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, 1996
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. [ X ]
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, 1997.....$116,968,123
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, 1997................. 26,915,752 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 1997 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 70% 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 leak
resistant "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 26 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"), and to the
Thermopipe(TM) System (the "Thermopipe Process"), under a license
from Angus Fire Armour Limited ("Angus"). 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 power 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.
In October 1995, Insituform Mid-America, Inc. ("IMA") which,
together with its subsidiaries, was licensed to provide the
Insituform technology in all or a portion of 22 states, was merged
with a subsidiary of the Company as a result of which IMA became a
wholly-owned subsidiary of the Company (the "IMA Merger"). The IMA
Merger and the IGL Acquisition have each been accounted for as a
pooling-of-interests and, accordingly, the consolidated financial
statements for the three years ended December 31, 1996 included in
response to "Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K" for the periods prior to the IMA Merger, and
(unless the context otherwise requires) all other financial
information included herein for such periods and prior periods,
include the combined historical results of the Company and,
respectively, IMA and IGL. The following acquisitions by the
Company, together with those of IMA, during the past six 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
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November 1995 FormaPipe Division, cured-in-place pipe-
Waterflow Services Limited line rehabilitation,
United Kingdom
April 1995 Enviroq Corporation Insituform and NuPipe
(pipeline rehabilitation licensee, southeast
business, including U.S. territories
Insituform Southeast, Inc.)
February 1995 Insituform France S.A.(1) 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 Technologies Insituform and NuPipe
Limited(2) (formerly, licensee, Canada(3)
Insituform Canada Limited)
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(4) Insituform and NuPipe
licensee, south-
western U.S.
territories
March 1991 United Pipeline Systems Tite Liner installer,
USA, Inc. U.S.
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(1) two-thirds of stock acquired
(2) remaining 49% minority interest acquired
(3) effective October 1995, Insituform Canada Limited divested its open-cut
sewer and water pipeline construction and rehabilitation operations
(4) 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.
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 synthetic fiber felt, the Insitutube, which is
constructed with a strong, smooth, watertight plastic 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 and progressive rounding, 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 and minimizes the annular
space between the new rounded pipe and the original 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 is a process for
rehabilitating pressure pipes, which the Company has the exclusive
license from Ashimori to offer in substantially all of North
America. 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 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.
The Thermopipe Process. The Thermopipe Process is a
trenchless process which the Company intends to introduce for
rehabilitating potable water and other aqueous fluid pipes. During
the third quarter of 1996, the Company acquired an exclusive
license from Angus to offer the Thermopipe Process in the United
States and Canada, and non-exclusive rights to offer the Thermopipe
Process in certain other countries (see "Patents and Licenses"
below). The process utilizes a thin-walled polyethylene liner
reinforced with a woven textile fiber, which is manufactured in
diameters that conform to the inside diameters of commonly used
water pipes, currently up to six inches in size. As a result of its
high long-term, independent internal pressure rating, the
Thermopipe liner is suited for the structural rehabilitation of
distribution mains made from most common materials. The factory-
folded pipe is stored on reels and, after insertion into the host
pipe, re-rounded by use of steam and air pressure to conform to the
inside of the pipe. End seals are then installed before the pipe is
placed back into service.
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, after a period of "relaxation", 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.
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 fills the annular space around 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 93% of the Company's consolidated revenues in
1996. 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 and to the Thermopipe Process under a license from
Angus. 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 Technologies 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"), and during 1996,
through newly organized subsidiaries in Argentina and Mexico.
Following consummation of the IMA Merger, and in view of the start-
up nature of operations conducted by the Company under the
UltraPipe(R) name, the Company has consolidated such operations
with IMA's larger corrosion and abrasion protection activities.
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, and is equipped with a high-pressure- water cleaning
truck, a television van with cutting apparatus, other support
trucks and vans, pumping and safety equipment and, in the case of
Insituform operations, a boiler truck and a refrigeration truck,
and, in the case of NuPipe operations, a spool trailer and power
unit. 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 is
formulating its plan to introduce the Thermopipe Process since its
acquisition of the rights to use such process during the third
quarter of 1996.
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 in 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.
The direct installation business of the Company is
project-oriented, and contracts may be obtained through competitive
bidding, usually requiring performance at a fixed price. The
profitability of these operations to the Company depends upon the
ability to estimate costs accurately, and such estimates may prove
to be inaccurate as a result of unforeseen conditions or events. A
substantial proportion of the work on any given project may be
subcontracted out to third parties by the Company.
Proper trenchless installation requires certain expertise that
is acquired on the job and through training, and, if an
installation is improperly performed, the Company may be required
to repair the defect, which may involve excavation. The Company,
accordingly, has incurred significant costs in establishing new
field installation crews, in training new operations personnel and
in equipping its direct installation staff. The Company generally
invoices installation revenues on a percentage-of-completion basis.
Under ordinary circumstances, collection from governmental agencies
in the United States is made within 60 to 90 days of billing.
The Company is required to carry insurance and bonding in
connection with certain direct installation projects, and,
accordingly, maintains comprehensive insurance policies, including
workers' compensation, general and automobile liability, and
property coverage. The Company believes that it presently maintains
adequate insurance coverage for all direct installation activities.
The Company has also arranged bonding capacity for bid, performance
and payment bonds. Typically, the cost of a performance bond is
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(1) 60% of
Tuberias Ltda. stock(2)
United Pipeline Tite Liner Mexico(1) 55% of
de Mexico, S.A. stock(3)
Insituform France Insituform France 66-2/3% of
S.A. stock(4)
Midsouth Partners Insituform Tennessee, 57-1/2%
NuPipe portions of general
Kentucky and partnership
Mississippi interest(5)
_______________________
(1) Jurisdiction of incorporation.
(2) 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.
(3) The remaining interest is held by a subsidiary of Produtos y Servicios
Miller de Mexico, S.A.
(4) The remaining interest is held by a subsidiary of Lyonnaise des Eaux S.A.
(5) The Company holds a 15% partnership interest through Insituform Southwest,
Inc. ("ISW"), a wholly-owned subsidiary, and, as a result of the IMA
Merger, an additional 42.5% interest through a wholly-owned subsidiary of
Insituform Southeast, Inc. ("Insituform Southeast"). The remaining
interest is held by a subsidiary of Insituform East, Incorporated
("Insituform East"), an independent licensee.
Partnership interests in Midsouth Partners may not be
transferred nor may there be a change in control of any partner,
without the approval of all partners. The management and conduct of
the business of Midsouth Partners is vested in a management
committee comprised of seven members. In June 1996, the arbitration
panel in proceedings initiated by the Insituform East subsidiary
holding a Midsouth Partners partnership interest determined the
Insituform Southeast subsidiary holding such interest, but not ISW,
was in default of its obligations under the Midsouth Partners
partnership agreement and that as a consequence thereof, the
Insituform East subsidiary had the right to appoint a
representative to the management committee, in place of one of the
three representatives appointed by the Insituform Southeast
subsidiary and in addition to the three members previously
appointed by the Insituform East subsidiary and the one member
appointed by ISW.
MANUFACTURING AND PRODUCT SALES
The Company's manufacturing and product sales operations
accounted for approximately 6% of the Company's consolidated
revenues in 1996. 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.
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. The Company believes that the sources of supply in
connection with its Insituform operations are adequate for its
needs and that currently 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 has entered into a supply agreement with an
unaffiliated party, under which the Company will purchase pipe to
satisfy no less than 90% of specified formulations of its
licensees' NuPipe requirements 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 will continue to purchase the PAL-Liner it uses
from Ashimori. Pursuant to its license to the Thermopipe Process,
the Company will purchase the Thermopipe product and associated
components from Angus.
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.
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 1996 the Company entered into one new Insituform
license agreement covering an additional territory and, at present,
the Insituform Process is commercialized under license by an
aggregate of 34 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, 1996,
license fees and royalty income from the Company's Insituform
licensees represented approximately $5.4 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. NuPipe International, Inc.,
a wholly-owned subsidiary of NuPipe, Inc., has entered into a
number of licensing arrangements outside of the United States.
During the year ended December 31, 1996, the Company recognized
royalty income from its NuPipe licensees in an amount less than 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. During 1996, the Company also granted an
exclusive license to use the Tite Liner Process for specified uses
in much of the Middle East, in exchange for royalty payments
calculated on the basis of the licensee's gross sales (subject to
minimum payments). 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.
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.
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 the domestic licensees), upon prior
notice to the Company, may also terminate the license for any
reason. The Company may vary the agreement used with new licensees
according to prevailing conditions.
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) paid an initial license fee of $60,000 and 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, Switzerland and Germany, and also, through subsidiaries,
introduced the NuPipe Process in the United Kingdom, France 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 or pay a royalty on
product ordered. 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.
INVESTMENTS IN LICENSEES
The Company makes investments in its licensees, and enters
into joint ventures, from time to time 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,
1996, 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, through its subsidiary, Insituform Holdings (UK)
Limited ("Holdings"), holds one-half of the equity interest in
Insituform Rohrsanierungstechniken GmbH ("Insituform Germany"), the
Company's licensee of the Insituform and NuPipe Processes in
Germany. Under the joint venture arrangements, the managing
director of Insituform Germany is appointed by the 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(1)
Ka-Te Insituform A.G. Insituform Switzerland, 50% joint venture
Liechtenstein and interest(2)
Voralberg, Austria
_____________________
(1) The remaining interest is held by N.V. Kumpen.
(2) The remaining interest is held by Ka-Te Holding A.G.
The interests in the Company's Belgian joint venture and its
Swiss joint venture, both formed in 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 in certain respects with the continuing resin business
of the joint venture for a period of three years after such
buy-out.
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. 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 has the right to market 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 currently utilizes its own sales
representatives who work with gas companies in selected areas 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,
1996, 1995 and 1994, 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, 1996 and 1995, 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 $177.3 million and $134.1 million,
respectively. Of such amounts, approximately $9.7 million and $25.6
million, respectively, represent projects where the Company was the
low bidder. Backlog at December 31, 1996 and December 31, 1995
included approximately $28.6 million and $11.1 million,
respectively, attributable to the Company's corrosion and abrasion
protection operations (primarily involving the application of the
Tite Liner Process) and approximately $39.7 million and $16.2
million, respectively, attributable to tunnelling operations. The
Company anticipates that substantially all construction backlog
recorded at December 31, 1996 will be completed in 1997, except
for amounts aggregating approximately $25.6 million, which the
Company anticipates will be completed the following year.
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 8% 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 59 patents in the United States relating to
the Insituform Process, the last to expire of which will remain in
effect until 2014, and has obtained patent protection in its
principal overseas markets covering aspects of the Insituform
Process.
Two of the significant patents relating to the Insituform
Process, covering, respectively, the curing of a resin-impregnated
tube and material aspects of the inversion process, have expired
where previously in effect. The 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 -- -- -- -- -- --
(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
(l) 5510078 04/23/13 * * -- -- * *
_____________
(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.
(l) method of inverting a tube with the use of a rolling ring.
* application pending
/TABLE
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 nine 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 be issued 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.
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.
Under its license from Angus (the "Angus License"), the Company
holds exclusive rights to use the patents, trademarks and know-how
related to the Thermopipe Process for the United States and Canada,
and non-exclusive rights in Mexico, France, Benelux, Spain and
Italy. Angus has the option under the license to convert the
exclusive rights to non-exclusive rights if the Company does not
meet certain minimum purchases of Thermopipe liner. The Angus
License extends for an initial term of five years and is renewable
by the Company for an additional five year term, subject to
termination in the event of specified defaults. In connection with
the Thermopipe license, Angus was paid an initial license fee of
$60,000, with two additional payments of $20,000 each due after the
end of the first and second years of the license. No further
royalties are due under the license. Under the Angus License, any
improvements made by the Company which relate exclusively to the
Thermopipe Process, and which are not derivative of the Company's
installation technology relating to other products, are licensed on
a royalty-free basis to Angus.
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, 1996, 1995 and 1994, the Company spent approximately $7.7
million, $7.6 million and $6.2 million, respectively, on all
strategic marketing and product development activities.
