of IMA Class A Common Stock in
accordance with its terms. At the Effective Time, in effectuation
of the foregoing terms, the Company became obligated to issue an
aggregate of approximately 12,450,896 shares of ITI Common Stock to
stockholders of IMA.
TECHNOLOGIES
Pipeline System Rehabilitation
The Insituform Process. The Insituform Process for the
rehabilitation of sewers, pipelines and other conduits utilizes a
tubing made of a polyester-fiber felt, the Insitutube, which is
constructed with a strong, smooth, watertight polyolefin coating on
the outside. The Insitutube is custom manufactured to the diameter,
length and other characteristics of the pipe, sewer or conduit to
be repaired.
A pipe to be repaired is first cleaned by removing tree roots
and other debris and a remote-controlled video camera is inserted
into the pipe to inspect it and in order to make a recording of the
location of the lateral connections for use in subsequent
re-opening of the connections. If necessary, the section of pipe to
be rehabilitated is bypassed from the balance of the pipeline
system. Services to users in the affected section are usually not
disconnected but usage may be curtailed to prevent excess back-up
in the lateral connections.
In the case of a typical sewer pipe to be repaired by the
Insituform Process, access is gained through an existing manhole.
Prior to the installation, the Insitutube is saturated throughout
its length with a thermosetting liquid resin. In most cases, the
Insitutube is installed using pressure from a column of water
maintained inside an inversion tube, and the Insitutube is turned
inside out and advanced through the pipe to be repaired with the
resin-saturated surface held against the surface of the existing
pipe. The smooth-coated side of the Insitutube forms the new
interior surface of the pipe. After the Insitutube is fully
extended through the pipe to be repaired, the water inside the
Insitutube is heated to a prescribed temperature in order to cause
the thermosetting liquid resin to harden, or cure. Essentially, the
Insituform Process creates a "pipe within a pipe," the Insitupipe.
Each end of the Insitupipe is cut off at the manhole walls and the
flow is re-established.
During the installation of the Insitutube, smaller lateral
lines feeding into the existing pipe are temporarily blocked.
Lateral lines are side connecting pipes, typically between four and
six inches in diameter, which discharge flow from homes and
businesses into the main pipe undergoing repair. To complete the
installation, the Insitupipe must be cut, or routed out, at the
lateral junctions to re-establish the flow from these laterals. A
remote-controlled cutter, the Insitucutter(R), and a video camera
are inserted into the pipe and used to open the lateral lines into
the pipe. The Company's lateral rehabilitation service includes the
cleaning, inspection, evaluation and rehabilitation of laterals,
utilizing the Insituform Process.
The NuPipe Process. The NuPipe Process entails the manufacture
for the Company 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 creating a tight fit against the conduit being
repaired. In this position, the now expanded NuPipe is subjected to
internal pressure, and cooled to create a new pipe for permanent
installation, with lateral connections then cut from within.
The NuPipe Process requires little or no excavation for
installation. In addition, the NuPipe Process does not materially
reduce the diameter of the existing pipe, eliminates most of the
annular space between the new rounded pipe and the original pipe,
and reduces the need for grouting the main pipe. Because the pipe
is tight-fitting and jointless, flow capacity in most cases is at
least equal to that of the existing pipe, or is improved. The
NuPipe Process involves manufacture of pipe in continuous lengths
of standard pipe diameters, rather than custom manufacture for
specific applications, as is the case with the Insituform Process,
making it suited for small-diameter pipes.
Ashimori Products. The Paltem-HL system, which the Company has
the exclusive license from Ashimori to offer in substantially all
of North America, is a process for rehabilitating pressure pipes.
The system utilizes a woven polyester hose with an elastomer
coating called a PAL-Liner(TM), which is custom-manufactured to the
dimensions of the pipe to be rehabilitated. Prior to installation,
the PAL-Liner hose is coated with a pre-determined amount of epoxy
resin. Compressed air or other suitable means is then used to
invert and propel the PAL-Liner through the pipe from an access
pit. After the PAL-Liner reaches a receiving pit, the resin hardens
and the PAL-Liner forms a smooth, pressure resistant lining on the
inside surface of the pipe.
In addition to the Paltem-HL system, the Ashimori License
provides for the rights to utilize, manufacture and sell the
following Ashimori Products, which are in various stages of
development: (i) the Paltem-Apollo(TM) system, a process for point
repair by pulling a specially designed robot together with Apollo-
Liner into the pipe, inflating and light-curing the liner to form
a new rigid pipe at the spot to be repaired, including a system for
forming a new pipe at the point of connection of the lateral to the
main pipe and reconnecting the lateral; (ii) the Paltem-Frepp(TM)
system, a process for restoration of pipes by pulling a partially
folded Frepp-pipe into the pipe and reforming it to form a new pipe
within the pipe; (iii) Paltem-March(TM) products, which are non-
woven fiber tubes with a seamless coating used in pipeline
rehabilitation; and (iv) the Paltem-SZ(TM) system, a process for
restoration of sewer pipes by pulling SZ-Liner into the pipe,
inflating, and forming a new rigid pipe within a pipe utilizing
heat-curing resin applied to the liner.
Corrosion and Abrasion Protection
The Company's Tite Liner Process is a method of lining
pipelines with a corrosion and abrasion resistant pipe in order to
extend system life. Oil field, natural gas distribution lines and
certain industrial process systems typically utilize steel pipe,
which is subjected to highly corrosive fluids and gases, while
slurry lines used in mining operations are subjected to highly
abrasive flows. The Tite Liner Process utilizes a polyethylene
liner which is diameter-reduced in a roller box and then pulled
through a steel pipe. When the pulling tension is released, the
liner expands to create a tight fit against the host pipe's inner
wall. After installation, the ends of the polyethylene pipe are
finished by formation of a flange.
In view of the start-up nature of operations conducted by the
Company under the UltraPipe(R) name, and as a result of the IMA
Merger, the Company has consolidated such operations with IMA's
larger corrosion and abrasion protection activities. See "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations" for information concerning the Company's
determination to divest operations utilizing the UltraPipe
technologies for certain offsite applications.
Tunnelling
Tunnelling is a trenchless, subterranean construction process
that generally is utilized for the construction of pipeline
systems. In the Company's tunnelling operations, the crew first
digs a work shaft and then constructs the tunnel, installs pipe in
the new tunnel and backfills the newly-constructed pipeline with
grout. The Company utilizes seven tunnelling machines to construct
two to fourteen-foot diameter tunnels into which pipes are
inserted. Four of the Company's large diameter tunnelling machines
are state-of-the-art, earth-pressure-balanced tunnelling machines,
designed to reduce costs and risks of subsidence, and improve
competitiveness, by virtue of the ability to tunnel without de-
watering the surrounding soils, and two other machines operated by
the Company are capable of mining in hard rock.
DIRECT INSTALLATION AND OTHER CONSTRUCTION ACTIVITIES
The Company's direct installation operations utilizing the
Insituform Process and its other construction activities accounted
for approximately 91% of the Company's consolidated revenues in
1995. Such operations are conducted in North America principally
through subsidiaries which hold the Insituform Process and NuPipe
Process licenses for 41 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 certain other products under a license
from Ashimori. Outside of North America, the Company conducts
Insituform Process or NuPipe Process direct installation operations
through its subsidiaries in the United Kingdom and France.
The worldwide rights to the Tite Liner Process are applied by
United Pipeline Systems USA, Inc. and, through its United Pipeline
division, Insituform Canada Limited ("Insituform Canada"), 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"). Following consummation
of the IMA Merger, and in view of the start-up nature of operations
conducted by the Company under the UltraPipe name, the Company has
consolidated such operations with IMA's larger corrosion and
abrasion protection activities.
Direct trenchless installation operations are organized into
field installation and construction crews. Each Insituform and
NuPipe field unit is typically composed of crews responsible for
cleaning and preparation, installation, and video/cutter
operations, respectively, and is equipped with a high-pressure-
water cleaning truck, a boiler truck, a refrigeration truck, a
television van with cutting apparatus, other support trucks and
vans, and pumping and safety equipment. Each Paltem crew is
typically equipped with a turning truck, resin mixers, pulling
machine and other supporting trucks and equipment. Installation
crews engaged in the Company's corrosion and abrasion protection
work are typically equipped with a wire line unit, roller boxes,
fusion machines, a spool trailer, pickup trucks and other
supporting trucks and equipment.
The Company's Affholder, Inc. subsidiary offers a broad range
of traditional pipe rehabilitation and construction services,
including tunnelling, point repairs, shaft work and pipe cleaning.
Effective October 31, 1995, Insituform Canada sold the assets
utilized in its multi-service, open-cut sewer and water pipeline
construction and rehabilitation operations to certain members of
its management, after transferring its micro-tunnelling equipment
to Affholder, Inc. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" below.
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.
Typically, collection from governmental agencies is made within 60
to 90 days of billing.
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.
See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" for information concerning
contingencies related to insurance maintained in connection with
operations of Naylor Industries, Inc. ("Naylor") that were divested
before the acquisition of Naylor by the Company. The Company has
also arranged bonding capacity for bid, performance and payment
bonds. Typically, the cost of a performance bond is approximately
1% of the contract value. The Company is required to indemnify
surety companies for any payments the sureties are required to make
under the bonds.
The Company's principal direct installation and other
construction activities are conducted by direct or indirect wholly-
owned subsidiaries, except for the following subsidiaries that are
less than wholly-owned:
Subsidiary Processes Territory Interest
---------- --------- --------- --------
United Sistema de Tite Liner Chile<F1> 60% of
Tuberias Ltda. stock<F2>
Insituform France Insituform France 66-2/3% of
S.A. stock<F3>
Midsouth Partners Insituform Tennessee, 57-1/2%
NuPipe portions of general
Kentucky and partnership
Mississippi interest<F4>
_______________________
<FN>
<F1> Jurisdiction of incorporation.
<F2> The remaining interest is held by Inversiones Bellavista S.A.
("IBS"). The
Company's arrangements provide for IBS' option to purchase an
additional
10% of the equity of United Chile upon terms to be defined.
<F3> The remaining interest is held by a subsidiary of Lyonnaise
des Eaux S.A.
<F4> The Company holds a 15% partnership interest through
Insituform
California, Inc. ("ICI"), a wholly-owned subsidiary, and, as
a result of
the IMA Merger, an additional 42.5% interest through a
wholly-owned
subsidiary of Enviroq. The remaining interest is held by a
subsidiary of
Insituform East, Incorporated ("Insituform East"), an
independent
licensee.
The management and conduct of the business of Midsouth
Partners is vested in a management committee comprised of one
representative of ICI, three representatives of the Insituform East
subsidiary, and three representatives of the Enviroq subsidiary.
Partnership interests in Midsouth Partners may not be transferred
by the subsidiaries holding such interests, nor may there be a
change in control of any partner, without the approval of all
partners. See "Item 3. Legal Proceedings" for a description of
arbitration proceedings initiated by Insituform East, claiming that
an event of default occurred under the Midsouth Partners
partnership agreement as a result of both IMA's acquisition of the
pipeline rehabilitation business of Enviroq (the "Enviroq
Acquisition") and the IMA Merger. Insituform East has also
purported to exercise its alleged rights as a non-defaulting
partner to name a majority of the members of the management
committee, an action to which the Company has objected.
MANUFACTURING AND PRODUCT SALES
The Company's manufacturing and product sales operations
accounted for approximately 7% of the Company's consolidated
revenues in 1995. Product sales to licensees acquired by the
Company are, under the purchase method of accounting, eliminated
from the Company's consolidated revenues subsequent to the
respective acquisitions of such licensees by the Company. In
addition, as a result of accounting for the IMA Merger as a
pooling-of-interests, product sales to IMA are eliminated for all
periods including those prior to such transaction.
Although the Company's Insituform license agreements typically
contain no requirement that licensees purchase equipment or
materials from the Company, the Company sells Insitutubes and
related products utilized in the Insituform Process pursuant to
supply contracts with its domestic Insituform licensees. Under the
current term of the Company's domestic supply arrangements, the
licensee purchases from the Company a specified percentage (60% or
90%) of its Insitutube requirements, unless excused in certain
circumstances, subject to minimum annual purchases by the buyer and
maximum required sales by the Company. Prices under such contracts
are fixed, subject to limited annual increases by the Company. Such
contracts are renewable on an annual basis.
In Europe, Insituform Linings Plc ("Linings"), a joint venture
between the Company and five licensees, manufactures and sells
Insitutube linings. The Company owns 51% of the equity of Linings,
but does not control a majority of its board. In 1992, the Company
inaugurated its Insitutube manufacturing facility in Matsubuse,
Japan.
The Insitutube is manufactured by the Company in varying
lengths, diameters and thicknesses to accommodate the requirements
of each specific installation. The average lead time necessary to
produce the custom manufactured Insitutube varies from one to two
weeks depending principally on the length, thickness and diameter
required. The Company maintains an inventory of the plain and
coated materials used in the manufacture of Insitutubes and a small
inventory of the most common diameters and thicknesses of
Insitutubes.
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 the Insitutube materials
from a limited number of suppliers. The Company maintains its own
felt manufacturing facility contiguous to its Insitutube
manufacturing facility in Batesville, Mississippi. The Company
believes that resins are readily available from a number of major
corporations and, as described under "Investments" below, has
terminated its joint venture arrangements with respect to resins.
The Company believes that the sources of supply in connection with
its Insituform operations are adequate for its needs and that it is
not substantially dependent upon any one supplier.
In connection with the introduction of the NuPipe Process,
each domestic licensee has entered into supply agreements pursuant
to which the licensee is required to purchase from the Company all
of its requirements for the thermoplastic pipe utilized in the
application of the NuPipe Process. Prices under each supply
agreement are subject to limited increases by the Company. Each
supply agreement is automatically renewed for successive periods of
two years each, unless the licensee exercises a non-renewal option,
which is available if the Company's quality and prices are not
competitive with commercially practicable alternative sources. The
Company has not received notice of exercise of any such non-renewal
option.
The Company's supply agreement with an unaffiliated party,
under which the Company was entitled to purchase pipe to satisfy
its licensees' NuPipe requirements, expired in June 1995, and the
Company has been engaged in discussions with such supplier with
respect to the extension of the arrangement through the end of
1998, subject to automatic renewal unless one party terminates upon
at least twelve months' prior notice 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 currently purchases the PAL-Liner it uses from
Ashimori. The Company expects that it will perform the coating
function necessary in manufacturing PAL-Liner for substantially all
of its requirements at some future time. Longer term, the Company
expects to weave the lining material to further vertically
integrate its PAL-Liner operations. See "Item 2. Properties" for
information concerning the Company's consideration of additional
manufacturing capacity in connection with the expansion of its
activities with respect to commercialization of the Ashimori
Products.
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. In December 1993, the Company determined to
discontinue certain off-site rehabilitation operations from its
plant in Dallas, Texas. The Company subsequently determined to
abandon its efforts to find a purchaser for such division and to
shut down the Dallas facility. See Note 15 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."
LICENSING OPERATIONS
The Company grants licenses for the Insituform Process,
covering exclusive and non-exclusive territories, to licensees who
provide sewer and pipeline repair and rehabilitation services to
governmental, industrial and commercial users 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
Insituform Process, to use the Company's copyrights and to use the
trademark "Insituform."
During 1995, the Company entered into a new Insituform license
agreement covering New Zealand. At present, the Insituform Process
is commercialized under license by an aggregate of 33 unaffiliated
licensees and sublicensees. From time to time, in those territories
which do not justify the granting of a license, the Company also
appoints agents which promote the Insituform Process and secure
contracts to be performed by the Company or its licensees. During
the year ended December 31, 1995, license fees and royalty income
from the Company's Insituform licensees represented approximately
$6.4 million, or approximately 2% of consolidated revenues.
Royalties from licensees acquired by the Company are eliminated
from the Company's consolidated revenues subsequent to the
respective acquisitions of such licensees by the Company. In
addition, as a result of accounting for the IMA Merger as a
pooling-of-interests, royalties from IMA are eliminated for all
periods including those prior to such transaction.
Effective in December 1990, NuPipe, Inc., a wholly-owned
subsidiary of the Company, entered into licenses granting the
exclusive right to commercialize the NuPipe Process in assigned
territories covering the United States, Puerto Rico and the United
States Virgin Islands. NuPipe International, Inc., a wholly-owned
subsidiary of NuPipe, Inc., has entered into a number of licensing
arrangements outside of the United States, and has identified, and
is engaged in discussions with, additional prospective licensees.
During the year ended December 31, 1995, the Company recognized
royalty income from its NuPipe licensees in the amount of
approximately $.2 million, or approximately .1% of consolidated
revenues.
Pursuant to the Ashimori License, the Company is obligated to
enter into a license granting to Ashimori the exclusive right to
use the Tite Liner Process in Japan, in exchange for royalties of
7% on installations. As a result of the Company's acquisition
during 1994 of certain territories initially reserved by the seller
of the UltraPipe technologies, the Company assumed the seller's
obligations under the grant of an exclusive license of such
technologies for much of the Middle East, in exchange for royalty
payments based upon gross profits. The Company is engaged in
discussions with such licensee to modify such arrangements, and to
extend to such licensee a license covering application of the Tite
Liner Process in such territory. During 1995, the Company's
arrangements with respect to the licensing of UltraPipe in Africa
south of the equator were suspended.
Insituform License Agreements
Each licensee has entered into an agreement with the Company
setting forth the rights and obligations of the parties with
respect to the exploitation of the Insituform Process. Each of the
Company's domestic Insituform licensees (including its unaffiliated
licensees, which hold the rights to use the Insituform Process in
eight states and a portion of another state) pays a minimum annual
royalty, which varies according to the population of the licensed
territory, against a royalty of 8% of the gross contract price of
all sales and contracts utilizing the Insituform Process, including
any preparatory and finishing work performed and subject to
specified allowances. Domestic licensees are also obligated to pay
a royalty surcharge of 8% to 12% of their sales and contracts
utilizing the Insituform Process outside of their licensed
territories. The amount of such surcharges are then paid by the
Company to the domestic licensee in whose territory the
installation was performed.
In the event any domestic Insituform licensee has, for any
year, produced to the Company an acceptable plan for marketing and
sales penetration, minimum royalties otherwise established for such
year will not apply, subject to achievement of performance
objectives established with respect to utilization of the Company's
trenchless rehabilitation processes. In addition, the Company is
obligated to pay to Insituform East one-half of one percent of the
gross contract value of certain contracts using the Insituform
Process entered into by licensees introduced to the Company by
Insituform East's predecessor-in-interest, SAW Associates, and also
one-half of one percent of the reported turnover of Insituform
East.
Insituform licensees outside of the United States are
obligated to pay royalties, calculated by reference to the gross
contract price of all contracts utilizing the Insituform Process,
ranging from 5% to 8%. Foreign licenses may also provide for
minimum annual royalties as well as initial license fees and
trademark fees.
The Company requires its licensees to be well-trained and
fully qualified in the installation and service of the Insituform
Process. The Company typically establishes certain financial,
professional and operating requirements which must be met by each
licensee. In addition to possessing adequate capital and competent
technical personnel each licensee must demonstrate an ability to
market the Insituform Process aggressively to potential users
within its territory.
Any improvements or modifications a licensee may make in the
Insituform Process during the term of the license agreement becomes
the property of the Company or are licensed to the Company. The
Company is generally required to disseminate all information with
regard to the Insituform Process developed by it or any licensee to
all licensees, without any additional royalty.
Should a licensee fail to meet its royalty obligations or
other material obligations, the Company may terminate the license.
Many licensees (including all 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.
NuPipe Process License Agreements
In consideration for its NuPipe license, each domestic NuPipe
licensee (including its unaffiliated licensees, which hold the
rights to use the NuPipe Process in eight states and a portion of
another state) has paid an initial license fee of $60,000 and has
agreed thereafter to pay a royalty of 6.75% of the gross contract
price (including sales) of all contracts to the extent covering
installations performed utilizing the NuPipe Process. "Gross
contract price" is defined to include preparatory and finishing
work and does not exclude certain allowances as does the comparable
calculation utilized by the Company for domestic Insituform
royalties. If the licensee commercializes the NuPipe Process
outside of its assigned territory, it will be obligated to pay to
the Company, for repayment in turn to the licensee assigned such
territory, 10.125% of the gross contract price of such
installations. In connection with its introduction in 1995 of a
second fold and formed product, the Company has offered domestic
licensees the right to elect to modify royalty calculations so as
to be based upon linear feet of pipe delivered, but has not
completed such arrangements with its unaffiliated licensees.
Each domestic NuPipe licensee has committed to use its best
efforts to create a demand for the NuPipe Process within the
territory covered by its license and to use its best efforts to
fill such demand. In furtherance of its commitments under the
license, each domestic licensee has agreed that in order to
maintain the license it will, during each year of the term of the
license, complete contracts covering the repair, rehabilitation or
reconstruction in its territory of the minimum quantities of length
of pipeline as established under the license, by utilizing certain
of the Company's trenchless rehabilitation processes.
Each domestic licensee has, pursuant to its license, entered
into a supply agreement with the Company relating to its
requirements of the thermoplastic pipe utilized in the application
of the NuPipe Process, as described under "Manufacturing and
Product Sales" above. Domestic NuPipe licensees are subject to
terms similar to those in the Company's Insituform licenses with
respect to maintenance of quality standards, rights in improvements
to the process and termination of the license.
The Company has entered into licensing arrangements covering
Sweden and Switzerland, and also, through affiliates, introduced
the NuPipe Process in the United Kingdom and Canada. In
consideration for its NuPipe license, each unaffiliated foreign
NuPipe licensee has paid an initial license fee, and each foreign
licensee remains obligated to pay a royalty of 8% of its net
invoices in connection with the operation of the NuPipe Process in
its exclusive territory, subject to minimum royalty payments,
throughout the life of the 20-year agreements. Under the
agreements, the licensees have committed to use their best efforts
to promote the operation of the NuPipe Process in their respective
territories, but may, upon six months prior notice, terminate the
license. The licensor may also terminate the license in the event
the licensee fails to make payments when due or fails to meet its
other material obligations. Foreign licensees have granted to the
licensor a non-exclusive, royalty free license, without limit of
time, covering all improvements to the NuPipe Process that the
licensees may develop or acquire.
