FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1999
---------------------------------
Commission file number #0-10786
------------------------------------------
Insituform Technologies, Inc.
- ----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3032158
- ----------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
702 Spirit 40 Park Drive, Chesterfield, Missouri 63005
- ----------------------------------------------------------------
(Address of Principal Executive Offices)
(636) 530-8000
- ----------------------------------------------------------------
(Registrant's telephone number including area code)
- ----------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by 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 that 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 the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding at August 1, 1999
- -------------------------- ---------------------------------
Class A Common Stock, 25,400,506 Shares
$0.01 par value
INDEX
-----
Part I Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosure
About Market Risk
Part II Other Information and Signatures:
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of
Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
Index to Exhibits
PART I. - FINANCIAL INFORMATION
-------------------------------
ITEM 1. - FINANCIAL STATEMENTS
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTIONS>
Unaudited
June 30, 1999 December 31, 1998
------------- -----------------
ASSETS
CURRENT ASSETS
--------------
Cash and cash equivalents $65,258 $76,904
Trade receivables, less allowance
for doubtful accounts of $2,899
and $2,909, respectively 46,634 52,280
Retainage under construction contracts 11,018 12,368
Costs and estimated earnings in excess
of billings 16,954 9,792
Inventories 9,714 11,282
Prepaid expenses and other 7,468 7,479
-------- --------
TOTAL CURRENT ASSETS 157,046 170,105
-------- --------
PROPERTY AND EQUIPMENT, less accumulated
depreciation 53,797 56,421
-------- --------
OTHER ASSETS
- ------------
Goodwill, less accumulated amortization of
$16,657 and $15,078, respectively 65,807 56,504
Patents and patent applications, less
accumulated amortization of $6,360 and
$5,663, respectively 10,581 11,172
Investments in licensees and affiliated
companies 5,126 5,234
Other 4,864 5,172
-------- --------
TOTAL OTHER ASSETS 86,378 78,082
-------- --------
TOTAL ASSETS $297,221 $304,608
======== ========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
Unaudited
June 30, 1999 December 31, 1998
------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
-------------------
Accounts payable and accrued expenses $45,477 $45,231
Current maturities of long-term debt
and notes payable 1,914 2,918
-------- --------
TOTAL CURRENT LIABILITIES 47,391 48,149
LONG-TERM DEBT, less current maturities 111,597 112,131
OTHER LIABILITIES 1,052 1,115
-------- --------
TOTAL LIABILITIES 160,040 161,395
-------- --------
MINORITY INTERESTS 3,756 3,708
-------- --------
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 25,394,551
and 27,302,304 275 273
Additional paid-in capital 71,663 68,931
Retained earnings 97,000 86,355
-------- --------
168,938 155,559
Treasury stock - 2,151,601 and 991,701
shares (31,384) (13,097)
Cumulative foreign currency translation
adjustments (4,129) (2,957)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 133,425 139,505
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $297,221 $304,608
======== ========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except share amounts)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
Rehabilitation revenue $85,640 $75,501 $156,802 $139,261
Cost of rehabilitation 56,046 51,067 103,058 92,933
-------- -------- -------- --------
Gross profit 29,594 24,434 53,744 46,328
Selling, administrative and
general expenses 16,761 15,180 31,983 30,057
-------- -------- -------- --------
Operating income 12,833 9,254 21,761 16,271
Other expense:
- --------------
Interest expense (2,230) (2,243) (4,444) (4,556)
Other income 618 769 1,545 1,310
-------- -------- -------- --------
Total other expense (1,612) (1,474) (2,899) (3,246)
Income before taxes on income 11,221 7,780 18,862 13,025
Taxes on income 4,607 3,088 7,699 5,169
-------- -------- -------- --------
Income before minority
interests and equity in earnings 6,614 4,692 11,163 7,856
Minority interests in net income (237) (173) (436) (250)
Equity in earnings of affiliated
companies 16 (110) (84) (151)
-------- -------- -------- --------
Net income $6,393 $4,409 $10,643 $7,455
======== ======== ======== ========
Basic earnings per share $0.25 $0.16 $0.41 $0.28
======== ======== ======== ========
Diluted earnings per share $0.25 $0.16 $0.41 $0.27
======== ======== ======== ========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
For the Six Months
Ended June 30,
1999 1998
---- ----
Cash flows from operating activities:
- -------------------------------------
Net income $10,643 $7,455
Adjustments to reconcile net income to cash used by
operating activities:
Depreciation and amortization 9,443 9,299
Miscellaneous (254) 345
Equity in earnings of affiliated companies 84 151
Minority interests 436 250
Translation adjustments (1,170) (758)
Deferred income taxes (166) (142)
Changes in operating assets and liabilities,
net of assets acquired:
Receivables 6,813 16,292
Costs in excess of billings under construction (7,140) (4,540)
Inventories 1,899 286
Prepaid expenses and other (1,217) 426
Other assets (167) 832
Accounts payable and accruals 838 (444)
Income taxes payable 564 (3,352)
------- ------
Net cash provided by operating activities 20,606 26,100
------- ------
Cash flows from investing activities:
- -------------------------------------
Capital expenditures (4,682) (7,767)
Proceeds on disposal of property and equipment 1,607 569
Purchase of business net of cash acquired (11,771) -
Investments in licensees/affiliated companies - 16
Patents and patent applications (66) (688)
------- ------
Net cash used by investing activities (14,912) (7,870)
------- ------
(continued)
See accompanying summary of accounting policies and notes to consolidated
financial statements.
