-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O9p0I/Rv11EVc+VzIzTqeVqWe3DOtaWtWqmewX4hX/hZNc710o0M5yaKkFPfROTi nyRJSR9tS6wQHToKffbSHg== 0000922435-98-000005.txt : 19980331 0000922435-98-000005.hdr.sgml : 19980331 ACCESSION NUMBER: 0000922435-98-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSITUFORM TECHNOLOGIES INC CENTRAL INDEX KEY: 0000353020 STANDARD INDUSTRIAL CLASSIFICATION: WATER, SEWER, PIPELINE, COMM AND POWER LINE CONSTRUCTION [1623] IRS NUMBER: 133032158 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-10786 FILM NUMBER: 98579167 BUSINESS ADDRESS: STREET 1: 1770 KIRBY PKWY STE 300 CITY: MEMPHIS STATE: TN ZIP: 38118 BUSINESS PHONE: 9017597473 MAIL ADDRESS: STREET 1: 1770 KIRBY PKWY SUITE 300 CITY: MEMPHIS STATE: TN ZIP: 38138 FORMER COMPANY: FORMER CONFORMED NAME: INSITUFORM OF NORTH AMERICA INC/TN/ DATE OF NAME CHANGE: 19930617 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ---------- to ---------- Commission file number 0-10786 INSITUFORM TECHNOLOGIES, INC. -------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3032158 - ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 702 Spirit 40 Park Drive Chesterfield, Missouri 63005 - ---------------------------------------- ------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 314-530-8000 ------------ Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $.01 par value ------------------------------------ (Title of class) Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period as the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information state-ments incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting and non- voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the common stock was sold, or the average bid and asked prices of such common equity, as of a specified date within 60 days prior to the date of filing. Aggregate market value as of March 15, 1998.....$228,062,297 Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date. Class A Common Stock, $.01 par value, as of March 15, 1998................. 26,959,459 shares DOCUMENTS INCORPORATED BY REFERENCE List hereunder the documents, all or portions of which are incorporated by reference herein, and the part of the Form 10-K into which the document is incorporated: Proxy Statement to be filed with respect to the 1998 Annual Meeting of Stockholders-Part III. PART I ITEM 1. BUSINESS General Insituform Technologies, Inc. (the "Company") is a worldwide provider of proprietary trenchless technologies for the rehabilitation and improvement of sewer, water, gas and industrial pipes. The Company's primary technology is the Insituform(R) Process (the "Insituform Process"), a "cured-in-place," non-disruptive pipeline rehabilitation process that, during the Company's most recent fiscal year, contributed approximately 63% of the Company's revenues. In addition to the Insituform Process, the Company offers certain other products in trenchless pipeline system rehabilitation. The Company's NuPipe(R) Process (the "NuPipe Process"), which utilizes a "fold and formed" technology, is used primarily to repair smaller or less damaged pipe. The Company also exercises the exclusive rights in substantially all of North America, and non-exclusive rights in specified other territories, to the Paltem(R)-HL system and to the Thermopipe(TM) System (the "Thermopipe Process"). The Company's Tite Liner(R) Process (the "Tite Liner Process") is used to line new and existing steel pipelines. Through its Affholder, Inc. subsidiary, the Company is engaged in trenchless tunnelling used in the installation of new underground pipelines. The Company was incorporated in Delaware in 1980 under the name Insituform of North America, Inc., in order to act as the exclusive licensee of the Insituform Process in most of the United States of Insituform Group Limited, the then owner of the worldwide rights to the Insituform Process, and to license other companies to market and provide Insituform installation services in return for royalties and sales from materials manufactured by the Company. Contemporaneously with the consummation in 1992 of the Company's acquisition of IGL, the name of the Company was changed to Insituform Technologies, Inc. As a result of its successive licensee acquisitions, the Company has further integrated its business to perform the entire process of manufacture and installation using its trenchless processes. In 1995, Insituform Mid-America, Inc. ("IMA") which, together with its subsidiaries, was licensed to provide the Insituform technology in all or a portion of 22 states, was merged with a subsidiary of the Company as a result of which IMA became a wholly-owned subsidiary of the Company (the "IMA Merger"). The IMA Merger has been accounted for as a pooling-of-interests and, accordingly, the consolidated financial statements for the three years ended December 31, 1997 included in response to "Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K" for the periods prior to the IMA Merger, and (unless the context otherwise requires) all other financial information included herein for such periods and prior periods, include the combined historical results of the Company and IMA. As used in this Annual Report on Form 10-K, the term the "Company" refers to the Company and, unless the context otherwise requires, its direct and indirect subsidiaries. For certain information concerning each of the Company's industry segments and domestic and foreign operations, see Note 18 of the Notes to the Company's Consolidated Financial Statements included in response to "Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K," which information is incorporated herein by reference. This Annual Report on Form 10-K contains various forward looking statements and information that are based on information currently available to management and management's beliefs and assumptions. When used in this document, the words "anticipate," "estimate," "believes," "plans," and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. Such statements are subject to risks and uncertainties, and the Company's actual results may vary materially from those anticipated, estimated or projected due to a number of factors, including, without limitation, the competitive environment for the Company's products and services, the geographical distribution and mix of the Company's work, and other factors set forth in reports and other documents filed by the Company with the Securities and Exchange Commission from time to time. Technologies Pipeline System Rehabilitation. The Insituform Process for the rehabilitation of sewers, pipelines and other conduits utilizes a custom-manufactured tube, or liner, made of a synthetic fiber with a plastic coating on one side which, after installation, becomes the new inside surface of the pipe being rehabilitated. After the pipe is saturated (impregnated) with a thermosetting resin, the liner is inverted into the host pipe by various processes, and the resin is then heated by various means until it hardens, or cures, forming a new hard pipe within a pipe. The Company's NuPipe Process entails the manufacture of a folded replacement pipe from a thermoplastic material which is stored on a reel in a reduced shape. The pipe is heated at the installation site in order to make it flexible enough to be inserted into an existing conduit, pulled into place and then sequentially expanded to match the existing conduit by internal heat and pressure and progressive rounding, creating a tight fit against the conduit being repaired. See "Patents and Licenses" below for information concerning the Paltem system and the Thermopipe Process, both licensed by the Company, neither of which were material to the Company's results of operations during the year ended December 31, 1997. Corrosion and Abrasion Protection. The Company's Tite Liner Process is a method of lining new and existing steel pipelines with a corrosion and abrasion resistant polyethylene pipe. Tunnelling. Tunnelling is a trenchless, subterranean construction process that generally is utilized for the construction of pipeline systems. The Company utilizes its tunnelling machines to construct new pipes from two to fourteen- foot diameter in size. Rehabilitation Activities The Company conducts its rehabilitation activities through direct installation and other construction operations performed through wholly-owned and, in some cases, majority-owned subsidiaries. During the year ended December 31, 1997, such operations accounted for approximately 92% of the Company's consolidated revenues. In addition, in those areas of the world in which the Company's management believes it would not be profitable for the Company to exploit its trenchless processes directly, the Company has granted licenses to unaffiliated companies. The Company has also entered into joint ventures from time to time to encourage additional royalties, sales of its products and exploitation of its trenchless rehabilitation processes. Direct Installation and Other Construction Activities. The Company's direct installation operations are conducted in North America principally through subsidiaries which hold the Insituform Process and NuPipe Process licenses for 39 of the 50 states (and a portion of another state), in addition to Puerto Rico and the U.S. Virgin Islands, and all of Canada, and the rights in substantially all of North America to the Paltem system and to the Thermopipe Process. Outside of North America, the Company conducts Insituform Process or NuPipe Process direct installation operations through its subsidiaries in the United Kingdom and France. North American rehabilitation operations are headquartered in Chesterfield, Missouri, with principal operations facilities maintained in approximately thirteen locations geographically dispersed through all major regions. European operations are headquartered in La Courneuve, France, with regional operations facilities located in the United Kingdom. The worldwide rights to the Tite Liner Process are applied by United Pipeline Systems USA, Inc. and, through its United Pipeline division, Insituform Technologies Limited, both subsidiaries of the Company. During 1994, Tite Liner operations commenced in Chile through a newly-organized subsidiary, United Sistema de Tuberias Ltda. ("United Chile"), and during 1996, through newly organized subsidiaries in Argentina and Mexico. The Company's corrosion and abrasion protection work is coordinated through facilities in Durango, Colorado, with regional facilities located in Canada and Latin America. Following consummation of the IMA Merger, and in view of the start-up nature of operations conducted by the Company under the UltraPipe(R) name, the Company has consolidated such operations with IMA's larger corrosion and abrasion protection activities. The Company's Affholder, Inc. subsidiary, in addition to tunnelling, offers a range of pipe rehabilitation and construction services. The direct installation business of the Company is project-oriented, and contracts may be obtained through competitive bidding, usually requiring performance at a fixed price. The profitability of these operations to the Company depends upon the ability to estimate costs accurately, and such estimates may prove to be inaccurate as a result of unforeseen conditions or events. A substantial proportion of the work on any given project may be subcontracted out to third parties by the Company. Proper trenchless installation requires certain expertise that is acquired on the job and through training, and, if an installation is improperly performed, the Company may be required to repair the defect, which may involve excavation. The Company, accordingly, has incurred significant costs in establishing new field installation crews, in training new operations personnel and in equipping its direct installation staff. The Company generally invoices installation revenues on a percentage-of-completion basis. Under ordinary circumstances, collection from governmental agencies in the United States is made within 60 to 90 days of billing. In some cases, five to fifteen percent of the contract value is withheld by the owner until testing is completed or the warranty period has expired. The Company is required to carry insurance and bonding in connection with certain direct installation projects, and, accordingly, maintains comprehensive insurance policies, including workers' compensation, general and automobile liability, and property coverage. The Company believes that it presently maintains adequate insurance coverage for all direct installation activities. The Company has also arranged bonding capacity for bid, performance and payment bonds. Typically, the cost of a performance bond is less than approximately 1% of the contract value. The Company is required to indemnify surety companies for any payments the sureties are required to make under the bonds. The Company's principal direct installation and other construction activities are conducted by direct or indirect wholly-owned subsidiaries, except for the following subsidiaries that are less than wholly-owned:
Subsidiary Processes Territory Interest ---------- --------- --------- -------- Insituform France Insituform France 66-2/3% of S.A. stock(2) United Pipeline Tite Liner Mexico(1) 55% of de Mexico, S.A. stock(3) _______________________ (1) Jurisdiction of incorporation. (2) The remaining interest is held by a subsidiary of Lyonnaise des Eaux S.A. (3) The remaining interest is held by a subsidiary of Produtos y Servicios Miller de Mexico, S.A.