EMPLOYEES
As of December 31, 1996, the Company employed 1,497
individuals, including nine officers, 136 technical specialists and
managers, 134 manufacturing staff, 908 direct installation staff,
225 administrative personnel and 94 marketing personnel. Certain of
the Company's contracting operations are parties to collective
bargaining agreements covering an aggregate of 262 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 Thermopipe product also has NSF approval. The NSF
assumes no liability for use of any products, and the NSF's
arrangements with the EPA do not constitute the EPA's endorsement
of the NSF, the NSF's policies or its standards. 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, 1997 the Company
---- -------------- --------------
Jerome Kalishman 69 Chairman of the Board
Anthony W. Hooper 49 President and Chief
Executive Officer
Robert W. Affholder 61 Senior Executive Vice
President
William A. Martin 55 Senior Vice
President-Chief
Financial Officer
Dale T. Harden 56 Senior Vice President-
Chief Operating Officer
of North American Con-
tracting Operations
Raymond P. Toth 49 Vice President-
Human Resources
Joseph F. Olson 52 Vice President-Controller
of North American Con-
tracting Operations
F. Thomas Driver 59 Vice President-Technical
Sales
Robert L. Kelley 51 Vice President-General
Counsel
Jerome Kalishman has been Chairman of the Board of the Company
since November 1996, having served as Vice Chairman of the Board of
the Company from October 1995 until November 1996. Prior to the IMA
Merger and since prior to 1991, Mr. Kalishman was Chairman of the
Board and Chief Executive Officer of IMA.
Anthony W. Hooper has been President of the Company since
November 1996. Mr. Hooper was previously, since August 1994, Senior
Vice President-Marketing and Technology of the Company, having
served as Senior Vice President-Marketing of the Company from
November 1993 to that date. From 1992 until joining the Company,
Mr. Hooper was President of Huyck Formex/Weavexx Corporation, a
North Carolina industrial textile and process equipment
manufacturer and subsidiary of BTR, Inc. 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.
Robert W. Affholder has been Senior Executive Vice President
of the Company since August 1996. Mr. Affholder was previously,
since October 1995, Senior Vice President-Chief Operating Officer
of North American Contracting Operations of the Company. Mr.
Affholder was President of IMA from 1994 to October 1995 and from
prior to 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.
Dale T. Harden joined the Company as Senior Vice President in
June 1996 and became its Chief Operating Officer-North American
Contracting Operations in August 1996. From prior to 1991 until
joining the Company, Mr. Harden was employed by the General
Electric Company, serving most recently as General Manager of its
Power Generation and Apparatus Service Department.
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.
Robert L. Kelley has been Vice President of the Company since
June 1996, having joined the Company as General Counsel in the
prior month. Mr. Kelley was Assistant General Counsel of Monsanto
Company from prior to 1991 until joining the Company.
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 46,000 square
feet of space on 10.5 acres, 19,400 square feet of which is
utilized as office space and the remaining 27,000 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. 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, which was prepaid in February 1997, and was
secured by the issuer's title to the property, which is leased to
the Company under arrangements that provide for the Company's
purchase option at (subsequent to such prepayment) nominal value.
In January 1995 the Company sold to Linings (a 51%-owned
subsidiary), for a sale price of Pound Sterling 750,000, 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.
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), Grand Prairie, Texas (9,000 square feet),
Lakeland, Florida (15,000 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, Opaloca, Florida,
Atlanta, Georgia, 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 foregoing facilities are regarded by management as adequate
for the current and anticipated future requirements of the
Company's business. Upon payment by the Company in the last quarter
of 1996 in the amount of approximately $1.26 million, the Company
terminated its lease, entered into by IGL prior to the IGL
Acquisition, of premises located in Langley, Berkshire, England,
which entailed an initial rent of Pound Sterling 245,960 per annum, subject to
adjustment every five years through 2015 based upon the open market
rent applicable at that time. The Company may seek to negotiate
termination of leases on certain additional properties in the
United Kingdom, and, in order to rationalize the Company's
operations combined as a result of the IMA Merger, to relocate
certain other operations.
ITEM 3. LEGAL PROCEEDINGS
The Company has initiated proceedings which are pending 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 Kanal Sanierung
Hans Muller GmbH & Co. In such proceeding, defendants asserted
counterclaims alleging both that suit was brought in bad faith, and
certain antitrust violations, and further alleging that the Company
engaged in unfair competition.
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. 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
a trial on the issue of damages, the amount of which remains to be
determined. Defendants filed a notice of appeal to the United
States Court of Appeals for the Federal Circuit, and the Company
filed a notice of cross-appeal from the 1991 judgment. 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. The District Court has denied defendants' motion for a
partial new trial, and defendants have filed a notice of appeal
from that ruling with the United States Court of Appeals for the
Federal Circuit which is set for argument in April 1997.
In November 1996, the Court of Appeals for the Federal Circuit
affirmed the District Court in declining to declare the Company's
serial impregnation patent invalid and found that the jury's
rejection of defendants' challenge to the validity of that patent
was supported by the evidence. The Court of Appeals further
affirmed the District Court in granting defendants' judgment
notwithstanding the jury verdict on the issue of literal
infringement of the patent, and vacated the District Court's
finding of infringement under the doctrine of equivalency, holding
that the District Court had used an incorrect claim construction
and remanding the case to the District Court for new findings
regarding such issue. In December 1996, the District Court issued
its new findings under the guidelines suggested by the Court of
Appeals, and again found that both of the processes employed by
defendants infringed the Company's serial vacuum impregnation
patent. The damages portion of the Texas Proceedings are
continuing, with trial currently scheduled for mid-1997. In March
1997, defendants filed a petition for a writ of certiorari in the
U.S. Supreme Court with respect to the November 1996 ruling, which
the Company is opposing.
In October 1996, two of the defendants in the Texas Proceedings
filed a separate action (the "Additional Texas Proceedings") in the
District Court against the Company and Insituform East,
Incorporated (Inliner U.S.A. and Cat Contracting, Inc. v.
Insituform Technologies, Inc. and Insituform East, Inc. [Civil
Action No. H96-3627]) alleging, among other matters, that the
Company had commenced the Texas Proceedings with knowledge that the
Company's serial impregnation patent was invalid and gave false
testimony in the Texas Proceedings. The suit further alleges that
the Company committed various infractions of the antitrust laws,
including conduct by the Company constituting unreasonable
restraints of trade and monopolization of its market, in violation
of Sections 1 and 2 of the Sherman Act, made false or misleading
representations in violation of Sections 1 and 2 of the Sherman
Act, made false or misleading representations in violation of
Section 43(a) of the Lanham Act, and engaged in other anti-
competitive practices in violation of Texas state law, and seeks
compensatory and punitive damages. The Company has denied the
allegations and raised affirmative defenses, including collateral
estoppel, the Noerr-Pennington doctrine, and statute of
limitations, and filed a motion to dismiss regarding certain of the
antitrust claims which plaintiffs are opposing. No discovery has
been conducted in the case. A scheduling order has been entered
with trial currently set for November 1998.
In October 1996, Western Slope Utilities, Inc., which utilizes
a serial impregnation process licensed from Inliner, U.S.A., one of
the defendants in the Texas Proceedings, commenced an action
against the Company in the United States District Court for the
District of Colorado (Western Slope Utilities, Inc. v. Insituform
Technologies, Inc. and Insituform Netherlands) B.V. [Civil Action
No. 96-N-2394]), seeking, among other things, a judgment declaring
the Company's serial impregnation patent invalid, unenforceable and
not infringed by plaintiff's current activities, and injunctive
relief enjoining the Company from charging plaintiff or any of its
customers or suppliers with infringing that patent. This case has
been transferred to the United States District Court for the
Southern District of Texas and a motion is pending to have it
consolidated with the Additional Texas Proceedings. Plaintiffs
recently filed an application for writ of mandamus with the United
States Court of Appeals for the Federal Circuit contesting the
transfer order, which the Company is opposing.
In December 1996, the Company entered into settlement
arrangements with respect to two previously reported proceedings
initiated by the Company against, inter alia, Spiniello Limited,
Inc. in the United States District Courts for, respectively, the
District of New Jersey (Civil Action No. 8904174 (MTB)) (the "New
Jersey Proceedings") and the Central District of California (Civil
Action No. 95-5484 (GHK) (the "California Proceedings"), alleging
infringement of the Company's Insituform patents, among other
matters. In the New Jersey Proceedings, defendants had asserted
counterclaims alleging both that the suit was brought in bad faith,
and certain antitrust violations, and, in the California
proceedings, seeking a declaratory judgment that the subject
patents were invalid. The New Jersey Proceedings had been stayed
pending a final judgment in the Texas Proceedings. In the
California Proceedings, the court had preliminarily enjoined
defendants from infringing the Company's serial impregnation
patent, and from misappropriating various of the Company's trade
secrets. Under the settlement arrangements, the New Jersey
Proceedings have been dismissed and, in the California Proceedings,
the parties agreed to convert the preliminary injunction against
infringing the Company's serial impregnation patent to a permanent
injunction for the life of the patent, the preliminary injunctive
relief against misappropriating the Company's trade secrets was
made permanent for an agreed upon term and defendants paid an
agreed upon sum to the Company.
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
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's class A common stock, $.01 par value ("Common
Stock"), is traded in the over-the-counter market under the symbol
"INSUA". The following table sets forth the range of quarterly high
and low sales prices commencing after December 31, 1994, 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
------ ---- ---
1996
First Quarter $12.00 $9.38
Second Quarter 13.38 7.63
Third Quarter 8.00 6.13
Fourth Quarter 8.38 6.38
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
As of March 15, 1997, the number of record holders of the
Company's Common Stock was 1,874.
Holders of Common Stock are entitled to receive dividends
as and when they may be declared by the Company's Board of
Directors. The Company has never paid a cash dividend on the Common
Stock. The Company's present policy is to retain earnings to
provide for the operation and expansion of its business. However,
the Company's Board of Directors will review the Company's dividend
policy from time to time and will consider the Company's earnings,
financial condition, cash flows, financing agreements and other
relevant factors in making determinations regarding future
dividends, if any. Under the terms of certain debt arrangements to
which the Company is a party, the Company is subject to certain
limitations in paying dividends. See Notes 8 and 20 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.
For each year prior to consummation of the IMA Merger
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 the class A common stock, $.01 par value, of IMA
and $.1272 per share of the class B common stock, $.01 par value,
of IMA.
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,
-----------------------------------------------------
1996(1) 1995(1)(2) 1994(3) 1993(4) 1992(5)
------- ------- ------- ------- -------
(in thousands, except per share amounts)
INCOME STATEMENT DATA:
Revenues.................. $289,933 $ 272,203 $ 223,171 $ 151,622 $ 156,219
Operating costs and
expenses:
Cost of revenues......... 201,219 182,286 146,248 95,729 98,169
Selling, administrative
and general............. 60,181 55,990 41,511 34,889 29,873
Strategic marketing and
product development..... 7,689 7,636 6,180 6,878 6,303
Unusual items............. 6,498 14,541(6) -- (981) 14,572(7)
Total operating
income............ 14,346 11,750 29,232 15,107 7,302
Other income (expense)..... (4,933) (8,120)(8) (2,398) (468) 2,859
Taxes on income........... 4,985 3,987 10,457 5,159 8,907
Equity in earnings of
affiliated companies..... 441 666 570 638 1,282
Income (loss) from
continuing operations.... 4,492 (966)(8) 15,667 9,734 2,288
Net income (loss)......... 4,492 (966) 14,503 7,487 1,748
Earnings (loss) per share:
Income (loss) from
continuing operations... .17 (.04) .57 .36 .09
Discontinued operations... -- -- (.04)(9) (.09)(9) (.02)
Cumulative effect of
accounting change........ -- -- -- .01 --
Net income (loss)........ .17 (.04) .53 .28 .07
Weighted average common
and common equivalent
shares outstanding....... 27,112 26,902 27,162 27,206 24,317
BALANCE SHEET DATA:
Working capital........... 78,876 69,538 46,403 40,724 31,990
Current assets............ 130,879 120,711 106,926 81,102 67,074
Property and equipment.... 57,266 59,773 51,471 40,407 32,184
Intangibles............... 71,953 73,158 65,268 52,707 29,489
Total assets.............. 267,944 260,300 227,627 177,010 133,682
Long-term debt............ 82,384 82,813 47,347 36,297 7,675
Redeemable preferred
stock.................... -- -- -- 157 84
Total liabilities......... 139,106 137,845 110,310 77,108 43,652
Total common stock and
other stockholders'
equity.................. 123,203 116,810 114,880 100,106 90,267
___________________
(1) As a consequence of a 15% general partnership interest in Midsouth Partners held by a
subsidiary of the Company, and the consummation of the acquisition (the "Enviroq
Acquisition") of the pipeline rehabilitation business of Enviroq Corporation in April
1995, including a 42.5% interest in Midsouth Partners held by a subsidiary of Insituform
Southeast, Midsouth Partners has been consolidated in the Company's financial statements
since such date.