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
For the Six Months
Ended June 30,
1999 1998
---- ----
Cash flows from financing activities:
- -------------------------------------
Proceeds from issuance of common stock 2,734 537
Purchases of treasury stock (18,287) -
Increase (decrease) in short-term borrowings (662) 237
Repayments of long-term debt (824) (1,286)
------- -------
Net cash used by financing activities (17,039) (512)
------- -------
Effect of exchange rates changes on cash (301) (33)
------- -------
Net increase (decrease) in cash and cash
equivalents for the period (11,646) 17,685
------- -------
Cash and cash equivalents, beginning of period 76,904 45,734
------- -------
Cash and cash equivalents, end of period $65,258 $63,419
======= =======
Supplemental disclosures of cash flows information:
- ---------------------------------------------------
1999 1998
---- ----
Cash paid during six months ended June 30, for:
--------------------------------------------------
Interest $4,381 $4,525
Income taxes $7,129 $5,295
Non-cash investing and financing activities:
--------------------------------------------
Deferred consideration for business acquired - $1,105
See accompanying summary of accounting policies and notes to consolidated
financial statements.
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1999
1. GENERAL
In the opinion of the Company, the accompanying consolidated
financial statements contain all adjustments (consisting of
only normal recurring adjustments) necessary to present
fairly the financial position as of June 30, 1999
(unaudited) and the unaudited results of operations and cash
flows for the six months ended June 30, 1999 and 1998. The
financial statements have been prepared in accordance with
the requirements of Form 10-Q and consequently do not
include all the disclosures normally made in an Annual
Report on Form 10-K. Accordingly, the consolidated
financial statements included herein should be reviewed in
conjunction with the financial statements and the footnotes
thereto included in the Company's 1998 Annual Report on Form
10-K.
The results of operations for the six months ended June 30,
1999 and 1998 are not necessarily indicative of the results
to be expected for the full year.
2. COMPREHENSIVE INCOME
For the quarters ended June 30, 1999 and 1998, comprehensive
income was $5.1 million and $4.3 million, respectively. For
the six months ended June 30, 1999 and 1998, comprehensive
income was $9.5 million and $6.7 million, respectively. The
Company's adjustment to comprehensive income consists solely
of cumulative foreign currency translation adjustments.
3. EARNINGS PER SHARE
Earnings per share has been calculated using the following
share information:
Three Months Ended June 30,
1999 1998
---- ----
Weighted average number of
common shares used for basic
EPS 25,435,941 26,978,379
Effect of dilutive stock
options and warrants 551,949 277,636
---------- ----------
Weighted average number of
common shares and dilutive
potential common stock 25,987,890 27,256,015
========== ==========
Six Months Ended June 30,
1999 1998
---- ----
Weighted average number of
common shares used for basic
EPS 25,700,211 26,968,862
Effect of dilutive stock
options and warrants 470,778 201,482
---------- ----------
Weighted average number of
common shares and dilutive
potential common stock 26,170,989 27,170,344
========== ==========
4. SEGMENT REPORTING
The Company has principally three operating segments:
rehabilitation, tunneling and corrosion and abrasion ("Tite
Liner(R)"). These operating units represent strategic
business units that offer distinct products and services and
serve different markets.
The following disaggregated financial results have been
prepared using a management approach, which is consistent
with the basis and manner with which management internally
disaggregates financial information for purposes of
assisting in making internal operating decisions.