In March 1998, the Company completed the acquisition of the entire minority interest in United Chile for an aggregate purchase price of approximately $2.1 million. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." Licensing Operations. The Company grants licenses for the Insituform Process and the NuPipe Process, covering exclusive and non-exclusive territories, to licensees who provide pipeline repair and rehabilitation services throughout their respective licensed territories. The licenses generally grant to the licensee the right to utilize the know-how and practice the invention of the patent rights (where they exist) relating to the subject process, and to use the Company's copyrights and trademarks. At present, the Insituform Process is commercialized under license by an aggregate of 35 unaffiliated licensees and sublicensees, and the NuPipe Process is commercialized under license by an aggregate of seven unaffiliated licensees. The Company's licensees generally are obligated to pay a royalty at a specified rate, which in many cases is subject to a minimum royalty payment. Domestic licensees are also obligated to pay specified royalty surcharges on their sales and contracts outside of their licensed territories, which are then paid by the Company to the domestic licensee in whose territory the installation was performed. Any improvements or modifications a licensee may make in the subject process during the term of the license agreement becomes the property of the Company or are licensed to the Company. Should a licensee fail to meet its royalty obligations or other material obligations, the Company may terminate the license. Many licensees (including the domestic licensees), upon prior notice to the Company, may also terminate the license for any reason. The Company may vary the agreement used with new licensees according to prevailing conditions. The Company has also granted an exclusive license to use the Tite Liner Process for specified uses in much of the Middle East, in exchange for royalty payments calculated on the basis of the licensee's gross sales (subject to minimum payments). Ownership Interests in Licensees. The Company, through two subsidiaries, holds an aggregate of 57.5% of the partnership interest in Midsouth Partners, the Company's licensee of the Insituform and NuPipe Processes in Tennessee and portions of Mississippi and Kentucky,with the remaining interest in Midsouth Partners held by a subsidiary of Insituform East, Incorporated ("Insituform East"), an unaffiliated licensee. The management and conduct of the business of Midsouth Partners is vested in a management committee comprised of seven members. Notwithstanding the Company's majority equity ownership interest in Midsouth Partners, as a result of the determination in June 1996 by an arbitration panel that one Company subsidiary was in default of certain obligations under the partnership agreement, Insituform East was awarded majority control of the management committee and effectively determines the partnership's business strategy and its implementation. Partnership interests in Midsouth Partners may not be transferred nor may there be a change in control of any partner, without the approval of all partners. The Company, through its subsidiary, Insituform Holdings (UK) Limited, holds one-half of the equity interest in Insituform Rohrsanierungstechniken GmbH, the Company's licensee of the Insituform and NuPipe Processes in Germany. The joint venture partners have rights-of-first-refusal in the event either party determines to divest its interest. The Company holds additional ownership interests in licensees as follows:
Licensee Processes Territory Interest - -------- --------- --------- -------- N.V. Kumpen-Insituform Insituform Belgium, 50% joint venture Luxembourg interest(1) Ka-Te Insituform A.G. Insituform Switzerland, 50% joint venture Liechtenstein and interest(2) Voralberg, Austria _____________________ (1) The remaining interest is held by N.V. Kumpen. (2) The remaining interest is held by Ka-Te Holding A.G.
The Company has also entered into contractual joint ventures in order to develop joint bids on contracts for its direct installation business, and for tunnelling operations. The Company continues to investigate opportunities for augmenting its business through such arrangements. Marketing The Company has focused the marketing of its rehabilitation technologies primarily on the municipal wastewater markets worldwide, which the Company expects to remain the largest part of its business for the foreseeable future. The Company produces sales literature and presentations, participates in trade shows, conducts national advertising and executes other marketing programs for the Company's own sales force and those of unaffiliated licensees. As a result of its acquisitions, the Company's distribution efforts are implemented predominantly through the direct installation activities of its subsidiaries. See "Rehabilitation Activities" above for a description of the Company's licensing operations and investments in licensees. The Company's unaffiliated licensees are responsible for marketing and sales activities in their respective territories, and each has a staff for that purpose. The Company offers its corrosion and abrasion protection technologies worldwide to line new and existing steel pipelines. No customer accounted for more than ten percent of the Company's consolidated revenues during the years ended December 31, 1997, 1996 and 1995, respectively. Backlog At December 31, 1997 and 1996, respectively, the Company recorded backlog from construction operations (excluding projects where the Company has been advised that it is the low bidder) in the amounts of approximately $102.1 million and $167.6 million, respectively. The Company anticipates that substantially all construction backlog recorded at December 31, 1997 will be completed in 1998. Product Development The Company, by utilizing its own laboratories and test facilities and outside consulting organizations and academic institutions, continues to develop improvements to its proprietary processes, including the materials used and the methods of manufacturing and installing pipe. See "Item 2. Properties" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" for information concerning inauguration of the Company's new research and development facility in Chesterfield, Missouri. During the years ended December 31, 1997, 1996 and 1995, the Company spent approximately $7.0 million, $7.7 million and $7.6 million, respectively, on all strategic marketing and product development activities. Manufacturing and Suppliers The Company maintains its principal North American liner manufacturing facility in Batesville, Mississippi, with an additional facility located in Memphis, Tennessee. In Europe, Insituform Linings Plc ("Linings"), a joint venture between the Company and five licensees, manufactures and sells linings from its plant located in Wellingborough, United Kingdom. The Company, through a subsidiary, owns 51% of the equity of Linings. In 1992, the Company inaugurated its liner manufacturing facility in Matsubuse, Japan. While raw materials used in the Company's Insituform products are typically available from multiple sources, the Company's historical practice has been to purchase materials from a limited number of suppliers. The Company maintains its own felt manufacturing facility contiguous to its Insitutube manufacturing facility in Batesville, and purchases substantially all of its fiber requirements from one source, alternate vendors of which the Company believes are readily available. Although it is working with one vendor to develop a uniform and standard resin to source substantially all of its resin requirements, the Company believes that resins are also readily available from a number of major corporations. The Company believes that the sources of supply in connection with its Insituform operations are adequate for its needs. The Company has entered into a supply agreement with an unaffiliated party, under which the Company will purchase the thermoplastic pipe to satisfy the substantial portion of its NuPipe requirements, subject to automatic annual renewal periods and to minimum purchases by the Company. The Company believes that alternative sources of supply for its pipe requirements in connection with the NuPipe Process are available. If the Company were unable to obtain its NuPipe requirements under its existing third party arrangements, the Company might be adversely affected until arrangements with alternative sources are formulated. The Company sells liners and related products utilized in the Insituform Process, and the thermoplastic pipe utilized in the application of the NuPipe Process, to its licensees, in the case of domestic licenses pursuant to fixed-term supply contracts. The Company manufactures certain equipment used in its corrosion and abrasion protection operations, and, in connection with any licenses to unaffiliated parties, will sell such equipment to its licensees. Patents and Licenses The Company currently holds 64 patents in the United States relating to the Insituform Process, the last to expire of which will remain in effect until 2015, and has obtained patent protection in its principal overseas markets covering aspects of the Insituform Process. These patents cover certain aspects of the Insituform Process including the manufacture of liners, the resin saturation process and the process of reconstructing the pipeline. Two of the significant patents relating to the Insituform Process, covering, respectively, the curing of a resin-impregnated tube and material aspects of the inversion process, have expired where previously in effect. The specifications and/or rights granted in relation to each patent will vary from jurisdiction to jurisdiction. In addition, as a result of differences in the nature of the work performed and in the climate of the countries in which the work is carried out, not every licensee uses each patent, and the Company does not necessarily seek patent protection for all of its inventions in every jurisdiction in which it does business. Although the Company believes these patents are important to the business of the Company, there can be no assurance that the validity of the patents will not be successfully challenged or that they are sufficient to afford protection against another company utilizing a process similar to the Insituform Process. The Company's business could be adversely affected by increased competition in the event that one or more of the patents were adjudicated to be invalid or inadequate in scope to protect the Company's operations or upon expiration of the patents. The Company believes, however, that while the Company has relied on the strength and validity of its patents, the Company's long experience with the Insituform Process, its continued commitment to support and develop the Insituform Process, the strength of its trademarks, and its degree of market penetration, should enable the Company to continue to compete effectively in the pipeline rehabilitation market. Ten patents covering the NuPipe Process or the materials used in connection with the NuPipe Process have been issued in the United States. The Company holds patents in connection with the NuPipe Process in 21 other countries. The Company believes that the success of its corrosion and abrasion protection operations will depend primarily upon its proprietary know-how and its marketing and sales skills. Pursuant to a license from Ashimori Industry Co., Ltd. ("Ashimori"), the Company holds the exclusive rights to use the patents, trademarks and know-how related to the Paltem-HL system, a process for rehabilitating pressure pipes, and certain other products which are in various stages of development, for substantially all of North America. In March 1998, the license was amended to extend to additional non-exclusive territories in the eastern hemisphere and Latin America. Ashimori is entitled to receive ongoing royalties at specified rates on installations and sales of liners. The license extends for an initial term through 2009 and automatically is renewed for successive one-year terms unless the Company gives notice of non-renewal at least 90 days prior to the end of a term. In the event annual minimum royalties are not met, Ashimori has the right to render the agreement non- exclusive and, in the event minimum royalties are not met for two consecutive years, to terminate the agreement. Under a license from Angus Fire Armour Limited ("Angus"), the Company holds exclusive rights for the United States and Canada, and non-exclusive rights in Mexico and certain territories in the eastern hemisphere, to use the patents, trademarks and know-how related to