(2) In 1995 the Company consummated the acquisition of two-thirds of Insituform France S.A.
("Insituform France") and the Enviroq Acquisition, which have been accounted for under
the purchase method of accounting.
(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 Industries, Inc. 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) 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.
(7) Reflects $9.7 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 $4.9 million for restructuring costs, primarily for asset-related write-
offs, lease termination provisions and personnel related costs.
(8) In 1995 the Company settled certain outstanding litigation for a cash payment of $3.2
million and issuance of 30,000 shares of Common Stock, resulting in an after-tax charge
against earnings of approximately $2.2 million.
(9) 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, Chile, Argentina and Mexico. Royalties and license
fees are paid by the Company's 34 unaffiliated Insituform licensees
and sub-licensees and its ten unaffiliated NuPipe licensees. During
the three years ended December 31, 1996, 1995 and 1994,
approximately 69.7%, 71.2% and 67.8%, 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 acquisitions in July 1993 of Naylor Industries,
Inc., 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, 1996 Compared to Year Ended December
31, 1995
Revenues. Revenues increased 6.5% to $289.9 million from
$272.2 million in the prior year, primarily as a result of an
increase in construction revenues, offset by decreases in product
sales to and royalties and license fees from independent licensees.
The increase in revenues reflects the April 1995 Enviroq
Acquisition, including Insituform Southeast (and the consequent
consolidation of Midsouth Partners), resulting in the elimination
of the related product sales and royalty revenues. Fluctuations in
currency exchange rates of the Japanese yen, British pound
sterling, French franc and Canadian dollar to the United States
dollar negatively impacted total revenues by approximately $1.2
million in 1996.
Construction revenues increased 8.6% to $268.2 million from
$246.9 million in 1995 in part as a result of the acquisition of
Insituform Southeast (which together with the consolidation of
Midsouth Partners, contributed to construction revenues during the
entire 1996 fiscal year an aggregate of $9.9 million in excess of
the amount contributed in the prior year, subsequent to the April
acquisition), in addition to revenue increases in United Kingdom
operations which primarily reflect the acquisition of the FormaPipe
business in November 1995. Construction revenues in 1995 include
$10.2 million from the Company's water and sewer open cut
construction operations in Canada, the assets of which were sold to
certain members of management in November 1995.
Product sales decreased 12.3% to $16.4 million in 1996 from
$18.6 million in 1995 (which included pre-acquisition sales to
Insituform Southeast and Midsouth Partners). The decrease in
product sales was coupled with a decrease in sales in Japan
primarily as a result of the negative impact of the fluctuation in
the currency exchange rate of the Japanese yen to the United States
dollar by approximately $0.9 million.
Royalty and license fees decreased 19.1% to $5.4 million
compared to $6.7 million in 1995. The decrease was primarily
attributable to lower royalties collected from independent
licensees in the United States, coupled with the elimination of
intercompany royalties from recently-acquired subsidiaries. During
1996, the Company signed license agreements for Insituform in
Taiwan and for NuPipe in Germany, and recognized $0.3 million in
license fee revenue, while in 1995, the Company signed an
Insituform license agreement in New Zealand, recognizing $48,000 in
license fee revenue.
Operating Costs and Expenses. In 1996, cost of construction
contracts (which, during such year, included trenchless
installations, abrasion, corrosion and pipeline construction, and
tunnelling) increased 11.7% to $ 189.7 million from $ 169.9 million
in 1995, primarily attributable to newly-acquired licensees. Costs
of construction in 1995 included $9.4 million from the Company's
open cut operations in Canada which were sold in November 1995.
Construction costs as a percentage of construction revenues
increased to 70.7%, as compared to 68.8% in 1995, principally due
to lower margins achieved by newly-acquired subsidiaries. In
addition, there was an increase in 1996 in worldwide volume of the
Company's abrasion and corrosion operations, which carry lower
margins than those of the Company's pipeline rehabilitation
operations.
Cost of product sales decreased 8.4% to $11.0 million in 1996
from $12.0 million in 1995. The decrease was a result of decreased
product revenue. Cost of product sales as a percentage of product
sales increased to 67.2%. in 1996, as compared to 64.3% in 1995,
due primarily to a shift in the mix of products sold.
As a percentage of revenues, selling, administrative and
general expenses were 20.8% compared to 20.6% in 1995. The 1996
increase as a percentage of revenues is attributable primarily to
the Company's investment in stronger operations and sales
management, improvement in quality (ISO 9000), and focus on the
industrial market. In 1996, selling, administrative and general
expenses increased 7.5% to $60.2 million as compared to $56.0
million in 1995. This increase is due, in large part, to the
incremental costs of operations for recently acquired entities of
$1.0 million (of which $0.3 million related to incremental goodwill
and non-compete amortization). Other increases were attributable to
added personnel costs in the Company's contracting operations in
the United States, principally in the areas of industrial sales,
and operations and project management. Strategic marketing and
product development costs did not materially change between 1995
and 1996.
Unusual Items. In 1996, the Company recognized $6.5 million in
unusual items in connection with the Company's rationalization of
its contracting operations. These consisted primarily of: (i) the
write-off of certain assets associated with the use of the
Company's Paltem product line in the gas distribution main
installation market (approximately $3.6 million), (ii) charges
related to the disposition of excess facilities (approximately $1.4
million), and (iii) costs related to reorganization of North
American contracting operations (approximately $1.5 million). In
1995, the Company recognized merger and restructuring costs of
approximately $14.5 million in connection with the IMA Merger,
completed in October 1995. These included transaction costs related
to the merger of $6.5 million, which were primarily attributable to
investment banking fees, legal and accounting fees, filing fees,
and management travel costs and a charge for approximately $8.1
million relating to restructuring costs.
Other Income (Expense). In 1996, other income increased to
$1.3 million from a $1.7 million expense in 1995, primarily due to
a 1995 charge to earnings of $3.6 million during the second
quarter, as a result of the settlement of a pending shareholder
class action lawsuit which entailed a cash payment to class members
in the amount of $3.2 million and the issuance of 30,000 shares of
Common Stock. In 1996, interest expense decreased 3.1% to $6.2
million from $6.4 million in 1995, due primarily to reduced
principal and lower interest rates in 1996.
Taxes on Income. Taxes on income increased to $5.0 million
from $4.0 million in 1995 as a result of an increase of $5.8
million in income before taxes on income, offset by a decrease in
the effective tax rate to 53.0% from 109.8% in 1995. As indicated
in Note 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 1996 and 1995 effective tax
rates were higher than the United States federal statutory rate,
primarily due to the non-deductibility of goodwill amortization
associated with the recent acquisitions, which is generally not
deductible for tax purposes. The 1995 effective rate was also
affected by certain merger costs which were capitalized for tax
purposes.
In its financial statements, the Company has reported net
deferred income tax assets of $3.0 million as of December 31, 1996.
The Company has net operating loss and foreign tax credit
carryforwards which, if fully realized, would produce future tax
benefits of $6.4 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 $3.1 million to reduce the related net deferred tax
assets to $3.0 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 Financial 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 included in response to "Item
14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K".
Management has prepared projections that indicate that the
remaining NOLs would be absorbed prior to their expiration.
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 are inherently imprecise.
Accordingly, a valuation allowance of $3.1 million has been
recorded.
The realization of the net deferred tax asset of $3.0 million
would require that certain of the Company's subsidiaries, including
ISW, Insituform Southwest, Insituform of New England, Inc.,
Insituform Technologies, Ltd. (formerly, 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 ISW 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 (exclusive of 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 $17.7 million, or
6.5%, in 1996 over 1995, which was offset by an increase in cost of
revenues of $18.9 million, or 10.4%, coupled with increased
operating costs of $4.2 million, or 6.6%, offset by a decrease in
unusual items of $8.0 million, or 55.3%. These factors contributed
to an increase in operating income of $2.6 million, or 22.1%. A
decrease in interest expense of $0.2 million, coupled with the
non-recurrence of the litigation loss of $3.6 million, offset by
lower other income of $0.5 million and an increase in taxes on
income of $1.0 million, resulted in an increase in income before
minority interests and equity earnings from affiliated companies of
$4.8 million. As a result of the foregoing, net income for 1996 was
$4.5 million, an increase of $5.5 million from net income in 1995.
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 Midsouth Partners,
another domestic licensee) resulting in the elimination of the
related product sales and royalty revenues. Fluctuations in
currency exchange rates had an immaterial effect on revenues during
1995.
Construction 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
to 1995 construction revenues an aggregate of $43.1 million in
excess of the amount contributed (by Gelco subsequent to its
acquisition) in the prior year. 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.
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.
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 post-acquisition
intercompany royalties from Insituform France, Insituform Southeast
and Midsouth Partners in 1995. 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, during such year, included trenchless
installations, abrasion and corrosion and pipeline construction,
tunnelling and open cut excavation) increased 29.2% to $169.9
million from $131.5 million in 1994, primarily attributable to
newly-acquired licensees. During 1995, construction costs as a
percentage of construction revenues increased to 68.8% from 67.9%
in 1994, due primarily to poorer performance of certain newly-
acquired licensees 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 20.6% 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 certain newly-acquired 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 34.9% to $56.0 million
compared to $41.5 million in 1994 due, in part, to the incremental
costs of operations for recently acquired entities of $8.9 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.
Unusual Items. 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 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.
Net Income. Total revenues increased $49.0 million, or 22.0%,
in 1995 over 1994, while cost of revenues increased $36.0 million,
or 24.6%, and operating costs (including merger and restructuring
costs of $14.5 million) increased $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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had $13.5 million in cash,
U.S. treasury bills, and short-term investments, as compared to
$11.4 million at December 31, 1995. Cash and cash equivalents
increased $2.1 million primarily as a result of cash provided by
operations of $28.2 million offset by cash used for capital
expenditures of $18.2 million and net repayments of long-term debt
of $5.9 million. The Company's working capital ratio was 2.5 to 1.0
at December 31, 1996 representing an increase from 2.4 to 1.0 at
December 31, 1995. On February 14, 1997 (the "Senior Note
Closing"), the Company completed the sale, in a private
transaction, of $110,000,000 principal amount of its 7.88% Senior
Notes, Series A, due February 14, 2007 (the "Senior Notes"),
approximately $85.0 million of which was applied at closing to the
refinancing of outstanding indebtedness of the Company.
Operations provided cash of $28.2 million during 1996, as
compared to cash provided of $1.1 million in 1995. During 1996,
inventories changed by an immaterial amount (compared to a 1995
increase of $4.1 million), prepaid expenses and miscellaneous
decreased by $2.5 million (compared to a 1995 increase of $4.1
million), accounts payable and accruals (excluding changes in
restructuring reserve accruals) increased $5.6 million (compared to
a 1995 reduction of $3.8 million) and accrued income taxes
increased $0.1 million (compared to a 1995 reduction of $5.3
million). In addition, in 1996 there was an increase in
depreciation and amortization of $2.4 million primarily associated
with continuing capital expenditures, as well as from the Enviroq
Acquisition.