NuPipe Acquisition Arrangements
Under the terms of the agreement pursuant to which the Company
acquired the NuPipe Process, the Company was obligated to make
ongoing payments to the former stockholders of the predecessor of
NuPipe, Inc. until the later to occur of 15 years after the closing
of the transaction or the expiration of all patents or copyrights
granted with respect to the NuPipe Process. Payments amounted to
35% of the royalty income collected by the Company in connection
with the NuPipe Process from unaffiliated and affiliated licensees.
Until such arrangements were modified in October 1994, one-half of
such payments were made in cash and one-half in shares of the
Series C Cumulative Non-Voting Preferred Stock, $.10 par value
("Series C Preferred Stock"), of the Company; in October 1994, all
such shares were repurchased, and the parties agreed that payments
would thereafter be made solely in cash. In March 1995, the Company
exercised an option, granted in October 1994, to acquire all rights
to such contingent payments in exchange for the Company's notes
aggregating $1,000,000, payable over three years, and accruing
interest at 5.4% per annum (reflecting the rate of return on the
Series C Preferred Stock).
INVESTMENTS IN LICENSEES
The Company makes investments in its licensees, and enters
into joint ventures, from time to time so as to encourage
additional royalties and sales of its products and further enable
the Company to influence and participate in the exploitation of its
trenchless rehabilitation processes. During the three years ended
December 31, 1995, the Company did not record earnings from any
such investment that were material to the Company's results of
operations. See Note 6 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." The
Company has divested minority positions in licensees as appropriate
opportunities arose, in order to focus on supporting licensee
operations through more active marketing, research and development
and technical support efforts.
The Company, through its subsidiary, Insituform Technologies
Limited ("ITL"), holds one-third of the equity interest in
Insituform Brochier Rohrsanierungstechnik GmbH ("Insituform
Brochier"), the Company's licensee of the Insituform Process in
Germany. Pursuant to Insituform Brochier's joint venture agreement,
ITL granted an exclusive Insituform license to Insituform Brochier
covering central and southern Germany (the remaining territory of
which is covered by licenses assigned by another joint venturer or
subsequently extended by IGL). Under the joint venture
arrangements, the managing director of Insituform Brochier is
appointed by the unanimous agreement of the parties, and the joint
venture partners have rights-of-first-refusal in the event any
party determines to divest its interest.
The Company holds additional investments in licensees as
follows:
Licensee Processes Territory Interest
- -------- --------- --------- --------
N.V. K-Insituform S.A. Insituform Belgium, 50% joint
venture
Luxembourg
interest<F1>
Ka-Te Insituform A.G. Insituform Switzerland, 50% joint
venture
Liechtenstein and
interest<F2>
Voralberg, Austria
_____________________
<FN>
<F1> The remaining interest is held by N.V. Kumpen.
<F2> The remaining interest is held by Ka-Te Holding A.G.
The interests in the Company's Belgian joint venture, formed
in April 1993, and its Swiss joint venture, formed in September
1993, are subject to its partners' right-of-first-refusal.The
Company's joint venture in Belgium is managed by four directors,
two named by the Company, who are responsible for technical and
financial matters, and two named by N.V. Kumpen, who are
responsible for marketing, sales and general management. The
Company's Swiss joint venture is managed by three directors, with
unanimity required of the directors, or of the shareholders, to
take certain actions. Of the directors of the Swiss joint venture,
one is named by Ka-Te Holding A.G., who is responsible for
marketing, sales and general management, one is named by the
Company, who is responsible for technical and financial matters,
and a third is named by the Company with the approval of its
partner, which may not unreasonably be withheld.
Until March 1995, the Company was also a party to a joint
venture, called Enhansco, which develops, blends and sells resins
used in connection with the Insituform Process. At such date, the
Company's joint venture partner purchased the Company's one-half
interest in the joint venture for the sum of $400,000, one-half of
which was paid within 30 days of closing and the remainder of which
is due on December 31, 1997. The Company has agreed that it will
not compete with the continuing resin business of the joint venture
for a period of three years after such buy-out.
In April 1995, the Company disposed of its investment in
approximately 7% of the share capital of Enviroq as a result of
IMA's Enviroq Acquisition. Pursuant to such transaction, the
Company holds a comparable percentage of the share capital of New
Enviroq Corporation (renamed Enviroq Corporation; "New Enviroq"),
which was distributed by Enviroq to its stockholders immediately
prior to the Enviroq Acquisition. New Enviroq holds the assets and
liabilities related to Enviroq's prior interest in Synox
Corporation (engaged in developing and testing a process for the
treatment of municipal wastewater "sludge") and in Sprayroq
Corporation (which offers a spray-applied resinous product used in
rehabilitation of manholes, among other applications).
See "Direct Installation and Other Construction Activities"
above for a description of the Company's interest in Midsouth
Partners which, following the IMA Merger, has been consolidated in
the Company's results of operations. A partner of Midsouth Partners
has purported to exercise its alleged rights as a non-defaulting
partner to name a majority of the members of the management
committee of Midsouth Partners, an action to which the Company has
objected.
MARKETING
The Company markets its technologies primarily to the municipal
wastewater and industrial markets worldwide and natural gas
distribution market in North America. The Company's product
managers and engineers develop strategies and design products
intended to meet the needs of customers in each of these markets.
In addition, 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. The Company's
unaffiliated licensees are responsible for marketing and selling
the Company's trenchless rehabilitation processes in their
respective territories, and each has a staff for that purpose.
The municipal wastewater market has historically represented
the single largest segment for the Company's trenchless
rehabilitation services. The Company expects this segment to remain
the largest part of its business for the foreseeable future. In
response to competition from other providers of trenchless
technologies, the Company's strategy is to differentiate its
products based on design and performance benefits. The Company
attempts to build long-term relationships with its customers for
the utilization of the Company's complete line of rehabilitation
products and services. The Company utilizes its own sales force (or
that of unaffiliated licensees) with a view toward having its
technologies permitted or required in bid specifications.
The Company believes that the industrial market represents
significant opportunities for the use of the Company's trenchless
rehabilitation products and services. The Company's processes are
used to stop leakage in difficult-to-access pressurized pipes,
achieve containment of industrial effluents and restore structural
integrity to underground wastewater and storm sewers. The Company
has designated industrial managers in various locations who develop
industrial business and then serve as project managers for the
duration of the projects. In areas not directly served by the
Company, the Company's unaffiliated licensees are responsible for
marketing and selling the Company's products to the industrial
market.
The Company believes that its tunnelling operations strengthen
its relationships with its customers by positioning the Company as
a problem solver for pipeline systems and enhance its capacities to
perform large-diameter installations of the Insituform Process.
The Company markets the Paltem-HL hoselining system in
substantially all of North America to natural gas distribution
companies, in order to renew both mains and services connections
which are suffering from the effects of corrosion or similar
deterioration. The Company believes that the greatest need for
trenchless renewal of gas pipelines is in cities located in the
Northeast and on the West Coast which have older pipe systems in
need of repair or rehabilitation. The Company utilizes its own
sales representatives in these areas who work with gas companies to
educate them about the advantage of using the Company's trenchless
technologies.
The Company offers the Tite Liner system worldwide for use in
oil and gas field systems, which typically utilize steel pipe that
is subjected to highly corrosive fluids and gases, and in mining
slurry lines, which typically are subjected to highly abrasive
flows. The Company believes that customers in the oil and gas and
mining markets will continue to look for ways to improve and extend
the useful life of their facilities rather than to replace their
existing pipelines.
The Company expects to continue licensing the Insituform
Process and the NuPipe Process pursuant to existing arrangements
and in those additional areas of the world in which the Company's
management believes it would not be profitable for the Company to
exploit such processes directly. The Company intends to continue to
investigate the formation of subsidiaries and other affiliates,
including joint ventures, which will directly provide installation
services utilizing the Company's processes.
No customer accounted for more than ten percent of the
Company's consolidated revenues during the years ended December 31,
1995, 1994 and 1993, respectively.
BACKLOG
Orders for Insitutubes are generally shipped within one to two
weeks after receipt, and, accordingly, no substantial backlog of
orders for this product normally exists.
At December 31, 1995 and 1994, respectively, the Company
recorded backlog from construction operations (including projects
where the Company has been advised that it is the low bidder) in
the amounts of approximately $134.1 million and $101.4 million,
respectively. Of such amounts, approximately $25.6 million and
$11.7 million, respectively, represent projects where the Company
was the low bidder. Backlog at December 31, 1995 included
approximately $3.2 million attributable to Insituform France S.A.
("Insituform France"), which was acquired in February 1995,
approximately $7.4 million attributable to Insituform Southeast
Inc. ("Insituform Southeast"), which was acquired in April 1995,
and approximately $2.4 million attributable to the pipeline
rehabilitation business acquired from Waterflow Services Limited
("Waterflow") in November 1995. Backlog at December 31, 1995 and
December 31, 1994 also included approximately $11.1 million and
$5.4 million, respectively, attributable to the Company's corrosion
and abrasion protection operations (primarily involving the
application of the Tite Liner Process) and approximately $16.2
million and $5.8 million, respectively, attributable to tunnelling
operations. The Company anticipates that substantially all
construction backlog recorded at December 31, 1995 will be
completed in 1996.
SEASONALITY
Although severe cold weather affects the Company's operations
in Canada in the months of December, January, February and March
(where, over the past three years, the volume of work performed in
the first calendar quarter has averaged 6% of the total year's
work), the volume of work reported on a consolidated basis by the
Company's licensees (including affiliated licensees) in the first
calendar quarter of the year has averaged, for the past five years,
approximately 24% of the work they reported over the full year.
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.
PATENTS AND LICENSES
The Insituform Process was developed in the United Kingdom in
1971. The Company's commercialization of the Insituform Process has
been protected by patents which cover certain aspects of the
Insituform Process including the Insitutube construction, the resin
saturation process and the process of reconstructing the pipeline.
Pursuant to provisions recently adopted under the General Agreement
on Tariffs and Trade, patents in force on June 8, 1995 will be
entitled to a patent term of the longer of 17 years from issuance
or 20 years from the earliest filing date of the patent. The
Company currently holds 55 patents in the United States relating to
the Insituform Process, the last to expire of which will remain in
effect until 2013, and has obtained patent protection in its
principal overseas markets covering aspects of the Insituform
Process.
One of the significant patents relating to the Insituform
Process, covering the curing of a resin-impregnated tube, has
expired in many countries, in particular the United States, Canada,
Japan, the United Kingdom and Germany. Another important method
patent relating to the Insituform Process, which covers material
aspects of the inversion process has also expired in the United
States, Canada, Japan, the United Kingdom and Germany. The
following patents of the Company relate to the Insituform Process,
collectively constituting an integrated product and service:
Expiry Expiry Expiry
Expiry
Patent U.S. Date Canada Date Japan Date U.K.
Date
------ ---- ------- ------ ------ ----- ------ ----
-------
(a) 4366012 02/05/01 -- -- -- --
1423819 01/21/92
(b) 4434115 02/11/02 -- -- -- --
2096265 02/18/01
(c) 4446181 05/01/01 1134290 10/26/99 1202781 07/18/98
2031107 09/20/99
(d) 4581247 01/05/04 1254852 05/30/06 -- -- --
--
(e) 4776370 10/11/05 -- -- -- -- --
--
(f) 5044405 08/21/09 -- -- -- -- --
--
(g) 5108533 10/10/09 -- -- -- -- --
--
(h) 5154936 10/05/10 * * * *
0504343 09/19/11
(i) 5167901 10/05/10 -- -- -- -- --
--
(j) 5384086 01/24/12 * * * *
0511260 01/16/11
(k) 5407630 04/18/12 * * * *
0464121 03/19/10
_____________
(a) method of serial vacuum impregnation of a resin into an
Insitutube.
(b) method for remote lining of side connections.
(c) manufacture of tubular laminates.
(d) method for lining pipes incorporating the curing of a
resin-impregnated
liner using a light source.
(e) apparatus for securing cable to a tubular pipe liner.
(f) method of installing a lateral lining from the main line by
use of a
carrier tube.
(g) method of installing a lateral lining from the lateral
clean-out to the main.
(h) apparatus for everting an Insitutube.
(i) method of everting an Insitutube.
(j) method of lining pipelines by inverting a tube against a
moveable backstop.
(k) method of lining pipelines using a sealed inversion process.
* application pending
In addition, in Germany applications for patents (h), (i) and (j)
are pending, and an application for patent (d) has been abandoned.
In the United Kingdom, in respect of certain classes of patents,
any person has the right to compel the patent holder to license
such person during the last four years of the patent's life, on
such terms as are agreed with the patent holder (including the
level and/or amount of royalty) failing which such terms are
judicially determined.
The specifications and/or rights granted in relation to each
patent will vary from jurisdiction to jurisdiction. In addition, as
a result of differences in the nature of the work performed and in
the climate of the countries in which the work is carried out, not
every licensee uses each patent, and the Company does not
necessarily seek patent protection for all of its inventions in
every jurisdiction in which it does business.
Although the Company believes these patents are important to
the business of the Company, there can be no assurance that the
validity of the patents will not be successfully challenged or that
they are sufficient to afford protection against another company
utilizing a process similar to the Insituform Process. The
Company's business could be adversely affected by increased
competition in the event that one or more of the patents were
adjudicated to be invalid or inadequate in scope to protect the
Company's operations or upon expiration of the patents. The Company
believes, however, that while the Company has relied on the
strength and validity of its patents, the Company's long experience
with the Insituform Process, its continued commitment to support
and develop the Insituform Process, the strength of its trademarks,
and its degree of market penetration, should enable the Company to
continue to compete effectively in the pipeline rehabilitation
market.
In September 1989, the United States Patent and Trademark
Office issued the Company's initial patent covering the NuPipe
Process, which was followed by eight additional patent grants.
Patents covering the NuPipe Process or the materials used in
connection with the NuPipe Process have also been issued in 20
other countries. The Company intends aggressively to pursue the
remaining U.S. and foreign patent applications related to the
NuPipe Process, but there can be no assurance that any of the
remaining patents will issue as a result of such applications, or
that any patent granted will be sufficient to afford protection
against another company utilizing a process similar to the NuPipe
Process.
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. Under the
Company's acquisition arrangements relating to the UltraPipe
Process, in addition to a royalty-free license to the seller
extending to agricultural irrigation applications worldwide, the
Company is obligated, subject to an initial grace period, to make
contingent payments calculated on the basis of the length of the
pipe lined and other criteria.
Pursuant to the Ashimori License, the Company holds the
exclusive rights to use the patents, trademarks and know-how
related to the Ashimori Products, including the rights to
manufacture and sell Ashimori Products, for substantially all of
North America. Such license currently covers seven United States
patents relating to Paltem-HL and the related PAL-Liner. In
addition, there are currently five patent applications filed in the
United States relating to the Ashimori Products.
In connection with the Ashimori License, Ashimori was paid an
initial license fee of $100,000 and is entitled to receive ongoing
royalties of 6% on Paltem-HL and Paltem-March installations and 7%
on installations of other licensed Ashimori Products, with a
royalty of 5% on sales of liners to which the installation royalty
does not apply, in each case due within 60 days of each semi-annual
royalty period. Under the Ashimori License, any non-patentable
improvements by the Company made to the licensed technology are
licensed on a non-exclusive basis to Ashimori, while Ashimori's
right to use patentable improvements made by the Company is subject
to payment to the Company of mutually agreeable royalties.
The Ashimori License extends for an initial term of 15 years
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. Commencing with the year ending in
September 1998, 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. In addition, the Ashimori
License is subject to termination in the event of specified
defaults.
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. During the years ended December
31, 1995, 1994 and 1993, the Company spent approximately $7.6
million, $6.2 million and $6.9 million, respectively, on all
strategic marketing and product development activities.
EMPLOYEES
As of December 31, 1995, the Company employed 1,342
individuals, including seven officers, 147 technical specialists
and managers, 100 manufacturing staff, 762 direct installation
staff, 220 administrative personnel and 106 marketing personnel.
Certain of the Company's contracting operations are parties to
collective bargaining agreements covering an aggregate of 163
employees. None of the Company's other employees is represented by
a labor union, although the Company's United Kingdom operation
belongs to a trade association that prescribes minimum terms of
employment for members. 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 licensees (including
the Company's direct installation operations) may have to comply
with building code specifications, permit requirements, and
extensive bonding and insurance requirements with regard to
installation activities 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 in the installation process,
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 were certified by the NSF for use in drinking water
systems. 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. The
Company does not currently have an NSF certified Insituform
product, but intends to submit an improved product for NSF
certification.
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, 1996 the Company
---- -------------- --------------
James D. Krugman 47 Chairman of the Board
Jerome Kalishman 68 Vice Chairman of the
Board
Jean-Paul Richard 53 President and Chief
Executive Officer
Robert W. Affholder 59 Senior Vice President-
Chief Operating Officer
of North American
Contracting Operations
William A. Martin 54 Senior Vice
President-Chief
Financial Officer
Anthony W. Hooper 48 Senior Vice President-
Marketing and Technology
Raymond P. Toth 47 Vice President-
Human Resources
Joseph F. Olson 51 Vice President-Controller
of North American Con-
tracting Operations
F. Thomas Driver 58 Vice President-Technical
Sales
James D. Krugman has been Chairman of the Board of the Company
since 1988, having served as a director of the Company since 1987,
and acted as the Company's Chief Executive Officer in 1989 and
1990. Mr. Krugman has been a partner in the law firm of Krugman,
Chapnick & Grimshaw since prior to 1991. Mr. Krugman is also a
director and Chairman of the Executive Committee of Hayward
Industries, Inc.
Jerome Kalishman has been Vice Chairman of the Company since
October 1995. Prior to the IMA Merger and since prior to 1991, Mr.
Kalishman was Chairman of the Board and Chief Executive Officer of
IMA.
Jean-Paul Richard has been President and Chief Executive
Officer of the Company since November 1993. Prior to joining the
Company, from 1991, Mr. Richard was a member of the executive team
of Varity Corporation, a manufacturer of industrial and farm
machinery and equipment, and more recently served as Chief
Executive of its Massey-Ferguson Group. From 1990 to 1991, Mr.
Richard was Executive Vice President of Asea Brown Boveri, Inc.,
the North American subsidiary of Asea Brown Boveri. Mr. Richard is
also a director of AGCO Corporation.
Robert W. Affholder has been Senior Vice President-Chief
Operating Officer of North American Contracting Operations of the
Company since October 1995. Mr. Affholder was President of IMA from
1994 to October 1995 and from prior to 1991 to 1993, and was Vice
Chairman of IMA from 1993 to 1995.
William A. Martin has been Chief Financial Officer of the
Company since 1988, a Vice President from 1989 to January 1993 and
a Senior Vice President since January 1993.
Anthony W. Hooper has been Senior Vice President-Marketing and
Technology since August 1994, having served as Senior Vice
President-Marketing of the Company from November 1993 to that date.
Mr. Hooper was previously, since 1992, President of Huyck
Formex/Weavexx Corporation, a North Carolina industrial textile and
process equipment manufacturer and subsidiary of BTR, Inc. From
prior to 1990 to 1991, Mr. Hooper was employed by Sprout Bauer,
Inc., an industrial machinery and systems manufacturer owned by
Combustion Engineering, Inc., where he was Vice President-Marketing
before becoming President of the Pulp and Paper Division.
Raymond P. Toth has been the Company's Vice President-Human
Resources since February 1994. Since prior to 1991 and until
joining the Company, Mr. Toth was employed as Director of Human
Resources for Sprout Bauer, Inc.
Joseph F. Olson has been Vice President-Controller of North
American Contracting Operations of the company since October 1995.
Mr. Olson was Vice President-Finance and Administration of IMA from
prior to 1991 to October 1995.
F. Thomas Driver has been Vice President-Technical Sales of the
Company since October 1995. Mr. Driver was Vice President-Product
Development and Manufacturing of IMA from January 1994 to October
1995. Mr. Driver was Senior Vice President-Manufacturing and
Research and Development of the Company from January 1993 to
January 1994 and its Vice President-Technical Director from prior
to 1991 to January 1993.
ITEM 2. PROPERTIES
The Company's executive offices are located in Memphis,
Tennessee, at 1770 Kirby Parkway. The Company's lease of such
premises with an unaffiliated party covers 17,885 square feet of
office space, at an annual rental of $254,868, plus taxes and
operating expenses in excess of a base amount, and expires in 2000.
The Company's North American contracting operations are based
in Chesterfield, Missouri, where the Company owns 38,000 square
feet of space on 2.5 acres, 17,000 square feet of which is utilized
as office space and the remaining 21,000 square feet of which is
used for operations.
The Company's manufacturing facilities in Memphis, Tennessee
are sub-leased from an unaffiliated entity for an initial term of
forty years expiring on December 31, 2020. The annual rental cost
to the Company during the initial term of the lease is currently
$28,956, plus real estate taxes, and increases by varying
percentages every five years to $44,952, plus real estate taxes, in
2016 and thereafter. The premises consist of 56,000 square feet of
manufacturing space, with an adjoining 6,000 square foot
administrative office complex, the cost of a portion of which,
together with certain machinery and equipment, was financed from
the sale of a $1.5 million industrial development bond and secured
by a mortgage on the premises and equipment. See Note 8 of the
Notes to the Company's Consolidated Financial Statements included
in response to "Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K," which information is incorporated herein
by reference. An additional 2,700 square feet of space added to the
facility is used for research and development.
The Company maintains 87,000 square feet of space on 20 acres
of land in Batesville, Mississippi, 27,000 square feet of which is
utilized as an Insitutube fabrication facility, 27,000 square feet
as a contiguous felt manufacturing facility, 27,000 square feet as
warehousing space, and 6,000 square feet as office space. The costs
relating to the acquisition, construction and equipping of the
Batesville facilities, in the aggregate amount of $5.5 million,
were financed from the proceeds of the sale of an industrial
development bond and secured by the issuer's title to the property,
which is leased to the Company for a term that expires concurrently
with maturity of the bond in January 2004. See Note 8 of the Notes
to the Company's Consolidated Financial Statements included in
response to "Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K," which information is incorporated herein by
reference.