the Thermopipe Process, which the Company intends to introduce for rehabilitating potable water and other aqueous fluid pipes. Angus has the option under the license to convert the exclusive rights to non-exclusive rights in those territories where the Company does not meet certain minimum purchases of Thermopipe liner. The license extends for an initial term of five years and is renewable by the Company for an additional five year term, subject to termination in the event of specified defaults. After payment of an initial license fee, no further royalties are due under the license. Competition The pipeline reconstruction, rehabilitation and repair business is highly competitive, and the Company competes against many companies, some of which have far greater financial resources and experience than the Company. Accordingly, there can be no assurance as to the success of the Company's processes in competition with such companies and alternative technologies for pipeline rehabilitation. In each of its rehabilitation markets, the Company currently faces competition from more conventional methods, including: (i) total replacement, which is the excavation and replacement of an entire section of pipe; (ii) point repair, which is the replacement of cracked or structurally failed sections of pipes by actual excavation and replacement; (iii) sliplining, which is the insertion of a smaller pipe within an existing deteriorated pipe; and (iv) the placement of gelatinous material, hydraulic cement, or other acceptable material in defective pipes to repair leaks and prevent infiltration in gravity sewers. In addition, the Company faces competition from other trenchless processes throughout the world. In the United States, the Company faces competition from several cured-in-place processes and, outside of the United States, from additional cured-in-place processes currently in regional use. The Company also faces competition from several fold and formed thermoplastic processes. Several companies offer in-place polyethylene lining systems which compete with the Company's abrasion and corrosion protection technologies. The Company's trenchless processes may also encounter competition from alternative trenchless approaches such as pipe bursting and other methods. The Company's tunnelling operation competes with utility contracting firms throughout North America. Seasonality Although the Company's operations can be affected by severe weather, for the past five years seasonal variation in work performed has not had a material effect on the Company's consolidated results of operations. Employees As of December 31, 1997, the Company employed 1,420 individuals. Certain of the Company's contracting operations are parties to collective bargaining agreements covering an aggregate of 244 employees. The Company generally considers its relations with its employees to be good. Government Regulation The Company and its licensees are required to comply with all national, state and local statutes, regulations and ordinances, including those disclosure and filing requirements relating to the grant of licenses. In addition, the Company's direct installation and other construction operations, and those of its licensees, may have to comply with relevant code specifications, permit requirements, and bonding and insurance requirements as well as with fire regulations relating to the storage, handling and transporting of flammable materials. The Company's manufacturing facilities, as well as its direct installation operations and those of its licensees, are subject to state and national environmental protection regulations, none of which presently has any material effect on the Company's capital expenditures, earnings or competitive position in connection with the Company's present business. However, while the Company's direct installation operations have established monitoring programs relating to the use of solvents, further restrictions could be imposed on the use of solvents or the thermosetting resins used in the Insituform Process. The Company believes that it is in material compliance with environmental laws and regulations applicable to it. The use of both thermoplastics and thermosetting resin materials in contact with drinking water is strictly regulated in most countries. In the United States, a consortium led by NSF International ("NSF"), under arrangements with the United States Environmental Protection Agency (the "EPA"), establishes minimum requirements for the control of potential human health effects from substances added indirectly to water via contact with treatment, storage, transmission and distribution system components, by defining the maximum permissible concentration of materials which may be leached from such components into drinking water, and methods for testing them. In February 1996, the Paltem- HL and Frepp processes under license from Ashimori were certified by the NSF for use in drinking water systems, followed in April 1997 by certification by the NSF of the Insituform pressure pipe liner for such use. The Thermopipe product also has NSF approval. The NSF assumes no liability for use of any products, and the NSF's arrangements with the EPA do not constitute the EPA's endorsement of the NSF, the NSF's policies or its standards. Because of the need for dedicated equipment in connection with use of these products in drinking water applications, and the time required for the marketing process, the Company does not expect meaningful revenues from drinking water rehabilitation at least through 1998. Executive Officers The executive officers of the Company, and their respective ages and positions with the Company, are as follows:
Age at Position with Name March 15, 1998 the Company ---- -------------- -------------- Anthony W. Hooper 50 Chairman of the Board, President and Chief Executive Officer Jerome Kalishman 70 Vice Chairman of the Board Robert W. Affholder 62 Senior Executive Vice President William A. Martin 56 Senior Vice President-Chief Financial Officer Robert L. Kelley 52 Vice President-General Counsel
Anthony W. Hooper has been Chairman of the Board of the Company since June 1997, and has been President of the Company since November 1996. Mr. Hooper was previously, since August 1994, Senior Vice President-Marketing and Technology of the Company, having served as Senior Vice President-Marketing of the Company from November 1993 to that date. From 1992 until joining the Company, Mr. Hooper was President of Huyck Formex/Weavexx Corporation, a North Carolina industrial textile and process equipment manufacturer and subsidiary of BTR, Inc. Jerome Kalishman has been Vice Chairman of the Board of the Company since June 1997, and held such position from October 1995 until November 1996. Mr. Kalishman served as Chairman of the Board of the Company from November 1996 until June 1997. Prior to the IMA Merger and since prior to 1992, Mr. Kalishman was Chairman of the Board and Chief Executive Officer of IMA. Robert W. Affholder has been Senior Executive Vice President of the Company since August 1996. Mr. Affholder was previously, since October 1995, Senior Vice President-Chief Operating Officer of North American Contracting Operations of the Company. Mr. Affholder was President of IMA from 1994 to October 1995 and from prior to 1992 to 1993, and was Vice Chairman of IMA from 1993 to 1995. William A. Martin has been Chief Financial Officer of the Company since 1988, a Vice President from 1989 to January 1993 and a Senior Vice President since January 1993. Robert L. Kelley has been Vice President of the Company since June 1996, having joined the Company as General Counsel in the prior month. Mr. Kelley was Assistant General Counsel of Monsanto Company from prior to 1992 until joining the Company. ITEM 2. PROPERTIES The Company's executive offices, located in Chesterfield, Missouri, a suburb of St. Louis, at 702 Spirit 40 Park Drive, are leased from an unaffiliated party through May 31, 2002. The Company maintains a liner fabrication facility and contiguous felt manufacturing facility in Batesville, Mississippi. The industrial development bond used to finance such facilities was prepaid in February 1997. The property remains leased to the Company under arrangements that provide for the Company's purchase option at (subsequent to such prepayment) nominal value. The Company's manufacturing facilities in Memphis, Tennessee are located on land sub-leased from an unaffiliated entity for an initial term of forty years expiring on December 31, 2020. The cost of the building, together with certain machinery and equipment, was financed from the sale of a $1.5 million industrial development bond and secured by a mortgage on the premises and equipment. Linings (a 51%-owned subsidiary) owns certain premises comprising its liner manufacturing facility, located in Wellingborough, England. The Company leases additional manufacturing space in Matsubuse, Japan. In March 1998, the Company inaugurated a new research and development facility owned by it and adjacent to its installation operations in Chesterfield, comprising approximately 59,500 square feet of space. In support of its direct installation operations, the Company owns or leases facilities in the United States, Europe and Latin America, the principal sites of which currently are in Chesterfield, Missouri, Charlton, Massachusetts, Jacksonville, Florida, Birmingham, Alabama, Hammond, Indiana, Lemont, Illinois, Owosso, Michigan, Houston, Texas, Wichita, Kansas, Santa Fe Springs, California, Salem, Oregon, Edmonton, Alberta, Surrey, British Columbia, Ossett, United Kingdom, Antofagasta, Chile and Villahermosa, Mexico. The Ossett and Jacksonville properties are subject to mortgages. The foregoing facilities are regarded by management as adequate for the current and anticipated future requirements of the Company's business. In order to rationalize the Company's operations combined as a result of the IMA Merger, the Company may seek to relocate certain operations. ITEM 3. LEGAL PROCEEDINGS Cat Proceeding. The Company, in 1990, initiated proceedings against Cat Contracting, Inc., et. al. in the United States District Court for the Southern District of Texas, Houston Division (Civil Action No. H-90-1690)(the "Cat Proceeding"), alleging infringement of certain of the Insituform patents in connection with conduit relining work performed in Houston by licensees of Kanal Sanierung Hans Muller GmbH & Co. In such proceeding, defendants asserted counterclaims alleging that the suit had been brought in bad faith, that the Company had engaged in certain antitrust violations and further that the Company had engaged in unfair competition. In 1991, the jury rendered its verdict finding that defendants had infringed the Insituform patents at issue and that such patents were not invalid. In response to defendants' request, the court declined to declare such patents invalid and further declined to disturb the jury's verdict rejecting defendant's counterclaims that the suit had been brought in bad faith and defendant's claims that plaintiffs had engaged in unfair competition. The court did, however, grant the defendants' motion for a new trial on the matter of whether defendants had infringed certain of the Insituform patents under the doctrine of equivalents, setting aside that portion of the jury's verdict; and granted defendants judgment notwithstanding the jury verdict on the issue of literal infringement of that patent. In October 1995, the court held the mandated new trial and ruled that defendants' serial vacuum impregnation processes infringed the Company's patent under the doctrine of equivalents. The court further issued a permanent injunction against defendants' use of the processes covered by such patent and ordered a trial on the issue of damages, the amount of which had yet to be determined. Defendants filed a notice of appeal to the United States Court of Appeals for the Federal Circuit and the Company filed a notice of cross-appeal from the 1991 judgment. In November 1996, the Court of Appeals for the Federal Circuit affirmed the District Court in declining to declare the Company's serial vacuum impregnation patent invalid and found that the jury's rejection of defendants' challenge to the validity of that patent was supported by the evidence. The Court of Appeals further affirmed the District Court's grant to defendants of judgment notwithstanding the jury verdict on the issue of the literal infringement of the patent, and vacated the District Court's finding of infringement under the doctrine of equivalency, holding that the District Court had used incorrect claim construction. The Court of Appeals remanded the case to the District Court for new findings on the infringement issue. In March 1997, defendants sought