Trade receivables, together with costs and estimated earnings
in excess of billings, used $8.2 million of cash during 1996,
compared to $1.0 million in 1995. Trade receivables, including
costs and estimated earnings in excess of billings, increased 10.6%
to $84.6 million from $76.5 million in 1995, reflecting a $1.0
million increase in trade receivables, a $1.1 million increase in
retainage receivables, and an increase of $6.1 million in costs and
estimated earnings in excess of billings on construction contracts.
These increases reflect increased volume in the Company's North
American operations in the fourth quarter 1996, in particular its
tunnelling and corrosion and abrasion operations. 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. In the United States, the Company's retainage
receivables are generally received within 60 to 90 days after the
completion of a contract.
During 1996, increases in accounts payable and accruals
provided $5.6 million in cash compared to 1995, in which $3.8
million was used. This difference was due primarily to lower
payments for employee bonuses in 1996 compared to 1995. Increased
accruals of income taxes provided $0.1 million to cash in 1996,
compared to a decrease in accruals of $5.3 million in 1995.
Capital expenditures were $18.2 million in 1996, compared to
$16.5 million in 1995. Capital expenditures generally reflect
replacement equipment required by the Company's contracting
subsidiaries.
In April 1996, the Company entered into arrangements whereby,
in exchange for payments in the approximate amount of $1.1 million,
the Company increased its share of the equity of its German
licensee from one-third to one-half, effective January 1, 1996.
Financing activities used $6.1 million in cash during 1996 as
compared to cash provided in the amount of $26.1 million in 1995.
During 1996, the Company made principal payments of $5.4 million on
notes issued in connection with the October 1994 acquisition of
Gelco. In addition, as a result of demands for payment of the
Company's $3 million five-year subordinated note issued in April
1995 as part of the $18.3 million purchase price in the Enviroq
Acquisition, and ensuing litigation, the Company discharged its
obligation under such note and under arrangements to pay $1 million
in consulting fees over five years, and settled such litigation,
for the aggregate amount of $3.1 million and the release of other
claims.
The Company remains obligated on certain notes issued in
connection with the acquisition in October 1994, of all of the
outstanding stock of Gelco and affiliates, aggregating $1.4
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.
At December 31, 1996, $76.3 million was outstanding under the
Company's credit agreement dated October 25, 1995 (the "Credit
Agreement") with SunTrust Bank, Nashville, N.A. ("SunTrust"), as
agent, and a group of participating lenders (the "Lenders"), which
provided 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). Indebtedness pursuant
to the Credit Agreement was due to mature in October 2000, with
installments based on a five-year amortization schedule, commencing
December 31, 1997. Interest on indebtedness under the Credit
Agreement was payable at a rate per annum selected by the Company
as either SunTrust's prime 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 was available for
borrowings 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 obligated the Company
to comply with certain financial ratios and restrictive covenants
that, among other things, limited the ability of the Company and
its subsidiaries to incur further indebtedness, pay dividends, make
loans and encumber any properties, and required guarantees of
certain domestic subsidiaries. At the Senior Note Closing, all
outstanding indebtedness to the Lenders under the Credit Agreement,
and outstanding indebtedness owed to SunTrust under an industrial
revenue bond encumbering the Company's Batesville facility ($3.4
million principal amount recorded at December 31, 1996), was
prepaid.
At the Senior Note Closing, the Company also prepaid recorded
amounts outstanding under the Company's senior subordinated note
acquired by Hanseatic Corporation ("Hanseatic") in July 1993 ($4.8
million principal amount recorded at December 31, 1996), which
required 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
was subordinated to bank and other institutional financing, and
purchase money debt incurred in connection with acquisitions of
businesses. The note was 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 ($100,000 paid at the Senior Note
Closing). Warrants with respect to 350,877 shares of 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 Common Stock of $14.25, and such shares are entitled to demand
and incidental registration rights.
The Senior Notes issued by the Company in February 1997 mature
on February 14, 2007, and bear interest, payable semi-annually in
August and February of each year, at the rate per annum of 7.88%.
Each year, from February 2001 to February 2006, inclusive, the
Company will be required to make principal payments of $15.7
million, together with an equivalent payment at maturity. The
Senior Notes may be prepaid at the Company's option, in whole or in
part, at any time, together with a make whole premium, and upon
specified change in control events each holder has the right to
require the Company to purchase its Senior Note without any premium
thereon.
The note purchase agreements pursuant to which the Senior
Notes were acquired obligate the Company to comply with certain
financial ratios and restrictive covenants that, among other
things, place limitations on operations and sales of assets by the
Company or its subsidiaries, and limit the ability of the Company
to incur further secured indebtedness and liens and of subsidiaries
to incur indebtedness, and, in the event of default under the
Senior Notes, limit the ability of the Company to pay cash
dividends or make other distributions to the holders of its capital
stock or to redeem such stock. Such agreements also obligate the
Company's subsidiaries to provide guarantees to holders of the
Senior Notes if guaranties are delivered by them to specified other
lenders. To the extent not utilized to refinance indebtedness of
the Company at the Senior Note Closing, proceeds of the sale of the
Senior Notes are available for general corporate purposes,
including possible acquisitions of products, technologies and
businesses and repurchases of Common Stock. The Company has not
reached any determination with respect to any such transaction, and
there can be no assurance that any such transaction will be
undertaken.
Management believes its current working capital, including the
proceeds of the Senior Note placement, will be adequate to meet its
requirements for the foreseeable future. In connection with the
anticipated expansion of its operations, and so as to maintain its
liquidity in the event of application of the proceeds of the Senior
Notes, the Company will seek to implement an additional revolving
credit facility for general corporate purposes.
RECENTLY ISSUED ACCOUNTING STANDARDS
During 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"), issued by the Financial Accounting
Standards Board effective for transactions entered into in fiscal
years that begin after December 15, 1995. As allowed under the
provisions of SFAS 123, the Company will continue to measure
compensation cost for employee stock-based compensation plans using
the intrinsic value based method of accounting prescribed by the
Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. As such, the Company will make pro forma
disclosures (see Note 10 of the Notes to Consolidated Financial
Statements included in response to "Item 14. Exhibits, Financial
Statement Schedules and Reports on Form 8-K") of net income and
earnings per share as if the fair value based method of accounting
had been applied. Accordingly, adoption had no material effect on
the Company's financial position or results of operations.
During 1996, the Company also adopted Statements of Financial
Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for the Long-Lived Assets to be Disposed Of
("SFAS 121"). SFAS No. 121 establishes new guidelines regarding
when impairment losses on long-lived assets, which include plant
and equipment and certain identifiable intangibles and goodwill,
should be recognized and how impairment should be measured.
Adoption of this standard did not have a material effect on the
Company's financial condition 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. The Company has filed a Current Report
on Form 8-K dated July 17, 1996 reporting, under "Item 4. Changes
in Registrant's Certifying Accountant" thereunder, the engagement
of Arthur Andersen LLP as the Company's independent accountant in
substitution for BDO Seidman, LLP.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning this item, see "Item 1.
Business-Executive Officers" and the Proxy Statement to be filed
with respect to the 1997 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, 1996, the
Company filed a Current Report on Form 8-K dated November 18, 1996
which, under "Item 5. Other Events" thereunder, reported certain
changes in management. In addition, the Company has filed a Current
Report on Form 8-K dated February 14, 1997 which, under "Item 5.
Other Events" thereunder, reported the completion of the Company's
private sale of its 7.88% Senior Notes, Series A, due February 14,
2007. No financial statements were filed as part of either such
report.
POWER OF ATTORNEY
The registrant and each person whose signature appears
below hereby appoint Jerome Kalishman, Anthony W. Hooper, 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 28, 1997 INSITUFORM TECHNOLOGIES, INC.
By s/Anthony W. Hooper
--------------------------------
Anthony W. Hooper
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated:
Signature Title Date
S/Anthony W. Hooper
- -----------------------
Anthony W. Hooper Principal Executive March 28, 1997
Officer and Director
s/William A. Martin
- -----------------------
William A. Martin Principal Financial March 28, 1997
and Accounting Officer
s/Robert W. Affholder
- -----------------------
Robert W. Affholder Director March 28, 1997
s/Paul A. Biddelman
- -----------------------
Paul A. Biddelman Director March 28, 1997
s/Brian Chandler
- -----------------------
Brian Chandler Director March 28, 1997
s/Douglas K. Chick
- -----------------------
Douglas K. Chick Director March 28, 1997
s/William Gorham
- -----------------------
William Gorham Director March 28, 1997
s/Jerome Kalishman
- -----------------------
Jerome Kalishman Director March 28, 1997
s/James D. Krugman
- -----------------------
James D. Krugman Director March 28, 1997
s/Steven Roth
- -----------------------
Steven Roth Director March 28, 1997
s/Alvin J. Siteman
- -----------------------
Alvin J. Siteman Director March 28, 1997
s/Silas Spengler
- -----------------------
Silas Spengler Director March 28, 1997
s/Sheldon Weinig
- -----------------------
Sheldon Weinig Director March 28, 1997
s/Russell B. Wight, Jr.
- -----------------------
Russell B. Wight, Jr. Director March 28, 1997
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Certified Public
Accountants........................................ F-2
Consolidated Balance Sheets, December 31,
1996 and 1995.................................... F-4
Consolidated Statements of Operations for
each of the three years in the period
ended December 31, 1996............................ F-6
Consolidated Statements of Stockholders'
Equity for each of the three years in
the period ended December 31, 1996................. F-7
Consolidated Statements of Cash Flows
for each of the three years in the
period ended December 31, 1996..................... F-8
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 PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Insituform Technologies, Inc.:
We have audited the accompanying consolidated balance sheet of
Insituform Technologies, Inc. and subsidiaries (the "Company") as
of December 31, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audit. The financial
statements of the Company as of December 31, 1995, and for the
years ended December 31, 1995 and 1994, were audited by other
auditors whose report dated March 8, 1996, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of
Insituform Technologies, Inc. and subsidiaries as of December 31,
1996, and the results of their operations and their cash flows for
the year then ended, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Memphis, Tennessee,
March 6, 1997
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Insituform Technologies, Inc.:
We have audited the accompanying consolidated balance sheet of
Insituform Technologies, Inc. and subsidiaries as of December 31,
1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the two 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 the results of their operations and their
cash flows for each of the two years in the period ended December
31, 1995, in conformity with generally accepted accounting
principles.
BDO SEIDMAN, LLP
Memphis, Tennessee,
March 8, 1996, except for
Note 10 which is as of
March 26, 1997
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF DECEMBER 31
-----------------
(In thousands)
ASSETS 1996 1995
- ------ ------- -------
CURRENT ASSETS:
Cash and cash equivalents, restricted
$573 and $842 $ 13,476 $ 11,416
Receivables 68,627 64,717
Costs and estimated earnings in excess
of billings 20,127 14,008
Inventories 15,781 16,572
Deferred income taxes 5,158 4,287
Prepaid expenses and miscellaneous 7,710 9,711
-------- --------
Total current assets 130,879 120,711
-------- --------
PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization 57,266 59,773
-------- --------
OTHER ASSETS:
Costs in excess of net assets of
businesses acquired, lessaccumulated
amortization of $9,837 and $6,960 56,943 58,431
Patents and patent applications,
less accumulated amortization of
$3,889 and $3,270 10,049 8,963
Investments in licensees and affiliated
companies 3,137 1,555
Deferred income taxes 1,935 1,862
Non-compete agreements, less accumulated
amortization of $3,327 and $2,323 2,699 3,554
Miscellaneous 5,036 5,451
-------- --------
Total other assets 79,799 79,816
-------- --------
$267,944 $260,300
======== ========
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED BALANCE SHEETS (Continued)
--------------------------------------
AS OF DECEMBER 31
-----------------
(In thousands, except share amounts)
1996 1995
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Notes payable to banks $ 1,387 $ 1,053
Accounts payable and accruals 40,578 35,644
Income taxes payable 2,801 1,768
Deferred income taxes 507 627
Current maturities of long-term debt 6,730 12,081
--------- ---------
Total current liabilities 52,003 51,173
LONG-TERM DEBT, less current maturities 82,384 82,813
DEFERRED INCOME TAXES 3,635 2,850
OTHER LIABILITIES 1,084 1,009
--------- ---------
Total liabilities 139,106 137,845
--------- ---------
MINORITY INTERESTS 5,635 5,645
--------- ---------
COMMITMENTS AND CONTINGENCIES
(Notes 1, 10, 12 and 17)
STOCKHOLDERS' EQUITY:
Preferred stock, undesignated,
$.10 par - shares authorized 2,000,000;
none outstanding - -
Common stock, $.01 par - shares
authorized 40,000,000; shares outstanding
27,144,331 and 27,104,940 271 271
Additional paid-in capital 67,824 67,427
Retained earnings 59,049 54,557
--------- ---------
127,144 122,255
Treasury stock - 255,801 shares (3,269) -
Cumulative foreign currency translation
adjustments (672) (1,821)
Notes receivable from affiliates - (3,624)
--------- ---------
Total stockholders' equity 123,203 116,810
--------- ---------
$267,944 $260,300
========= =========
See accompanying summary of accounting policies and notes to
consolidated financial statements.