In January 1995 the Company sold to Linings (a 51%-owned
subsidiary), for a sale price of 750,000 pounds sterling, the land
and building previously leased to Linings and comprising its
Insitutube manufacturing facility located on 1.3 acres and
comprising 25,100 square feet of space in Wellingborough, England.
The Company leases additional Insitutube manufacturing space in
Matsubuse, Japan, and Gurabo, Puerto Rico.
In support of its direct installation operations, the Company
owns facilities in Ossett, England (36,250 square feet), Lemont,
Illinois (24,378 square feet), Owosso, Michigan (21,500 square
feet), Littleton, Colorado (8,000 square feet), Durango, Colorado
(10,000 square feet), Wichita, Kansas (14,125 square feet), Grand
Prairie, Texas (9,000 square feet) and Jacksonville, Florida
(25,000 square feet). The Ossett and Jacksonville properties are
subject to mortgages. The Company manages installation operations
from leased sites in the United States in Houston, Indianapolis,
Santa Fe Springs, Sacramento and Charlton, Massachusetts, Kent,
Washington, Kailua, Hawaii, Hammond, Louisiana and Salem, Oregon;
and in Canada in Edmonton, Alberta, Surrey, British Columbia,
Pickering, Ontario and Vaudreuil, Quebec. The Company's contracting
subsidiaries maintain additional sales and administrative offices
in the event required by operations.
The Company remains party to a lease with an unaffiliated
entity entered into by IGL and expiring in April 2015 for a
two-story office building comprising 12,226 square feet located in
Langley, Berkshire, England. The initial rent under the lease is
245,960 pounds sterling per annum, subject to adjustment every five
years based upon the open market rent applicable at that time.
The foregoing facilities are regarded by management as adequate
for the current and anticipated future requirements of the
Company's business. In connection with the expansion of its
activities with respect to commercialization of the Ashimori
Products, the Company will consider establishment of an additional
manufacturing facility adjacent to its Batesville plant, and
whether to dispose of approximately 5.4 acres in Chesterfield on
which, prior to execution of the IMA Merger Agreement, IMA had
commenced construction of a manufacturing facility. In order to
rationalize the Company's operations combined as a result of the
IMA Merger, the Company plans to relocate certain other operations.
The Company intends to continue to seek to negotiate terminations
of its lease in Langley and of leases on certain additional
properties in the United Kingdom.
ITEM 3. LEGAL PROCEEDINGS
On December 15, 1995, the United States District Court for the
Western District of Tennessee issued its final judgment and order
approving the stipulation of settlement executed by the Company on
September 11, 1995 to settle an action initially filed by a
shareholder of the Company against the Company and one former and
one current officer, alleging various misstatements and omissions
relating to, among other things, acquisition and restructuring
costs arising from the IGL Acquisition in December 1992, in public
disclosures by the Company during the period from October 28, 1992
to May 12, 1993 in violation of, among other things, Rule 10b-5
under the Securities Exchange Act of 1934 (Neil Weinberg, on behalf
of himself and all others similarly situated, Plaintiffs v.
Insituform Technologies, Inc., William C. Willis, Jr., and William
A. Martin, Defendants (United States District Court for the Western
District of Tennessee, Western Division)). On September 30, 1994,
the court had ruled on the Company's motion to dismiss the first
amended complaint, granting in part and denying in part the
Company's motion. The court further granted plaintiffs leave to
amend their complaint insofar as defective from a pleading
perspective. The Company further filed an answer to the complaint
as so amended, denying its material allegations. On April 7, 1995,
the court issued its order certifying the action as a class action
on behalf of all purchasers of ITI Common Stock during the relevant
time period.
Notwithstanding the Company's belief that it had defenses to
the plaintiff's claim that were well grounded in fact and law, on
May 23, 1995 the Company entered into a memorandum of understanding
to settle such litigation, which was evidenced by the stipulation
of settlement approved by the court. Under the settlement, the
Company has made a cash payment to class members in the amount of
$3.2 million and issued to class members 30,000 shares of ITI
Common Stock.
The Company has initiated proceedings which are pending in the
United States District Court for the District of New Jersey (the
"New Jersey Proceedings") against Spiniello Limited, Inc. and
Spiniello Construction Co. (Civil Action No. 89-4174 (MTB)),
alleging infringement of certain of the Insituform patents in
connection with conduit relining work to be performed in Pittsburgh
by licensees of Kanal-Mueller-Grappe-Frehruhngs-Gesselschaft
("KM"), and in the United States District Court for the Southern
District of Texas, Houston Division (the "Texas Proceedings")
against Cat Contracting, Inc. et al. (Civil Action No. H-90-1690),
alleging infringement of certain of the Insituform patents in
connection with conduit relining work performed in Houston by
licensees of KM. In both proceedings, defendants asserted
counterclaims alleging that suit was brought in bad faith, and
certain antitrust violations, and, in the Texas proceedings,
defendants alleged that the Company engaged in unfair competition.
The New Jersey Proceedings have been stayed pending a final
judgment in the Texas Proceedings.
In June 1991, the jury in the Texas Proceedings rendered its
verdict finding that the competitors named as defendants had
infringed the Insituform patents at issue, and that such patents
were not invalid. The court had also previously severed defendants'
antitrust counterclaims, for hearing at a later date. In the
continuing proceedings, the court, in August 1991, declined to
declare such patents invalid, as was requested by defendants, and
did not disturb the jury's verdict finding that the plaintiffs were
not liable on the defendant's counterclaims alleging that the suit
had been brought in bad faith and that plaintiffs had engaged in
unfair competition. The court, however, granted the defendants a
new trial on the matter of whether they had infringed certain
Insituform patents, under the doctrine of equivalents, setting
aside that portion of the jury's verdict, and granting defendants
judgment notwithstanding the jury verdict on the issue of literal
infringement of that patent.
In October 1995, the court in the Texas Proceedings ruled that
the defendants' serial impregnation processes infringed the
Company's patent and issued a permanent injunction against
defendants' use of the processes covered by such patent and ordered
the parties to proceed to mediation on the issue of damages, the
amount of which remains to be determined. Defendants have filed a
notice of appeal to the United States Court of Appeals for the
Federal Circuit, and the Company has filed a notice of cross-appeal
from the 1991 judgment. Furthermore, in February 1996 defendants
filed a motion with the Texas district court for a partial new
trial alleging that the Company gave knowingly false testimony at
the 1991 trial and seeking dismissal of the action and monetary
sanctions, which the Company has opposed.
In August 1995, the Company commenced an action against
Spiniello Limited, Inc., Spiniello Construction Co. and certain
former employees of the Company's licensees (Insituform
(Netherlands) B.V., Insituform North America Corp., Insituform
East, Inc,. and Insituform Southeast, Plaintiffs v. Spiniello
Limited, Inc., Spiniello Construction Co., Inc., John Ott, Greg
McIlwain and Donald Morrow, Defendants (United States District
Court, Central District of California, Civil Action No. 95-5484
(GHK)) seeking damages and injunctive relief with respect to, among
other things, the alleged infringement of two of the Company's
Insituform patents, misappropriation of the Company's trade secrets
and unfair competition in connection with rehabilitation work being
performed in California. The defendants have denied the material
allegations of the complaint and seek, among other things, a
declaratory judgment that the subject patents are invalid. In
November 1995, defendants were preliminarily enjoined from
infringing the Company's serial impregnation patent no. 4,306,012
and from misappropriating various of the Company's trade secrets.
In November 1995, following completion of the IMA Merger, the
action commenced by the Company in Tennessee Chancery Court
(subsequently removed by defendants to the United States District
Court for the Western District of Tennessee, Western Division) and
captioned Insituform North America Corp. and NuPipe, Inc. v.
Insituform Southeast, Inc., NuPipe Southeast, Inc., Enviroq
Corporation and Insituform Mid-America, Inc., whereby the Company
sought a declaratory judgment confirming its action in declining to
grant its consent as requested by Enviroq, under the various
Insituform and NuPipe license agreements with Enviroq's
subsidiaries, in connection with the Enviroq Acquisition, was
dismissed at the Company's direction.
E-Midsouth, Inc., an indirect, wholly-owned subsidiary of the
Company as a result of the IMA Merger, is a party to certain
arbitration proceedings commenced by Insitu, Inc., a wholly-owned
subsidiary of Insituform East, in connection with their respective
partnership interests in Midsouth Partners. In December 1994,
Insituform East notified Enviroq of its claim that, as a result of
Enviroq's execution of its agreement with IMA, an event of default
had occurred under the Midsouth Partners partnership agreement, and
subsequently sought a declaration to such effect in arbitration,
together with unspecified remedies under the partnership agreement.
The partnership agreement grants non-defaulting partners the right
to require compliance with the agreement, enjoin any breach, seek
dissolution of the partnership, and approve representatives to the
management committee of the partnership in place of those appointed
by the defaulting partner, among other alternatives. In November
1995, Insitu, Inc. amended its claim to allege that as a result of
consummation of the IMA Merger, the Company and its subsidiary,
ICI, had acted in concert with E-Midsouth, Inc. and IMA, and that,
accordingly, ICI was also in default under its obligations as a
partner of Midsouth Partners. ICI has denied that it is in default.
The American Arbitration Association held hearings on this matter
in March 1996. Post-hearing briefs are due in April and May 1996.
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 operations
of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On October 12, 1995, the Company convened its Annual
Meeting of Stockholders (the "Annual Meeting").
(b) Not applicable because (i) proxies for the Annual Meeting
were solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934 together with the Company's Joint Proxy
Statement/Prospectus dated September 15, 1995; (ii) there was no
solicitation in opposition to management's nominees as listed in
such Joint Proxy Statement/Prospectus; and (iii) all of such
nominees were elected.
(c) At the Annual Meeting, the Company's stockholders voted
in favor of a proposal to approve the IMA Merger Agreement. The
holders of 9,386,533 shares voted in favor of, the holders of
56,391 shares voted against, and the holders of 56,204 shares
abstained with respect to approval of such proposal.
At the Annual Meeting, the stockholders voted in favor of a
proposal to approve an amendment of the Certificate of
Incorporation of the Company, effective contemporaneously with the
consummation of the IMA Merger, to increase the number of
authorized shares of ITI Common Stock from 25,000,000 shares to
40,000,000 shares. The holders of 9,329,571 voted in favor of, the
holders of 137,423 shares voted against, and the holders of 55,817
shares abstained with respect to approval of such proposal.
At the Annual Meeting, the stockholders voted in favor of a
proposal to approve an amendment of the Certificate of
Incorporation of the Company, effective contemporaneously with the
consummation of the IMA Merger, to provide for the filling of
vacancies on the Company's Board of Directors as contemplated by
the IMA Merger Agreement. The holders of 9,338,637 shares voted in
favor of, the holders of 90,099 shares voted against, and the
holders of 70,312 shares abstained with respect to approval of such
proposal.
At the Annual Meeting, the stockholders voted in favor of
management's nominees for election as Class III directors of the
Company. The holders of 10,948,155 shares voted in favor of, and
holders of 98,030 shares withheld their vote for, the election of
Brian Chandler; the holders of 10,959,110 shares voted in favor of,
and the holders of 87,075 shares withheld their vote for, the
election of James D. Krugman; the holders of 10,959,110 shares
voted in favor of, and the holders of 87,075 shares withheld their
vote for, the election of Jean-Paul Richard; and the holders of
10,958,910 shares voted in favor of, and the holders of 87,275
shares withheld their vote for, the election of Russell B. Wight,
Jr.
At the Annual Meeting, the stockholders voted in favor of
authorizing the Board of Directors of the Company to adjourn the
meeting to permit further solicitation of proxies, if necessary.
The holders of 10,668,155 shares voted in favor of, the holders of
298,083 shares voted against, and the holders of 79,947 shares
abstained with respect to the approval of such proposal.
(d) Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The ITI 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, 1993, 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
------ ---- ---
1995
First Quarter $13.00 $11.13
Second Quarter 14.13 12.00
Third Quarter 16.63 12.88
Fourth Quarter 14.88 11.13
Period High Low
------ ---- ---
1994
First Quarter $15.25 $10.50
Second Quarter 14.75 12.50
Third Quarter 13.75 12.50
Fourth Quarter 13.75 10.88
As of March 15, 1996, the number of record holders of the
Company's Common Stock was 2,152.
Holders of ITI 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 ITI
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 credit arrangements
to which the Company is a party, the Company is subject to certain
limitations in paying dividends. See Note 8 of the Notes to the
Company's Consolidated Financial Statements included in response to
"Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity," which
information is incorporated herein by reference.
Prior to the IMA Merger and for each year covered by the
Company's Consolidated Financial Statements included in response to
"Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K," IMA had a policy of paying regular cash dividends, semi-
annually in January and July, at an annual rate of $.14 per share
of IMA Class A Common Stock and $.1272 per share of IMA Class B
Common Stock.
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 and
December 1992, the Company consummated, respectively, the IMA
Merger and the IGL Acquisition, each of 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.
Year Ended December
31,
- -----------------------------------------------------
1995(1)(2) 1994(3) 1993(4)
1992(5) 1991(6)
------- ------- -------
- ------- ----
(in thousands, except per share
amounts)
INCOME STATEMENT DATA:
Revenues.................. $ 272,203 $ 223,171 $ 151,622
$ 156,219 $ 120,157
Operating costs and
expenses:
Cost of revenues......... 186,473 146,248 95,729
98,169 74,042
Selling, administrative
and general............. 51,803 41,511 34,889
29,873 24,036
Strategic marketing and
product development..... 7,636 6,180 6,878
6,303 7,064
Merger and restructur-
ing costs............ 14,541(7) -- (981)
14,572(8) 733
Total operating
income............ 11,750 29,232 15,107
7,302 14,282
Other income (expense):
Gain on sale of invest-
ment in Insituform
Mid-America, Inc........ -- -- --
-- 17,280(9)
Other..................... (8,120)(10) (2,398) (468)
2,859 2,350
Taxes on income........... 3,987 10,457 5,159
8,907 13,688
Equity in earnings of
affiliated companies..... 666 570 638
1,282 289
Income (loss) from
continuing operations.... (966)(10) 15,667 9,734
2,288 20,491
Net income (loss)......... (966) 14,503 7,487
1,748 21,872
Earnings (loss) per share:
Income (loss) from
continuing operations... (.04) .57 .36
.09 .90
Discontinued operations... -- (.04)(11) (.09)(11)
(.02) .01
Extraordinary item........ -- -- --
-- .05
Cumulative effect of
accounting change........ -- -- .01
-- --
Net income (loss)........ (.04) .53 .28
.07 .96
Weighted average common
and common equivalent
shares outstanding....... 26,902 27,162 27,206
24,317 22,738
BALANCE SHEET DATA:
Working capital........... 69,538 46,403 40,724
31,990 50,904
Current assets............ 120,711 106,926 81,102
67,074 89,696
Property and equipment.... 59,773 51,471 40,407
32,184 28,681
Intangibles............... 73,158 65,268 52,707
29,489 19,599
Total assets.............. 260,300 227,627 177,010
133,682 140,773
Long-term debt............ 82,813 47,347 36,297
7,675 8,411
Total liabilities......... 137,845 110,310 77,108
43,652 48,161
Redeemable preferred
stock.................... -- -- 157
84 5
Total common stock and
other stockholders'
equity.................. 116,810 114,880 100,106
90,267 92,435
___________________
(1) In 1995 the Company consummated the acquisition of two-thirds
of Insituform France and
the Enviroq Acquisition, which have been accounted for under
the purchase method of
accounting.
(2) At December 31, 1995 and through the year then ended, a 15%
general partnership interest
in Midsouth Partners was held by ICI (a subsidiary of the
Company) and a 42.5% interest
therein were held by a subsidiary of Enviroq; and, as a
consequence of the Enviroq
Acquisition, Midsouth Partners has been consolidated in the
Company's financial
statements since April 18, 1995. See "Item 3. Legal
Proceedings" for a description of
arbitration proceedings brought by the remaining partner of
Midsouth Partners alleging
an event of default by Enviroq under the partnership agreement
of Midsouth Partners, and
the purported exercise by such partner of its alleged rights as
a non-defaulting partner
to name a majority of the members of the management committee
of Midsouth Partners, an
action to which the Company has objected.
(3) In 1994 the Company consummated the acquisition of Gelco
Services, Inc. and affiliates,
which has been accounted for under the purchase method of
accounting.
(4) In 1993 the Company consummated the acquisitions of Naylor and
Insituform Midwest, Inc.,
which have been accounted for under the purchase method of
accounting.
(5) In 1992 the Company consummated the acquisitions of all of the
assets of Pipeline
Rehabilitation Systems, Inc., the minority interest in
Insituform Canada and of H.T.
Schneider, Inc., which have been accounted for under the
purchase method of accounting.
(6) In 1991 the Company consummated the acquisitions of United
Pipeline Systems USA, Inc.,
of the controlling interest in Insituform Southwest and of
United Pipeline Systems, Inc.
(and its parent), which have been accounted for under the
purchase method of accounting.
(7) Reflects $6.5 million in costs associated with the IMA Merger,
which have been charged
to operations primarily in the fourth quarter of 1995, and a
pre-tax charge in the
amount of $8.1 million for restructuring costs, primarily for
consolidation of corrosion
and abrasion protection operations, rationalization of Canadian
operations to one
facility, elimination of duplicative management positions,
relocation of certain
domestic employees and functions, and termination of
construction of proposed
manufacturing capacity.
(8) Reflects $9.667 million in costs associated with the IGL
Acquisition, which have been
charged to operations primarily in the fourth quarter of 1992,
and a pre-tax charge in
the amount of $4.905 million for restructuring costs, primarily
for asset-related write-
offs, lease termination provisions and personnel related costs.
(9) In May 1991 the Company completed the sale of an equity
interest in IMA as a result of
which the Company received payments aggregating $22.058
million, which, after accounting
for the aggregate carrying amount of the investment, expense
associated with the
transaction and taxes (subsequent to utilization of the
Company's capital loss carryover
reported as an extraordinary item), resulted in a contribution
of approximately $10.574
million to net income (approximately $9.451 million to income
before extraordinary
item).
(10)In 1995 the Company settled certain outstanding litigation for
a cash payment of $3.2
million and issuance of 30,000 shares of ITI Common Stock,
resulting in an after-tax
charge against earnings of approximately $2.2 million.
(11)In December 1993 the Company determined to discontinue the
operations of its division
engaged in the offsite rehabilitation of downhole tubulars for
the oil and gas industry.
As a result, the Company recorded a fourth quarter 1993 charge
to write down the
division's assets to their estimated net realizable values and
to accrue for operating
losses during the anticipated phase-out period. The statement
of operations and balance
sheets have been restated to reflect continuing operations. The
Company also recorded
a fourth quarter 1994 charge resulting from the abandonment of
efforts to find a
purchaser for, and shut down of, such division.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's revenues include construction revenues from
direct installation and other contracting activities, product sales
of materials and equipment to licensees and royalty income and
initial license fees received from licensees for the use of the
Company's trenchless rehabilitation processes. Product sales
consist primarily of sales of Insitutubes and NuPipe to licensees.
Construction contract revenue is generated by the Company's
subsidiaries operating in the United States, Canada, France, the
United Kingdom and Chile. Royalties and license fees are paid by
the Company's 33 unaffiliated Insituform licensees and sub
licensees and its ten unaffiliated NuPipe licensees. During the
three years ended December 31, 1995, 1994 and 1993, approximately
71.2%, 67.8% and 71.3%, respectively, of the Company's consolidated
revenues were derived from sales, construction and royalty revenues
related to the Insituform Process.
Product sales and royalties are primarily a function of the
contracts performed by the Company's licensees. However, changes in
product sales may vary from changes in royalties because of several
factors, including differences between the timing of Insitutube
sales and contract performance by licensees and the accrual by the
Company of minimum royalties in excess of royalties otherwise due
on work performed. The Company's consolidated subsidiaries obtain
supplies of Insitutubes and related materials from the Company.
The Company was incorporated in Delaware in 1980 in order to
act as the exclusive licensee of the Insituform Process in most of
the United States. In October 1995, the Company consummated the IMA
Merger, which has been accounted for as a pooling-of-interests.
Under the pooling-of-interests method of accounting, the historical
financial statements of the combining companies are retroactively
combined (after adjustments to eliminate intercompany balances and
transactions, and to conform accounting methods) as if the
companies had operated as a single entity.
The Company's results of operations for each of the three
years in the period ended December 31, 1995, after accounting for
the IMA Merger on a pooling-of-interests basis, confirm the
Company's increasing concentration of revenues derived from direct
installation activities (90.7%, 86.8% and 81.4%, respectively, of
total revenues for the combined companies as compared to 77.5%,
74.0% and 62.6%, respectively, for the Company's operations
exclusive of those of IMA combined as a result of the IMA Merger),
resulting from the acquisition of licensees. As a result of the
change in revenue mix, the Company's gross profit as a percentage
of total revenues for each of the three years in the period ended
December 31, 1995, after accounting for the IMA Merger on a
pooling-of-interests basis, was 31.5%, 34.5% and 36.9%,
respectively, compared to 34.1%, 36.2% and 40.2%, respectively, for
the Company's operations exclusive of those of IMA combined as a
result of the IMA Merger.
The Company's acquisitions in July 1993 of Naylor, the parent
of Insituform Gulf South, Inc. ("Gulf South"), and Insituform
Midwest, Inc. ("Midwest"), its acquisition in October 1994 of Gelco
Services, Inc. ("Gelco") and affiliates, its February 1995
acquisition of two-thirds of the interest in Insituform France, the
April 1995 Enviroq Acquisition and its November 1995 acquisition of
Waterflow's FormaPipe division have been accounted for under the
purchase method of accounting, so that the results of the acquired
companies are included in the Company's historical results of
operations from the consummation of such transactions,
respectively. In addition, product sales and purchases and royalty
revenues and expenses related to intercompany transactions
occurring subsequent to the acquisition dates of Gulf South,
Midwest, Gelco, Insituform France and Insituform Southeast have
been eliminated.