a writ of certiorari from the U.S. Supreme Court to review that ruling, which was denied by the Court. In December 1996, the District Court issued its new findings under the guidelines suggested by the Court of Appeals and again found that both of the processes employed by defendants infringed the Company's serial vacuum impregnation patent. In January 1997 defendants appealed from those findings, as well as from the refusal of the District Court to consider allegedly new evidence on the issue of equivalency. That appeal has been fully briefed and is awaiting argument. The District Court, as affirmed by the Court of Appeals in May 1997, has denied defendants' February 1996 motion for a partial new trial, which alleged that the Company gave false testimony at the 1991 trial and sought dismissal of the action and monetary sanctions. The damages portion of the Cat Proceeding was tried before the District Court in September 1997. The parties now await the District's Court's decision as to the amount of damages due to the Company as a result of defendant's infringement of the Company's serial vacuum impregnation patent during the period of 1989-90 through October 1995. Additional Texas Proceeding. In October 1996, two of the defendants in the Cat Proceeding filed a separate action in the District Court against the Company and Insituform East, Incorporated (Inliner U.S.A. and Cat Contracting, Inc. v. Insituform Technologies, Inc. and Insituform East, Inc. [Civil Action No. H96-3627]) alleging, among other matters, that the Company had commenced the Cat Proceeding with knowledge that the Company's serial impregnation patent was invalid and gave false testimony in the Cat Proceeding. The suit further alleges that the Company committed various infractions of the antitrust laws, including conduct by the Company constituting unreasonable restraints of trade and monopolization of its market, in violation of Sections 1 and 2 of the Sherman Act, made false or misleading representations in violation of Sections 1 and 2 of the Sherman Act, made false or misleading representations in violation of Section 43(a) of the Lanham Act, and engaged in other anti- competitive practices in violation of Texas state law, and seeks compensatory and punitive damages. The Company has denied the allegations, raised affirmative defenses, and filed a motion to dismiss regarding certain of the antitrust claims. In August 1997, the District Court issued its Memorandum and Order in which it granted the Company's motion to dismiss as to claims arising out of the Cat Proceeding, as well as Noerr-Pennington immunity for the patent litigation in the Cat Proceeding and the obtaining of certain product standards, among other matters, and dismissed plaintiffs claims that the acquisition by the Company of a number of its licensees constituted anti-competitive practices. The court further ordered plaintiffs to refile an amended complaint alleging with factual particularity any timely claims for tortious interference with business and contractual relations, as well as facts demonstrating certain antitrust injury and Section 43(a) Lanham Act claims of misrepresentation. Although the court denied the Company's motion as to the antitrust claims of complimentary bidding, bid rigging, and predatory pricing, the court ordered the plaintiffs to refile an amended complaint alleging with factual particularity any timely claims for tortious interference with business and contractual relations, true "sham" efforts to manipulate municipalities for exclusionary purposes, antitrust injury in regard to acts of complementary bidding, bid rigging and predatory price fixing, and Section 43(a) Lanham Act claim of misrepresentation. Plaintiffs motion to file an amended complaint purporting to add a subsidiary of the Company, Insituform Gulf South, Inc., as a defendant has been denied by the court. In its third amended complaint, plaintiffs allege that the Company committed various violations of the antitrust laws, including conduct by the Company constituting unreasonable restraints of trade and monopolization of its market in violation of Sections 1 and 2 of the Sherman Act, violations of Section 2 of the Clayton Act, made false or misleading representations in violation of Section 43(a) of the Lanham Act, tortious interference and business disparagement, and seeks compensatory and punitive damages. No discovery has been conducted to date. A scheduling order has been entered with trial currently set for November 1998. Western Slopes Utilities. In October 1996, Western Slope Utilities, Inc., which utilizes a serial impregnation process licensed from Inliner U.S.A., one of the defendants in the Cat Proceeding, commenced an action against the Company in the United States District Court for the District of Colorado (Western Slope Utilities, Inc. v. Insituform Technologies, Inc. and Insituform (Netherlands) B.V. [Civil Action No. 96-N-2394]), seeking, among other things, a judgment declaring the Company's serial impregnation patent invalid, unenforceable and not infringed by plaintiff's current activities, and injunctive relief enjoining the Company from charging plaintiff or any of its customers or suppliers with infringing that patent. This case has been transferred to the United States District Court for the Southern District of Texas, and plaintiff's application for writ of mandamus with the United States Court of Appeals for the Federal Circuit contesting the transfer order has been denied. In August 1997, the Company filed a motion to dismiss and, in the alternative, a motion for summary judgment dismissing plaintiff's declaratory judgment claims. Plaintiff has acquiesced in the Company's motion to dismiss the declaratory judgment claims and the court has consented and ordered those claims dismissed. Accordingly, the only remaining issues in the suit entail claims under Section 43(a) of the Lanham Act and tortious interference with business relationships under state law. LaRoche Industries. In February 1998, a settlement was reached in LaRoche Industries, Inc. v. Affholder, Inc. (Civil Action 96-3487(L)), pending in the United States District Court for the Eastern District of Louisiana. Claims that Affholder, Inc. and United Pipeline Systems USA, Inc., both subsidiaries of the Company, had performed negligent rehabilitation work on and had employed defective materials in repair of a brine line were dismissed. The Company's payments to plaintiff under the settlement had been fully reserved. Other. The Company is involved in certain additional litigation incidental to the conduct of its business and affairs. Management does not believe that the outcome of any such litigation will have a material adverse effect on the financial condition or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) On October 8, 1997, the Company convened its Annual Meeting of Stockholders (the "Annual Meeting"). (b) Not applicable because (i) proxies for the Annual Meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934 together with the Company's Proxy Statement dated August 25, 1997 (the "1997 Proxy Statement"); (ii) there was no solicitation in opposition to management's nominees as listed in the 1997 Proxy Statement and (iii) all of such nominees were elected. (c) At the Annual Meeting, the stockholders voted in favor of a proposal to approve an amendment of the Certificate of Incorporation of the Company to amend Article SIXTH in order to eliminate the three-year staggered terms of the directors and to provide for a new procedure to fill vacancies on the Board of Directors. The holders of 21,618,768 shares voted in favor of, the holders of 241,244 shares voted against, the holders of 104,923 shares abstained and there were 335,076 broker non-votes with respect to approval of such proposal. At the Annual Meeting, the stockholders voted in favor of a proposal to approve an amendment to Article III, Section 2, of the By-Laws of the Company in order to reduce the size of the Board of Directors to eight, with an automatic adjustment to nine upon appointment of an additional director. The holders of 21,640,228 shares voted in favor of, the holders of 335,611 shares voted against, the holders of 104,483 shares abstained and there were 219,689 broker non-votes with respect to approval of such proposal. At the Annual Meeting, the stockholders voted in favor of management's nominees for election as directors of the Company. The holders of 21,982,887 shares voted in favor of, and holders of 317,124 shares withheld their vote for, the election of Robert W. Affholder; the holders of 22,000,949 shares voted in favor of, and holders of 299,062 shares withheld their vote for, the election of Paul A. Biddelman; the holders of 22,001,099 shares voted in favor of, and holders of 298,912 shares withheld their vote for, the election of Stephen P. Cortinovis; the holders of 21,996,324 shares voted in favor of, and holders of 303,687 shares withheld their vote for, the election of Anthony W. Hooper; the holders of 21,993,723 shares voted in favor of, and holders of 306,288 shares withheld their vote for, the election of Jerome Kalishman; the holders of 21,999,245 shares voted in favor of, and holders of 300,766 shares withheld their vote for, the election of Silas Spengler; the holders of 22,002,095 shares voted in favor of, and holders of 297,916 shares withheld their vote for, the election of Russell B. Wight, Jr.; and the holders of 22,001,749 shares voted in favor of, and holders of 298,262 shares withheld their vote for, the election of Sheldon Weinig. (d) The terms of the Company's settlement agreement dated July 25, 1997 with the Dissident Group (as defined therein) and the additional incumbents on its Board of Directors are contained under the caption "IV. Settlement Agreement" contained in the 1997 Proxy Statement, the pertinent information of which is incorporated herein by reference. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) The Company's class A common stock, $.01 par value ("Common Stock"), is traded in the over-the-counter market under the symbol "INSUA." The following table sets forth the range of quarterly high and low sales prices commencing after December 31, 1995, as reported on The Nasdaq Stock Market. Quotations represent prices between dealers and do not include retail mark-ups, mark-downs or commissions.
Period High Low ------ ---- --- 1997 First Quarter $ 7.88 $5.50 Second Quarter 6.75 5.38 Third Quarter 9.25 5.88 Fourth Quarter 10.19 7.38 Period High Low ------ ---- --- 1996 First Quarter $12.00 $9.38 Second Quarter 13.38 7.63 Third Quarter 8.00 6.13 Fourth Quarter 8.38 6.38
As of March 15, 1998, the number of record holders of the Company's Common Stock was 1,703. Holders of Common Stock are entitled to receive dividends as and when they may be declared by the Company's Board of Directors. The Company has never paid a cash dividend on the Common Stock. The Company's present policy is to retain earnings to provide for the operation and expansion of its business. However, the Company's Board of Directors will review the Company's dividend policy from time to time and will consider the Company's earnings, financial condition, cash flows, financing agreements and other relevant factors in making determinations regarding future dividends, if any. Under the terms of certain debt arrangements to which the Company is a party, the Company is subject to certain limitations in paying dividends. See Note 8 of the Notes to the Company's Consolidated Financial Statements included in response to "Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity," which information is incorporated herein by reference. (b) Not applicable. ITEM 6. SELECTED FINANCIAL DATA The selected financial data set forth below have been derived from the Company's consolidated financial statements referred to under "Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K" of this Annual Report on Form 10-K, and previously published historical financial statements not included in this Annual Report on Form 10-K. In October 1995, the Company consummated the IMA Merger, which the Company has accounted for as a pooling-of-interests and, accordingly, the historical financial statements of the combining companies have been retroactively combined (after adjustments to eliminate intercompany balances and transactions, and to conform reporting periods and accounting methods) as if the companies had operated as a single entity for the periods presented. Certain historical financial data of IMA have been reclassified to conform to the Company's accounting policies. The selected financial data set forth below should be read in connection with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements, including the notes thereto, referred to herein.