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
------------------------------------
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
1996 1995 1994
-------- -------- --------
(In thousands, except per share amounts)
REVENUES:
Construction contracts $268,198 $246,904 $193,732
Product sales 16,353 18,649 21,949
Royalties and license fees 5,382 6,650 7,490
--------- --------- ---------
289,933 272,203 223,171
--------- --------- ---------
OPERATING COSTS AND EXPENSES:
Cost of construction contracts 189,683 169,864 131,533
Cost of product sales 10,985 11,987 14,492
Royalty expense 551 435 223
Selling, administrative and general 60,181 55,990 41,511
Strategic marketing and product development 7,689 7,636 6,180
Unusual items 6,498 14,541 -
--------- --------- ---------
275,587 260,453 193,939
--------- --------- ---------
OPERATING INCOME 14,346 11,750 29,232
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (6,223) (6,393) (3,410)
Other 1,290 (1,727) 1,012
--------- --------- ---------
(4,933) (8,120) (2,398)
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE TAXES ON INCOME 9,413 3,630 26,834
TAXES ON INCOME (4,985) (3,987) (10,457)
MINORITY INTERESTS (377) (1,275) (1,280)
EQUITY IN EARNINGS OF AFFILIATED COMPANIES 441 666 570
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS 4,492 (966) 15,667
LOSS FROM DISCONTINUED OPERATIONS - - (1,164)
--------- --------- ---------
NET INCOME (LOSS) $ 4,492 $ (966) $ 14,503
========= ========= =========
EARNINGS (LOSS) PER SHARE OF COMMON STOCK
AND COMMON STOCK EQUIVALENTS
Income (loss) from continuing operations$ .17$ (.04) $ .57
Discontinued operations - - (.04)
--------- --------- ---------
Net income (loss) $ .17 $ (.04) $ .53
========= ========= =========
See accompanying summary of accounting policies and notes to
consolidated financial statements.
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
Common Stock Additional
------------------ Paid-in Retained Treasury
Shares Amount Capital Earnings Stock
------ ------ ------------------ --------
(In thousands, except number of shares)
BALANCE, December 31, 199326,608,609$266 $61,991 $43,238 $ -
Net income for the year - - - 14,503 -
Issuance of common stock upon
exercise of options,
including income tax benefit
of $85 31,450 - 280 - -
Stock issued in conjunction
with acquisition 70,972 1 999 - -
Dividends declared - - - (1,474) -
Other - - - (5) -
--------------- -------- -------- -------
BALANCE, December 31, 199426,711,031 267 63,270 56,262 -
Net loss for the year - - - (966) -
Issuance of common stock
upon exercise ofoptions,
including income tax
benefit of $530 393,909 4 4,157 - -
Dividends declared - - - (739) -
Other - - - - -
---------------- -------- -------- -------
BALANCE, December 31, 199527,104,940 271 67,427 54,557 -
Net income for the year - - - 4,492 -
Issuance of common stock
upon exercise of options,
including income tax
benefit of $15 9,391 - 76 - -
Stock issued in conjunction
with litigation settlement 30,000 - 321 - -
Foreclosure of note
receivable from affiliates - - - - (3,269)
Other - - - - -
---------------- -------- -------- ---------
BALANCE, December 31, 199627,144,331$ 271 $67,824 $ 59,049 $ (3,269)
================ ======== ======== =========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
/TABLE
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
Cumulative
Foreign Unrealized Notes
Currency Holding Receivable Total
Translation Gains on From Stockholders'
Adjustments Investments Affiliates Equity
----------- ----------- ------------------------
(In thousands, except number of shares)
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, including
income tax benefit of $85 - - - 280
Stock issued in conjunction with
acquisition - - - 1,000
Dividends declared - - - (1,474)
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, including
income tax benefit of $530 - - - 4,161
Dividends declared - - - (739)
Other (88) (438) - (526)
------- --------- -------- -----------
BALANCE, December 31, 1995 (1,821) - (3,624) 116,810
Net income for the year - - - 4,492
Issuance of common stock upon
exercise of Options, including
income tax benefit of $15 - - - 76
Stock issued in conjunction with
litigation settlement - - - 321
Foreclosure of note receivable
from affiliates - - 3,624 355
Other 1,149 - - 1,149
---------- ---------- --------------------
BALANCE, December 31, 1996 $ (672) $ - $ - $ 123,203
========== ========== ====================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
/TABLE
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
1996 1995 1994
------- ------- -------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations$ 4,492 $ (966) $15,667
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Minority interests in net income 377 1,275 1,280
Provision for unusual items 2,381 4,123 -
Depreciation and amortization 19,180 16,799 11,882
Miscellaneous 1,909 424 1,047
Deferred income taxes (279) (1,246) (271)
Equity in earnings of affiliated companies (441) (666) (570)
Changes in operating assets and liabilities,
net of effects of businesses purchased:
Receivables (8,217) (972) (17,472)
Inventories (15) (4,106) (2,211)
Prepaid expenses and miscellaneous 2,510 (4,084) (1,227)
Miscellaneous and other assets 609 123 (104)
Accounts payable and accruals 5,571 (3,795) 7,929
Income taxes 78 (5,268) 5,225
--------- --------- --------
Net cash provided by operating
activities 28,155 1,641 21,175
Net cash used by discontinued
operations - (500) (99)
--------- --------- --------
Net cash provided by operations 28,155 1,141 21,076
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (18,187) (16,497) (18,472)
Proceeds from (investments in) licensees
and affiliated companies (1,141) 445 407
Patents and patent application expenditures (1,772) (1,445) (811)
Purchases of businesses, net of cash acquired - (18,885) (9,379)
Proceeds on disposal of property and equipment 780 2,506 1,383
Other - (790) -
--------- --------- --------
Net cash used in investing activities (20,320) (34,666) (26,872)
--------- --------- --------
/TABLE
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
-------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
1996 1995 1994
-------- ------- -------
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock $ 60 $ 3,631 $ 195
Proceeds from long-term debt 5,868 40,812 9,828
Principal payments on long-term debt (11,775) (9,439) (5,846)
Redemption of redeemable preferred stock - - (228)
Minority interests (562) (155) 239
Increase (decrease) in short-term borrowings 334 (7,293) 4,203
Dividends paid - (1,476) (1,474)
--------- --------- --------
Net cash provided (used) by financing
activities (6,075) 26,080 6,917
--------- --------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 300 191 60
--------- --------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS FOR THE YEAR 2,060 (7,254) 1,181
CASH AND CASH EQUIVALENTS, beginning of year 11,416 18,670 17,489
--------- --------- --------
CASH AND CASH EQUIVALENTS, end of year $ 13,476 $ 11,416 $18,670
========= ========= ========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Interest (net of amount capitalized) $ 7,478 $ 6,165 $ 3,587
Income taxes 4,864 8,265 4,467
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Deferred consideration for intangible
assets acquired $ - $ 1,000 $ -
Additional paid-in capital increased by
reduction in income taxes payable for
tax benefit arising from exercise of
stock options 15 530 85
Deferred consideration for businesses acquired - 3,000 11,850
Common stock issued in connection with purchase
of business - - 1,000
Treasury stock acquired in connection with
foreclosure of director note receivable 3,624 - -
Tax benefit arising from foreclosure of
director note receivable 760 - -
See accompanying summary of accounting policies and notes to
consolidated financial statements.
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
---------------------------------------------
SUMMARY OF ACCOUNTING POLICIES
------------------------------
Industry Information
Insituform Technologies, Inc. and subsidiaries (collectively, the
"Company" or "ITI") is a worldwide provider of proprietary
trenchless technologies for the rehabilitation and improvement of
sewer, water, gas and industrial pipes. 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 which 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 tunneling 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 55% owned
Mexican subsidiary, United Pipeline de Mexico, S.A., a 66% owned
French subsidiary, Insituform France, S.A. and a 57.5% owned
domestic partnership, Midsouth Partners. 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."
Taxes on Income
The Company provides for estimated income taxes payable or
refundable on current year income tax returns as well as the
estimated future tax effects attributable to temporary differences
and carryforwards, based upon enacted tax laws and tax rates.
U.S. and foreign income taxes are not provided on undistributed
earnings of foreign subsidiaries where it is the Company's
intention to indefinitely reinvest such earnings in the
subsidiary's operations and not to transfer them in a taxable
transaction.
Foreign Currency Translation
Results of operations for foreign entities are translated using the
average exchange rates during the period. Assets and liabilities
are translated to U.S. dollars using the exchange rates in effect
at the balance sheet date, and the related translation adjustments
are reported as a separate component of stockholders' equity.
Cash and Cash Equivalents
The Company classifies highly liquid investments with maturities of
90 days or less as cash equivalents.
Investments
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.
Investments in licensees and affiliated companies are carried on
the equity method if the Company's ownership interest is 20% or
greater, but not exceeding 50%. Intercompany profits and losses
are eliminated.
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 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.
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
During 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation. 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
("APB") Opinion No. 25, Accounting for Stock Issued to Employees.
As such, the Company will make pro forma disclosures (see Note 10)
of net income and earnings per share as if the fair value based
method of accounting had been applied. Thus, adoption had no
effect on the Company's financial position or results of
operations.
Stock options are typically granted to certain officers, directors,
and employees at the prevailing market price on the date of the
grant and, therefore, 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 and 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.
Earnings per share has been computed using 27,112,846, 26,902,321
and 27,162,020 shares in 1996, 1995 and 1994, respectively. Common
stock equivalents were not considered in the 1995 calculation as
the effect would be anti-dilutive.
Reclassifications
Certain prior year amounts in the consolidated financial statements
have been reclassified to conform to the 1996 presentation.
New Accounting Standards
During 1996, the Company adopted SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. This 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. Adoption of this standard did not have a material effect
on the Company's financial position or results of operations.
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1996
----------------
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 fields, 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 $0.5
million), the elimination of certain duplicative management
positions (approximately $0.8 million), the relocation of certain
domestic employees and functions ($1.7 million) and the termination
of construction on IMA's new manufacturing facility in
Chesterfield, Missouri ($1.8 million).
1. BUSINESS ACQUISITIONS (Continued):
---------------------------------
In 1996, the Company recorded an additional $6.5 million in costs
related to the ongoing rationalization of contracting operations.
These costs consisted principally of the write-off of certain
assets of the Paltem product line ($3.6 million), charges related
to the disposition of excess facilities ($1.4 million), and costs
related to reorganization of the North American contracting
operations ($1.5 million).
The write-off of the Paltem product line includes $2.8 million of
manufacturing and installation equipment that related specifically
to the gas distribution main installation market, which the Company
has decided not to pursue. The Paltem product line may, however,
be used in other markets.
Combined and separate results of the Company and IMA 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
During the three-year period ended December 31, 1996, the Company
also completed acquisitions of two 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. In March 1996, as a result of
demands for payment and ensuing litigation, the Company discharged
its obligation under such note and under arrangements to pay $1
million in consulting fees over five years, and settled such
litigation for the aggregate amount of $3.1 million and the release
of other claims.