Financial information by segment is as follows (in
thousands):
Three Months Ended June 30,
1999 1998
---- ----
Revenues
Rehabilitation $67,279 $56,415
Tunneling 11,005 8,809
Tite Liner 7,356 10,277
------- -------
Total Revenues $85,640 $75,501
======= =======
Operating Income
Rehabilitation $11,929 $7,942
Tunneling 1,647 880
Tite Liner (743) 432
------- -------
Total Operating Income $12,833 $9,254
======= =======
Six Months Ended June 30,
1999 1998
---- ----
Revenues
Rehabilitation $122,710 $105,572
Tunneling 20,578 15,598
Tite Liner 13,514 18,091
------- -------
Total Revenues $156,802 $139,261
======== ========
Operating Income
Rehabilitation $20,130 $14,170
Tunneling 2,661 1,538
Tite Liner (1,030) 563
------- -------
Total Operating Income $21,761 $16,271
======= =======
5. ACQUISITION
On June 1, 1999, the Company completed its acquisition of
all of the shares of Riooltechnieken Nederland B.V., its
exclusive licensee of the Insituform(R) Process in the
Netherlands, from BFI Holdings B.V. The purchase price was
NGL 25 million (approximately US$11.8 million), which was
paid in cash at closing.
6. CURRENT EVENTS
On July 20, 1999, the Company entered into a settlement
agreement with Insituform East, Inc. ("East") and its
affiliates, providing for dismissal of the pending actions
before the Delaware Chancery Court and the American
Arbitration Association involving the parties and their
joint venture doing business under the name Midsouth
Partners ("Midsouth"). The Company has accounted for losses
in Midsouth, which was 57.5% owned by the Company and its
subsidiary, on the equity method, as a consequence of
Midsouth's management by a seven-member management committee
controlled by East.
Under the settlement, the Company and its subsidiary
withdrew as partners in Midsouth, and the licenses from the
Company to Midsouth with respect to the Insituform(R)
process and the NuPipe(R) process were terminated. Pursuant
to the settlement, East will pay to the Company an amount
equal to the book value of the interests of the Company and
its subsidiary in Midsouth, and will repay to the Company
outstanding loans to Midsouth in the amount of $400,000.
Under the settlement, the Company and its affiliates and
licensees may operate in Midsouth's former exclusive
territory (consisting of Tennessee and portions of
Mississippi and Kentucky) without any obligation to East or
its affiliates.
7. LITIGATION
The Company is involved in certain litigation incidental to
the conduct of its business. In the Company's opinion, none
of these proceedings will have a material adverse effect on
the Company's financial position, results of operations and
liquidity. The financial statements include the estimated
amounts of liabilities that are likely to be incurred from
these and various other pending litigation and claims.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial
condition and results of operations during the periods included
in the accompanying consolidated financial statements.
GENERAL
- -------
The Company's revenues derive primarily from rehabilitation,
tunneling and corrosion and abrasion operations, generated by
the Company's subsidiaries conducting business in the United
States, Canada, France, the United Kingdom, Chile, Argentina and
Mexico, and include product sales to, and royalties and license
fees paid by, the Company's unaffiliated Insituform(R)licensees
and sub-licensees and its unaffiliated NuPipe(R) licensees.
During the three years ended December 31, 1998, 1997 and 1996,
approximately 63.8%, 62.5% and 69.7%, respectively, of the
Company's consolidated revenues related to the Insituform(R)
Process.
Statements contained in and preceding management's discussion
and analysis include various forward-looking information that is
based on data currently available to management and management's
beliefs and assumptions. When used in this document, the words
"anticipate," "estimate," "believes," "plans," and similar
expressions are intended to identify forward-looking statements,
but are not the exclusive means of identifying such statements.
Such statements are subject to risks and uncertainties, and the
Company's actual results may vary materially from those
anticipated, estimated or projected due to a number of factors,
including, without limitation, the competitive environment for
the Company's products and services, the geographical
distribution and mix of the Company's work, and other factors
set forth in reports and other documents filed by the Company
with the Securities and Exchange Commission from time to time.
RESULTS OF OPERATIONS
- ---------------------
Three and Six Months Ended June 30, 1999 and 1998
Total revenues for the second quarter increased 13.3% to $85.6
million from $75.5 million in 1998, which contributed to an
increase in revenues for the first half of 1999 of 12.6% to
$156.8 million from $139.3 million in the first half of 1998.