Fluctuations in the exchange rates between the United States
dollar and the currencies of other countries in which the Company
operates or has licensees may have an impact on the Company's
consolidated results during the relevant reporting period. The
Company intends to manage any such foreign currency exposure in the
context of discrete commercial transactions and, when appropriate,
to offset such exposure in whole or in part by entering into
foreign currency forward contracts, in order to reduce the impact
of such fluctuations on results of operations. The Company does not
anticipate that the circumstances in which such hedging activity
would be appropriate will have a material effect on the Company's
liquidity.
RESULTS OF OPERATIONS
Year Ended December 31, 1995 Compared to Year Ended December
31, 1994
Revenues. Revenues increased 22.0% to $272.2 million in 1995
from $223.2 million in the prior year, primarily as a result of an
increase in construction revenues. As discussed above, during 1995
and 1994 the Company consolidated the construction revenues of
newly-acquired former licensees, both in the United States and in
Europe (and obtained a majority interest in another domestic
licensee) resulting in the elimination of the related product sales
and royalty revenues.
Construction contract revenues increased 27.4% to $246.9
million from $193.7 million in 1994, primarily as a result of the
acquisitions of Insituform Southeast (in April 1995), Insituform
France (in February 1995) and Gelco and affiliates (in October
1994), which, together with the consolidation of Midsouth Partners,
contributed $47.7 million to 1995 construction revenues, compared
to $4.6 million from Gelco subsequent to its acquisition in the
prior year. See "Item 1. Business", for information describing the
Company's majority interest in Midsouth Partners resulting from the
Enviroq Acquisition, and claims made in arbitration relating to
control of the management committee of Midsouth Partners.
Construction revenues also reflect increases in revenues in 1995 in
the United States from the Company's midwestern operations of $3.8
million, its Gulf coast operations of $4.3 million, and IMA's
central region of $3.8 million. In addition, the Company's
tunnelling business generated an additional $6.8 million of
revenues.
These increases were offset by decreases in revenues of the
Company's New England operations of $4.4 million (due primarily to
the completion of certain contracts with the Massachusetts Water
Resources Authority), and of Insituform Canada's water and sewer
open cut construction business of $3.8 million (due primarily to
the continued sluggish housing market in Canada). During the fourth
quarter of 1995, Insituform Canada completed the sale to certain
members of its management of the assets utilized in its open cut
business, which in 1995, through the date of sale, represented
$10.2 million in revenues, compared to $14.0 million for the entire
prior year. Fluctuations in currency exchange rates had an
immaterial effect on construction revenues during 1995.
Product sales decreased 15.0% to $18.6 million in 1995 from
$21.9 million in 1994. The decrease is primarily due to additional
eliminations of intercompany sales subsequent to recent
acquisitions. Post-acquisition intercompany sales to Insituform
France, Insituform Southeast, and Midsouth Partners of $3.1 million
were excluded from 1995 consolidated product sales. In addition,
1994 sales included $1.1 million of pre-acquisition sales to Gelco.
Royalty and license fee revenue decreased 11.2% in 1995 to
$6.7 million compared to $7.5 million in 1994. The decrease is
primarily attributable to the elimination of $1.7 million in
post-acquisition intercompany royalties from Insituform France,
Insituform Southeast and Midsouth Partners in 1995. Royalties in
1994 included $0.6 million of pre-acquisition royalties from Gelco.
In 1995, the Company added a license for New Zealand, recognizing
$48,000 in license fee revenue, while in 1994, the Company signed
licenses in South Korea and, on a non-exclusive basis, for Japan
and Poland, recognizing $0.3 million in license fee revenue.
Operating Costs and Expenses. In 1995, cost of construction
contracts (which include trenchless installations, abrasion and
corrosion and pipeline construction, tunnelling and open cut
excavation) increased 32.3% to $174.1 million from $131.5 million
in 1994. The increase was primarily attributable to newly-acquired
licensees, which added collectively $35.9 million to 1995
construction costs, compared to $3.0 million from Gelco subsequent
to its acquisition in 1994. During 1995, construction costs as a
percentage of construction revenues increased to 70.5% from 67.9%
in 1994, due primarily to poorer performance of the Company's New
England, Gulf coast and United Kingdom operations, in addition to
the historically lower margins associated with general contracting
in the Company's Chilean and tunnelling operations. These negative
factors were somewhat offset by improvements resulting from the
Gelco and Insituform France operations, which achieved
comparatively higher margins.
Cost of product sales as a percentage of product sales
decreased to 64.3% in 1995 compared to 66.0% in 1994, while gross
margins decreased to $6.7 million in 1995 from $7.5 million in
1994. This improvement in cost of product sales as a percentage of
product sales primarily reflects a favorable year for production
quality and customer satisfaction in the United States, offset by
increases in product sales in Japan and the United Kingdom, where
margins are historically lower. In 1994, the Company had recorded
a provision of $0.6 million for certain obsolete inventories of
NuPipe.
As a percentage of revenues, selling, administrative and
general expenses were 19.0% compared to 18.6% in 1994. The increase
in 1995 as a percent of revenues is primarily attributable to
higher costs of operations at Gelco, increased focus on company-
wide quality of $0.4 million, additional legal costs associated
with litigation and intellectual property maintenance of $0.8
million, and increased costs in the Company's New England
operations due to management transition and additional crew
management to handle increased volume during the first half of
1995. Selling, administrative and general costs increased 24.7% to
$51.8 million compared to $41.5 million in 1994 due, in part, to
the incremental costs of operations for recently acquired entities
of $6.9 million (of which $1.1 million related to incremental
goodwill and non-compete amortization).
Strategic marketing and product development costs increased
23.6% to $7.6 million compared to $6.2 million in 1994, primarily
due to the enhanced efforts in connection with Paltem and NuPipe of
$0.7 million. Management also expanded its strategic marketing
efforts in the industrial market in 1995, resulting in incremental
salaries and benefits of $0.4 million for additional personnel,
travel and associated costs.
In 1995, the Company recognized merger and restructuring costs
of approximately $14.5 million in connection with the IMA Merger.
These included transaction costs related to the merger of
approximately $6.5 million, which were primarily attributable to
investment banking fees, legal and accounting fees, filing fees,
and management travel costs. These also included a charge of
approximately $8.1 million relating to restructuring costs,
consisting primarily of: (i) the consolidation of the combined
companies' corrosion and abrasion protection operations and the
abandonment of certain assets related to the UltraPipe process
(approximately $2.6 million), (ii) the rationalization of certain
Canadian operations to one facility in Edmonton (approximately $0.5
million), (iii) the elimination of certain duplicative management
positions (approximately $0.8 million), (iv) the relocation of
certain domestic employees and functions (approximately $1.7
million), and (v) the termination of construction on IMA's proposed
manufacturing facility in Chesterfield, Missouri (approximately
$1.8 million).
Other Income (Expense). Other expense increased to $8.1
million from $2.4 million in 1994, a significant portion of which
is attributable to additional interest incurred on debt issued to
fund the Company's recent acquisitions (an increase of $3.0 million
compared to 1994). In addition, notwithstanding its belief that it
had defenses to plaintiff's claims that were well-grounded in law
and fact, in May 1995 the Company entered into a memorandum of
understanding to settle a pending shareholder class action lawsuit.
Under the settlement, which has been evidenced by a stipulation of
settlement formally approved by court order in December 1995, the
Company made a cash payment to class members in the amount of $3.2
million and (in January 1996) issued 30,000 shares of ITI Common
Stock (valued at $0.4 million). The Company recorded a pre-tax
charge to earnings for $3.6 million (after-tax effect of $2.2
million) during 1995 with respect to the settlement.
Taxes on Income. Taxes on income applicable to continuing
operations decreased to $4.0 million from $10.5 million in 1994 as
a result of a $23.2 million decrease in income before taxes on
income, offset by an increase in the effective tax rate to 109.8%,
as compared to 39.0% in 1994. As indicated in Note 14 of the Notes
to Consolidated Financial Statement included in response to "Item
14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K," the 1995 and 1994 effective tax rates were higher than the
United States federal statutory rate, which in 1995 was primarily
due to the non-deductibility of a substantial portion of the $6.5
million in merger-related costs in connection with the IMA Merger.
The additional amortization of goodwill associated with the recent
acquisitions, which is generally not deductible for tax purposes,
contributed to the increase in the rate for both years, as did the
need to provide a valuation allowance due to uncertainties
regarding the Company's ability to utilize certain current and
prior year losses in certain tax jurisdictions to offset current
and prior year profits in other jurisdictions.
In its financial statements, the Company has reported net
deferred income tax assets of $2.7 million as of December 31, 1995.
The Company has net operating loss and foreign tax credit
carryforwards which, if fully realized, would produce future tax
benefits of $7.0 million. The realization of these benefits is
dependent on the generation of future taxable income in the
applicable jurisdictions, and the Company has recorded a valuation
allowance of $3.8 million to reduce the related net deferred tax
assets to $2.7 million. Such amounts represent the level of future
income tax benefits the realization of which, in management's
opinion, meets the "more likely than not" threshold required under
Statement of Financing Accounting Standards No. 109, "Accounting
for Income Taxes". The net operating loss carryforwards ("NOLs") of
the Company's subsidiaries are summarized in Note 14 of the Notes
to Consolidated Financial Statements including in response to "Item
14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K".
Approximately $1.2 million of the United States NOLs, expiring
in 2007, are further subject to limitations imposed by Internal
Revenue Code Section 382 and may only be utilized to the extent of
approximately $.4 million per year as a result of the ownership
change which occurred upon the Company's acquisition of its New
England operations in 1992. However, this limitation is such that
the full amount of NOLs may be utilized before the expiration of
the carryforward period.
Management has prepared projections of the respective
subsidiaries' taxable income for future years that indicate that
the NOLs that are subject to a Section 382 limitation would be
absorbed within four to seven years, that the remaining United
States and Canadian NOLs would be absorbed within three years and
a substantial portion of the United Kingdom NOLs would be absorbed
within seven years. However, the Company does not believe that the
future realization of all of these future tax benefits indicated by
its projections is sufficiently assured to allow their full
recognition in the consolidated financial statements. In
particular, projections of operating results over an extended
period, such as seven years, are inherently imprecise. Accordingly,
a valuation allowance of $3.8 million has been recorded.
The realization of the net deferred tax asset of $2.7 million
would require that certain of the Company's subsidiaries, including
ICI, Insituform Southwest, Insituform of New England, Inc.,
Insituform Canada, Insituform Permaline Ltd., and Insituform
Technical Services Ltd., generate various levels of annual taxable
income over the respective carryforward periods. Management
believes that it is more likely than not that the applicable levels
of taxable income can be generated. In reaching this conclusion,
management noted a number of factors, including the following
related to its domestic operations: (i) the operations of
Insituform New England were historically profitable, the NOL
carryforward was generated by a non-recurring charge immediately
prior to its acquisition by the Company and the Company believes
managerial problems experienced during 1994 and early 1995 have
been corrected; and (ii) historically profitable partnership
investments held by ICI are expected to continue to result in
annual taxable income. With regard to its foreign operations,
management noted a number of factors including that, with the
exception of NuPipe Limited, the Company's United Kingdom
operations have had a history of profitability until the United
Kingdom recession, the Company has eliminated duplicative
administrative and research and development facilities in the
United Kingdom and has also reduced managerial and other staffing
levels in the United Kingdom and the acquisition of the business
and personnel of Waterflow's FormaPipe division in late 1995 have
helped to restore volume to needed levels.
Net Income. Total revenues increased by $49.0 million, or
22.0%, in 1995 over 1994, which was coupled with an increase in
gross profit of $8.8 million, or 11.4%, offset by increased
operating costs (including merger and restructuring costs of $14.5
million) of $26.2 million, or 55.1%. These factors contributed to
a decrease in operating income of $17.5 million, or 59.8%.
Excluding merger and restructuring costs in 1995, operating income
would have decreased $2.9 million, or 10.0%. An increase in other
expense of $5.7 million, offset by a decrease in taxes on income of
$6.5 million, resulted in a decrease in income from continuing
operations of $16.6 million, or 106.2%. In 1994, the Company
recognized a $1.2 million loss from discontinued operations. As a
result of the foregoing, net loss for 1995 was $1.0 million, a
decrease of $15.5 million, or 106.7%, from net income in 1994.
Year Ended December 31, 1994 Compared to Year Ended December
31, 1993
Revenues. Revenues increased 47.2% to $223.2 million in 1994
from $151.6 million in the prior year, primarily as a result of an
increase in construction revenues and to a lesser extent, product
sales. During 1994 and 1993, the Company consolidated the
construction revenues of newly-acquired former licensees, resulting
in the elimination of the related product sales and royalty
revenues.
Construction contract revenues increased 56.9% to $193.7
million from $123.4 million in 1993, reflecting the acquisitions of
Gelco (in October 1994) and Midwest and Gulf South (both in July
1993), which collectively contributed $51.3 million to 1994
construction revenues, compared to $20.7 million from Midwest and
Gulf South subsequent to their acquisition in the prior year.
Construction revenues also reflect an increase in 1994 of $12.6
million by the Company's New England operations, due primarily to
project work on its contracts with the Massachusetts Water Resource
Authority. In addition, the Company's revenues were impacted by the
normalization of IMA's rehabilitation operation which had been
impacted by floods and rains in the prior year, and the start-up of
abrasion and corrosion and pipeline operations in Chile, which
added $11.2 million to 1994 revenues. Fluctuations in currency
exchange rates of Canadian dollars to United States dollars
negatively impacted 1994 construction revenues by approximately
$1.6 million.
Product sales increased 6.8% to $21.9 million in 1995 from
$20.5 million in 1993. The increase in 1994 is primarily due to
increased licensee activity in the United States, activity in Japan
relating to the Narita airport project, and recovering economic
conditions in Europe. These increases were offset by eliminations
of intercompany sales to the Company's recently acquired
subsidiaries. Post-acquisition intercompany sales to Gelco of $0.7
million were excluded from 1994 consolidated product sales. In
addition, 1993 sales included $2.9 million of pre-acquisition sales
to Midwest and Gulf South.
Royalty and license fee revenue decreased 1.8% in 1994 to $7.5
million compared to $7.6 million in 1993. The decrease is primarily
attributable to the elimination of $0.2 million in post-acquisition
intercompany royalties from Gelco in 1994. Royalties in 1993
included $0.6 million of pre-acquisition royalties from Midwest and
Gulf South. In 1994, the Company added licenses for South Korea,
and on a nonexclusive basis, for Japan and Poland, recognizing
license fee revenue of $0.3 million, while in 1993, the Company
signed licenses in Australia, Belgium, Hawaii, Switzerland and, on
a non-exclusive basis, various territories in the former Soviet
Union, recognizing $0.6 million in license fee revenue.
Operating Costs and Expenses. In 1994, cost of construction
contracts increased 57.8% to $131.5 million from $83.3 million in
1993. The increase was primarily attributable to newly-acquired
licensees, which added collectively $40.0 million to 1994
construction costs, compared to $14.0 million attributable to
Midwest and Gulf South in 1993. In addition, IMA's start-up
operations in Chile, normalization of IMA's rehabilitation
activities in 1994 after flooding and rains in the prior year, and
increased costs in tunnelling activities contributed to the growth
in construction costs. During 1994, construction costs, as a
percentage of construction revenues increased to 67.9% from 67.5%
in 1993, due primarily to poorer performance in the Company's New
England operations, and the pipeline constructions activities
undertaken in Chile, which carried the historically lower margins
associated with general contacting. These negative factors were
somewhat offset by improvements resulting from the Gelco and
Midwest operations which achieved comparatively higher margins.
Cost of product sales as a percentage of product sales
increased to 66.0% in 1994 compared to 58.9% in 1993 with gross
margin decreasing to $7.5 million in 1994 from $8.4 million in
1993. Those results primarily reflect an increase in product sales
in 1994 of $2.9 million in Japan and the United Kingdom, where
margins are lower. In addition, the Company recorded a provision of
$0.6 million for certain obsolete inventory of NuPipe in 1994.
Also, in 1993, the Company recorded reductions in certain European
warranty reserves no longer required in the amount of $0.5 million,
which favorably impacted cost of product sales, whereas, in 1994,
no such reductions were recorded.
As a percentage of revenues, selling administrative and
general expenses were 18.6% compared to 23.0% in 1993. The
decreases in 1994 as a percent of revenues is attributable
primarily to economies of scale realized by the allocation of fixed
costs over a larger revenue base. Further, the Company incurred
approximately $0.7 million in costs late in 1993 in connection with
reorganizing management. Selling, administrative and general costs
increased 19.0% to $41.5 million compared to $34.9 million in 1993
due, in part, to the incremental costs of operations for recently
acquired entities of $2.3 million (of which $0.7 million related to
incremental goodwill and non-compete amortization), and the
start-up of Latin American operations of $0.5 million. Also
contributing to the increase was the additional ongoing costs of
expanded administrative efforts in 1994, including salaries and
benefits of $3.0 million for the additional personnel, travel and
other costs.
Strategic marketing and product development costs decreased
10.1% to $6.2 million compared to $6.9 million in 1993, primarily
due to the elimination of duplicative United Kingdom research and
development costs, including personnel and facilities, as a result
of the acquisition of IGL in December 1992, and the concentration
of such efforts in the United States. This was offset somewhat by
expanded strategic marketing efforts in 1994, including salaries
and benefits of $0.5 million for the additional personnel, travel
and other costs.
In 1993, the Company recognized merger and restructuring
credits of approximately $1.0 million, which primarily reflected
the effect of an early termination of a sublease under the
Company's Langley, United Kingdom, lease (which resulted in the
receipt of $0.8 million). The Company continues to seek to
negotiate a termination of the underlying lease in Langley.
Other Income (Expense). Other expense increased to $2.4
million from $0.5 million in 1993, primarily attributable to
additional interest incurred on debt issued to fund the Company's
corporate acquisitions (an increase in $1.8 million compared to
1993).
Taxes on Income. Taxes on income applicable to continuing
operations increased to $10.5 million from $5.2 million in 1993 as
a result of an increase in the effective tax rate to 39.0%, as
compared to 35.2% in 1993, combined with a $12.2 million increase
in income before taxes on income. As indicated in Note 14 of the
Notes to Consolidated Financial Statements included in response to
"Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K," the 1993 effective tax rate was fairly low, primarily
due to the favorable foreign tax treatments of certain foreign
earnings generated in the period. The additional amortization of
goodwill associated with the Gulf South and Midwest acquisitions of
$1.0 million, which is not deductible for tax purposes, contributed
to the increase in the 1994 rate over the statutory rate, as did
the need to provide a valuation allowance due to uncertainties
regarding the Company's ability to utilize current year losses in
certain tax jurisdictions to offset current year profits in other
jurisdictions.
Discontinued Operations. In December 1993, the Company adopted
a formal plan to discontinue the operations of its division engaged
in the off-site rehabilitation of downhole tubulars for the oil and
gas industry. The Company offered the business and the related
assets, including a facility located in Dallas, Texas, for sale
during 1994, but was unable to obtain a commitment from prospective
buyers, and management determined to shut down the division. The
Company recorded a charge of $2.0 million ($1.3 million net of
applicable income tax benefit) in the fourth quarter of 1993 to
write down the division's assets to their estimated net realizable
value and to accrue for estimated operating losses during the
phase-out period. Upon the determination to liquidate the
division's assets, the Company recorded, in the fourth quarter of
1994, a charge of $1.8 million ($1.2 net of applicable income tax
benefit) to write down the division's assets to their estimated
liquidation values and to accrue for estimated costs to shut down
the operation.
The downhole tubular division's revenues for the years ended
December 31, 1994 and 1993 were $1.1 million and $1.9 million,
respectively. The results of operations of the downhole tubular
division have been reclassified to separately identify them as
discontinued operations.
Net Income. Total revenues increased by $71.5 million, or
47.2%, in 1994 over 1993, which was coupled with an increase in
gross profit of $21.0 million, or 37.6%, partially offset by
increased operating costs of $6.9 million, or 16.9%. These factors
contributed to an increase in operating income of $14.1 million, or
93.5%. Excluding merger and restructuring credits in 1993,
operating income would have increased $13.1 million, or 87.0%. An
increase in other expenses of $1.9 million, coupled with an
increase in taxes on income of $5.3 million, resulted in an
increase in income from continuing operations of $5.9 million, or
61.0%. Losses in 1994 from discontinued operations were $1.2
million (net of applicable income tax benefits of $0.6 million). As
a result of the foregoing, net income for 1994 was $14.5 million,
an increase of $7.0 million, or 93.7% from 1993.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company had $11.4 million in cash,
U.S. treasury bills, and short-term investments, compared to $18.7
million at December 31, 1994. The decrease of $7.3 million in cash
and cash equivalents during the year reflected cash used for
capital expenditures of $16.5 million and repayments of long-term
debt of $9.4 million, partially offset by cash provided by
operations of $1.1 million and $3.6 million in proceeds received
upon exercise of outstanding stock options. During the year ended
December 31, 1995, the Company also received proceeds of $40.8
million from long-term debt, which was used to fund business
acquisitions and refinance IMA's term loan and short-term debt. The
Company's working capital ratio was 2.4-to-1.0 at December 31,
1995, representing an increase from 1.8-to-1.0 at December 31,
1994.
Continuing operations provided cash of $1.6 million during the
year ended December 31, 1995, compared to $21.2 million in 1994.