1. BUSINESS ACQUISITIONS (Continued):
---------------------------------
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 accounts of Midsouth Partners since April 18,
1995. In June 1996, the arbitration panel in proceedings
commenced by the remaining partner, a wholly-owned subsidiary of
Insituform East, Incorporated (a licensee of the Company),
determined that the Enviroq subsidiary but not the Company's
original subsidiary was in default of its obligations under the
Midsouth Partners partnership agreement and that, as a consequence
thereof, the remaining partner had the right unilaterally to
appoint a representative to the seven-member management committee
of the partnership, in place of a representative appointed by the
Enviroq subsidiary and in addition to the three members previously
appointed by the remaining partner.
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.
Except as otherwise described, these acquisitions were funded
primarily from the proceeds of the Company's prior existing credit
facility with SunTrust Bank, Nashville, N.A. ("SunTrust"), or loans
refinanced by such facility, and from working capital and the
issuance of subordinated and purchase-money debt.
Allocation of the purchase prices of these acquisitions is
summarized as follows (in thousands):
1. BUSINESS ACQUISITIONS (Continued):
---------------------------------
<CAPTION)
Allocated
----------------------------------------------------
Cost in
Total Property excess of
purchase Working 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
The following table presents summarized consolidated unaudited pro
forma results of operations for 1995 and 1994 as if the Enviroq
acquisition and the Gelco acquisition had occurred at the beginning
of 1994. 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, (in thousands) 1995 1994
- -------------------------------------- ------- -------
Total revenues $282,742 $269,257
Income (loss) from continuing operations (1,709) 16,959
Income (loss) from continuing operations
per common and common equivalent share (.06) .62
Other
During 1995, the Company also completed two smaller acquisitions.
On February 16, 1995, the Company acquired 66% of the common stock
of Insituform France, S.A., a newly formed subsidiary of its former
French licensee, for approximately $1,463,000. Additionally, on
November 30, 1995, the Company completed the acquisition of the UK-
based Formapipe Division of Water Flow Services Limited, for
$4,308,000.
2. RECEIVABLES:
-----------
Receivables consist of the following at December 31 (in thousands):
1996 1995
------ ------
Trade, less allowance for doubtful accounts
of $1,031 and $974 $52,030 $51,049
Retainage under construction contracts 12,456 11,395
Refundable income taxes 4,141 2,273
------- -------
$68,627 $64,717
======= =======
Activity in the allowance for doubtful accounts is summarized as
follows for the years ended December 31 (in thousands):
1996 1995 1994
------ ------ ------
Balance, at beginning of period$ 974 $ 637 $ 495
Charged to expense 289 657 575
Uncollected balances written off,
net of recoveries (232) (320) (433)
------- ------ ------
Balance, at end of period $1,031 $ 974 $ 637
======= ====== ======
3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS:
-----------------------------------------------------
Costs and estimated earnings on uncompleted contracts consist of
the following at December 31 (in thousands):
1996 1995
-------- --------
Costs incurred on uncompleted contracts $ 105,109 $ 98,421
Estimated earnings 17,097 20,535
---------- ---------
122,206 118,956
Less billings to date (103,098) (105,488)
---------- ---------
$ 19,108 $ 13,468
========== =========
Included in the accompanying balance sheets
under the following captions:
Costs and estimated earnings in excess
of billings $ 20,127 $ 14,008
Billings in excess of costs and
estimated earnings on uncompleted contracts
(Note 9) (1,019) (540)
---------- ----------
$ 19,108 $ 13,468
========== ==========
4. INVENTORIES:
-----------
Inventories are summarized as follows at December 31 (in thousands):
1996 1995
------ ------
Raw materials $ 968 $ 1,451
Manufactured components 1,921 2,839
Work-in-process 1,289 1,053
Finished products 1,988 822
Construction materials 9,615 10,407
------- --------
$15,781 $ 16,572
======= ========
5. PROPERTY AND EQUIPMENT:
----------------------
Property and equipment consists of the following at December 31 (in
thousands):
1996 1995
------- -------
Land and land improvements $ 2,667 $ 3,474
Buildings and improvements 15,715 15,264
Machinery and equipment 77,608 64,980
Furniture and fixtures 8,796 7,967
Autos and trucks 2,647 3,685
Construction in progress 1,730 5,168
--------- ---------
109,163 100,538
Less accumulated depreciation (51,897) (40,765)
--------- ---------
$ 57,266 $ 59,773
========= =========
6. INVESTMENTS IN LICENSEES AND AFFILIATED COMPANIES:
-------------------------------------------------
Investments in licensees and affiliated companies consist of the
following at December 31 (in thousands):
1996 1995
------ -------
Insituform Rohrsanierungstechniken GmbH
(50% and 33%, respectively) $2,800 $ 982
KA-TE Insituform AG (50%) 161 398
N.V. K - Insituform S.A. (50%) 128 116
M&M Soltar, a Joint Venture (50%) 48 59
------ -------
$3,137 $ 1,555
====== =======
/TABLE
6. INVESTMENTS IN LICENSEES AND AFFILIATED COMPANIES (Continued):
-------------------------------------------------------------
In April 1996, the Company entered into arrangements whereby, in
exchange for payments in the approximate amount of $1.1 million, the
Company increased its share of the equity of Insituform
Rohrsanierungstechniken GmbH, its German licensee, from one-third to
one-half, effective January 1, 1996.
7. LINES OF CREDIT:
---------------
See Note 8 for a description of the Company's prior existing revolving
credit facility.
Insituform Technologies Limited (formerly Insituform Permaline Limited)
("ITL") has a line of credit and overdraft facility of pounds Sterling
700,000 (US$1,183,000) with National Westminister Bank Plc ("NatWest")
which bears interest at NatWest's base rate (6.0% at December 31, 1996)
plus 2.0% for borrowings up to pounds Sterling 450,000 and 3.0% for
those above pounds Sterling 450,000. The facility is available through
March 1997, and is secured by ITL's real property and the Company's
guarantee. At December 31, 1996 and 1995, respectively, pounds Sterling
473,000 (US$800,000) and pounds Sterling 398,000 (US$618,000) were
outstanding under this facility.
Insituform Japan KK ("Japan") also has a line of credit facility of
Yen 100,000,000 (US$871,000) with Fuji Bank which bears interest at
Fuji Bank's base rate and is available through December 1997. At
December 31, 1996 and 1995, Yen 0 and Yen 45,000,000 (US$435,000) were
outstanding under this facility, respectively.
Prior to October 1995, IMA had a line of credit facility which provided
for advances of up to $23 million for working capital purposes.
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.
8. LONG-TERM DEBT:
--------------
Long-term debt consists of the following at December 31 (in thousands):
1996 1995
------ -------
SunTrust facilities $76,275 $ 73,052
8.5% senior subordinated note,
payable in $1,000 installments 4,789 4,730
annually each July 1998 through
2001, with the entire remaining
balance due in July 2002 with
interest quarterly (net of
unamortized discount of $211 and $270)
Industrial revenue bond, payments 3,356 3,701
ranging from $85 to $170 through
January 2004, with interest at 90% of
prime (prime was 8.25% at December 31,
1996)
Industrial development bond, quarterly 921 1,020
principal payments ranging from $23 to
$51 through January 2003, with interest
at approximately 79% of prime (prime
was 8.25% at December 31, 1996)
Promissory notes retired October 1996, - 4,000
interest paid quarterly
Promissory notes payable to affiliates 1,425 2,850
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%
Subordinated promissory note, 6% - 3,000
interest payable semiannually, retired
in March 1996 (Note 1)
Other 2,348 2,541
-------- ---------
89,114 94,894
Less current maturities (6,730) (12,081)
-------- ---------
$82,384 $ 82,813
======== =========
In July 1993, the Company obtained from SunTrust a credit facility
providing for advances up to $30 million, which was restated in June
1995 to aggregate up to $50 million. Pursuant to the June 1995
restatement of the facility, 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
acquisition of the Gelco companies (see Note 1), as well as prior
acquisitions.
8. LONG-TERM DEBT (Continued):
--------------------------
In October 1995, the Company obtained a credit facility from SunTrust,
as agent, and a group of participating lenders which provided 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 ($14.5
million), and short-term debt under IMA's line of credit ($16.0
million) (see Note 7). Additional advances were available for the
expansion of the Company's business and for general corporate purposes.
Prior to its prepayment in February 1997, the SunTrust facility was due
to mature in October 2000, with installments based on a five-year
amortization schedule, commencing December 31, 1997. Interest on
indebtedness under the facility was payable at either (i) SunTrust's
prime rate (8.25% at December 31, 1996), plus a margin of up to .25% in
the event certain financial ratios were not maintained, or (ii) an
adjusted LIBOR rate (5.6% at December 31, 1996), plus a margin ranging
from 1.00% to 1.75%, depending on the maintenance of certain financial
ratios. Up to $5 million under the credit facility was available to be
borrowed from SunTrust pursuant to a "swing line facility," which
accrued interest at a rate per annum equal to 0.5% below SunTrust's
prime rate. Such facility obligated the Company to comply with certain
financial ratios and restrictive covenants that, among other things,
limited the ability of the Company and its subsidiaries to incur
indebtedness, pay dividends, make loans and encumber any properties,
and required guarantees of certain domestic subsidiaries. Essentially
all of the Company's retained earnings at December 31, 1996 were
restricted under such covenants.
In April 1995, in connection with the Enviroq acquisition, the Company
obtained 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 part of the October 1995
refinancing discussed above.
Prior to its prepayment in February 1997, the 8.5% senior subordinated
note was subordinated in right to the Company's bank and other
institutional financing and to deferred consideration incurred in
connection with business acquisitions. As discussed in Note 10,
warrants to purchase 350,877 unregistered shares of Common Stock were
also issued to the lender. The note was prepayable at the Company's
option, at premiums until July 1998 ranging from 3% to 1% of the amount
prepaid. The subordinated note also restricted the Company's ability
to pay dividends and repurchase outstanding common stock.
8. LONG-TERM DEBT (Continued):
--------------------------
Prior to its prepayment in February 1997, the industrial revenue bond
was subject to call by the holder, an institutional purchaser, in 1999
or each year thereafter until maturity. Property and equipment with a
net book value of approximately $3,500,000 was pledged to collateralize
these bonds. These bonds also restricted the Company's ability to pay
dividends.
On February 14, 1997 the Company completed a $110 million private debt
offering of 7.88% Senior Notes due February 14, 2007 ("Senior Notes").
Interest is payable semi-annually in August and February of each year,
and each year, from February 2001 to February 2006, inclusive, the
Company is required to make principal repayments of $15,715,000,
together with an equivalent payment at maturity. The Senior Notes may
be prepaid at the Company's option, in whole or in part, at any time,
together with a make-whole premium, and upon specified change in
control events each holder has the right to require the Company to
purchase its Senior Note without any premium thereon. The agreements
pursuant to which the Senior Notes were acquired obligate the Company
to comply with certain financial ratios and restrictive covenants that,
among other things, place limitations on operations and sales of assets
by the Company or its subsidiaries, and limit the ability of the
Company to incur further secured indebtedness and liens and of
subsidiaries to incur indebtedness, and, in the event of default under
the Senior Notes, limit the ability of the Company to pay cash
dividends or make other distributions to the holders of its capital
stock or to redeem such stock. Such agreements also obligate the
Company's subsidiaries to provide guarantees to the holders of the
Senior Notes if guaranties are given by them to certain other lenders.
The transaction costs of $891,000 incurred in connection with the
private debt offering were recorded as deferred charges and will be
amortized over the life of the Senior Notes. The net proceeds were
used to repay existing indebtedness (approximately $85 million), as
discussed above, and for general corporate purposes.
After considering the issuance of the Senior Notes and the repayment of
existing indebtedness with the proceeds thereof, as discussed above,
principal payments required to be made for each of the next five years
and thereafter are summarized as follows (in thousands):
Years ending December 31, Amount
------------------------- ------
1997 $ 2,537
1998 845
1999 595
2000 300
2001 15,929
After 2001 94,493
---------
$ 114,699
=========
/TABLE
9. ACCOUNTS PAYABLE AND ACCRUALS:
-----------------------------
Accounts payable and accruals consist of the following at December 31
(in thousands):
1996 1995
------- -------
Accounts payable - trade $17,108 $15,130
Compensation and profit sharing 6,759 4,185
Merger and restructuring 2,840 4,123
Accrual for pending litigation and claims 1,180 1,793
Bank overdrafts 3,369 545
Billings in excess of costs and earnings 1,019 540
Miscellaneous 8,303 9,328
------- -------
$40,578 $35,644
======= =======
10. 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.