Unaudited Year Ended December 31, ----------------------------------------------------- 1997 1996 1995(1) 1994(2) 1993(3) ---- ------- ------- ------- ------- (in thousands, except per share amounts) INCOME STATEMENT DATA: Revenues.................. $320,640 $289,933 $ 272,203 $ 223,171 $151,622 Operating income.......... 25,030 14,346 11,750(4) 29,232 15,107 Income (loss) from continuing operations.... 9,644 4,492 (966)(5) 15,667 9,734 Net income (loss)......... 9,419 4,492 (966) 14,503 7,487 Basic and diluted earnings (loss) per share: Income (loss) from continuing operations... .36 .17 (.04) .57 .36 Net income (loss)......... .35 .17 (.04) .53(6) .28(6) BALANCE SHEET DATA: Working capital........... 114,283 78,876 69,538 46,403 40,724 Current assets............ 161,273 130,372 120,711 106,926 81,102 Property and equipment.... 57,983 57,266 59,773 51,471 40,407 Total assets.............. 297,852 265,502 260,300 227,627 177,010 Long-term debt............ 111,440 82,384 82,813 47,347 36,297 Redeemable preferred stock.................... -- -- -- -- 157 Total liabilities......... 162,705 136,664 137,845 110,310 77,108 Total common stock and other stockholders' equity.................. 131,502 123,203 116,810 114,880 100,106 ___________________ (1) In 1995, the Company consummated the acquisition of the pipeline rehabilitation business of Enviroq Corporation, which has been accounted for under the purchase method of accounting. (2) In 1994 the Company consummated the acquisition of Gelco Services, Inc. and affiliates, which has been accounted for under the purchase method of accounting. (3) In 1993 the Company consummated the acquisitions of Naylor Industries, Inc. and Insituform Midwest, Inc., which have been accounted for under the purchase method of accounting. (4) Reflects $6.5 million in costs associated with the IMA Merger, which have been charged to operations primarily in the fourth quarter of 1995, and a pre-tax charge in the amount of $8.1 million for restructuring costs, primarily for consolidation of corrosion and abrasion protection operations, rationalization of Canadian operations to one facility, elimination of duplicative management positions, relocation of certain domestic employees and functions, and termination of construction of proposed manufacturing capacity. (5) In 1995 the Company settled certain outstanding litigation for a cash payment of $3.2 million and issuance of 30,000 shares of its Common Stock, resulting in an after-tax charge against earnings of approximately $2.2 million. (6) In December 1993 the Company determined to discontinue the operations of its division engaged in the offsite rehabilitation of downhole tubulars for the oil and gas industry. As a result, the Company recorded a fourth quarter 1993 charge to write down the division's assets to their estimated net realizable values and to accrue for operating losses during the anticipated phase-out period. The statement of operations and balance sheets have been restated to reflect continuing operations. The Company also recorded a fourth quarter 1994 charge resulting from the abandonment of efforts to find a purchaser for, and shut down of, such division.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's rehabilitation revenues derive primarily from direct installation and other contracting activities, generated by the Company's subsidiaries operating in the United States, Canada, France, the United Kingdom, Chile, Argentina and Mexico, and include product sales to, and royalties and license fees paid by, the Company's 35 unaffiliated Insituform licensees and sub- licensees and its seven unaffiliated NuPipe licensees. During the three years ended December 31, 1997, 1996 and 1995, approximately 62.5%, 69.7% and 71.2%, respectively, of the Company's consolidated revenues related to the Insituform Process. The Company was incorporated in Delaware in 1980 in order to act as the exclusive licensee of the Insituform Process in most of the United States. In October 1995, the Company consummated the IMA Merger, which has been accounted for as a pooling-of- interests. Under the pooling-of-interests method of accounting, the historical financial statements of the combining companies are retroactively combined (after adjustments to eliminate intercompany balances and transactions, and to conform accounting methods) as if the companies had operated as a single entity. The Company's acquisition in April 1995 of the pipeline rehabilitation business of Enviroq Corporation (the "Enviroq Acquisition"), and its November 1995 acquisition of the FormaPipe division of Waterflow Services Limited, have been accounted for under the purchase method of accounting, so that the results of the acquired companies are included in the Company's historical results of operations from the consummation of such transactions, respectively. Fluctuations in the exchange rates between the United States dollar and the currencies of other countries in which the Company operates or has licensees may have an impact on the Company's consolidated results during the relevant reporting period. The Company intends to manage any such foreign currency exposure in the context of discrete commercial transactions and, when appropriate, to offset such exposure in whole or in part by entering into foreign currency forward contracts, in order to reduce the impact of such fluctuations on results of operations. The Company does not anticipate that the circumstances in which such hedging activity would be appropriate will have a material effect on the Company's liquidity. RESULTS OF OPERATIONS Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Total rehabilitation revenues increased 10.6% to $320.6 million from $289.9 million in 1996. The primary reason for the increase was increased volume from the Company's corrosion and abrasion operations in the United States and Latin America. This increase was offset slightly by lower volume from the Company's North American and European pipeline rehabilitation operations, primarily due to the elimination of non-core projects, such as cleaning and inspection. In addition, since April 1997, the Company has accounted for its investment in Midsouth Partners on an equity basis as a result of the composition of its management committee; prior to such date, the Company recorded $1.8 million of revenue in 1997, compared to $7.0 million in 1996. Fluctuations in currency exchange rates did not have a material impact on revenues in 1997. The Company's gross profit from rehabilitation activities increased 6.5% to $94.5 million from $88.7 million in 1996. This increase was primarily due to increased revenue, offset slightly by lower margins. The overall gross margin achieved in 1997 was 29.5% versus 30.6% in 1996. This decrease was primarily due to increased volume from the Company's corrosion and abrasion operations, which traditionally carry lower margins than the Company's pipeline rehabilitation operations. Selling administrative and general expenses decreased 4.0% to $57.8 million from $60.2 million in 1996. This decrease was due to cost savings gained from the reorganization of the Company's pipeline rehabilitation operations through elimination of positions, facilities, and realignment of responsibilities, along with the consolidation of the Company's headquarters in Chesterfield. This was offset slightly by increased overhead costs related to the buildup of personnel for the Company's corrosion and abrasion operations in Latin America. As a percentage of revenues, selling, administrative and general expenses decreased to 18.0% from 20.8% in 1996. This decrease was primarily attributable to economies of scale resulting from increased volume, along with the decrease in costs as a result of reorganization. Strategic marketing and product development costs decreased 10.0% to $7.0 million from $7.7 million in 1996. This decrease was primarily attributable to controlled spending in advertising and research projects, along with decreased personnel in industrial marketing. During 1997, the Company charged to earnings $4.6 million in unusual expenses related to further reorganization of the Company's pipeline rehabilitation operations and the Company's headquarters. The expenses primarily consist of severance, moving costs of employees and office equipment, and costs related to exiting facilities and markets. In 1996, the unusual expenses of $6.5 million relate to the Company's rationalization of rehabilitation operations, as described below. Interest expense increased 40.3% to $8.7 million from $6.2 million in 1996, due primarily to increased debt principal of approximately $23 million from the senior notes financing completed in February 1997. See "Liquidity and Capital Resources" below. Taxes on income increased 42.0% to $7.1 million from $5.0 million 1996 due primarily to an increase in income before taxes on income of $7.5 million from 1996, offset by a decrease in the effective tax rate to 41.7% from 53.0% in 1996. As indicated in Note 16 of the Notes to Consolidated Financial Statements included in response to "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K", the 1997 and 1996 effective tax rates were higher than the United States federal statutory rate, primarily due to non-deductibility of goodwill amortization associated with acquisitions, which is generally not deductible for tax purposes, and the effect of foreign income earned taxed at higher rates. In February 1997, as a result of the closing of the Company's senior note financing, certain previous debt facilities were retired. Costs of $0.4 million ($0.2 million after-tax benefits) associated with these debt facilities which were capitalized, such as commitment fees and legal costs, were written off. This expense has been classified as an extraordinary item in the Company's results of operations for 1997. As a result of the foregoing, net income for 1997 was $9.4 million, an increase of $4.9 million from net income in 1996. Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 Rehabilitation revenues increased 6.5% to $289.9 million from $272.2 million in the prior year, primarily as a result of the April 1995 Enviroq Acquisition (and the consequent consolidation of Midsouth Partners), in addition to revenue increases in United Kingdom operations which primarily reflect the acquisition of the FormaPipe business in November 1995. Fluctuations in currency exchange rates of the Japanese yen, British pound sterling, French franc and Canadian dollar to the United States dollar negatively impacted revenues by approximately $1.2 million in 1996. In 1996, gross profit from rehabilitation activities decreased 1.3% to $88.7 million from $89.9 million in 1995, primarily due to lower margins achieved by newly-acquired subsidiaries. In addition, there was an increase in 1996 in worldwide volume of the Company's corrosion and abrasion operations, which carry lower margins than those of the Company's pipeline rehabilitation operations. In 1996, selling, administrative and general expenses increased 7.5% to $60.2 million, compared to $56.0 million in 1995. This increase is due, in large part, to the incremental costs of operations for recently acquired entities of $1.0 million (of which $0.3 million related to incremental goodwill and non- compete amortization). Other increases were attributable to added personnel costs in the Company's pipeline rehabilitation operations, principally in the areas of industrial sales, and operations and project management. Strategic marketing and product development costs did not materially change between 1995 and 1996. In 1996, the Company recognized $6.5 million in unusual items in connection with the Company's rationalization of its contracting operations. These consisted primarily of: (i) the write-off of certain assets associated with the use of the Company's Paltem product