The decrease is due primarily to the 1995 loss from continuing
operations of $1.0 million, reflecting merger and restructuring
costs of $14.5 million (of which $4.1 million had not been paid as
of December 31, 1995)and cash litigation settlement costs of $3.2
million, compared to 1994 income from continuing operations of
$15.7 million. During the year ended December 31, 1995, cash was
also used to fund increases in inventory of $4.1 million, prepaid
expenses and miscellaneous of $4.1 million, and reductions in
income taxes payable of $5.3 million and in accounts payable and
accruals of $3.8 million. These were further offset by additional
depreciation and amortization of $4.9 million (primarily associated
with the 1994 acquisition of the Gelco companies and the 1995
acquisitions of Insituform France and Insituform Southeast).
Discontinued operations used cash of $.5 million in 1995, compared
to $.1 million in 1994.
Receivables used $1.0 million of cash during 1995, compared to
$17.5 million in 1994. Primarily due to the acquisition of
Insituform Southeast, and increased activity in the United Kingdom
due to the acquisition of Waterflow's Formapipe division,
receivables, including costs and estimated earnings in excess of
billings, increased 12.5% to $76.5 million from $68.0 million in
1994, reflecting a $3.9 million increase in retainage receivables
and a decrease of $5.3 million in costs and estimated earnings in
excess of billings on construction contracts from 1994. The
collection cycle for construction receivables is generally longer
than for the Company's other operations due to provisions for
retainage, often 5% to 10% of the contract amount, as well as the
slow internal review processes often employed by the construction
subsidiaries' municipal customers. Retainage receivables are
generally received within 60 to 90 days after the completion of a
contract.
The $3.8 million in cash provided by reductions in accounts
payable and accruals during 1995, compared to $7.9 million in cash
provided in 1994, reflected normal timing factors relating to trade
payables. Additional federal and state income tax payments were
made by the Company during the year as a result of greater levels
of currently taxable income in 1995 compared to 1994. A substantial
portion of the merger costs incurred in connection with the IMA
Merger are not deductible for income tax purposes.
See "Item 1. Business; IMA Merger" for a description of the
IMA Merger, pursuant to which IMA became a wholly-owned subsidiary
of the Company and holders of IMA Class A Common Stock became
entitled to receive an aggregate of 12,450,896 shares of ITI Common
Stock, subsequent to the conversion into IMA Class A Common Stock,
in accordance with its terms, of the outstanding IMA Class B Common
Stock.
In April 1995, IMA completed the Enviroq Acquisition for a
purchase price of $18.3 million (including $3.0 million in a
five-year covenant not to compete), paid $15.3 million in cash
funded by a term loan from IMA's banks and $3.0 million in a five-
year subordinated promissory note issued to New Enviroq. As a
result of demands for payment of such note and ensuing litigation,
in March 1996 the Company discharged its obligation under such
note, and under arrangements to pay $1 million in consulting fees
to New Enviroq over five years, and settled such litigation, for
the aggregate amount of $3.4 million and the release of other
claims.
In February 1995, the Company acquired two-thirds of the stock
of Insituform France for the sum of approximately $1.4 million,
and, in November 1995, completed the acquisition of Waterflow's
United Kingdom based Formapipe division for $4.3 million in cash,
which were both funded by the Company's credit facility with
SunTrust Bank, Nashville, National Association ("SunTrust"),
formerly Third National Bank in Nashville. The Company also remains
obligated on certain notes issued in connection with the
acquisition, in October 1994, of all of the outstanding stock of
Gelco and affiliates, originally representing the one-half of the
purchase price of $18 million not paid in cash at closing, such
notes due on the first and second anniversaries of closing. In
addition, the Company issued promissory notes, aggregating $2.85
million, to the former Gelco shareholders and their affiliates,
representing net current liabilities of the acquired companies to
related parties and a portion of working capital at closing. The
notes issued in the Gelco closing are secured by the assets
acquired, subject to the rights of SunTrust, as agent, under its
loan arrangements with the Company.
Capital expenditures decreased in 1995 to $16.5 million from
$18.5 million in 1994. Capital expenditures generally reflect
replacement equipment required by the Company's contracting
subsidiaries. During 1995, the Company received $2.5 million in
proceeds upon disposal of older equipment, compared to $1.4 million
in 1994. See "Item 2. Properties" for information concerning the
Company's consideration of additional manufacturing capacity in
connection with its commercialization of the Ashimori Products.
Financing activities provided $26.1 million in cash during
1995 compared to $6.9 million in 1994. During 1995, the $40.8
million in proceeds received by the Company as a result of
incurring long-term debt was primarily used to fund the
acquisitions of Insituform France and Waterflow's FormaPipe
division along with retiring IMA's term loan used to finance the
Enviroq Acquisition and IMA's credit facility. Principal payments
increased to $9.4 million in 1995 from $5.8 million in 1994,
primarily as a result of payments due on the first anniversary of
the Gelco notes, and scheduled payments under the Company's credit
facility with SunTrust.
In October 1995, the Company entered into a credit agreement
dated such date (the "Credit Agreement") with SunTrust, as agent,
and a group of participating lenders (the "Lenders"), which
provides for advances by the Lenders through October 1997 on a
revolving basis aggregating up to $105 million (including a $5
million standby letter of credit facility). Of such amount,
approximately $35.9 million was applied to refinance the prior
existing debt of the Company to SunTrust and approximately $14.5
million to IMA's prior existing term loan and approximately $16.0
million to short-term debt of IMA under credit lines replaced with
the new facility. Additional advances may be used for the expansion
of the Company's business and for general corporate purposes.
Indebtedness pursuant to the Credit Agreement matures five
years after closing, with installments based on a five-year
amortization schedule commencing December 31, 1997. Interest on
indebtedness under the Credit Agreement is payable at a rate per
annum selected by the Company as either SunTrust's prime rate, plus
a margin up to 0.25%, in the event certain financial ratios are not
maintained, or an adjusted LIBOR rate, plus a margin ranging from
1.00% to 1.75%, depending on the maintenance of certain financial
ratios. Up to $5 million under the Credit Agreement may be borrowed
from SunTrust pursuant to a swing-line facility, and would accrue
interest at a rate per annum equal to 0.5% below SunTrust's prime
rate. The Credit Agreement obligates the Company to comply with
certain financial ratios and restrictive covenants that, among
other things, limit the ability of the Company and its subsidiaries
to incur further indebtedness, pay dividends, make loans and
encumber any properties, and requires guarantees of certain
domestic subsidiaries.
The Company's prior existing facility with SunTrust, arranged
in July 1993, provided for advances of up to $30 million, which was
increased by up to an additional $12 million in August 1994 and
restated in June 1995 to aggregate up to $50 million. Borrowings
under the prior facility initially bore interest at the lesser of
the bank's prime rate or 2.75% above the 30-day adjusted LIBOR
rate. Pursuant to the June 1995 restatement, interest accrued at a
rate selected by the Company as either the bank's prime rate, plus
a margin ranging up to 0.25%, or the 30-day adjusted LIBOR rate,
plus a margin ranging from 1.75% to 2.25%. Initially, quarterly
principal payments of $1.1 million were required, and an additional
$.3 million to have commenced in September 1995, with the original
maturity date of December 1997 subsequently extended to June 2000.
IMA's term loan, which funded in April 1995 and was re-
financed from the SunTrust facility, originally aggregated $15.25
principal amount, payable $1.5 million per year with the balance
due in April 2002. This loan was secured by first mortgages on real
estate and a pledge of the shares of certain U.S. and Canadian
subsidiaries.
The Company's senior subordinated note in the principal amount
of $5 million acquired by Hanseatic Corporation in July 1993 for
discretionary customer accounts requires quarterly payments of
interest at 8.5% per annum and installments of principal in the
amount of $1 million on each of the fifth through eighth
anniversary dates of closing, with the entire remaining principal
due nine years after closing. The note is subordinated to bank and
other institutional financing (including the Credit Agreement), and
purchase money debt incurred in connection with acquisitions of
businesses. The note is pre-payable at the option of the Company,
at premiums until the fifth anniversary of closing ranging from 3%
to 1% of the amount prepaid. Warrants with respect to 350,877
shares of ITI Common Stock issued in connection with such note are
exercisable, at the election of the holder, through July 25, 1998,
at a price per share of ITI Common Stock of $14.25, and such shares
are entitled to demand and incidental registration rights.
In May 1995, the Company agreed to extend by one year, through
July 1996, the maturity of the note held by the Company issued by
Ringwood Limited in the principal amount of $3.624 million (see
Note 11 of the Notes to the Consolidated Financial Statements
included in response to "Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K").
In October 1992, prior to its acquisition by the Company,
Naylor sold all of the common stock of its industrial services
subsidiary, and as part of the sale remains obligated to indemnify
the purchaser, with certain exceptions and subject to specified
limitations, against certain claims, including certain pending or
threatened litigation known to Naylor as of the date of purchase.
There can be no assurance that any claims, if successful, are or
will be wholly or partially insured, or covered by financial
reserves, or that such claims will not result in retroactive
adjustments in Naylor's insurance premiums based on the terms of
its retrospective rated policies. The Company's financial
statements reflect management's estimate of the likely amounts of
such remaining premiums. The Company has also provided in its
financial statements for the estimated amounts of liabilities that
are likely to be incurred from pending litigation and claims
involving Naylor.
Management believes its working capital and its existing
credit availability will be adequate to meet its capital
requirements for the foreseeable future. In connection with any
plans for the expansion of the Company's business and for general
corporate purposes, the Company may consider an offering of shares
of ITI Common Stock or convertible or other debt. The Company has
not reached any determination with respect to the size or nature of
any such offering or whether any such offering will be undertaken,
and there can be no assurance that any such offering will be made.
RECENTLY ISSUED ACCOUNTING STANDARD
In March 1995, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for the
Long-Lived Assets to be Disposed Of ("FAS 121"). FAS No. 121
requires that long-lived assets and certain identifiable
intangibles and goodwill to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable.
FAS No. 121 is effective for the Company beginning with the
year ending December 31, 1996. Management does not expect adoption
of this accounting standard to have a material effect on the
Company's operating results, financial condition and liquidity.
The FASB has also recently issued Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("FAS 123"). FAS 123 and its disclosure requirements
are effective for transactions and financial statements for fiscal
years beginning after December 15, 1995. The new standard
encourages entities to adopt a fair value method of accounting for
employee stock-based compensation plans and requires such
accounting for transactions in which an entity acquires goods or
services from non-employees through issuance of equity instruments.
As allowed under the provisions of FAS 123, the Company will
continue to measure compensation cost for employee stock-based
compensation plans using the intrinsic value based method of
accounting prescribed by the Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees. As such, the
Company will make pro forma disclosures of net income and earnings
per share as if the fair value based method of accounting had been
applied. Accordingly, adoption will have no material effect on its
financial position or results of operations.
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 1996 Annual Meeting of Stockholders (the "Proxy
Statement"), which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
For information concerning this item, see the 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 Proxy
Statement, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning this item, see the 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, 1995, the Company
filed a Current Report on Form 8-K dated October 25, 1995 which,
under "Item 2. Acquisition or Disposition of Assets" thereunder,
reported the IMA Merger. The following financial statements of IMA
(including the financial statements of Enviroq), and pro forma
financial information, were incorporated by reference to such
report:
Financial Statements of IMA:
Independent Auditors' Report
Consolidated Balance Sheets as of September 30, 1994 and 1993
Consolidated Statements of Income for the years ended September 30,
1994, 1993 and 1992
Consolidated Statements of Changes in Stockholders' Equity for the
years ended September 30, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the years ended September
30, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1995
(unaudited) and September 30, 1994
Condensed Consolidated Statements of Income (unaudited) for the
nine months ended June 30, 1995 and 1994
Condensed Consolidated Statements of Cash Flows (unaudited) for the
nine months ended June 30, 1995 and 1994
Notes to Condensed Consolidated Financial Statements (unaudited)
Financial Statements of Enviroq:
Independent Auditors' Report
Consolidated Balance Sheets as of March 25, 1995 and March 26, 1994
Consolidated Statements of Operations for the years ended March 25,
1995 and March 26, 1994
Consolidated Statements of Stockholders' Equity for the years ended
March 25, 1995 and March 26, 1994
Consolidated Statements of Cash Flows for the years ended March 25,
1995 and March 26, 1994
Notes to Consolidated Financial Statements
Unaudited Pro Forma Combined Condensed Financial Information:
Introductory material following the caption "Unaudited Pro Forma
Combined Condensed Financial Information"
Unaudited Pro Forma Combined Condensed Balance Sheet as of June 30,
1995
Notes to Unaudited Pro Forma Combined Condensed Balance Sheet
Unaudited Pro Forma Combined Statements of Operations for the six
months ended June 30, 1995
Unaudited Pro Forma Combined Statements of Operations for the year
ended December 31, 1994
Unaudited Pro Forma Combined Condensed Statements of Operations for
the six months ended June 30, 1994
Unaudited Pro Forma Combined Statements of Operations for the year
ended December 31, 1993
Unaudited Pro Forma Combined Statements of Operations for the year
ended December 31, 1992
Notes to Unaudited Pro Forma Combined Condensed Statements of
Operations
POWER OF ATTORNEY
The registrant and each person whose signature appears
below hereby appoint James D. Krugman, Jerome Kalishman, Jean-Paul
Richard and William A. Martin 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 29, 1996 INSITUFORM TECHNOLOGIES, INC.
By s/JEAN-PAUL RICHARD
--------------------------------
Jean-Paul Richard
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/JEAN-PAUL RICHARD
- -----------------------
Jean-Paul Richard Principal Executive March 29, 1996
Officer and Director
s/WILLIAM A. MARTIN
- -----------------------
William A. Martin Principal Financial March 29, 1996
and Accounting Officer
s/ROBERT W. AFFHOLDER
- -----------------------
Robert W. Affholder Director March 29, 1996
s/PAUL A. BIDDELMAN
- -----------------------
Paul A. Biddelman Director March 29, 1996
s/BRIAN CHANDLER
- -----------------------
Brian Chandler Director March 29, 1996
s/DOUGLAS K. CHICK
- -----------------------
Douglas K. Chick Director March 29, 1996
s/WILLIAM GORHAM
- -----------------------
William Gorham Director March 29, 1996
s/JEROME KALISHMAN
- -----------------------
Jerome Kalishman Director March 29, 1996
s/JAMES D. KRUGMAN
- -----------------------
James D. Krugman Director March 29, 1996
s/STEVEN ROTH
- -----------------------
Steven Roth Director March 29, 1996
s/ALVIN J. SITEMAN
- -----------------------
Alvin J. Siteman Director March 29, 1996
s/SILAS SPENGLER
- -----------------------
Silas Spengler Director March 29, 1996
s/SHELDON WEINIG
- -----------------------
Sheldon Weinig Director March 29, 1996
s/RUSSELL B. WIGHT, JR.
- -----------------------
Russell B. Wight, Jr. Director March 29, 1996
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Report of Independent Certified Public
Accountants........................................ F-2
Consolidated Balance Sheets, December 31,
1995 and 1994...................................... F-3
Consolidated Statements of Operations for
each of the three years in the period
ended December 31, 1995............................ F-5
Consolidated Statements of Stockholders'
Equity for each of the three years in
the period ended December 31, 1995................. F-7
Consolidated Statements of Cash Flows
for each of the three years in the
period ended December 31, 1995..................... F-9
Summary of Accounting Policies....................... F-10
Notes to Consolidated Financial Statements........... F-15
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 CERTIFIED 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 as of December 31,
1995 and 1994, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our 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 consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Insituform Technologies, Inc. and subsidiaries at
December 31, 1995 and 1994, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting
principles.
BDO SEIDMAN, LLP
Memphis, Tennessee
March 8, 1996
F-2
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Note 1)
December 31, 1995 1994
- ------------ ---- ----
(In
thousands)
Assets
Current
Cash and cash equivalents,
restricted $842 and
$3,836 (Note 17) $ 11,416 $ 18,670
Receivables (Note 2) 64,717 49,087
Costs and estimated earnings
in excess of billings (Note 3) 14,008 19,311
Inventories (Note 4) 16,572 11,022
Deferred income taxes (Note 14) 4,287 2,807
Prepaid expenses and miscellaneous 9,711 6,029
-------- --------
Total current assets 120,711 106,926
-------- --------
Property and equipment, less accumulated
depreciation and amortization
(Notes 5, 7 and 8) 59,773 51,471
-------- --------
Other assets
Costs in excess of net assets
of businesses acquired, less
accumulated amortization of
$7,124 and $4,427 (Note 1) 58,431 52,102
Patents and patent applications,
less accumulated amortization of
$3,868 and $1,988 8,963 9,020
Investments in licensees and
affiliated companies (Note 6) 1,555 2,131
Deferred income taxes (Note 14) 1,862 1,417
Non-compete agreements, less
accumulated amortization of
$2,323 and $1,176 (Note 1) 3,554 1,369
Miscellaneous 5,451 3,191
-------- --------
Total other assets 79,816 69,230
-------- --------
$260,300 $227,627
======== ========
See accompanying summary of accounting policies and notes to
consolidated
financial statements.
F-3
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Note 1)
December 31, 1995 1994
- ------------ ---- ----
(In thousands)
Liabilities and Stockholders' Equity
Current liabilities
Notes payable to banks (Note 7) $ 1,053 $ 8,092
Accounts payable and accruals (Note 9) 35,644 35,454
Income taxes payable (Note 14) 1,768 4,888
Deferred income taxes (Note 14) 627 517
Current maturities of long-term debt (Note 8) 12,081 11,572
-------- --------
Total current liabilities 51,173 60,523
Long-term debt, less current maturities
(Note 8) 82,813 47,347
Deferred income taxes (Note 14) 2,850 2,155
Other liabilities 1,009 285
-------- --------
Total liabilities 137,845 110,310
-------- --------
Minority interests 5,645 2,437
-------- --------
Commitments and contingencies
(Notes 1, 10, 12, and 17)
Stockholders' equity (Note 10):
Preferred stock, undesignated,
$.10 par - shares authorized
2,000,000; none outstanding - -
Common stock, $.01 par - shares
authorized 40,000,000;
shares outstanding 27,104,940
and 26,711,031 271 267
Additional paid-in capital 67,427 63,270
Retained earnings (Note 8) 54,557 56,262
-------- --------
122,255 119,799
Cumulative foreign currency
translation adjustments (1,821) (1,733)
Unrealized holding gains on
investments available-for-sale - 438
Notes receivable from affiliates
(Note 11) (3,624) (3,624)
-------- --------
Total Stockholders' equity 116,810 114,880
-------- --------
$260,300 $227,627
======== ========
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-4
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Note 1)
Year ended December 31, 1995 1994 1993
- ----------------------- ---- ---- ----
(In thousands, except per share amounts)
Revenues (Notes 12 and 16)
Net sales $ 18,649 $ 21,949 $ 20,545
Royalties and license fees 6,650 7,490 7,629
Construction contracts 246,904 193,732 123,448
-------- -------- --------
Total revenues 272,203 223,171 151,622
-------- -------- --------
Operating costs and expenses
Cost of sales 11,987 14,492 12,101
Royalty expense (Note 12) 435 223 281
Cost of construction
contracts 174,051 131,533 83,347
Selling, administrative
and general 51,803 41,511 34,889
Strategic marketing and
product development 7,636 6,180 6,878
Merger and restructuring
costs (Note 1) 14,541 - (981)
-------- -------- --------
Operating costs and expenses 260,453 193,939 136,515
-------- -------- --------
Operating income 11,750 29,232 15,107
-------- -------- --------
Other income (expense)
Interest expense (6,393) (3,410) (1,566)
Other (Note 13) (1,727) 1,012 1,098
-------- -------- --------
Other income (expense) (8,120) (2,398) (468)
-------- -------- --------
Income from continuing
operations before taxes
on income 3,630 26,834 14,639
Taxes on income (Note 14) 3,987 10,457 5,159
(continued)
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-5
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Note 1)
Year ended December 31, 1995 1994 1993
- ----------------------- ---- ---- ----
(In thousands, except per share amounts)
Minority interests $ (1,275) $ (1,280) $ (384)
Equity in earnings of
affiliated companies (Note 6) 666 570 638
-------- -------- --------
Income (loss) from continuing
operations (966) 15,667 9,734
Loss from discontinued
operations (Note 15) - (1,164) (2,465)
-------- -------- --------
Income (loss) before cumulative
effect of accounting change (966) 14,503 7,269
Cumulative effect of
accounting change (Note 14) - - 218
-------- -------- --------
Net income (loss) $ (966) $ 14,503 $ 7,487
======== ======== ========
Earnings (loss) per share
of common stock and common
stock equivalents
Income (loss) from
continuing operations $ (.04) $ .57 $ .36
Discontinued operations - (.04) (.09)
Cumulative effect of
accounting change - - .01
-------- -------- --------
Net income (loss) $ (.04) $ .53 $ .28
======== ======== ========
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-6
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Note 1)
Additional
Common Stock Paid-In
Retained
No. Shares AmountCapital
Earnings
---------- --------------- -------
(In thousands, except share
amounts)
Balance, December 31, 1992 26,264,529 $263$57,974 $37,232
Net income for the year - - - 7,487
Issuance of common stock upon
exercise of options 303,984 3 2,260
- -
Stock issued in conjunction
with acquisition (Note 1) 40,096 - 500
- -
Warrants issued with subordinated
debt (Note 10) - - 413
- -
Dividends declared (Note 10) - - -
(1,473)
Tax benefit related to
exercise of stock options - - 844
- -
Other - - -
(8)
---------- ----------- -------
Balance, December 31, 1993 26,608,609 266 61,991 43,238
Net income for the year - - - 14,503
Issuance of common stock
upon exercise of options 31,450 - 195
- -
Stock issued in conjunction
with acquisition (Note 1) 70,972 1 999
- -
Dividends declared (Note 10) - - -
(1,474)
Tax benefit related to
exercise of stock options - - 85
1
Other - - -
(5)
---------- ----------- -------
Balance, December 31, 1994 26,711,031 267 63,270 56,262
Net loss for the year - - -
(966)
Issuance of common stock
upon exercise of options 393,909 4 3,627
- -
Dividends declared (Note 10) - - -
(739)
Tax benefit related to
exercise of stock options - - 530
- -
Other - - -
- -
---------- ------------ -------
Balance, December 31, 1995 27,104,940 $271$67,427 $54,557
========== ============ =======
See accompanying summary of accounting policies and notes to
consolidated financial
statements.