Stock Option Plan
Under the 1992 Employee Stock Option Plan and Director Stock Option
Plan (the "Plans"), the Company may grant options to its employees and
directors not to exceed 1,000,000 and 500,000 shares of common stock,
respectively. The Plans are administered by the Board of Directors,
which determines the timing of awards, individuals to be granted
awards, the number of options to be rewarded and the price, vesting
schedule and other conditions of the options. The exercise price of
each option typically equals the market price of the Company's stock on
the date of grant. Options generally vest over a five year period and
have an expiration date of up to 10 years after grant.
Prior to the IMA Merger, IMA had granted options to certain officers,
directors and employees to acquire IMA Class A common shares. In
connection with the IMA Merger, all outstanding IMA options as of the
date of the acquisition, became options to purchase that number of
shares of ITI Common Stock that would have been received had the
options been exercised prior to the IMA Merger. Dividends reflected in
the statements of stockholders' equity reflect those which had been
declared on the IMA common shares prior to the IMA Merger.
The Company applies APB Opinion No. 25, and related interpretations in
accounting for stock option grants. Accordingly, no compensation cost
has been recognized in the statements of operations for this stock
option plan. In accordance with SFAS No. 123, the Company has
estimated the fair value of each option grant using the Black-Scholes
option-pricing model. The following weighted average assumptions were
used for the grants in 1996 and 1995, respectively: expected
10. STOCKHOLDERS' EQUITY (Continued):
--------------------------------
volatility of 44% and 48%; risk-free interest rates of 6.1% and 6.2%;
expected lives of five years and no dividends. Had compensation cost
for the stock options granted been determined based on their fair value
at the grant dates, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below (in
thousands, except per share amounts):
1996 1995
------ ------
Net income (loss)
As reported $4,492 $ (966)
Pro forma 4,116 (1,015)
Earnings (loss) per share
As reported .17 (.04)
Pro forma .15 (.04)
Based on the Black-Scholes option-pricing model the weighted average
fair value of options granted in 1996 was $3.84 for options granted at
the market price and $1.82 for options granted above market price. The
weighted average fair value of options granted in 1995 was $5.91, which
were granted at market price. The following table summarizes
information about options outstanding at December 31, 1996:
Options Outstanding Options Exercisable
-----------------------------------------------------
Weighted
Number Average Weighted Number Weighted
OutstandingRemainingAverage ExercisableAverage
at DecemberContractualExerciseDecember Exercise
Range of Exercise Price31, 1996Life Price 31, 1996 Price
- --------------------------------------------------------------------------
$2.61 to $9.79 537,989 4.8 years $ 7.40 305,065 $ 7.26
$11.09 to $16.25 660,609 4.2 years $13.15 427,687 $13.23
$19.25 to $25.00 83,601 1.0 years $22.91 83,601 $22.91
--------- -------
1,282,199 4.2 years $11.37 816,353 $11.99
========= =======
10. STOCKHOLDERS' EQUITY (Continued):
--------------------------------
Changes in options outstanding are summarized as follows:
Weighted
Average
Shares Option Price
------ ------------
Balance, December 31, 1993 1,759,091 $14.98
Granted 193,551 $13.33
Exercised (31,450) $ 5.66
Canceled (233,892) $16.08
----------
Balance, December 31, 1994 1,687,300 $14.80
Granted 398,210 $12.00
Exercised (393,909) $ 9.27
Canceled (292,666) $16.61
----------
Balance, December 31, 1995 1,398,935 $13.00
Granted 325,000 $ 9.14
Exercised (9,316) $ 7.92
Canceled (432,420) $15.02
----------
Balance, December 31, 1996 1,282,199 $11.37
==========
At December 31, 1996, 2,329,089 shares of Common Stock were
reserved pursuant to stock option plans and warrants.
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.
11. RELATED PARTY TRANSACTIONS:
--------------------------
On July 3, 1992, Ringwood Limited ("Ringwood"), and Douglas K.
Chick and Brian Chandler, both directors of the Company, entered
into an agreement whereby Ringwood executed to the Company a
secured, non-recourse promissory note (the "Note") in the amount of
$3,624,000 which bore interest at Citibank's prime rate plus 2-
1/2%, was originally due July 3, 1995, and was secured by a pledge
(the "Pledge") to the Company by Ringwood and Messrs. Chick and
Chandler of 255,801 shares (the "Shares") of the Company's stock
beneficially owned by them.
11. RELATED PARTY TRANSACTIONS (Continued):
--------------------------------------
On May 21, 1995, the Company extended the maturity date of the Note
to July 3, 1996 (the "Maturity Date"), and in December 1995 the
interest payment otherwise due in January 1996 was postponed to be
due on a date (the "Extension Date") no later than 30 days after
the date of first publication of the Company's operating results
covering at least a 30-day period after the consummation of the IMA
Merger. At the Extension Date, Ringwood had defaulted in the
payment to the Company of its interest payment postponed as
aforesaid, and on the Maturity Date had defaulted in payment of the
principal amount of the Note. Effective in August 1996, the
Company foreclosed on the Shares in full satisfaction of the
obligation of Ringwood and Messrs. Chick and Chandler under the
Note and the Pledge. The amount of the Note plus accrued interest
to the date of foreclosure has been recorded in treasury stock.
Krugman, Chapnick and Grimshaw provides legal services to the
Company. The Company paid Krugman, Chapnick and Grimshaw $815,000,
$1,766,000 and $755,000 in 1996, 1995 and 1994, respectively, for
legal services provided, together with reimbursement of out-of-
pocket expenses of $151,000, $248,000 and $162,000, respectively.
James D. Krugman, a partner at Krugman, Chapnick and Grimshaw, is
a director of the Company.
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 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 NuPipe technology acquired by the Company in 1988. In March
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 at December 31
(in thousands):
1996 1995 1994
------ ------- -------
Investment income $1,059 $ 1,177 $ 959
Litigation settlement (Note 17) - (3,547) -
Casualty gain - 722 -
Miscellaneous 231 (79) 53
------ -------- -------
$1,290 $(1,727) $ 1,012
====== ======== =======
14. TAXES ON INCOME:
---------------
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. It is not
practicable to estimate the amount of the unrecognized deferred tax
liability on such earnings.
Net deferred tax assets consist of the following at December 31 (in
thousands):
1996 1995
-------- --------
DEFERRED INCOME TAX ASSETS
Net operating loss carryforwards $ 5,527 $ 5,391
Foreign tax credit carryforwards 828 1,650
Accrued compensation 1,005 943
Inventory valuation 752 706
Accrual for pending litigation
and claims 356 660
Restructuring provision 2,580 1,675
Other 1,107 534
--------- ---------
Gross deferred income tax assets 12,155 11,559
Valuation allowance (3,056) (3,767)
--------- ---------
Total deferred income tax assets 9,099 7,792
--------- ---------
DEFERRED INCOME TAX LIABILITIES
Depreciation (4,219) (4,211)
Patent defense cost (905) -
Other (1,024) (909)
--------- ---------
Total deferred income tax liabilities (6,148) (5,120)
--------- ---------
Net deferred income tax assets $ 2,951 $ 2,672
========= =========
14. TAXES ON INCOME (Continued):
---------------------------
The Company has recorded deferred tax assets of $2,951,000
reflecting the benefit of $5,527,000 in loss carryforwards and
$828,000 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 assets will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced
in the near term if estimates of future taxable income during the
carryforward periods, as applicable are reduced.
Income (loss) from continuing operations before taxes on income is
as follows for the years ended December 31 (in thousands):
1996 1995 1994
------- ------ ------
Domestic $10,182 $1,897 $22,375
Foreign (769) 1,733 4,459
-------- ------ -------
Totals $ 9,413 $3,630 $26,834
======== ====== =======
Provisions for taxes on income from continuing operations consist
of the following components for the years ended December 31 (in
thousands):
1996 1995 1994
------ ------ ------
Current:
Federal $2,953 $1,225 $ 7,474
Foreign 1,708 2,154 1,715
State 735 827 1,270
------- ------- ---------
5,396 4,206 10,459
------- ------- ---------
Current tax benefit related to
exercise of stock options 15 530 85
------- ------- ---------
Deferred:
Federal 1,334 (622) (124)
Foreign (569) (54) 66
State (243) (73) (29)
Adjustments to beginning of year
valuation allowance (948) - -
-------- ------- ---------
(426) (749) (87)
-------- ------- ---------
Total taxes on income $ 4,985 $3,987 $ 10,457
======== ======= =========
/TABLE
14. TAXES ON INCOME (Continued):
---------------------------
A reconciliation between the U.S. federal statutory tax rate and
the effective tax rate follows:
1996 1995 1994
------ ------ ------
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 2.6 13.7 3.1
Tax amortization of intangibles(8.4) (21.5)(2.9)
Tax benefit not currently
recognizable on losses of
subsidiaries - 10.0 0.5
Merger costs capitalized for
tax purposes - 59.1 -
Goodwill amortization 8.2 18.3 2.0
Effect of foreign income taxed
at foreign rates 7.4 (4.4) (0.5)
Other 9.2 0.6 2.8
----- ----- -----
Total taxes on income 53.0% 109.8% 39.0%
===== ====== =====
Subject to the future taxable income on certain of the Company's
subsidiaries, the Company has available tax operating loss
carryforwards as follows:
Amount Expiration
Jurisdiction (in thousands) date
- ------------ -------------- ----------
United Kingdom $11,077 Indefinite
France 113 2001
Puerto Rico 1,779 2000-2003
U.S. State 11,967 2004-2010
U.S. Federal 3,726 1997-2011
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 of $1,164,000 (net of applicable income taxes of
$627,000) was made to write down the assets to their estimated
liquidation values and accrue the estimated costs of closing the
operation. The division's revenue for the year ended December 31,
1994 was $1,137,000.
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 construction.
Operating profit (loss) by business segment and by geographic area
are defined as revenues less operating costs and expenses. Income
and expense not allocated to business segments or geographic areas
include investment income and corporate expenses.
Identifiable assets are those assets used exclusively in the
operations of each business segment or geographic area, or which
are allocated, when used jointly. Corporate assets are principally
comprised of cash equivalents and investments.