line in the gas distribution main installation market (approximately $3.6 million), (ii) charges related to the disposition of excess facilities (approximately $1.4 million), and (iii) costs related to reorganization of North American contracting operations (approximately $1.5 million). In 1995, the Company recognized merger and restructuring costs of approximately $14.5 million in connection with the IMA Merger, completed in October 1995. These included transaction costs related to the merger of $6.5 million, which were primarily attributable to investment banking fees, legal and accounting fees, filing fees, and management travel costs and a charge for approximately $8.1 million relating to restructuring costs. In 1996, other income increased to $1.3 million from a $1.7 million expense in 1995, primarily due to a 1995 charge to earnings of $3.6 million during the second quarter as a result of the settlement of a pending shareholder class action lawsuit which entailed a cash payment to class members in the amount of $3.2 million and the issuance of 30,000 shares of Common Stock. In 1996, interest expense decreased 3.1% to $6.2 million from $6.4 million in 1995, due primarily to reduced principal of the Company's indebtedness and lower interest rates in 1996. Taxes on income increased to $5.0 million from $4.0 million in 1995 as a result of an increase of $5.8 million in income before taxes on income, offset by a decrease in the effective tax rate to 53.0% from 109.8% in 1995. As indicated in Note 16 of the Notes to Consolidated Financial Statements included in response to "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K," the 1996 and 1995 effective tax rates were higher than the United States federal statutory rate, primarily due to the non-deductibility of goodwill amortization associated with the recent acquisitions, which is generally not deductible for tax purposes. The 1995 effective rate was also affected by certain merger costs which were capitalized for tax purposes. As a result of the foregoing, net income for 1996 was $4.5 million, an increase of $5.5 million from net income in 1995. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, the Company had $45.7 million in cash, U.S. Treasury bills, and short-term investments, as compared to $13.5 million at December 31, 1996. Cash and cash equivalents increased by the amount of $32.2 million, primarily as a result of the Company's completion in February 1997 (the "Senior Note Closing") of the sale, in a private placement transaction, of $110 million principal amount of its 7.88% Senior Notes, Series A, due February 14, 2007 (the "Senior Notes"), approximately $85 million of which was applied at closing to the refinancing of outstanding indebtedness of the Company and the remainder of which was applied to short-term investments. The Company's working capital ratio was 3.4-to-1.0 at December 31, 1997 representing an increase from 2.5- to-1.0 from December 31, 1996. Operations provided cash of $27.2 million in 1997, as compared to $28.2 million in 1996. The decline was primarily due to slightly unfavorable changes in operating assets and liabilities. Trade receivables, together with costs and estimated earnings in excess of billings and retainage under construction contracts, increased 4.8% to $88.7 million from $84.6 million in 1996, primarily attributable to an increase in revenue volume during 1997. The collection cycle for construction receivables is generally longer than for the Company's manufacturing and royalty operations due to provisions for retainage, often 5% to 15% of the contract amount, as well as the slow internal review processes often employed by the construction subsidiaries' municipal customers. In the United States retainage receivables are generally received within 60 to 90 days after the completion of a contract. Capital expenditures were $16.6 million in 1997, compared to $18.2 million in 1996. Capital expenditures generally reflect replacement equipment required by the Company's contracting subsidiaries. During the second quarter of 1997, the Company commenced combination of its corporate headquarters, engineering and development center, and North American contracting headquarters in new facilities located in Chesterfield. The cost of moving employees and offices was estimated at $3.5 million, including severance of approximately $1.0 million. In the second quarter the Company incurred approximately $0.8 million and accrued an additional $2.5 million; in the third and fourth quarters $2.3 million was spent and applied to the accrual. The remaining accrual will be applied to costs to be incurred over the remaining phases of combination of facilities and employees. In addition, during 1997 the Company commenced the construction of its new research and development facility. The total cost of such facility is estimated at $3.5 million, of which $2.9 has been incurred through December 31, 1997. The Company has several information system improvement initiatives underway that will require increased expenditures during the next several years. These initiatives, which began principally in 1997, include an improved data collection system from our field contracting units, and continual accounting system upgrades and modifications. The Company has assessed and continues to assess the impact of the year 2000 issues on its operations. Management believes that all system modifications necessary will be completed well before the year 2000, and spending on modifications will not have a significant impact on the Company's operations. Financing activities provided $23.4 million in cash in 1997, as compared to cash used of $6.1 million in 1996. This difference is primarily related to cash generated from the Senior Notes of approximately $25 million in February 1997, as compared to 1996, in which the Company made net principal payments totalling $1.2 million relating to the Company's prior existing credit facility with SunTrust Bank, Nashville, N.A. ("SunTrust") and repayment of other subsidiary debt of $4.7 million. At December 31, 1996, $76.3 million was outstanding under the Company's credit agreement (the "SunTrust Credit Agreement") with SunTrust, as agent, and a group of participating lenders (the "Lenders"), which provided for advances by the Lenders on a revolving basis aggregating up to $105 million (including a $5 million standby letter of credit facility). Interest on indebtedness under the SunTrust Credit Agreement was payable at a rate per annum selected by the Company as either SunTrust's prime rate plus a margin of up to .25% in the event certain financial ratios were not maintained, or an adjusted LIBOR rate, plus a margin ranging from 1.00% to 1.75%, depending on the maintenance of certain financial ratios. At the Senior Note Closing, all outstanding indebtedness to the Lenders under the Credit Agreement ($76.2 million), and outstanding indebtedness owed to SunTrust under an industrial revenue bond encumbering the Company's Batesville facility ($3.3 million), was prepaid. At the Senior Note Closing, the Company also prepaid recorded amounts outstanding under the Company's senior subordinated note acquired by Hanseatic Corporation in July 1993, which required quarterly payments of interest at 8.5% per annum. Warrants with respect to 350,877 shares of Common Stock issued in connection with such note remain exercisable, at the election of the holder, through July 25, 1998, at a price per share of Common Stock of $14.25, and such shares are entitled to demand and incidental registration rights. The Senior Notes issued by the Company in February 1997 mature on February 14, 2007, and bear interest, payable semi- annually in August and February of each year, at the rate per annum of 7.88%. Each year, from February 2001 to February 2006, inclusive, the Company will be required to make principal payments of $15.7 million, together with an equivalent payment at maturity. The Senior Notes may be prepaid at the Company's option, in whole or in part, at any time, together with a make whole premium, and upon specified change in control events each holder has the right to require the Company to purchase its Senior Note without any premium thereon. The note purchase agreements pursuant to which the Senior Notes were acquired obligate the Company to comply with certain financial ratios and restrictive covenants that, among other things, place limitations on operations and sales of assets by the Company or its subsidiaries, and limit the ability of the Company to incur further secured indebtedness and liens and of subsidiaries to incur indebtedness, and, in the event of default under the Senior Notes, limit the ability of the Company to pay cash dividends or make other distributions to the holders of its capital stock or to redeem such stock. Such agreements also obligate the Company's subsidiaries to provide guarantees to holders of the Senior Notes if guaranties are delivered by them to specified other lenders. To the extent not utilized to refinance indebtedness of the Company at the Senior Note Closing, proceeds of the sale of the Senior Notes are available for general corporate purposes, including possible acquisitions of products, technologies and businesses and repurchases of Common Stock. The Company has not reached any determination with respect to any such transaction, and there can be no assurance that any such transaction will be undertaken. Effective August 20, 1997, the Company entered into a Loan Agreement dated such date (the "NationsBank Credit Agreement") with NationsBank, N.A. ("NationsBank"), whereby NationsBank will make available to the Company, until September 1, 2000 (the "Maturity Date"), a revolving credit line of up to $20,000,000 aggregate principal amount for working capital and permitted acquisitions, including $5,000,000 available for standby and commercial letters of credit. Interest on outstanding advances accrues, at the election of the Company, at either the lender's prime rate, payable monthly, or its LIBOR rate, plus a margin ranging from .5% to 1.5% depending on the maintenance of certain financial ratios, payable at the end of selected interest periods (from one to six months). Outstanding principal is subject to repayment on the Maturity Date, except that advances for permitted acquisitions must be repaid within six months after disbursement. The NationsBank Credit Agreement obligates the Company to comply with certain financial ratios and restrictive covenants that, among other things, prohibit dividends and stock repurchases in the event of loan defaults, place limitations on operations and sales of assets by the Company and its subsidiaries and limit the ability of the Company and its subsidiaries to incur further secured indebtedness and liens and of subsidiaries to incur additional indebtedness. The NationsBank Credit Agreement also obligates certain of the Company's domestic subsidiaries to guaranty the Company's obligations, as a result of which the same subsidiaries have also delivered their guaranty with respect to the Senior Notes. In October 1997, the Company completed payment of certain secured notes issued in connection with the acquisition in October 1994 of all of the outstanding stock of Gelco and affiliates, aggregating $1.4 million, representing net current liabilities of the acquired companies to related parties and a portion of working capital at closing. In March 1998, the Company completed the acquisition of the entire minority interest in United Chile for an aggregate purchase price of approximately $2.1 million, $1 million of which was paid in connection with closing, $.6 million of which is due at the first anniversary of closing, and the remainder of which is due on the second anniversary of closing. Management believes its current working capital will be adequate to meet its requirements for the foreseeable future. RECENTLY ISSUED ACCOUNTING STANDARDS In the first quarter of 1997, the Financial Accounting Standards Board (the "Board") issued Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), effective for financial statements for both interim and annual periods ending after December 15, 1997. The new standard replaces the provisions prescribed by the Accounting Principles Board Opinion 15, simplifying earnings per share calculations and requiring further disclosures. In addition, the Board also issued Statement of Financial Accounting Standards No. 129, Disclosure of Information about Capital Structure ("SFAS 129"), effective for financial statements for periods ending after December 15, 1997. SFAS 129 continues the existing requirements to disclose pertinent rights and privileges of all securities other than ordinary common stock, but expands the number of companies subject to the requirements. The provisions of SFAS 128 and SFAS 129, and its adoption thereof, did not have a material effect on the Company's financial statements. In 1998, the Company will adopt the provisions of SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information." The Company does not believe the adoption of these standards will have a material effect on the Company's financial statement. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA For information concerning this item, see "Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K," which information is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. The Company has filed a Current Report on Form 8-K dated July 17, 1996 reporting, under "Item 4. Changes in Registrant's Certifying Accountant" thereunder, the engagement of Arthur Andersen LLP as the Company's independent accountant in substitution for BDO Seidman, LLP. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT For information concerning this item, see "Item 1. Business-Executive Officers" and the Proxy Statement to be filed with respect to the 1998 Annual Meeting of Stockholders (the "1998 Proxy Statement"), which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION For information concerning this item, see the 1998 Proxy Statement, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT For information concerning this item, see the 1998 Proxy Statement, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For information concerning this item, see the 1998 Proxy Statement, which information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements: The consolidated financial statements filed in this Annual Report on Form 10-K are listed in the attached Index to Consolidated Financial Statements and Schedules. 2. Financial Statement Schedules: No Financial Statement Schedules are included herein because they are not required or are not applicable or the required information is contained in the consolidated financial statements or notes thereto. 3. Exhibits: The exhibits required to be filed as part of this Annual Report on Form 10-K are listed in the attached Index to Exhibits. (b) Current Reports on Form 8-K: During the quarter ended December 31, 1997, the Company did not file a Current Report on Form 8-K. POWER OF ATTORNEY The registrant and each person whose signature appears below hereby appoint Anthony W. Hooper, William A. Martin, and Robert L. Kelley as attorneys-in-fact with full power of substitution, severally, to execute in the name and on behalf of the registrant and each such person, individually and in each capacity stated below, one or more amendments to the annual report which amendments may make such changes in the report as the attorney-in-fact acting deems appropriate and to file any such amendment to the report with the Securities and Exchange Commission. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 30, 1998 INSITUFORM TECHNOLOGIES, INC. By s/Anthony W. Hooper -------------------------------- Anthony W. Hooper President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date s/Anthony W. Hooper - ----------------------- Anthony W. Hooper Principal Executive March 30, 1998 Officer and Director s/William A. Martin - ----------------------- William A. Martin Principal Financial March 30, 1998 and Accounting Officer s/Robert W. Affholder - ----------------------- Robert W. Affholder Director March 30, 1998 s/Paul A. Biddelman - ----------------------- Paul A. Biddelman Director March 30, 1998 s/Stephen P. Cortinovis - ----------------------- Stephen P. Cortinovis Director March 30, 1998 s/Jerome Kalishman - ----------------------- Jerome Kalishman Director March 30, 1998 s/Silas Spengler - ----------------------- Silas Spengler Director March 30, 1998 s/Sheldon Weinig - ----------------------- Sheldon Weinig Director March 30, 1998 s/Russell B. Wight, Jr. - ----------------------- Russell B. Wight, Jr. Director March 30, 1998 s/Alfred L. Woods - ----------------------- Alfred L. Woods Director March 30, 1998 INDEX TO FINANCIAL STATEMENTS Reports of Independent Certified Public Accountants........................................ F-2 Consolidated Balance Sheets, December 31, 1997 and 1996.................................... F-4 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1997............................ F-6 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1997................. F-7 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1997..................... F-8 Notes to Consolidated Financial Statements........... F-10 No Financial Statement Schedules are included herein because they are not required or not applicable or the required information is contained in the consolidated financial statements or notes thereto. F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Insituform Technologies, Inc.: We have audited the accompanying consolidated balance sheets of Insituform Technologies, Inc. and subsidiaries (a Delaware corporation) as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Insituform Technologies, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP St. Louis, Missouri, March 4, 1998 F-2 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Insituform Technologies, Inc.: We have audited the accompanying consolidated statements of operations, stockholders' equity, and cash flows of Insituform Technologies, Inc. and subsidiaries for the year ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Insituform Technologies, Inc. and subsidiaries for the year ended December 31, 1995, in conformity with generally accepted accounting principles. BDO SEIDMAN, LLP Memphis, Tennessee March 8, 1996, except for Note 13 which is as of March 26, 1997 F-3 INSITUFORM TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS--AS OF DECEMBER 31, 1997 AND 1996 (in thousands, except share information)
ASSETS 1997 1996 ------ -------- -------- CURRENT ASSETS: Cash and cash equivalents, restricted $-0- and $573, respectively $ 45,734 $ 13,476 Trade receivables, less allowance for doubtful accounts of $2,587 and $1,031 58,660 52,030 Costs and estimated earnings in excess of billings 15,551 20,127 Retainage under construction contracts 14,480 12,456 Refundable income taxes 2,517 4,141 Inventories 12,214 15,781 Deferred income taxes 5,439 4,651 Prepaid expenses and other 6,678 7,710 -------- -------- Total current assets 161,273 130,372 -------- -------- PROPERTY AND EQUIPMENT, less accumulated depreciation 57,983 57,266 -------- -------- OTHER ASSETS: Goodwill, less accumulated amortization of $12,483 and $9,837, respectively 54,133 56,943 Patents and patent applications, less accumulated amortization of $4,496 and $3,889, respectively 11,610 10,049 Investments in licensees and affiliated companies 5,499 3,137 Noncompete agreements, less accumulated amortization of $4,282 and $3,327, respectively 1,744 2,699 Other 5,610 5,036 -------- -------- Total other assets 78,596 77,864 -------- -------- Total assets $297,852 $265,502 ======== ======== (Continued on the following page) F-4
(in thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 ------------------------------------ -------- -------- CURRENT LIABILITIES: Notes payable to banks $ 1,231 $ 1,387 Accounts payable and accruals 41,698 40,578 Income taxes payable 3,172 2,801 Current maturities of long-term debt 889 6,730 -------- -------- Total current liabilities 46,990 51,496 LONG-TERM DEBT, less current maturities 111,440 82,384 DEFERRED INCOME TAXES 3,258 1,700 OTHER LIABILITIES 1,017 1,084 -------- -------- Total liabilities 162,705 136,664 -------- -------- MINORITY INTERESTS 3,645 5,635 -------- -------- COMMITMENTS AND CONTINGENCIES (Note 17) STOCKHOLDERS' EQUITY: Preferred stock, undesignated, $.10 par- shares authorized 2,000,000; none out- standing - - Common stock, $.01 par- shares authorized 40,000,000; shares outstanding 27,214,718 and 27,144,331 272 271 Additional paid-in capital 68,119 67,824 Retained earnings 68,468 59,049 -------- -------- 136,859 127,144 Treasury stock - 255,801 shares (3,269) (3,269) Cumulative foreign currency translation adjustments (2,088) (672) -------- -------- Total stockholders' equity 131,502 123,203 -------- -------- Total liabilities and stockholders' equity $297,852 $265,502 ======== ======== The accompanying notes are an integral part of these balance sheets F-5
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ------- ------- ------- (In thousands, except per share amounts) REHABILITATION REVENUES $ 320,640 $ 289,933$ 272,203 --------- ------------------ OPERATING COSTS AND EXPENSES: Cost of rehabilitation 226,152 201,219 182,286 Selling, administrative and general 57,845 60,181 55,990 Strategic marketing and product development 7,007 7,689 7,636 Unusual items 4,606 6,498 14,541 --------- ------------------ TOTAL OPERATING COSTS AND EXPENSES 295,610 275,587 260,453 --------- ------------------ OPERATING INCOME 25,030 14,346 11,750 --------- ------------------ OTHER INCOME (EXPENSE): Interest expense (8,750) (6,223) (6,393) Other 647 1,290 (1,727) --------- ------------------ TOTAL OTHER INCOME (EXPENSE) (8,103) (4,933) (8,120) --------- ------------------ INCOME BEFORE TAXES ON INCOME 16,927 9,413 3,630 TAXES ON INCOME 7,067 4,985 3,987 --------- ------------------ INCOME (LOSS) BEFORE MINORITY INTERESTS AND EQUITY IN EARNINGS 9,860 4,428 (357) MINORITY INTERESTS (519) (377) (1,275) EQUITY IN EARNINGS OF AFFILIATED COMPANIES 303 441 666 --------- ------------------ INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 9,644 4,492 (966) EXTRAORDINARY ITEM- Loss on early retirement of debt (net of income tax benefits) (225) - - --------- ------------------ NET INCOME (LOSS) $ 9,419 $ 4,492$ (966) ========= ================== BASIC AND DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK AND COMMON STOCK EQUIVALENTS: Income (loss) before extraordinary item$ .36$ .17$ (.04) Extraordinary loss, net of income tax benefits (.01) - - --------- ------------------ Net income (loss) $ .35 $ .17$ (.04) ========= ================== F-6
INSITUFORM TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Cumulative Foreign Common Stock Additional Currency ----------------- Paid-In Retained Treasury Translation Shares Amount Capital Earnings Stock Adjustments -------- -------- ----------- -------- -------- ----------- (In thousands, except number of shares) BALANCE, December 31, 1994 26,711,031 $267 $63,270 $56,262 $ - $(1,733) Net Loss for the year - - - (966) - - Issuance of common stock upon exercise of options, including income tax benefit of $530 393,909 4 4,157 - - - Dividends declared - - - (739) - - Other - - - - - (88) ---------- ---- ------- ------- -------- ------- BALANCE, December 31, 1995 27,104,940 271 67,427 54,557 - (1,821) Net income for the year - - - 4,492 - - Issuance of common stock upon exercise of options, including income tax benefit of $15 9,391 - 76 - - - Stock issued in con- junction with liti- gation settlement 30,000 - 321 - - - Foreclosure of note receivable from affiliates - - - - (3,269) - Other - - - - - 1,149 ---------- ---- ------- ------- -------- ------- BALANCE, December 31, 1996 27,144,331 271 67,824 59,049 (3,269) (672) Net income for the year - - - 9,419 - - Issuance of common stock upon exercise of options 70,387 1 295 - - - Other - - - - - (1,416) ---------- ---- ------- ------- -------- ------- BALANCE, December 31, 1997 27,214,718 $272 $68,119 $68,468 $(3,269) $(2,088) ========== ==== ======= ======= ======== ======= (Continued on the following page) F-7 /TABLE