The majority of the increased volume for the second quarter
continued to come from the Company's installation operations
within North America and Europe in addition to tunneling
operations. The Company's Titeliner revenues for second quarter
1999 decreased 28.4% compared to the same quarter in the prior
year, and decreased 25.3% for the first half of 1999 compared to
the same period in the prior year. This decline continued
principally due to lower volume in Canada and Chile.
The Company's gross profit during the second quarter increased
21.3% to $29.6 million from $24.4 million in the second quarter
of 1998, and during the first half of 1999 increased 16.0% to
$53.7 million from $46.3 million during the first half of 1998,
primarily due to increased revenues as well as increased
profitability from the Company's North American and European
rehabilitation operations as well as the tunneling operations.
The improvement in rehabilitation operations was offset somewhat
by a decrease in gross profit from the Company's corrosion and
abrasion operations due to the revenue volume decrease and
continued project difficulties in Chile. The overall gross
profit margin for second quarter 1999 was 34.6% compared to
32.4% in the second quarter of 1998 and for the first half of
1999 was 34.3% compared to 33.3% in the prior year.
In second quarter 1999, selling, administrative and general
expenses increased 10.5% to $16.8 million from $15.2 million in
the same quarter in the prior year, and for the first half of
1999 increased 6.3% to $32.0 million from $30.1 million in the
same period in the prior year. This increase was primarily due
to increased costs related to North American rehabilitation
administration. In addition, at the corporate level there were
increased costs in compensation, legal and consulting fees, and
ongoing costs related to the Company's management information
system's improvements. Also, amortization of goodwill
increased, which was a result of acquiring the installation
operation in the Netherlands. As a percentage of revenues,
selling, administrative and general expenses decreased in the
second quarter of 1999 to 19.6% from 20.1% in the comparable
quarter of the prior year and for the first half of 1999
decreased to 20.4% from 21.6% in first half of 1998. This
decrease is primarily attributable to revenue volume increasing
at a faster rate than selling, administrative and general
expenses.
Interest expense in second quarter 1999 remained relatively flat
with second quarter 1998 due to virtually no change in
outstanding debt. For the first half of 1999, interest expense
decreased 2.5% to $4.4 million from $4.6 million in the prior
year, due primarily to lower revolving credit borrowings in the
Company's subsidiaries.
Other income decreased in second quarter 1999 to $0.6 million
from $0.8 million in second quarter 1998, due principally to
lower investment income resulting from lower interest rates.
Despite a decrease in second quarter 1999, other income for the
first half of 1999 increased to $1.5 million from $1.3 million
in the first half of 1998 due primarily to increased invested
cash and cash equivalents.
In the second quarter of 1999, taxes on income increased to $4.6
million from $3.1 million in 1998 due principally to the
increase in income before taxes on income of $3.5 million from
the second quarter of 1998. In the first half of 1999, taxes on
income increased 49% to $7.7 million from $5.8 million due
principally to the increase in income before taxes on income of
$2.5 million from the first half of 1998.
As a result of the foregoing, net income for second quarter 1999
increased 45.0% to $6.4 million, representing a 7.5% return on
revenue, compared to $4.4 million for second quarter 1998, when
a 5.8% return on revenue was achieved. For the first half of
1999, net income was $10.6 million, or a 6.8% return on revenue,
compared to $7.5 million in the first half of 1998, when a 5.4%
return on revenue was achieved.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 1999, the balance of cash, U.S. Treasury bills, and
short-term investments was $65.3 million, compared to $76.9
million at December 31, 1998. The decrease in cash and cash
equivalents in 1999 resulted from operation of the Company's
previously reported stock repurchase program, which used cash in
the amount of $18.3 million in the first half of 1999. Also,
there were cash outlays for capital spending of $4.7 million,
and $11.8 million for the acquisition of the Netherlands
operations, offset somewhat by the Company's continued strong
positive generation of cash from operating activities of $20.6
million. Working capital was $109.7 million at June 30, 1999,
compared to $122.0 million at December 31, 1998.
While operating activities generated cash of $20.6 million
during the first half of 1999, $26.1 million was generated in
the first half of 1998. The principal reason for the decrease
was a smaller favorable change in operating assets and
liabilities of $1.6 million during the first half of 1999, as
compared to a favorable change of $9.5 million during the first
half of 1998.
Trade receivables, together with costs and estimated earnings in
excess of billings and retainage under construction contracts,
increased only slightly to $74.6 million from $74.4 million at
December 1998, primarily attributable to stronger management
control over collections. The collection of installation
receivables involves contractual provisions for retainage by the
project owner, often 5% to 15% of the contract amount, which
extends the collection process. Collections are also sometimes
further prolonged by the slow internal review processes often
employed by the Company's municipal customers. In the United
States, retainage receivables are generally received within 60
to 90 days after the completion of a contract.