/TABLE
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Cumulative UnrealizedNotes
Foreign Holding Receiv- Total
Currency Gains on able
Stock-
Translation Invest- From
holders'
Adjustments ment Affiliates
Equity
----------- --------- ----------
- -------
(In thousands, except share
amounts)
Balance, December 31, 1992$(1,578) $ - $(3,624)
$90,267
Net income for the year - - -
7,487
Issuance of common stock upon
exercise of options - - -
2,263
Stock issued in conjunction
with acquisition (Note 1) - - -
500
Warrants issued with subordinated
debt (Note 10) - - -
413
Dividends declared (Note 10) - - -
(1,473)
Tax benefit related to
exercise of stock options - - -
844
Other (187) - -
(195)
------- ----- -------
- -------
Balance, December 31, 1993 (1,765) - (3,624)
100,106
Net income for the year 14,503 - -
-
Issuance of common stock
upon exercise of options - - -
195
Stock issued in conjunction
with acquisition (Note 1) - - -
1,000
Dividends declared (Note 10) - - -
(1,474)
Tax benefit related to
exercise of stock options - - -
85
Other 32 438 -
465
------- ----- ------
- -------
Balance, December 31, 1994 (1,733) 438 (3,624)
114,880
Net loss for the year - -
(966)
Issuance of common stock
upon exercise of options - - -
3,631
Dividends declared (Note 10) - - -
(739)
Tax benefit related to
exercise of stock options - - 530
Other (88) (438) -
(526)
------- ----- -------
- -------
Balance, December 31, 1995$(1,821) $ - $(3,624)
$116,810
======= ===== =======
========
See accompanying summary of accounting policies and notes to
consolidated financial
statements.
F-7
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Note 1)
Year ended December 31, 1995 1994 1993
- ----------------------- ---- ---- ----
(In thousands)
Cash flows from operating
activities
Income (loss) from
continuing operations $ (966) $ 15,667 $
9,734
Adjustments to reconcile net
income (loss) to net cash
provided (used) by operating
activities:
Minority interest in
net income 1,275 1,280
384
Provision for re-
structuring costs 4,123 -
(981)
Depreciation 12,348 8,832
7,560
Amortization 4,451 3,050
2,090
Miscellaneous 466 757
707
Deferred income taxes (1,246) (271)
(1,576)
Loss (gain) on sale of
fixed assets (42) 290
73
Equity in earnings of
affiliated companies (666) (570)
(638)
Changes in operating
assets and liabilities,
net of effect of businesses
purchased (Note 1):
Receivables (972) (17,472)
2,613
Inventories (4,106) (2,211)
(814)
Prepaid expenses
and miscellaneous (4,084) (1,227)
1,315
Miscellaneous
other assets 123 (104)
911
Accounts payable
and accruals (3,795) 7,929
(7,856)
Income taxes (5,268) 5,225
(1,544)
-------- --------
- --------
Net cash provided by continuing
operations 1,641 21,175
11,978
------- ---------
- --------
Net cash used by discontinued
operations (500) (99)
(940)
------- ---------
- --------
Net cash provided by operations 1,141 21,076
11,038
------- ---------
- --------
Cash flows from investing activities
Capital expenditures (16,497) (18,472)
(10,812)
Proceeds from (investments in)
licensees and affiliated
companies 445 407
(460)
Purchase of patents and
applications (1,445) (811)
(343)
Purchases of businesses,
net of cash acquired (Note 1)(18,885) (9,379)
(32,588)
Proceeds on disposal of
property and equipment 2,506 1,383
1,092
Other (790) -
- -
Net cash used by investing ------- ---------
- --------
activities (34,666) (26,872)
(43,111)
------- ---------
- --------
(continued)
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-8
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Note 1)
Year ended December 31, 1995 1994 1993
- ----------------------- ---- ---- ----
(In thousands)
Cash flows from financing
activities
Proceeds from issuance of
common stock $ 3,631 $ 195 $ 2,263
Proceeds from long-term debt 40,812 9,828 35,430
Principal payments on
long-term debt (9,439) (5,846)
(2,994)
Redemption of redeemable
preferred stock - (228)
- -
Minority interests (155) 239
(67)
Increase (decrease) in
short-term borrowings (7,293) 4,203 1,367
Dividends paid (Note 10) (1,476) (1,474)
(1,473)
------- ------- -------
Net cash provided by
financing activities 26,080 6,917 34,526
------- ------- -------
Effect of exchange rate
changes on cash 191 60
(280)
------- ------- -------
Net increase (decrease)
in cash and cash equivalents
for the year (7,254) 1,181 2,173
Cash and cash equivalents,
beginning of year 18,670 17,489 15,316
------- ------- -------
Cash and cash equivalents,
end of year $11,416 $18,670 $17,489
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF
CASH FLOWS INFORMATION:
Cash paid during the year
for:
Interest (net of
amount capitalized) $ 6,165 $ 3,587 $ 1,815
Income taxes 8,265 4,467 4,979
Non-cash investing and
financing activities
Deferred consideration
for intangible assets
acquired (Note 12) 1,000 -
- -
Additional paid-in
capital increased by
reduction in income
taxes payable for tax
benefit arising from
exercise of stock options 530 85 844
Deferred consideration for
businesses acquired (Note 1) 3,000 11,850 1,000
Common stock issued in
connection with purchase
of business (Note 1) - 1,000 500
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-9
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Industry Information
Insituform Technologies, Inc. (the "Company" or "ITI") is a
worldwide provider of proprietary trenchless technologies for the
rehabilitation and improvement of sewer, water, gas and industrial
pipes. In addition to the Company's primary technology, the
Insituform(R) Process, a "cured-in-place" pipeline rehabilitation
process, the Company also offers the NuPipe(R) Process, a "fold and
formed" technology, through licensees or its subsidiaries. The
Company sells the materials used in these processes to many of its
licensees. The Company is the licensee in substantially all of
North America for the Paltem(R)-HL system of rehabilitating
pressure pipes, and the Company's Tite Liner(R) process is a method
of lining oil field, natural gas distribution and slurry lines with
a corrosion and abrasion resistant pipe. Through its Affholder,
Inc. subsidiary, the Company is engaged in trenchless tunnelling
used in the installation of new underground services.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries, including a 51% owned
United Kingdom subsidiary, Insituform Linings, Plc., a 60% owned
Chilean subsidiary, United Sistema de Tuberias, Ltda., a 66% owned
French subsidiary, Insituform France, S.A. and a 57.5% owned
domestic partnership, Midsouth Partners (see Note 1). All material
intercompany balances, transactions and stockholdings are
eliminated.
Accounting Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Business Acquisitions
The accounts and operations of businesses acquired in exchange for
common stock, and which were accounted for as poolings of
interests, are included in the financial statements as if they had
always been subsidiaries.
The net assets of businesses acquired and accounted for using the
purchase method of accounting are recorded at their fair values at
the acquisition dates, and the financial statements include their
operations only from those dates. Any excess of acquisition costs
over the fair value of net assets acquired is included in the
balance sheet as "Costs in excess of net assets of businesses
acquired."
F-10
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Taxes on Income
Effective January 1, 1993, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes ("SFAS 109"). Under SFAS 109, 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
For purposes of the statements of cash flows, the Company
classifies cash on hand and in savings, money market, certificates
of deposit, and checking accounts, as well as other highly liquid
debt securities with original maturities of 90 days or less, as
cash equivalents.
Investments
Effective January 1, 1994, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities ("SFAS 115").
Under SFAS 115, the Company has classified investments in equity
securities that have readily determinable fair values and all
investments in debt securities as available-for-sale. Such
investments are reported at fair value, with unrealized gains and
losses excluded from earnings and reported in a separate component
of stockholders' equity.
Corporate investments are carried 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 no greater than 50% are accounted for on the equity
method. For those investments accounted for on the equity method,
intercompany profits and losses are eliminated.
F-11
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Inventories
Inventories are valued at the lower of cost (first-in, first-out)
or market. Maintenance and office supplies are not inventoried.
Property, Equipment, Depreciation and Amortization
Property and equipment are stated at cost. Depreciation and
amortization on property and equipment are computed using the
straight-line method for financial reporting purposes 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
For income tax purposes, depreciation and amortization are computed
using accelerated methods over the estimated useful lives.
Intangibles
The Company amortizes any excess of cost of businesses acquired
over the fair value of the net assets at dates of acquisition 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. Existing patents
acquired are amortized in a similar manner. Certain of the
Company's patents related to the Insituform process have expired in
many countries, including the United States.
The Company's management continually evaluates the market coverage
and earnings capacity of its acquirees and its patented processes
to determine if the unamortized balances can be recovered from
their undiscounted future cash flows.
F-12
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
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.
Stock Options
Stock options are typically granted to certain officers, directors,
and employees at the prevailing market price on the date of the
grant. The Company generally makes no charge to earnings with
respect to these options. Proceeds from the sale of common stock
issued under these options are credited to common stock and
additional paid-in capital at the time the options are exercised.
With respect to non-qualified stock options, the Company recognizes
a tax benefit upon exercise in an amount equal to the difference
between the exercise price and the fair market value of the common
stock. With respect to incentive stock options, tax benefits
arising from disqualifying dispositions are generally recognized at
the time of disposition. Tax benefits related to stock options are
credited to additional paid-in capital.
Retirement Plans
The Company and certain subsidiaries provide non-contributory
profit sharing/voluntary contributory 401(k) plans which cover
substantially all domestic employees. The Company's policy is to
annually fund the retirement plan costs accrued for that year.
Earnings Per Share
Earnings per share are computed on the basis of the weighted
average number of common equivalent shares outstanding during each
year and include the common and common equivalent shares issued in
acquisitions of businesses accounted for as a pooling-of-interests
as if such shares had been outstanding in all periods.
F-13
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Earnings per share has been computed using 26,902,321, 27,162,020
and 27,206,133 shares in 1995, 1994 and 1993, respectively, which
represents the weighted average number of common and common
equivalent shares required to be recognized during the respective
periods. Common stock equivalents were not considered in the 1995
calculation as the effect would be anti-dilutive.
New Accounting Standards
Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of ("SFAS No. 121"), issued by the Financial Accounting
Standards Board ("FASB") is effective for financial statements for
fiscal years beginning after December 15, 1995. The new standard
establishes new guidelines regarding when impairment losses on
long-lived assets, which include plant and equipment and certain
identifiable intangible assets and goodwill, should be recognized
and how impairment losses should be measured. The Company does not
expect adoption to have a material effect on its financial position
or results of operations.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123"), issued by the FASB is
effective for transactions entered into in fiscal years that begin
after December 15, 1995. The disclosure requirements of SFAS No.
123 are also effective for financial statements for fiscal years
beginning after December 15, 1995. The new standard encourages
entities to adopt a fair value method of accounting for employee
stock-based compensation plans and requires such accounting for
transactions in which an entity acquires goods or services from
non-employees through issuance of equity instruments. As allowed
under the provisions of SFAS No. 123, the Company will continue to
measure compensation cost for employee stock-based compensation
plans using the intrinsic value based method of accounting
prescribed by the Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. As such, the Company will
make pro forma disclosures of net income and earnings per share as
if the fair value based method of accounting had been applied.
Thus, adoption will have no effect on the Company's financial
position or results of operations.
F-14
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business Acquisitions
Insituform Mid-America, Inc.
On October 25, 1995, the Company completed the acquisition (the
"IMA Merger") of Insituform Mid-America, Inc. ("IMA") through the
merger into IMA of the Company's wholly-owned subsidiary, ITI
Acquisition Corp., as a result of which IMA became a wholly-owned
subsidiary of the Company. The Company issued an aggregate of
12,450,896 shares of common stock to all prior holders of IMA's
Class A common stock, subsequent to the conversion, in accordance
with its terms, of all shares of IMA Class B common stock into IMA
Class A common stock.
IMA, through its subsidiaries, utilizes various trenchless and
other technologies for rehabilitation, new construction and
improvement of pipeline systems, including sewers, gas lines,
industrial waste lines and oil field, mining, and industrial
process pipelines, and as the Company's licensee in all or a
portion of 22 states, Puerto Rico and the U.S. Virgin Islands. The
work typically is performed under fixed-price contracts.
The IMA Merger has been accounted for using the pooling-of-
interests method of accounting, and accordingly, the accompanying
consolidated financial statements give retroactive effect to the
acquisition, as if the companies had always operated as a single
entity.
Costs related to the IMA Merger of approximately $6.48 million were
charged to expense, primarily during the fourth quarter of 1995.
(See Note 14 for information regarding the related impact on taxes
on income.) The Company also recorded a pre-tax charge of
approximately $8.06 million in the fourth quarter of 1995 for
restructuring costs, including the consolidation of corrosion and
abrasion protection operations under the Tite Liner process and the
abandonment of certain assets related to the Ultra Pipe Process
(approximately $2.6 million), the rationalization of certain
Canadian operations to one facility in Edmonton (approximately $.5
million), the elimination of certain duplicative management
positions (approximately $.8 million), the relocation of certain
domestic employees and functions ($1.7 million) and the termination
of construction on IMA's new manufacturing facility in Chester-
field, Missouri ($1.8 million).
F-15
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Combined and separate results of Insituform Technologies, Inc. and
Insituform Mid-America, Inc. are as follows (in thousands):
ITI IMA EliminationsCombined
--- --- --------------------
January 1, 1995 to October 25,
1995:
Revenues $141,381$94,341 $(10,617)$225,105
Net income 6,312 4,142 - 10,454
Year ended December 31, 1994:
Revenues $148,247$84,022 $ (9,098)$223,171
Net income 8,630 5,873 - 14,503
Year ended December 31, 1993:
Revenues $100,508$60,495 $ (9,381)$151,622
Net income 5,013 2,474 - 7,487
During the three-year period ended December 31, 1995, the Company
also
completed acquisitions of four of its domestic licensees, each of
which
has been accounted for using the purchase method of accounting, as
follows:
Enviroq
On April 18, 1995, the Company acquired the pipeline rehabilitation
business of Enviroq Corporation ("Enviroq"), including Enviroq's
Insituform process business conducted by its Insituform Southeast,
Inc.
subsidiary in Alabama, Florida, Georgia, North Carolina and South
Carolina, through the merger into Enviroq of a wholly-owned
subsidiary
of the Company.
The base purchase price of $18,250,000 (including $3,000,000 in
payment
of a five-year covenant not to compete) was paid $15,250,000 in
cash
(see Note 8) and $3,000,000 in a five-year subordinated promissory
note. The Company has classified such note as a current liability
as
a result of demands for payment therefor.
Prior to April 18, 1995, a 15% general partnership interest in
Midsouth
Partners, an Insituform licensee in Tennessee, Kentucky and
northern
Mississippi, was held by a subsidiary of the Company, and a 42.5%
interest therein was held by a subsidiary of Enviroq. As a result
of
the Enviroq acquisition, the Company holds a majority ownership
(57.5%)
in Midsouth Partners and has accordingly consolidated the
F-16
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accounts of Midsouth Partners since April 18, 1995. The remaining
partner has initiated arbitration proceedings alleging a default by
the
Enviroq subsidiary and claiming the right to name a majority of the
members of the partnership's management committee, an action to
which
the Company objects.
Gelco Companies
On October 21, 1994, the Company acquired all of the outstanding
common
stock of Gelco Services, Inc., Gelco NuPipe, Inc., GelTech
Constructors, Inc. and Mar-Tech Insituform Ltd. (the "Gelco
companies"), the Company's licensees of the Insituform and NuPipe
processes in Oregon, Washington, Idaho, Alaska, Hawaii, Guam,
northern
California and northern Nevada, portions of Montana and British
Columbia. In addition, the Company acquired related assets of an
affiliated company. The purchase price of $18,000,000 was paid
$9,000,000 in cash, together with promissory notes aggregating
$9,000,000 due on the first and second anniversaries of the closing
date. In addition, the Company issued promissory notes aggregating
$2,850,000, representing net current liabilities (as defined) of
the
acquired Gelco companies to related parties and a portion of
working
capital at closing.
Insituform Midwest, Inc.
On July 26, 1993, the Company acquired the common stock and related
assets of Insituform Midwest, Inc. ("Midwest"), its licensee in
Indiana
and portions of Illinois, Iowa and Wisconsin. The base purchase
price
of $14.5 million (including $750,000 in payment of a five-year non-
competition agreement from the sellers), was paid $14,000,000 in
cash
together with 40,096 unregistered shares of the Company's Class A
common stock, $.01 par value ("Common Stock"). Further, during 1994
the
sellers received contingent consideration in the amount of 70,972
additional shares of Common Stock, based on the obtainment of 1993
gross contracts, as defined. The contingent consideration (valued
at
$1,000,000) was accounted for in 1993 as costs in excess of assets
acquired.
Naylor Industries, Inc.
On July 14, 1993, the Company completed the acquisition of Naylor
Industries, Inc. ("Naylor") for a cash purchase price of
$23,550,000,
including transaction costs. Naylor is the parent of Insituform
Gulf
South, Inc. ("IGS"), the Company's licensee in Louisiana and
portions
of Texas and Mississippi.
Except as otherwise described, these acquisitions have been funded
primarily from the proceeds of the Company's credit facility with
SunTrust Bank, Nashville, National Association ("SunTrust")
(formerly
Third National Bank in Nashville), or loans refinanced by such
facility, and from working capital and the issuance of subordinated
and
purchase-money debt.
F-17
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The excess of the purchase price over the estimated fair value of
the
net assets acquired is being amortized over 25 years on the
straight-
line basis. Allocation of the purchase prices of these acquisitions
is
summarized as follows:
(In thousands) Allocated to
- ---------------------------------------------------
Cost in
Total Property excess
of
purchaseWorking and Other net
assets
price capital equipmentassets
acquired
--------------- ---------------
- ----------
Year ended December 31, 1995:
Enviroq $18,899 $3,934 $5,489 $4,938 $4,538
Year ended December 31, 1994:
Gelco Companies 21,613 2,209 3,003 1,349 15,052
Year ended December 31, 1993:
Naylor 23,550 5,664 3,058 (247) 15,075
Midwest 15,790 2,533 3,096 84 10,077
The following table presents summarized consolidated unaudited pro
forma results of operations for 1995, 1994 and 1993 as if the
Enviroq
acquisition had occurred at the beginning of 1994 and the Gelco,
Naylor
and Midwest acquisitions had occurred at the beginning of 1993.
These
pro forma results are provided for comparative purposes only and do
not
purport to be indicative of the results which would have been
obtained
if these acquisitions had been effected on the dates indicated or
which
may be obtained in the future.
Year ended December 31, 1995 1994 1993
- ----------------------- ---- ---- ----
(In thousands, except per share
amounts)
Total revenues $282,742 $269,257
$180,512
Income (loss) from continuing operations$ (1,709) $ 16,959 $
10,667
Income (loss) from continuing operations
per common and common equivalent share$ (.06) $ .62 $
.39
F-18
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other
During 1995, the Company also completed two smaller acquisitions.
On February 16, 1995, the Company acquired 66% of the common stock
of Insituform France, S.A., a newly formed subsidiary of its former
French licensee, for FF7,400,000 (US$1,463,000). Additionally, on
November 30, 1995, the Company completed the acquisition of the UK-
based Formapipe Division of Water Flow Services Limited, for
$4,308,000.
2. Receivables
Receivables consist of the following (in thousands):
December 31, 1995 1994
- ------------ ---- ----
Trade, less allowance for possible
losses of $974 and $637 $51,049 $41,109
Retainage under construction
contracts (Note 3) 11,395 7,533
Refundable income taxes 2,273 445
------- -------
Receivables $64,717 $49,087
======= =======
Activity in the allowance for possible losses is summarized as
follows (in thousands):
Year ended December 31, 1995 1994 1993
- ----------------------- ---- ---- ----
Balance, at beginning of period $637 $495 $456
Charged to expense 657 575 106
Increase resulting from
business acquisitions - - 212
Uncollected balances written off,
net of recoveries (320) (433) (279)
---- ---- ----
Balance, at end of period $974 $637 $495
==== ==== ====
F-19
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts consist of
the following (in thousands):
December 31, 1995 1994
- ------------ ---- ----
Costs incurred on uncompleted contracts $ 98,421 $75,993
Estimated earnings 20,535 20,132
-------- -------
118,956 96,125
Less billings to date (105,488) (77,968)
-------- -------
$ 13,468 $18,157
======== =======
Included in the accompanying balance sheets under the following
captions:
Costs and estimated earnings in
excess of billings $14,008 $19,311
Billings in excess of costs and
estimated earnings on uncompleted
contracts (see Note 9) (540) (1,154)
------- -------
$13,468 $18,157
======= =======
4. Inventories
Inventories are summarized as follows (in thousands):
December 31, 1995 1994
- ------------ ---- ----
Finished products $ 822 $ 1,118
Work-in-process 1,053 584
Construction materials 9,608 6,040
Raw materials 5,089 3,280
------- -------
Inventories $16,572 $11,022
======= =======
F-20
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Property and Equipment
Property and equipment consists of the following (in thousands):
December 31, 1995 1994
- ------------ ---- ----
Land and land improvements $ 3,474 $ 1,925
Buildings and improvements 15,264 12,764
Machinery and equipment 64,980 52,864
Furniture and fixtures 7,967 6,567
Autos and trucks 3,685 3,026
Construction in progress 5,168 4,134
------- -------
100,538 81,280
Less accumulated depreciation (40,765) (29,809)
------- -------
Net property and equipment $59,773 $51,471
======= =======
6. Investments in Licensees and Affiliated Companies
Investments in licensees and affiliated companies, all of which are
accounted for on the equity method, consist of the following (in
thousands):
December 31, 1995 1994
- ------------ ---- ----
Corporations:
Insituform Brochier
Rohrsanierungstechnik GmbH (33%) $982 $823
KA-TE Insituform AG (50%) 398 244
N.V. K - Insituform S.A. (50%) 116 117
Partnership interests:
M&M Soltar, a Joint Venture (50%) 59 98
Midsouth Partners (15%) (Note 1) - 466
Enhansco Joint Venture (50%) - 383
---- ----
Investments in licensees and
affiliated companies $1,555 $2,131
====== ======
In March 1995, the Company sold its interest in the Enhansco Joint
Venture to its partner for $400,000, one-half of which is due three
years after closing.