Financial information by industry segment is as follows at December
31 (in thousands):
1996 1995 1994
------ ------ ------
PIPELINE TECHNOLOGY
Revenues:
Unaffiliated companies $ 21,735 $ 25,299 $ 29,439
Intersegment 51,420 45,582 36,993
-------- -------- --------
Total revenues 73,155 70,881 66,432
-------- -------- --------
Operating income 18,428 16,642 25,582
Identifiable assets 25,494 29,699 24,036
Capital expenditures 2,133 750 950
Depreciation and amortization 1,628 1,569 1,465
CONSTRUCTION
Revenues $268,198 $246,904 $193,732
Operating income 7,908 5,479 11,972
Identifiable assets 218,096 211,543 183,168
Capital expenditures 15,881 15,557 17,434
Depreciation and amortization 17,141 14,961 10,130
ELIMINATIONS AND CORPORATE ITEMS
Revenues $(51,420) $(45,582) $(36,993)
Operating loss (11,990) (10,371) (8,322)
Identifiable assets 24,354 19,058 20,423
Capital expenditures 173 190 88
Depreciation and amortization 411 269 287
16. SEGMENT AND GEOGRAPHIC INFORMATION (Continued):
----------------------------------------------
1996 1995 1994
------ ------ ------
CONSOLIDATED
Revenues $289,933 $272,203 $223,171
Operating income 14,346 11,750 29,232
Identifiable assets 267,944 260,300 227,627
Capital expenditures 18,187 16,497 18,472
Depreciation and amortization 19,180 16,799 11,882
Financial information by geographic area is as follows at December
31 (in thousands):
1996 1995 1994
------ ------ ------
UNITED STATES
Revenues:
Unaffiliated companies $220,848 $202,555 $160,378
Between geographic areas 43,986 40,243 32,740
-------- -------- --------
Total revenues 264,834 242,798 193,118
-------- -------- --------
Operating income 19,291 11,055 24,373
Identifiable assets 204,598 202,165 182,380
CANADA
Revenues:
Unaffiliated companies $ 16,955 $ 28,620 $ 27,304
Between geographic areas 1,305 1,617 1,190
-------- -------- --------
Total revenues 18,260 30,237 28,494
-------- -------- --------
Operating income 2,179 1,674 1,849
Identifiable assets 18,541 21,233 21,851
EUROPEAN COMMUNITY
Revenues:
Unaffiliated companies $ 32,934 $ 21,566 $ 18,014
Between geographic areas 4,516 2,325 2,636
-------- -------- --------
Total revenues 37,450 23,891 20,650
-------- -------- --------
Operating income 4,018 8,253 9,408
Identifiable assets 29,533 20,959 10,971
ASIA
Revenues:
Unaffiliated companies $ 7,137 $ 8,048 $ 6,182
Between geographic areas 1,613 1,256 427
-------- -------- --------
Total revenues 8,750 9,304 6,609
-------- -------- --------
16. SEGMENT AND GEOGRAPHIC INFORMATION (Continued):
----------------------------------------------
1996 1995 1994
------ ------ ------
Operating income $ 1,208 $ 440 $ 476
Identifiable assets 3,186 4,162 2,477
SOUTH AMERICA
Revenues:
Unaffiliated companies $ 9,805 $ 9,740 $ 11,252
Operating income (loss) (360) 786 1,739
Identifiable assets 6,969 4,806 5,071
OTHER
Revenues:
Unaffiliated companies $ 2,254 $ 1,674 $ 41
Between geographic areas - 141 -
-------- -------- --------
Total revenues 2,254 1,815 41
-------- -------- --------
Operating loss - (796) -
Identifiable assets - - -
ELIMINATIONS AND CORPORATE ITEMS
Revenues:
Between geographic areas $(51,420) $(45,582) $(36,993)
Operating loss (11,990) (9,662) (8,613)
Identifiable assets 5,117 6,975 4,877
CONSOLIDATED
Revenues $289,933 $272,203 $223,171
Operating income 14,346 11,750 29,232
Identifiable assets 267,944 260,300 227,627
17. COMMITMENTS AND CONTINGENCIES:
-----------------------------
Leases
The Company leases a number of its administrative operations
facilities under noncancellable operating leases expiring at
various dates through 2020. In addition, the Company also leases
certain construction and automotive equipment on a multi-year,
monthly, or daily basis. Rent expense under all operating leases
for 1996, 1995 and 1994 was $8,837,000, $6,000,000 and $3,326,000,
respectively.
At December 31, 1996, the future minimum lease payments required
under the noncancellable operating leases were as follows (in
thousands):
Year ending December 31, Minimum lease payments
------------------------ ----------------------
1997 $3,164
1998 2,657
1999 1,639
2000 981
2001 509
After 2001 830
------
Total $9,780
======
Employment Agreements
The Company and certain of its subsidiaries have employment
contracts with various officers with remaining terms ranging from
six months to three years at amounts approximating their current
levels of compensation. The companies' minimum aggregate
commitment at December 31, 1996 under such contracts was
approximately $1,929,000.
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 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.
17. COMMITMENTS AND CONTINGENCIES (Continued):
-----------------------------------------
Retirement Plans
The Company maintains profit sharing/401(k) plans which cover
substantially all eligible domestic employees. Company profit
sharing contributions are discretionary. Under the terms of its
401(k) features, the plan also provides for the Company to
contribute 100% of the participating employee's contribution up to
3% of the employee's salary, and 50% of the next 2% of the
employee's salary. Certain recently acquired domestic subsidiaries
had continued to maintain their pre-existing profit sharing plans
during 1995 and 1996 until such time as their employees could be
added to the Company's plan. As of July 1, 1996, all non-union
employees had been added to the Company's plan. Total
contributions to the domestic plans were $2,447,000, $1,401,000 and
$815,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
In addition, certain foreign subsidiaries maintain various other
defined contribution retirement plans. Company contributions to
such plans for the years ended December 31, 1996, 1995 and 1994
were $107,000, $136,000 and $125,000, respectively.
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 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% of revenues from Paltem process installations.
Other
At December 31, 1996, $2,080,000 in stand-by letters of credit were
outstanding under the Company's SunTrust facility. The Company has
outstanding letter of credit commitments totaling $450,000 from
Texas Commerce Bank to its insurance carriers. Cash equivalents
totaling $464,000 are pledged to secure these commitments at
December 31, 1996. At December 31, 1996, the Company's U.K.
subsidiary had outstanding performance bonds aggregating Pound
Sterling 416,000 (US$712,000).
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
18. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued):
---------------------------------------------------------
Recorded book values are a reasonable estimate of 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, 1996 and
1995, the estimated fair value of debt instruments with fixed
interest rates was approximately $5.2 million and $7.7 million,
respectively, as compared with a carrying value of such instruments
of $5.3 million and $8.5 million, respectively.
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.
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
---------------------------------------------
1st 2nd 3rd 4th
------- ------- ------- ------
(In thousands, except per share data)
Year ended December 31, 1996:
Revenues $68,110 $71,769 $70,647 $79,407
Operating income (loss) 5,180 7,489 6,625 (4,948)(A)
Net income (loss) 2,250 3,830 3,416 (5,004)(A)
Earnings (loss) per share .08 .14 .13 (.19)
Year ended December 31, 1995:
Revenues $62,266 $69,621 $69,893 $70,423
Operating income (loss) 6,434 8,618 7,782 (11,084)(A)
Net income (loss) 3,420 2,143(B) 4,223 (10,752)(A)
Earnings (loss) per share .13 .08 .15 (.40)
(A) See Note 1 for information relative to unusual charges
recorded in the fourth quarters of 1996 and 1995.
(B) 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.
INDEX TO EXHIBITS(1)(2)
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 (Incorporated
by reference to Exhibit 3.2 to the
Annual Report on Form 10-K for the
fiscal year ended December 31, 1995).
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
- ------------------------
1 The Company's current, quarterly and annual reports are filed
with the Securities and Exchange Commission under file no. 0-
10786.
2 Pursuant to Reg. Section 229.601, does not include certain
instruments with respect to long-term debt of the Company and
its consolidated subsidiaries not exceeding 10% of the total
assets of the Company and its subsidiaries on a consolidated
basis. The Company undertakes to furnish to the Securities and
Exchange Commission, upon request, a copy of all long-term
debt instruments not filed herewith.
INDEX TO EXHIBITS(1)(2) (Continued)
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 fiscal
year ended December 31, 1994).
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. (Incorporated by refer-
ence to Exhibit 10.5 to the Annual Report
on Form 10-K for the fiscal year ended
December 31, 1996).
10.6 - Form of Note Purchase Agreements dated
as of February 14, 1997 among the Company
and, respectively, each of the lenders
listed therein.
10.7 - 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,
- ------------------------
1 The Company's current, quarterly and annual reports are filed
with the Securities and Exchange Commission under file no. 0-
10786.
2 Pursuant to Reg. Section 229.601, does not include certain
instruments with respect to long-term debt of the Company and
its consolidated subsidiaries not exceeding 10% of the total
assets of the Company and its subsidiaries on a consolidated
basis. The Company undertakes to furnish to the Securities and
Exchange Commission, upon request, a copy of all long-term
debt instruments not filed herewith.
INDEX TO EXHIBITS(1)(2) (Continued)
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).
10.8 - 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).
10.9 - Amendment dated November 18, 1996 to
Employment Agreement between the
Company and James D. Krugman.(3)
10.10 - 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).(3)
- ------------------------
1 The Company's current, quarterly and annual reports are filed
with the Securities and Exchange Commission under file no. 0-
10786.
2 Pursuant to Reg. Section 229.601, does not include certain
instruments with respect to long-term debt of the Company and
its consolidated subsidiaries not exceeding 10% of the total
assets of the Company and its subsidiaries on a consolidated
basis. The Company undertakes to furnish to the Securities and
Exchange Commission, upon request, a copy of all long-term
debt instruments not filed herewith.
3 Management contract or compensatory plan or arrangement.
INDEX TO EXHIBITS(1)(2) (Continued)
10.11 - Amendment dated November 18, 1996 to
Agreement between the Company and
Jerome Kalishman.(3)
10.12 - Consulting Agreement dated October 25,
1995 between the Company and Jerome
Kalishman (Incorporated by reference to
Exhibit 2(c) to the Current Report on
Form 8-K dated October 25, 1995).(3)
10.13 - Letter Agreement dated November 18, 1996
between the Company and Anthony W.
Hooper.(3)
10.14 - Employment Agreement dated October 25,
1995 between the Company and Robert
W. Affholder (Incorporated by reference
to Exhibit 2(d) to the Current Report
on Form 8-K dated October 25, 1995).(3)
10.15 - Employment Agreement dated December 17,
1993 between Insituform Mid-America, Inc.
and Franklin T. Driver (Incorporated by
reference to Exhibit 10.14 to the Annual
Report on Form 10-K for the fiscal year
ended December 31, 1995).(3)
10.16 - 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).
- ------------------------
1 The Company's current, quarterly and annual reports are filed
with the Securities and Exchange Commission under file no. 0-
10786.
2 Pursuant to Reg. Section 229.601, does not include certain
instruments with respect to long-term debt of the Company and
its consolidated subsidiaries not exceeding 10% of the total
assets of the Company and its subsidiaries on a consolidated
basis. The Company undertakes to furnish to the Securities and
Exchange Commission, upon request, a copy of all long-term
debt instruments not filed herewith.
3 Management contract or compensatory plan or arrangement.
INDEX TO EXHIBITS(1)(2) (Continued)
10.17 - 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).
10.18 - Equipment Lease dated as of October 10,
1989 between A-Y-K-E Partnership and
Affholder, Inc. (Incorporated by reference
to Exhibit 10.20 to the Annual Report on
Form 10-K for the fiscal year ended
December 31, 1995).
10.19 - 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).(3)
10.20 - 1992 Employee Stock Option Plan of the
Company.
10.21 - 1992 Director Stock Option Plan of the
Company.
10.22 - INA Acquisition Corp. Stock Option Plan
(Incorporated by reference to Exhibit
10.58 to Registration Statement on Form
S-4 No. 33-53772).(3)
10.23 - Insituform Mid-America, Inc. Stock Option
Plan, as amended (Incorporated by reference
to Exhibit 4(i) to the Registration
Statement on Form S-8 No. 33-63953).(3)
- ------------------------
1 The Company's current, quarterly and annual reports are filed
with the Securities and Exchange Commission under file no. 0-
10786.
2 Pursuant to Reg. Section 229.601, does not include certain
instruments with respect to long-term debt of the Company and
its consolidated subsidiaries not exceeding 10% of the total
assets of the Company and its subsidiaries on a consolidated
basis. The Company undertakes to furnish to the Securities and
Exchange Commission, upon request, a copy of all long-term
debt instruments not filed herewith.
3 Management contract or compensatory plan or arrangement.
INDEX TO EXHIBITS(1)(2) (Continued)
10.24 - 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).(3)
21 - Subsidiaries of the Company.
23.1 - Consent of Arthur Andersen LLP.
23.2 - Consent of BDO Seidman, LLP.
- ------------------------
1 The Company's current, quarterly and annual reports are filed
with the Securities and Exchange Commission under file no. 0-
10786.
2 Pursuant to Reg. Section 229.601, does not include certain
instruments with respect to long-term debt of the Company and
its consolidated subsidiaries not exceeding 10% of the total
assets of the Company and its subsidiaries on a consolidated
basis. The Company undertakes to furnish to the Securities and
Exchange Commission, upon request, a copy of all long-term
debt instruments not filed herewith.
3 Management contract or compensatory plan or arrangement.
INDEX TO EXHIBITS (Continued)
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.