Capital expenditures were $4.7 million in the first half of
1999, compared to $7.8 million in the first half of 1998.
Capital expenditures generally reflect replacement equipment
required by the Company's installation operations. During the
first half of 1998, capital expenditures also reflected
approximately $0.5 million related to the completion of the
Company's new research and development center.
While the Company expects that routine capital spending will
continue at the current level in the foreseeable future, the
Company has several information system improvement initiatives
underway that will require increased expenditures during the
next several years. These initiatives, which began principally
in 1997, include expenditures of approximately $1.6 million in
connection with the installation of an electronic data
collection system in each of the Company's North American
rehabilitation operations during the course of 1999, of which
$1.0 million was spent during the first half of 1999. See "Year
2000" below for information concerning the impact of year 2000
issues on the Company's operations. In addition, during the
second half of 1999, the Company plans to increase expenditures
related to field crew capacity expansion to meet rising volume
demands.
On June 1, 1999, the Company completed its acquisition of all of
the shares of Riooltechnieken Nederland B.V., its exclusive
licensee of the Insituform process in the Netherlands, from BFI
Holdings, B.V. The purchase price was NGL 25 million
(approximately $11.8 million), which was paid in cash at
closing. Included in the acquisition was a 10% stockholding
owned by the licensee in Insituform Linings PLC, a joint venture
between the Company and certain European licensees, which
manufactures the Insituform tubes used by the Company's
operations and licensees in Europe and Asia.
Financing activities used $17.0 million in the first half of
1999, as compared to cash used of $0.5 million in the first half
of 1998. In July 1998, the Company announced that its Board of
Directors had authorized the repurchase of up to 2,700,000
shares of the Company's class A common stock, $.01 par value, to
be made from time to time over five years in open market
transactions. The amount and timing of purchases will be
dependent upon a number of factors, including the price and
availability of the Company's shares, general market conditions
and competing alternative uses of funds, and may be discontinued
at any time. During the first half of 1999, the Company used
cash in the amount of $18.3 million for the repurchase of
1,159,900 shares. The Company has used cash in the cumulative
amount of $28.1 million for the repurchase of 1,895,800 shares
through June 30, 1999 since inception of the stock repurchase
program. The repurchased shares will be held as treasury stock.
In the first half of 1999, the Company made principal payments
totaling $0.8 million relating to the Company's existing debt,
as compared to $1.3 million in the first half of 1998. The
Company generated $2.7 million from the issuance of common stock
from stock options granted to employees, as compared to $0.5
million in the first half of 1998.
The Company's $110 million principal amount of Senior Notes,
Series A, due February 14, 2007 (the "Senior Notes") bear
interest, payable semi-annually in August and February of each
year, at the rate per annum of 7.88%. Each year, from February
2001 to February 2006, inclusive, the Company will be required
to make principal payments of $15.7 million, together with an
equivalent payment at maturity. The Senior Notes may be prepaid
at the Company's option, in whole or in part, at any time,
together with a make whole premium, and upon specified change in
control events each holder has the right to require the Company
to purchase its Senior Note without any premium thereon.
The Company has a credit agreement (the "Credit Agreement")
whereby the lender will make available to the Company, until
September 1, 2001 (the "Maturity Date"), a revolving credit line
of up to $20,000,000 aggregate principal amount for working
capital and permitted acquisitions, including $10,000,000
available for standby and commercial letters of credit.
Interest on outstanding advances accrues, at the election of the
Company, at either the lender's prime rate, payable monthly, or
its LIBOR rate, plus a margin ranging from .5% to 1.5% depending
on the maintenance of certain financial ratios, payable at the
end of selected interest periods (from one to six months).
Outstanding principal is subject to repayment on the Maturity
Date, except that advances for permitted acquisitions must be
repaid within six months after disbursement.
The note purchase agreements pursuant to which the Senior Notes
were acquired, and the Credit Agreement, obligate the Company to
comply with certain financial ratios and restrictive covenants
that, among other things, place limitations on operations and
sales of assets by the Company or its subsidiaries, and limit
the ability of the Company to incur further secured indebtedness
and liens and of subsidiaries to incur indebtedness, and, in the
event of default, limit the ability of the Company to pay cash
dividends or make other distributions to the holders of its
capital stock or to redeem such stock. The Credit Agreement
also obligates certain of the Company's domestic subsidiaries to
guaranty the Company's obligations, as a result of which the
same subsidiaries have also delivered their guaranty with
respect to the Senior Notes.