F-21
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Lines of Credit
See Note 8 for a description of the Company's revolving facility
with SunTrust.
Insituform Canada Limited had obtained a line of credit facility in
the amount of C$3,900,000 (US$2,858,000) with Alberta Treasury
Branches ("ATB") which bore interest at ATB's prime rate plus 1/2%
and was collateralized by an interest in the assets of Insituform
Canada. The outstanding balance under the lines was C$389,000
(US$277,000) at December 31, 1994. The line was terminated in
December 1995.
Insituform Permaline Ltd. ("Permaline") has a line of credit and
overdraft facility of pounds sterling 700,000 (US$1,087,000) with
National Westminster Bank Plc ("NatWest") which bears interest at
NatWest's base rate (6.5% at December 31, 1995) plus 2.0% for
borrowings up to 450,000 pounds sterling and 3.0% for those above
450,000 pounds sterling. The facility is available through March
1996, and is secured by Permaline's real property and the Company's
guarantee. At December 31, 1995 and 1994, respectively, 398,000
pounds sterling (US$618,000) and 0 pounds sterling were outstanding
under this facility.
Insituform Japan KK ("Japan") also has a line of credit facility of
100,000,000 yen (US$967,000) with Fuji Bank which bears interest at
Fuji Bank's base rate (2.125% at December 31, 1995) and is
available through December 1996. At December 31, 1995 and 1994,
45,000,000 yen (US$435,000) and 0 yen were outstanding under this
facility, respectively.
Prior to October 1995, IMA had a line of credit facility with
Boatmen's National Bank ("Boatmen's") and Mark Twain Bank ("Mark
Twain") which provided advances up to $23 million for working
capital purposes (the credit limit was successively increased to
such amount from $10 million, $13 million and $20 million,
respectively). Interest on related borrowings was payable monthly,
at the lesser of the bank's prime lending rate or a rate tied to
the London Interbank Offered Rate ("LIBOR"). As of October 25,
1995, the facility was terminated, and all outstanding principal
(together with IMA's term loan) was refinanced with SunTrust (see
Note 8). Weighted average borrowings for 1995 through October were
approximately $7.6 million, with maximum borrowings during the year
of approximately $17.5 million. At December 31, 1994, the
outstanding principal was $7.8 million. For the year ended December
31, 1994, the weighted average borrowings were approximately $4.8
million, and maximum borrowings were approximately $7.8 million.
F-22
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Long-term Debt
Long-term debt consists of the following (in thousands):
December 31, 1995 1994
- ------------ ---- ----
Long-term debt:
SunTrust facilities $73,052 $35,211
8.5% senior subordinated note, payable in
$1,000 installments annually each July 1998
through 2001, with the entire remaining
balance due in July 2002 with interest
quarterly (net of unamortized discount of
$270 and $329) 4,730 4,671
Industrial revenue bond, payments ranging
from $85 to $170 through January 2004, with
interest at 90% of prime (prime was 8.5% at
December 31, 1995) 3,701 3,941
Industrial development bond, quarterly
principal payments ranging from $23 to $51
through January 2003, with interest at
approximately 79% of prime (prime was
8.5% at December 31, 1995) 1,020 1,107
Deferred purchase consideration:
Promissory notes to selling shareholders
with balance due October 1996, interest
payable quarterly at lesser of prime
(currently 8.5%) or LIBOR + 2.75%, secured
by pledge of assets of the acquired
companies 4,000 9,000
Promissory notes payable to affiliates of
former shareholders of Gelco companies,
payable in two equal installments in October
1996 and 1997, with interest payable
quarterly at lesser of prime or
LIBOR + 2.75% 2,850 2,850
Subordinated promissory note, 6% interest
payable semiannually, to be retired in
March 1996 (see Note 1) 3,000 -
Other notes 2,541 2,139
------- -------
94,894 58,919
Less current maturities (12,081) (11,572)
------- -------
Long-term debt $82,813 $47,347
======= =======
F-23
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 1993, the Company obtained from SunTrust (formerly Third
National Bank in Nashville) a credit facility initially providing
for
advances of up to $30 million, which was increased by up to an
additional $12 million in August 1994 and restated in June 1995 to
aggregate up to $50 million. Borrowings under this facility
initially
bore interest at the lesser of the bank's prime rate or 2.75% above
the 30-day adjusted LIBOR rate. Pursuant to the June 1995
restatement, interest accrued at a rate selected by the Company as
either the bank's prime rate, plus a margin ranging up to .25%, or
30-day adjusted LIBOR, plus a margin ranging from 1.75% to 2.25%.
Initially, quarterly principal payments of $1,072,000 were
required,
with an additional $339,000 to commence in September 1995 with
maturity in June 2000. This facility was utilized to fund the
acquisitions of Naylor, Midwest and the Gelco companies (see Note
1).
In October 1995, the Company obtained a credit facility from
SunTrust, as agent, and a group of participating lenders which
provides for advances through October 1997 on a revolving basis
aggregating up to $105 million (including a $5.0 million standby
letter of credit facility). Of such amount, approximately $66.4
million was applied to refinance existing debt under the Company's
prior arrangements with SunTrust (approximately $35.9 million),
IMA's
term loans with Boatmen's and Mark Twain ($14.5 million), and
short-
term debt under IMA's line of credit facility ($16.0 million) (see
Note 7). Additional advances are available for the expansion of the
Company's business and for general corporate purposes.
The current SunTrust facility matures in October 2000, with
installments based on a five-year amortization schedule, commencing
December 31, 1997. Interest on indebtedness under the facility is
payable at either (i) SunTrust's prime rate (8.5% at December 31,
1995), plus a margin of up to .25% in the event certain financial
ratios are not maintained, or (ii) an adjusted LIBOR rate (5.9% at
December 31, 1995), plus a margin ranging from 1.00% to 1.75%,
depending on the maintenance of certain financial ratios. Up to $5
million under the credit facility may be borrowed from SunTrust
pursuant to a "swing line facility," which accrues interest at a
rate
per annum equal to 0.5% below SunTrust's prime rate. The SunTrust
facility obligates the Company to comply with certain financial
ratios and restrictive covenants that, among other things, limit
the
ability of the Company and its subsidiaries to incur further
indebtedness, pay dividends, make loans and encumber any
properties,
and requires guarantees of certain domestic subsidiaries.
Essentially
all of the Company's retained earnings at December 31, 1995 are
restricted under such covenants.
In April 1995, in connection with the Enviroq acquisition, the
Company obtained from Boatmen's and Mark Twain a $15.25 million
term
loan payable $1.5 million per year with the balance due in April
2002. This term loan was secured by first mortgages on real estate
and a pledge of the shares of certain U.S. and Canadian
subsidiaries,
and was retired as discussed above.
The 8.5% senior subordinated note is subordinated in right to the
Company's bank and other institutional financing and to deferred
consideration incurred in connection with business acquisitions. As
F-24
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
discussed in Note 10, warrants to purchase 350,877 unregistered
shares of Common Stock were also issued to the lender. The note is
prepayable at the Company's option, at premiums until July 1998
ranging from 3% to 1% of the amount prepaid, and is subject to
defeasance in certain circumstances. The subordinated note also
restricts the Company's ability to pay dividends and repurchase
outstanding common stock.
The industrial revenue bond may be called by the holder, an
institutional purchaser, in 1999 or each year thereafter until
maturity. Property and equipment with a net book value of
approximately $3,500,000 is pledged to collateralize these bonds.
These bonds also restrict the Company's ability to pay dividends.
Principal payments required to be made for each of the next five
years and thereafter are summarized as follows (in thousands):
Year ending December 31, Amount
------------------------ ------
1996 $12,081
1997 6,349
1998 16,079
1999 15,998
2000 40,674
After 2000 3,713
-------
Total $94,894
=======
9. Accounts Payable and Accruals
Accounts payable and accruals consist of (in thousands):
December 31, 1995 1994
- ------------ ---- ----
Accounts payable - trade $15,130 $17,702
Compensation and profit sharing 4,185 3,619
Merger and restructuring (Note 1) 4,123 685
Accrual for pending litigation and
claims (Note 17) 1,793 1,941
Bank overdrafts 545 1,647
Billings in excess of costs and
earnings (Note 3) 540 1,154
Dividends payable - 737
Miscellaneous 9,328 7,969
------- -------
Accounts payable and accruals $35,644 $35,454
======= =======
F-25
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Common Stock and Stockholders' Equity
In accordance with accounting for a pooling-of-interests, all prior
period stockholders' equity accounts have been restated to give
effect to the IMA Merger described in Note 1.
The Company has granted stock options to certain officers,
directors,
employees and other stockholders. The exercise price is typically
the
fair market value on the date the option is granted. Options
generally expire up to five years from the date of grant. Options
to
purchase 300,000 shares, issued in 1993 to the Company's chief
executive officer, were exercisable 50,000 at the date of grant
with
the remainder commencing three years from the grant date; as a
result
of the IMA Merger, all such options became exercisable.
Prior to the IMA Merger, IMA had granted options to certain
officers,
directors and employees to acquire IMA Class A common shares. In
connection with the IMA Merger, all outstanding IMA options as of
the
date of the acquisition, became options to purchase that number of
shares of ITI Common Stock that would have been received had the
options been exercised prior to the IMA Merger. Dividends reflected
in the statement of stockholders' equity reflect those which had
been
declared on the IMA common shares prior to the IMA Merger.
Changes in options outstanding are summarized as follows:
Option price
Shares per share
------ ------------
$
Balance, December 31, 1992 1,280,362 2.61-19.125
Granted 877,933 9.68-25.00
Exercised (303,984) 3.625-19.125
Cancelled (95,220) 3.625-25.00
--------- ------------
Balance, December 31, 1993 1,759,091 2.61-25.00
Granted 193,551 13.31-14.125
Exercised (31,450) 3.625-8.125
Cancelled (233,892) 2.875-25.00
--------- -----------
Balance, December 31, 1994 1,687,300 2.61-25.00
Granted 398,210 11.375-12.29
Exercised (393,909) 3.625-14.125
Cancelled (292,666) 3.625-25.00
--------- ------------
Balance, December 31, 1995 1,398,935 2.61-25.00
========= ============
F-26
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1995, 2,638,841 shares of Common Stock were
reserved
pursuant to stock option plans and warrants. Options for 956,940
shares were currently exercisable.
In July 1993, the Company issued to Hanseatic Corporation warrants
to
purchase 350,877 unregistered shares of Common Stock in connection
with the issuance of subordinated debt (see Note 8). The warrants
are
exercisable at $14.25 per share and expire on July 26, 1998. Paul
Biddelman, a director of the Company, is Treasurer of Hanseatic.
The Board of Directors had previously designated 200,000 shares of
the Company's preferred stock as Series C cumulative, non-voting
preferred stock. Each share carried a semi-annual dividend rate of
$5.40 and was redeemable five years after issuance for $200 per
share, plus any accrued but unpaid dividends. In October 1994, all
outstanding shares were redeemed and retired.
11. Notes Receivable From Affiliates
On July 3, 1992, ITI, Ringwood Limited ("Ringwood"), Parkwood
Limited
("Parkwood") and Douglas K. Chick and Brian Chandler entered into
an
agreement whereby Messrs. Chick and Chandler and Ringwood executed
a
secured non-recourse promissory note in the amount of $3,624,000
which bears interest at Citibank's prime rate plus 2-1/2% (11.0% at
December 31, 1995) and was originally due July 3, 1995. On May 21,
1995, the Company extended the maturity date of the note to July 3,
1996. As security for the note, Ringwood and Messrs. Chick and
Chandler have pledged to ITI 255,801 shares of ITI's stock
beneficially owned by them. Messrs. Chandler and Chick are
directors
of ITI.
12. Licensees
The Company markets the Insituform Process and the NuPipe Process
in
selected territories by utilization of licensees. The bulk of the
trenchless repair and rehabilitation services of the licensees has
historically been performed for municipalities, and the Company
expects this to remain the largest part of the licensees' business
for the foreseeable future.
The Insituform Process license agreements require royalty payments
based upon 5% to 8% (generally 8% in the U.S.) of the gross
contract
price, as defined, often with varying minimum annual royalties.
In addition to an initial license fee, the NuPipe Process license
agreements require continuing royalty payments based upon 6.75% to
8%
of the gross contract price, as defined.
The former stockholders of NuPipe, Inc. were entitled to receive
35%
of the royalty income collected by the Company in connection with
the
NuPipe technology acquired by the Company in 1988. In March
F-27
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1995, the Company exercised an option, granted in October 1994, to
acquire such parties' interest in such payments in exchange for
issuance of the Company's promissory notes aggregating $1,000,000.
The notes are payable in quarterly installments over three years
and
bear interest at 5.4% per annum.
13. Other Income (Expense)
Other income (expense) is comprised of the following (in
thousands):
Year ended December 31, 1995 1994 1993
- ----------------------- ---- ---- ----
Investment income $ 1,177 $ 959 $ 891
Litigation settlement (Note 17) (3,547) - -
Casualty gain 722 - -
Discounts earned 322 247 131
Miscellaneous (401) (194) 76
------- ------ ------
$(1,727) $1,012 $1,098
======= ====== ======
14. Taxes on Income
Effective January 1, 1993, the Company adopted SFAS 109. As
permitted
by SFAS 109, the Company has elected to not restate prior periods'
consolidated financial statements. Except for the cumulative effect
of the accounting change of $218,000, or $.01 per share, the
application of this statement had no material effect on the 1993
results of operations.
Deferred federal income taxes are not provided on the unremitted
earnings of foreign subsidiaries since it has been the practice and
is the intention of the Company to continue to reinvest these
earnings in the business outside the United States. The cumulative
amount of unremitted foreign earnings at December 31, 1995 was
approximately $9,038,000. It is not practicable to estimate the
amount of the unrecognized deferred tax liability on such earnings.
F-28
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net deferred tax assets consist of the following (in thousands) at
December 31:
1995 1994
---- ----
Deferred income tax assets:
Net operating loss carryforwards $5,391 $4,924
Foreign tax credit carryforwards 1,650 1,505
Accrued compensation 943 626
Inventory valuation 706 353
Accrual for pending litigation and claims 660 738
Estimated loss on disposal of
discontinued operation - 880
Warranty accrual 347 433
Restructuring provision 1,675 -
Other 187 296
------ ------
Gross deferred income tax assets 11,559 9,755
Valuation allowance (3,767) (3,404)
------ ------
Total deferred income tax assets 7,792 6,351
------ ------
Deferred income tax liabilities:
Depreciation (4,211) (3,861)
Deferred revenue - (431)
Unrealized holding gains
on investments - (268)
Construction contracts (610) -
Other (299)
(239)
------ ------
Total deferred income tax liabilities (5,120)
(4,799)
------ ------
Net deferred income tax assets $2,672 $1,552
====== ======
The Company has recorded a deferred tax asset of $2,672, reflecting
the benefit of $5,391 in loss carryforwards and $1,650 in foreign
tax
credit carryforwards. Realization is dependent upon generating
sufficient taxable income in the applicable jurisdictions and, in
some instances, prior to the expiration of the carryforwards.
Although realization is not assured, management believes it is more
likely than not that all of the deferred tax asset 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.
F-29
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income (loss) from continuing operations before taxes on income is
as
follows (in thousands):
Year ended December 31, 1995 1994 1993
- ----------------------- ---- ---- ----
Domestic $1,897 $22,375 $15,260
Foreign 1,733 4,459
(621)
------ ------- -------
Totals $3,630 $26,834
$14,639
====== ======= =======
Provisions for taxes on income from continuing operations consist
of
the following components (in thousands):
Year ended December 31, 1995 1994 1993
- ----------------------- ---- ---- ----
Current:
Federal $1,225 $ 7,474
$3,282
Foreign 2,154 1,715
1,450
State 827 1,270
508
------ ------- ------
4,206 10,459
5,240
------ ------- ------
Current tax benefit related to
exercise of stock options 530 85
844
------ ------- ------
Deferred:
Federal (622) (124)
(373)
Foreign (54) 66
(154)
State (73) (29)
25
Adjustments to beginning of year
valuation allowance - -
(423)
------ ------- ------
(749) (87) (925)
------ ------- ------
Total taxes on income $3,987 $10,457 $5,159
====== ======= ======
F-30
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effective tax rate was different than the U.S.federal statutory
tax
rate. The following summary reconciles taxes at the maximum U.S.
federal statutory tax rate with the actual taxes (in thousands) and
effective rates:
Year ended December 31, 1995 1994 1993
- ----------------------- ---- ---- ----
Income taxes at U.S. federal
statutory tax rate 34.0% 34.0% 34.0%
Increase (decrease) in taxes resulting from:
State income taxes,
net of federal income tax benefit 13.7 3.1 2.4
Tax amortization of intangibles (21.5) (2.9)
(5.0)
Tax benefit not currently
recognizable on losses of
subsidiaries 10.0 0.5 2.2
Merger costs capitalized for tax purposes59.1 - -
Goodwill amortization 18.3 2.0 2.0
Other items (3.8) 2.3 (0.4)
----- ---- ----
Total taxes on income 109.8%39.0% 35.2%
===== ==== ====
Certain of the Company's subsidiaries have available tax operating
loss carryforwards utilizable to the extent of such subsidiaries'
future taxable income as follows:
Amount Expira-
Jurisdic- (in tion
Subsidiary tion thousands) date
---------- --------- ---------- -------
Insituform California, Inc. US $1,547 1996 to
1999
H.T. Schneider, Inc. US $1,206 2007
NuPipe, Ltd. UK $4,559 Indefinite
Insituform Permaline LimitedUK $4,165 Indefinite
Insituform Technologies Ltd.UK $ 702 Indefinite
Insituform Technical
Services, Ltd. UK $ 909 Indefinite
Insituform Overseas Limited UK $ 857 Indefinite
Insituform Canada Limited Canada $1,123 1997 to
2002
F-31
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Discontinued Operations
On December 30, 1993, the Company adopted a plan to discontinue the
operation of its division engaged in the off-site rehabilitation of
downhole tubulars for the oil and gas industry, yet was unable to
sell
the business during 1994. As a result, the Company decided to
liquidate
the division's assets, and during the fourth quarter of 1994 a
provision was made to write down the assets to their estimated
liquidation values and accrue the estimated costs of closing the
operation.
The loss from discontinued operations includes the following
amounts,
in thousands:
Year ended December 31, 1995 1994 1993
- ----------------------- ---- ---- ----
Loss from operations
(net of applicable income tax
benefits of $592) $ - $ -
$(1,145)
Estimated loss on disposal,
including a provision of $0,
$1,427 and $585, respectively,
for losses during the phase-out
period (net of applicable
income tax benefits of $627 and $680) - (1,164)
(1,320)
----- -------
- -------
$ - $(1,164)
$(2,465)
===== =======
=======
The division's revenues for the years ended December 31, 1994 and
1993
were $1,137,000 and $1,889,000, respectively. The net assets and
liabilities of the discontinued operations were reclassified on the
balance sheet to other assets and accrued expenses and principally
consist of property and equipment, patents, inventory and accrued
losses during the phase-out period.
F-32
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Segment and Geographic Information
The Company's continuing operations include the following
reportable
segments:
"Pipeline Technology" - includes licensing, selling and servicing
trenchless, on-site pipeline reconstruction technology and
products.
"Construction" - includes the installation of trenchless pipeline
reconstruction materials as well as nontrenchless pipeline
construc-
tion.
Operating profit (loss) by business segment and by geographic area
are
defined as revenues less operating costs and expenses. Income and
expense not allocated to business segments or geographic areas
include
investment income and corporate expenses.
Identifiable assets are those assets used exclusively in the
operations
of each business segment or geographic area, or which are
allocated,
when used jointly. Corporate assets are principally comprised of
cash
equivalents and investments.