In July 1999, the Company borrowed EUR 5,672,000 in order to
refinance a portion of the purchase price for its Netherlands
licensee. Such amount is repayable in seven equal installments
annually on each July 31, and accrues interest, payable
quarterly, at the rate of 5.5% per annum.
On July 20, 1999, the Company entered into a settlement
agreement with Insituform East, Inc. ("East") and its
affiliates, providing for dismissal of the pending actions
before the Delaware Chancery Court and the American Arbitration
Association involving the parties and their joint venture doing
business under the name Midsouth Partners ("Midsouth"). Under
the Agreement, the Company and its subsidiary withdrew as
partners in Midsouth, and the licenses from the Company to
Midsouth with respect to the Insituform process and the NuPipe
process were terminated. Pursuant to the Agreement, East will
pay to the Company an amount equal to the book value of the
interests of the Company and its subsidiary in Midsouth, and
will repay to the Company outstanding loans to Midsouth in the
amount of $400,000.
The Agreement expressly provides that the Company and its
affiliates and licensees may operate in Midsouth's former
exclusive territory (consisting of Tennessee and portions of
Mississippi and Kentucky) without any obligation to East or its
affiliates. Under the Agreement, a subsidiary of East retains a
non-exclusive right in Midsouth's former territory to utilize
the cured-in-place process and technology in the condition and
state as commercially practiced under license on the date of
settlement. The Agreement further provides that such subsidiary:
(i) retains no rights to use the trademark "Insituform"; (ii) is
not entitled to receive from the Company any further
improvements or modifications to the cured-in-place process or
technology, nor any technical or marketing support; and (iii)
may not use any of the rights granted outside of such territory
unless such use is inadvertent and de minimis. Any breach of
the foregoing limitations results in immediate abrogation of the
rights granted.
In March 1998, the Company completed the acquisition of the
entire minority interest in its Chilean subsidiary for an
aggregate purchase price of approximately $2.1 million, $1.0
million of which was paid in connection with closing, $0.6
million of which is paid in March 1999, the first anniversary of
closing, and the remainder of which is due on the second
anniversary of closing. In September 1998, the Company
completed its acquisition of 80% of the shares of Video
Injection S.A. The purchase price for the these shares was $5.0
million, $2.4 million of which was paid at closing, $1.3 million
of which is due on the first anniversary of closing, and $1.3
million of which is due on the second anniversary of closing,
such additional installments secured by the Company's letter of
credit arrangements. On the fifth anniversary of closing (or
earlier, in specified events), the Company will purchase the
remaining 20% of the shares of Video Injection pursuant to a
formula based on Video Injection's results of operations.
Management believes its current working capital will be adequate
to meet its requirements for the foreseeable future.
YEAR 2000
- ---------
The "year 2000" problem relates to computer systems that have
time and date-sensitive programs that were designed to read
years beginning with "19," but may not properly recognize the
year 2000. If a computer system or software application used by
the Company or a third party dealing with the Company fails
because of the inability of the system or application to
properly read the year "2000," the results may adversely affect
the Company.
Accordingly, the Company is reviewing its internal computer
programs and systems to ensure year 2000 compliance. In 1998,
the Company established a project team to address year 2000
risks facing the Company, and its customers and suppliers, and
engaged an internationally-recognized consulting firm to assist
the team with implementing programs addressing preparedness of
the Company. The project team continues to coordinate the
identification and implementation of changes to computer
hardware and software applications that will attempt to ensure
the availability and integrity of the Company's information
systems. The project team is also reviewing and analyzing voice
and data communications systems, building systems, manufacturing
and operations equipment with embedded components (including
HVAC, security and fire protection), and field operations
equipment to ensure the reliability of operational systems and
manufacturing processes, both in North America and in Europe.
The project team has identified the Company sites and entities
that may harbor assets at risk, collecting pertinent
information, establishing year 2000 disposition strategies and
assessing and reporting risks. The Company's manufacturing
system has been modified so as to achieve year 2000 compliance
in all material respects, and the Company has identified
additional systems that will be replaced by year end. The
Company's project team provides consulting services where needed
in the areas of project planning and estimating, testing and
technical issues, and runs remedial projects as appropriate.