Financial information by industry segment is as follows (in
thousands):
Year ended December 31, 1995 1994 1993
- ----------------------- ---- ---- ----
Pipeline Technology
Revenues:
Unaffiliated companies $ 25,299 $ 29,439 $
28,174
Intersegment 45,582 36,993
26,605
-------- --------
- --------
Total revenues 70,881 66,432
54,779
-------- --------
- --------
Operating income 16,642 25,582
17,066
Identifiable assets 29,699 24,036
25,974
Capital expenditures 750 950
709
Depreciation and amortization 1,569 1,465
1,387
======== ========
========
Construction
Revenues $246,904 $193,732
$123,448
Operating income 5,479 11,972
2,071
Identifiable assets 211,543 183,168
133,719
Capital expenditures 15,557 17,434
9,551
Depreciation and amortization 14,961 10,130
7,641
======== ========
========
F-33
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1995 1994 1993
- ----------------------- ---- ---- ----
Eliminations and Corporate Items
Revenues $(45,582) $(36,993) $(26,605)
Operating loss (10,371) (8,322) (4,030)
Identifiable assets 19,058 20,423 17,317
Capital expenditures 190 88 552
Depreciation and amortization 269 287 622
======== ======== ========
Consolidated
Revenues $272,203 $223,171 $151,622
Operating income 11,750 29,232 15,107
Identifiable assets 260,300 227,627 177,010
Capital expenditures 16,497 18,472 10,812
Depreciation and amortization 16,799 11,882 9,650
======== ======== ========
Financial information by geographic area is as follows (in
thousands):
Year ended December 31, 1995 1994 1993
- ----------------------- ---- ---- ----
United States
Revenues:
Unaffiliated companies $202,555 $160,378 $106,580
Between geographic areas 40,243 32,740 21,211
-------- -------- --------
Total revenues 242,798 193,118 127,791
-------- -------- --------
Operating income 11,055 24,373 15,598
Identifiable assets 202,165 182,380 138,113
======== ======== ========
F-34
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1995 1994 1993
- ----------------------- ---- ---- ----
Canada
Revenues:
Unaffiliated companies $28,620 $27,304 $24,726
Between geographic areas 1,617 1,190 967
------- ------- -------
Total revenues 30,237 28,494 25,693
------- ------- -------
Operating income 1,674 1,849 1,418
Identifiable assets 21,233 21,851 19,973
------- ------- -------
European Community
Revenues:
Unaffiliated companies $21,566 $18,014 $15,360
Between geographic areas 2,325 2,636 4,427
------- ------- -------
Total revenues 23,891 20,650 19,787
------- ------- -------
Operating income 8,253 9,408 2,374
Identifiable assets 20,959 10,971 11,377
======= ======= =======
Asia
Revenues:
Unaffiliated companies $ 8,048 $ 6,309 $ 4,865
Between geographic areas 1,256 300 -
------- ------- -------
Total revenues 9,304 6,609 4,865
------- ------- -------
Operating income (loss) 440 476 (279)
Identifiable assets 4,162 2,477 2,156
======= ======= =======
South America
Revenues:
Unaffiliated companies $ 9,740 $11,252 $ 43
Operating income 786 1,739 26
Identifiable assets 4,806 5,071 -
======= ======= ========
F-35
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1995 1994 1993
- ----------------------- ---- ---- ----
Other
Revenues:
Unaffiliated companies $1,674 $ 41 $ 48
Between geographic areas 141 - -
------ ------ ------
Total revenues 1,815 41 48
------ ------ ------
Operating loss (796) - -
Identifiable assets - - -
====== ====== ======
Eliminations and Corporate Items
Revenues:
Between geographic areas $(45,582) $(36,993) $(26,605)
Operating loss (9,662) (8,613) (4,030)
Identifiable assets 6,975 4,877 5,391
======== ======== ========
Consolidated
Revenues $272,203 $223,171 $151,622
Operating income 11,750 29,232 15,107
Identifiable assets 260,300 227,627 177,010
======== ======== ========
F-36
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Commitments and Contingencies
A. Leases
The Company leases a number of its administrative operations
facilities
under noncancellable operating leases expiring at various dates
through
2020. In addition, the Company also leases certain construction and
automotive equipment on a multi-year, monthly, or daily basis. Rent
expense under all operating leases for 1995, 1994 and 1993 was
$4,221,000, $3,326,000 and $1,599,000, respectively.
At December 31, 1995, the future minimum lease payments required
under
the noncancellable operating leases were as follows (in thousands):
Year ending Minimum lease
December 31, payments
- ------------ -------------
1996 $ 3,265
1997 2,522
1998 1,908
1999 1,564
2000 1,270
After 2000 6,265
-------
Total $16,794
=======
B. Employment Agreements
The Company and certain of its subsidiaries have employment
contracts
with various officers with remaining terms ranging from six months
to
three years at amounts approximating their current levels of
compensa-
tion. The companies' minimum aggregate commitment at December 31,
1995
under such contracts is approximately $4,173,000.
C. Litigation
On May 23, 1995, the Company, notwithstanding its belief that it
had
defenses to plaintiff's claim that were well grounded in fact and
law,
entered into a memorandum of understanding to settle the previously
disclosed stockholder class action against the Company in the
United
States District Court for the Western District of Tennessee
alleging
various misstatements and omissions, relating to, among other
things,
acquisition and restructuring costs arising from the acquisition of
Insituform Group Limited in
F-37
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 1992, in public disclosures by the Company during the
period
from October 28, 1992 to May 12, 1993 in violation of, among other
things, Rule 10b-5 under the Securities Exchange Act of 1934. Under
the
settlement, the Company has made a cash payment to class members in
the
amount of $3.2 million and (in January 1996) issued to class
members
30,000 shares of the Company's class A common stock.
The Company is involved in certain additional litigation incidental
to
the conduct of its business. In the Company's opinion, none of
these
proceedings will have a material adverse effect on the Company's
financial position, results of operations and liquidity. The
financial
statements include the estimated amounts of liabilities that are
likely
to be incurred from these and various other pending litigation and
claims.
D. Retirement Plans
The Company and certain domestic subsidiaries maintain 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 50% of the participating employee's
contribution,
subject to a limitation of generally $400 per participant. Certain
recently acquired domestic subsidiaries have continued to maintain
their pre-existing profit sharing plans until such time as their
employees can be added to the Company's Plan. Total contributions
to
the domestic plans were $1,401,000, $815,000 and $735,000 for the
years
ended December 31, 1995, 1994 and 1993, respectively.
In addition, certain foreign subsidiaries maintain various other
defined contribution retirement plans. Company contributions to
such
plans for the years ended December 31, 1995, 1994 and 1993 were
$136,000, $125,000 and $197,000, respectively.
E. Paltem License
Pursuant to a license agreement with Ashimori Industry Co. Ltd.,
the
Company holds the exclusive rights to use the patents, trademarks
and
know-how related to certain Ashimori products, including Paltem-HL,
for
substantially all of North America. In connection with the license,
the
Company paid Ashimori an initial licensee fee of $100,000 and is
required to remit ongoing royalties ranging from 5% to 7% on Paltem
process installations.
F. Other
At December 31, 1995, $2,518,000 in stand-by letters of credit were
outstanding under the Company's SunTrust facility.
F-38
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Guarantees have been issued by the Company in support of its
subsidiaries as described in the following paragraphs.
Naylor has outstanding letter of credit commitments totaling
$450,000
from Texas Commerce Bank to its insurance carriers. Cash
equivalents
totaling $454,000 are pledged to secure these commitments at
December
31, 1995.
At December 31, 1995, Insituform Permaline has outstanding
performance
bonds aggregating 308,000 pounds sterling (US$478,000).
18. Estimated Fair Value of Financial Instruments
For financial instruments bearing a variable interest rate, it is
presumed that recorded book values are reasonable estimates of fair
value. For all other financial instruments, the following methods
and
assumptions are used to estimate fair values:
Cash and cash equivalents, receivables, accounts payable and
accrued
expenses - Recorded book values are a reasonable estimate of fair
value.
Investments in securities - Quoted market prices for the specific
instruments owned, or for similar securities, are used to determine
estimated fair value.
Long-term debt - Current market values for debt instruments with
fixed
interest rates are estimated based on borrowing rates currently
available to the Company for loans with similar terms. At December
31,
1995, the estimated fair value of debt instruments with fixed
interest
rates was approximately $7.7 million as compared with carrying
value of
such instruments of $8.5 million.
The remaining assets and liabilities of the Company are not
considered
financial instruments and have not been valued differently than is
customary under historical cost accounting.
F-39
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Selected Quarterly Financial Data (Unaudited)
(In thousands, except per share data)
1st 2nd 3rd 4th
$ $ $ $
Year ended December 31, 1995:(C)
Revenues 62,266 69,62169,893 70,423
Gross profit 20,498 23,64122,624 18,967
Net income (loss) 3,420
2,143(A)4,223(10,752)(B)
Earnings per share of common stock and common stock
equivalents:
Net income (loss) .13 .08 .15 (.40)
Year ended December 31, 1994:(C)
Revenues 47,754 47,14559,495 68,777
Gross profit 17,221 16,19520,765 22,742
Income from continuing operations 3,217 3,059 4,925 4,466
Loss from discontinued operations (Note 15)- - - (1,164)
Net income 3,217 3,059 4,925 3,302
Earnings per share of common stock and common stock
equivalents:
Income from continuing operations .12 .11 .18 .16
Loss from discontinued operations - - - (.04)
Net income .12 .11 .18 .12
(A) See Notes 13 and 17 for information relative to the charge
recorded against second quarter 1995 income in connection with the
settlement of
certain litigation.
(B) See Note 1 for information relative to merger and restructuring
charges recorded primarily in the fourth quarter of 1995.
(C) In accordance with the pooling-of-interests method of
accounting, the Company's consolidated financial statements have
been retroactively
restated to give effect to the IMA Merger, which was completed
in October 1995, as if the companies had always operated as a
single entity.
(See Note 1.)
(In thousands, except per share data)
1st 2nd 3rd 4th
$ $ $ $
As previously reported by ITI:
Year ended December 31, 1995:
Revenues 39,832 43,61442,654 N/A
Gross profit 14,348 15,85514,568 N/A
Net income 1.919 1.076 2,891 N/A
Earnings per share of common stock and common stock
equivalents:
Net income .13 .08 .20 N/A
Year ended December 31, 1994:
Revenues 30,481 31,80240,947 45,017
Gross profit 11,249 11,63815,068 15,663
Income from continuing operations 1,471 2,172 3,619 2,532
Loss from discontinued operations - - - (1,164)
Net income 1,471 2,172 3,619 1,368
Earnings per share of common stock and common stock
equivalents:
Income from continuing operations .10 .15 .25 .18
Loss from discontinued operations - - - (.08)
Net income .10 .15 .25 .10
F-40
INDEX TO EXHIBITS<F1><F2>
3.1 - Certificate of Incorporation of the
Company (Incorporated by reference to
Exhibit 4(iii) to the Registration
Statement Form S-8 No. 33-63953).
3.2 - By-Laws of the Company.
10.1 - Agreement and Plan of Merger dated as of
May 23, 1995 among the Company, ITI
Acquisition Corp. and Insituform Mid-
America, Inc. (Incorporated by reference
to Exhibit 5(a) to Current Report on
Form 8-K dated May 23, 1995).
10.2 - Merger Agreement dated as of November 2,
1994 by and among Insituform Mid-America,
Inc., IMA Merger Sub, Inc., Enviroq
Corporation and New Enviroq Corporation
(Incorporated by reference to Exhibit 10(a)
to the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995).
10.3 - Agreement of Purchase and Sale dated
as of October 21, 1994 among Gelco
Services, Inc., Gelco NuPipe, Inc.,
GelTech Constructors, Inc., Gelco
Corporation, Mar-Tech Insituform Ltd.
and the stockholders thereof, the
Company and GCO Acquisition Corp.
(Incorporated by reference to Exhibit
2(a) to the Current Report on Form 8-K
dated October 21, 1994), together with
Supplemental Agreement dated March 21,
1995 among the Company, GCO Acquisition
Corp., James D. Monaghan, Richard D. Beck,
as Trustee of The Richard D. Back Revocable
Trust, D. Robert Innis, J.R. Investments Co.,
and Pipe Recon Products Ltd. (Incorporated
by reference to Exhibit 10.11 to the
Annual Report on Form 10-K for the year
ended December 31, 1994).
<FN>
<FN1> The Company's current, quarterly and annual reports are filed
with the
Securities and Exchange Commission under file no. 0-10786.
<FN2> Pursuant to Reg. Section 229.601, does not include certain
instruments with
respect to long-term debt of the Company and its consolidated
subsidiaries not
exceeding 10% of the total assets of the Company and its
subsidiaries on a
consolidated basis. The Company undertakes to furnish to the
Securities and
Exchange Commission, upon request, a copy of all long-term
debt instruments
not filed herewith.
E-1
INDEX TO EXHIBITS<F1><F2> (Continued)
10.4 - Agreement dated as of October 21, 1994,
among the Company, NuPipe, Inc., James
D. Monaghan, Richard D. Beck and Campbell
H. Steketee, Jr. (Incorporated by reference
to Exhibit 2(o) to the Current Report on
Form 8-K dated October 21, 1994).
10.5 - Amended and Restated License Agreement
dated as of September 9, 1994 among
Insituform Mid-America, Inc., Ashimori
Industry Co., Ltd. and Ashimori Inter-
national Limited.
10.6 - Credit Agreement dated October 25, 1995
among the Company, the lenders listed
therein and SunTrust Bank, Nashville,
National Association, as agent (In-
corporated by reference to Exhibit 5(a)
to the Current Report on Form 8-K dated
October 25, 1995), together with Re-
volving Credit Notes each dated October
25, 1995 executed by the Company to,
respectively, SunTrust Bank, Nashville,
National Association, The Boatmen's
National Bank of St. Louis, United
States Bank of Oregon, Harris Trust
and Savings Bank, Daiwa Bank, Limited
and Union Planters National Bank (In-
corporated by reference to Exhibit 5(b)
to the Current Report on Form 8-K dated
October 25, 1995), Swing Line Promissory
Note dated October 25, 1995 executed by
the Company to SunTrust Bank, Nashville,
National Association (Incorporated by
reference to Exhibit 5(c) to the Current
Report on Form 8-K dated October 25, 1995)
and Master Letter of Credit Demand Note
dated October 25, 1995 executed by the
Company to SunTrust Bank, Nashville,
National Association (Incorporated by
reference to Exhibit 5(d) to the Current
Report on Form 8-K dated October 25, 1995).
<FN>
<FN1> The Company's current, quarterly and annual reports are filed
with the
Securities and Exchange Commission under file no. 0-10786.
<FN2> Pursuant to Reg. Section 229.601, does not include certain
instruments with
respect to long-term debt of the Company and its consolidated
subsidiaries not
exceeding 10% of the total assets of the Company and its
subsidiaries on a
consolidated basis. The Company undertakes to furnish to the
Securities and
Exchange Commission, upon request, a copy of all long-term
debt instruments
not filed herewith.
E-2
INDEX TO EXHIBITS<F1><F2> (Continued)
10.7 -Employment Agreement dated as of July
3, 1992, between the Company and James
D. Krugman (Incorporated by reference
to Exhibit 10.53 of Registration
Statement on Form S-4 No. 33-53772).<F3>
10.8 -Agreement dated October 25, 1995 between
the Company and Jerome Kalishman
(Incorporated by reference to Exhibit
2(b) to the Current Report on Form 8-K
dated October 25, 1995).
10.9 -Consulting Agreement dated October 25,
1995 between the Company and Jerome
Kalishman (Incorporated by reference to
Exhibit 2(c) to the Current Report on
Form 8-K dated October 25, 1995).
10.10 - Letter Agreement dated September 27, 1993
between the Company and Jean-Paul
Richard (Incorporated by reference to
Exhibit 10.35 to the Annual Report on
Form 10-K for the year ended December
31, 1993).
10.11 - Employment Agreement dated October 25,
1995 between the Company and Robert
W. Affholder (Incorporated by reference
to Exhibit 2(d) to the Current Report
on Form 8-K dated October 25, 1995).
10.12 - Letter Agreement dated July 31, 1993
between the Company and R. William
Pittman (Incorporated by reference to
Exhibit 10.34 to the Annual Report on
Form 10-K for the year ended December
31, 1993).<F3>
<FN>
<FN1> The Company's current, quarterly and annual reports are filed
with the
Securities and Exchange Commission under file no. 0-10786.
<FN2> Pursuant to Reg. Section 229.601, does not include certain
instruments with
respect to long-term debt of the Company and its consolidated
subsidiaries not
exceeding 10% of the total assets of the Company and its
subsidiaries on a
consolidated basis. The Company undertakes to furnish to the
Securities and
Exchange Commission, upon request, a copy of all long-term
debt instruments
not filed herewith.
<FN3> Management contract or compensatory plan or arrangement.
E-3
INDEX TO EXHIBITS<F1><F2> (Continued)
10.13 - Letter Agreement dated October 29, 1993
between the Company and Anthony W.
Hooper (Incorporated by reference to
Exhibit 10.36 to the Annual Report on
Form 10-K for the year ended December
31, 1993).<F3>
10.14 - Employment Agreement dated December 17,
1993 between Insituform Mid-America, Inc.
and Franklin T. Driver.<F3>
10.15 - Registration Rights Agreement dated as
of October 19, 1992, among the Company,
Interstate Properties, and the Ringwood
Group consisting of Parkwood Limited,
as trustee of the Anthony Basmadjian
"P" Settlement, Barford, as trustee of
the Anthony Basmadjian Settlement,
Ringwood Limited, Brian Chandler and
Douglas K. Chick. (Incorporated by
reference to Exhibit 10.54 of Registra-
tion Statement on Form S-4 No. 33-53772).
10.16 - Registration Rights Agreement dated as of
September 1, 1995 among the Company,
Xanadu Investments L.P. and Robert W.
Affholder (Incorporated by reference to
Exhibit 10.29 of Registration Statement
on Form S-4 No. 33-62677).
10.17 - Purchase Agreement dated as of July 26,
1993 between the Company and Hanseatic
Corporation (Incorporated by reference
to Exhibit 2(j) to the Current Report
on Form 8-K dated July 26, 1993),
together with 8.5% Senior Subordinated
Note dated July 26, 1993 executed by
<FN>
<FN1> The Company's current, quarterly and annual reports are filed
with the
Securities and Exchange Commission under file no. 0-10786.
<FN2> Pursuant to Reg. Section 229.601, does not include certain
instruments with
respect to long-term debt of the Company and its consolidated
subsidiaries not
exceeding 10% of the total assets of the Company and its
subsidiaries on a
consolidated basis. The Company undertakes to furnish to the
Securities and
Exchange Commission, upon request, a copy of all long-term
debt instruments
not filed herewith.
<FN3> Management contract or compensatory plan or arrangement.
E-4
INDEX TO EXHIBITS<F1><F2> (Continued)
the Company to Deltec Asset Management
Corporation, as custodian for Hanseatic
Corporation (Incorporated by reference
to Exhibit 2(k) to the Current Report
on Form 8-K dated July 26, 1993),
Warrant Certificate dated July 26, 1993
executed by the Company to Deltec Asset
Management Corporation, as custodian for
Hanseatic Corporation (Incorporated by
reference to Exhibit 2(l) to the Current
Report on Form 8-K dated July 26, 1993)
and Registration Rights Agreement dated
July 26, 1993 between the Company and
Hanseatic Corporation (Incorporated by
reference to Exhibit 2(n) to the Current
Report on Form 8-K dated July 26, 1993).
10.18 - Letter Agreement dated July 3, 1992,
among the Company, Parkwood Limited,
as Trustee of the Anthony Basmadjian
"P" Settlement, Ringwood Limited,
Brian Chandler and Douglas K. Chick
(Incorporated by reference to Exhibit
5(iii) to the Current Report on Form
8-K dated July 3, 1992), as amended
by Letter Agreement dated as of August
6, 1992 (Incorporated by reference to
Exhibit 5(b) to the Quarterly Report
on Form 10-Q for the period ended June
30, 1992) and Agreement dated as of May
21, 1995 among the Company, Ringwood
Limited, BrianChandler and Douglas K.
Chick, together with Substitute Secured,
Non-Recourse Promissory Note dated as
of July 3, 1992 executed by Ringwood
Limited to the Company (Incorporated
by reference to Exhibit 5(c) to Current
Report on Form 8-K dated May 23, 1995),
and Stock Pledge Agreement dated July
3, 1992 among the Company, Ringwood
<FN>
<FN1> The Company's current, quarterly and annual reports are filed
with the
Securities and Exchange Commission under file no. 0-10786.
<FN2> Pursuant to Reg. Section 229.601, does not include certain
instruments with
respect to long-term debt of the Company and its consolidated
subsidiaries not
exceeding 10% of the total assets of the Company and its
subsidiaries on a
consolidated basis. The Company undertakes to furnish to the
Securities and
Exchange Commission, upon request, a copy of all long-term
debt instruments
not filed herewith.
E-5
INDEX TO EXHIBITS<F1><F2> (Continued)
Limited, Brian Chandler and Douglas
K. Chick(Incorporated by reference
to Exhibit 5(i) to the Current Report
on Form 8-K dated July 3, 1992).
10.19 - Option Agreement dated as of December
15, 1995 between the Company and Sound
Pipe Limited.
10.20 - Equipment Lease dated as of October 10,
1989 between A-Y-K-E Partnership and
Affholder, Inc.
10.21 - 1983 Stock Option Plan of the Company
(Incorporated by reference to Exhibit
10.48 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1991).<F3>
10.22 - 1992 Employee Stock Option Plan of the
Company (Incorporated by reference to
Exhibit 10(a) to Quarterly Report on
Form 10-Q for the quarter ended June
30, 1994).<F3>
10.23 - 1992 Director Stock Option Plan of the
Company (Incorporated by reference to
Exhibit 10.57 to Registration Statement
on Form S-4 No. 33-53772).<F3>
10.24 - INA Acquisition Corp. Stock Option Plan
(Incorporated by reference to Exhibit
10.58 to Registration Statement on Form
S-4 No. 33-53772).<F3>
10.25 - 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).<F3>
<FN>
<FN1> The Company's current, quarterly and annual reports are filed
with the
Securities and Exchange Commission under file no. 0-10786.
<FN2> Pursuant to Reg. Section 229.601, does not include certain
instruments with
respect to long-term debt of the Company and its consolidated
subsidiaries not
exceeding 10% of the total assets of the Company and its
subsidiaries on a
consolidated basis. The Company undertakes to furnish to the
Securities and
Exchange Commission, upon request, a copy of all long-term
debt instruments
not filed herewith.
<FN3> Management contract or compensatory plan or arrangement.
E-6
INDEX TO EXHIBITS<F1><F2> (Continued)
10.26 - Form of Directors' Indemnification
Agreement (Incorporated by reference
to Exhibit 10.47 to the Annual Report
on Form 10-K for the fiscal year
ended December 31, 1988).<F3>
21 - Subsidiaries of the Company.
23 - Consent of BDO Seidman, LLP.
24 - Power of Attorney (See "Power of
Attorney" in the Annual Report on
Form 10-K)
27 - Financial Data Schedule, which is
submitted electronically to the
Securities and Exchange Commission
for information only and not filed.
<FN>
<FN1> The Company's current, quarterly and annual reports are filed
with the
Securities and Exchange Commission under file no. 0-10786.
<FN2> Pursuant to Reg. Section 229.601, does not include certain
instruments with
respect to long-term debt of the Company and its consolidated
subsidiaries not
exceeding 10% of the total assets of the Company and its
subsidiaries on a
consolidated basis. The Company undertakes to furnish to the
Securities and
Exchange Commission, upon request, a copy of all long-term
debt instruments
not filed herewith.
<FN3> Management contract or compensatory plan or arrangement.
E-7