The Company also faces risk to the extent that suppliers of
products, services and systems purchased by the Company and
others with whom the Company transacts business on a worldwide
basis do not comply with year 2000 requirements. Principal
areas of the Company's review are banking systems (and the
effects on receivables, payables and payroll),
telecommunications, suppliers to the Company's manufacturing and
operating units (such as felt and resin), transportation systems
(both inbound and outbound), and customer information systems
for order placement and release and payment of invoices. The
Company's project team has had formal communications with
representatives from significant outside parties that transact
with the Company to determine the extent to which the Company is
vulnerable to failure by them to remediate their own year 2000
issues. In the case of suppliers to the Company's manufacturing
and operating units, verification includes site visits. The
Company's strategy entails proactive compliance assessment in
the case of these parties when appropriate, as well as
maintaining paper records of transactions when advisable and
inventory stocks of key materials.
The Company expects to complete its year 2000 compliance program
during 1999 and, based on information collected, presently
believes that any significant issues within its own operations
and facilities will be addressed in a timely manner. However,
while the Company has not identified material difficulties
presented by its suppliers or in its financial or communications
support that are not being addressed, and while the estimated
cost of the Company's efforts is not expected to be material to
the Company's financial position or any year's results of
operations, there can be no assurance to this effect.
Based on management's current assessment that no material
exposure to significant business interruption exists, the
Company has not adopted any formal contingency plan in the event
its year 2000 project is not completed in a timely manner, or in
the event unforeseen difficulties arise. The Company will
appropriately modify its strategy as additional circumstances
come to its attention, but there can be no assurance that the
Company will timely identify and remediate all significant year
2000 problems, and that remedial efforts will not involve
significant time and expense, or that such problems will not
have a material adverse effect on the Company's business,
results of operations or financial position.
MARKET RISK
- -----------
The Company conducts its rehabilitation activities on a
worldwide basis, giving rise to exposures related to changes in
foreign currency exchange rates. For example, foreign currency
exchange rate movements may create a degree of risk to the
Company's operations by affecting: (i) the U.S. dollar value of
sales made in foreign currencies, and (ii) the U.S. dollar value
of costs incurred in foreign currencies. In addition, the
Company is exposed to market risks related to changes in
interest rates. The Company's objective is to minimize the
volatility in earnings and cash flow from these risks.
The Company has selectively used, and will continue to use,
forward exchange contracts in order to manage its currency
exposure. Forward exchange contracts are executed by the
Company only with large, reputable banks and financial
institutions and are denominated in currencies of major
industrial countries. Given its assessment of such risk, the
Company has not deemed it necessary to offset any interest rate
exposure. Furthermore, the Company does not enter into
transactions involving derivative financial instruments for
speculative trading purposes.
Based on the Company's overall currency exchange rate and
interest rate exposure at June 30, 1999, a ten percent weakening
in the U.S. dollar across all currencies or ten percent increase
in interest rates would not have a material impact on the
financial position, results of operations or cash flows of the
Company. These effects of hypothetical changes in currency
exchange rates and in interest rates, however, ignore other
effects the same movement may have arising from other variables,
and actual results could differ from the sensitivity
calculations of the Company. The Company regularly assesses
these variables, establishes policies and business practices to
protect against the adverse effects of foreign currency and
interest rate fluctuations and does not anticipate any material
losses generated by these risks.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
For information concerning this item, see "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Market Risk," which information is incorporated
herein by reference.
PART II. - OTHER INFORMATION
----------------------------
ITEM 1. LEGAL PROCEEDINGS
AM-Liner Proceeding. In previously reported patent
infringement proceedings brought by the Company in the United
States District Court for the Northern District of California
against AM-Liner USA, Inc., American Pipe & Plastics Inc.
("APP") and J.F. Pacific Liners, Inc. (Civil Action No.
C-95-01511 CAL), the court in May 1999 entered an amended
judgment against the defendants in a total amount of $3,491,000,
including pre-judgment interest and costs. The defendants filed
an amended appeal bond in an amount of the amended judgment plus
ten per cent. The Company has filed a cross-appeal from the
portion of the amended judgment that calculates the amount of
damages. The Company is not able to predict the likelihood of
any recovery from the defendants of amounts awarded or its
cross-appeal. The Company has commenced a further patent
infringement proceeding against APP and its licensee, Sancon
Engineering, Inc., in the Central District of California (Civil
Action No. SACV 99-909 DOC (EEx)) alleging that APP's processes
infringe one aspect of an additional patent held by the Company.
Ultraliner Proceedings. In May 1999, the Company
commenced an action against Ultraliner, Inc. ("Ultraliner") and
its licensee, HydroTech, Inc. ("HydroTech"), in the United
States District Court for the Northern District of California
(Civil Action No. C-99-2429 CAL), alleging infringement by the
defendants of six of the Company's NuPipe(R) patents in
connection with Ultraliner's manufacture and sale of its fold
and formed pipe liner and its installation by HydroTech.
Ultraliner has subsequently served its summons and complaint on
the Company with respect to an action in the Central District of
Tennessee for a declaration of invalidity of the Company's U.S.
patent no. 4,867,921 covering the NuPipe(R) installation
process. Pursuant to the Company's motion, in July 1999 the
court ruled that the action should be transferred to the
Northern District of California.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 26, 1999, the Company convened its Annual
Meeting of Stockholders (the "Annual Meeting").
(b) Not applicable because (i) proxies for the Annual
Meeting were solicited pursuant to Regulation 14A under the
Securities Exchange Act of 1934 together with the Company's
Proxy Statement dated April 19, 1999 (the "Proxy Statement");
(ii) there was no solicitation in opposition to management's
nominees as listed in the Proxy Statement and (iii) all of such
nominees were elected.
(c) At the Annual Meeting, the stockholders voted in
favor of a proposal to approve an amendment to the By-Laws of
the Company providing procedures for nominations for election of
directors and the filling of vacancies on the Board of
Directors. The holders of 20,064,738 shares voted in favor of,
the holders of 93,349 shares voted against, the holders of
108,702 shares abstained and there were 2,452,024 broker
non-votes with respect to approval of such proposal.
At the Annual Meeting, the stockholders voted in favor
of a proposal to approve an amendment of the Certificate of
Incorporation of the Company in order to conform the filling of
vacancies on the Board of Directors to the procedures set forth
in the By-Laws of the Company. The holders of 20,063,245 shares
voted in favor of, the holders of 93,662 shares voted against,
the holders of 109,902 shares abstained and there were 2,452,004
broker non-votes with respect to approval of such proposal.
At the Annual Meeting, the stockholders voted in favor
of management's nominees for election as directors of the
Company. The holders of 22,483,261 shares voted in favor of,
and holders of 235,552 shares withheld their vote for, the
election of Robert W. Affholder; the holders of 22,484,001
shares voted in favor of, and holders of 234,812 shares withheld
their vote for, the election of Paul A. Biddelman; the holders
of 22,483,514 shares voted in favor of, and holders of 235,299
shares withheld their vote for, the election of Stephen P.
Cortinovis; the holders of 22,483,461 shares voted in favor of,
and holders of 235,352 shares withheld their vote for, the
election of Anthony W. Hooper; the holders of 22,483,294 shares
voted in favor of, and holders of 235,519 shares withheld their
vote for, the election of Thomas N. Kalishman; the holders of
22,483,423 shares voted in favor of, and holders of 235,390
shares withheld their vote for, the election of Silas Spengler;
the holders of 22,483,332 shares voted in favor of, and holders
of 235,481 shares withheld their vote for, the election of
Sheldon Weinig; the holders of 22,484,011 shares voted in favor
of, and holders of 234,802 shares withheld their vote for, the
election of Russell B. Wight, Jr.; and the holders of 22,483,514
shares voted in favor of, and holders of 235,299 shares withheld
their vote for, the election of Alfred L. Woods.
(d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this Quarterly
Report on Form 10-Q are listed on the annexed Index to Exhibits.
(b) During the quarter ended June 30, 1999, the
Company filed a Current Report on Form 8-K dated May 28, 1999
which, under "Item 5. Other Events" thereunder, reported (x)
modifications to the license from Ashimori Industry Co. Ltd.,
and (y) completion of the acquisition of the exclusive licensee
of the Insituform process in the Netherlands. In addition, the
Company has filed a Current Report on Form 8-K dated July 20,
1999 which, under "Item 5. Other Events" thereunder, reported
the settlement agreement between the Company and Insituform
East, Inc. and its affiliates. No financial statements were
filed as part of any such report.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
INSITUFORM TECHNOLOGIES, INC.
August 9, 1999 By: s/William A. Martin
---------------------------------
William A. Martin
Senior Vice President and
Principal Financial and
Accounting Officer
INDEX TO EXHIBITS
------------------
3.1 - Restated Certificate of Incorporation of the Company
3.2 - By-laws of the Company
27 - Financial Data Schedule, which is submitted
electronically to the Securities and Exchange Commission
for information only and is not filed