Unrealized Notes Holding Receivable Total Gains on From Stockholders' Investments Affiliates Equity ----------- ---------- ------------- (In thousands, except number of shares) BALANCE, December 31, 1994 $ 438 $(3,624) $114,880 Net Loss for the year - - (966) Issuance of common stock upon exercise of options, including income tax benefit of $530 - - 4,161 Dividends declared - - (739) Other (438) - (526) ----- ------- -------- BALANCE, December 31, 1995 - (3,624) 116,810 Net income for the year - - 4,492 Issuance of common stock upon exercise of options, including income tax benefit of $15 - - 76 Stock issued in con- junction with liti- gation settlement - - 321 Foreclosure of note receivable from affiliates - 3,624 355 Other - - 1,149 ----- ------- -------- BALANCE, December 31, 1996 - - 123,203 Net income for the year - - 9,419 Issuance of common stock upon exercise of options - - 296 Other - - (1,416) ----- ------- -------- BALANCE, December 31, 1996 $ 0 $ 0 $131,502 ===== ======= ======== The accompanying notes are an integral part of these statements
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ------- ------- ------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 9,419 $ 4,492 $ (966) Adjustments to reconcile net income (loss) to net cash provided by operating activities- Minority interests in net income 519 377 1,275 Provision for unusual items (891) 2,381 4,123 Depreciation and amortization 19,240 19,180 16,799 Other 1,095 1,909 424 Deferred income taxes 728 (279) (1,246) Equity in earnings of affiliated companies (303) (441) (666) Changes in operating assets and liabilities, net of effects of businesses purchased- Receivables (5,805) (8,217) (972) Inventories 2,766 (15) (4,106) Prepaid expenses and other 1,032 2,510 (4,084) Other assets (526) 609 123 Accounts payable and accruals (2,097) 5,571 (3,795) Income taxes 1,995 78 (5,268) -------- -------- -------- Net cash provided by operating activities 27,172 28,155 1,641 -------- -------- -------- Net cash used by discontinued operations - - (500) -------- -------- -------- Net cash provided by operations 27,172 28,155 1,141 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (16,552) (18,187) (16,497) Proceeds from (investments in) licensees and affiliated companies 140 (1,141) 445 Patents and patent application expenditures (2,227) (1,772) (1,445) Purchases of businesses, net of cash acquired - - (18,885) Proceeds on disposal of property and equipment 426 780 2,506 Other - - (790) -------- -------- -------- Net cash used in investing activities (18,213) (20,320) (34,666) (Continued on the following page) F-8
1997 1996 1995 ------- ------- ------- (In thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock $ 296 $ 61 $ 3,631 Proceeds from long-term debt 110,515 5,868 40,812 Principal payments on long-term debt (87,105) (11,775) (9,439) Minority interests (178) (562) (155) Increase (decrease) in short-term borrowings (124) 333 (7,293) Dividends paid - - (1,476) -------- -------- -------- Net cash provided (used) by financing activities 23,404 (6,075) 26,080 -------- -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (105) 300 191 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE YEAR 32,258 2,060 (7,254) CASH AND CASH EQUIVALENTS, beginning of year 13,476 11,416 18,670 -------- -------- -------- CASH AND CASH EQUIVALENTS, end of year $ 45,734 $ 13,476 $ 11,416 ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for- Interest (net of amount capitalized) $ 5,849 $ 7,478 $ 6,165 Income taxes 1,686 4,864 8,265 NONCASH INVESTING AND FINANCING ACTIVITIES: Deferred consideration for intangible assets acquired $ - $ - $ 1,000 Additional paid-in capital increased by reduction in income taxes payable for tax benefit arising from exercise of stock options - 15 530 Deferred consideration for businesses acquired - - 3,000 Treasury stock acquired in connection with foreclosure of director note receivable - 3,624 - Tax benefit arising from foreclosure of director note receivable - 760 - The accompanying notes are an integral part of these statements. F-9 /TABLE INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 1. DESCRIPTION OF BUSINESS: Insituform Technologies, Inc. (a Delaware corporation) and subsidiaries (collectively, the "Company" or "ITI") is a worldwide provider of proprietary trenchless technologies for the rehabilitation and improvement of sewer, water, gas and industrial pipes. The Company's primary technology is the Insituform(R) Process, a "cured-in-place" pipeline rehabilitation process. The Company's Tite Liner(R) Process is a method of lining steel lines with a corrosion and abrasion resistant pipe. Through its Affholder, Inc. subsidiary, the Company is engaged in trenchless tunneling used in the installation of new underground services. 2. SUMMARY OF ACCOUNTING POLICIES: Principles of Consolidation The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries, including a 51% owned United Kingdom subsidiary, Insituform Linings, Plc., a 60% owned Chilean subsidiary, United Sistema de Tuberias, Ltda., a 55% owned Mexican subsidiary, United Pipeline de Mexico, S.A. and a 66% owned French subsidiary, Insituform France, S.A. All intercompany balances, transactions and stockholdings are eliminated. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Business Acquisitions The accounts and operations of business acquired in exchange for common stock, and which were accounted for as poolings of interests, are included in the financial statements as if they had always been subsidiaries. The net assets of businesses acquired and accounted for using the purchase method of accounting are recorded at their fair values at the acquisition dates, and the financial statements include their operations only from those dates. Any excess of acquisition costs F-10 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 over the fair value of net assets acquired is included in the balance sheet as goodwill. Taxes on Income The Company provides for estimated income taxes payable or refundable on current year income tax returns as well as the estimated future tax effects attributable to temporary differences and carryforwards, based upon enacted tax laws and tax rates. U.S. and foreign income taxes are not provided on undistributed earnings of foreign subsidiaries where it is the Company's intention to indefinitely reinvest such earnings in the subsidiary's operations and not to transfer them in a taxable transaction. Foreign Currency Translation Results of operations for foreign entities are translated using the average exchange rates during the period. Assets and liabilities are translated to U.S. dollars using the exchange rates in effect at the balance sheet date, and the related translation adjustments are reported as a separate component of stockholders' equity. Cash and Cash Equivalents The Company classifies highly liquid investments with original maturities of 90 days or less as cash equivalents. Fair Value of Financial Instruments Recorded book values are reasonable estimates of fair value for cash and cash equivalents, receivables and accounts payable. Current market values for debt instruments with fixed interest rates are estimated based upon borrowing rates currently available to the Company for loans with similar terms. Investments Corporate investments are carried at cost if ownership is less than 20% and on the equity method if the Company's ownership interest is 20% and greater, but not exceeding 50%. Investments in partnerships for which the Company's ownership interest is not greater than 50% are accounted for on the equity method. In addition, the Company accounts for its interest in Midsouth Partners, a domestic partnership 57-1/2% owned by the Company, on F-11 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 the equity method, as a consequence of Midsouth's management composition being vested in a seven member management committee controlled by the minority partner. The minority partner was granted majority control following a determination by an arbitration panel that one Company subsidiary was in default of certain obligations under the partnership agreement. Intercompany profits and losses are eliminated for those investments carried on the equity method. Inventories Inventories are valued at the lower of cost (first-in, first-out) or market. Maintenance and office supplies are not inventoried. Property, Equipment and Depreciation Property and equipment are stated at cost. Depreciation on property and equipment is computed using the straight-line method over the following estimated useful lives: Years Land improvements 15-20 Buildings and improvements 5-40 Machinery and equipment 4-10 Furniture and fixtures 3-10 Autos and trucks 3-10 Intangibles The Company amortizes goodwill over periods not in excess of 25 years on the straight-line basis. Noncompete agreements are amortized on a straight-line basis over the term of the applicable agreements. Patent costs are amortized on a straight-line basis over the statutory life, normally not exceeding 20 years. Certain of the Company's patents related to the Insituform process have expired in many countries, including the United States. The Company's management continually evaluates the market coverage and earnings capacity of its acquires and its patented processes to determine if the unamortized balances can be recovered from their undiscounted future cash flows. F-12 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 Royalty Revenues and License Fees Royalty revenues are accrued as earned in accordance with the provisions of the license agreements and are recorded based upon reports submitted by the licensees. License fees are recognized as revenues when all material services have been substantially performed. Construction and Installation Revenues Construction and installation revenues are recognized using the percentage-of-completion method. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and equipment costs. Changes in estimated total contract costs are recognized in the period they are determined. Where a contract loss is forecast, the full amount of the anticipated loss is recognized in the period the loss is determined. Earnings Per Share In the first quarter of 1997, the Financial Accounting Standards Board ("the Board") issued Statement of Financial Accounting Standard No. 128, Earnings Per Share ("SFAS 128"), effective for financial statements for both interim and annual periods ending after December 15, 1997. The new standard replaced the provisions provided by Accounting Principles Board Opinion 15, simplifying earnings per share calculations and requiring further disclosures. Earnings per share amounts for the years ended December 31, 1996 and 1995, respectively, have been recalculated to give effect to the application of SFAS 128. The effect of restatement had no material effect on either year. Earnings per share has been calculated as follows: F-13 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ---- ---- ---- Weighted average number of common shares used for Basic EPS 26,926,148 27,036,008 26,902,321 Effect of dilutive stock options and warrants 46,900 76,838 - (a) ---------- ---------- ---------- Weighted average number of common shares and dilutive potential common stock used in diluted EPS 26,973,048 27,112,846 26,902,321 ========== ========== ==========
(a) In 1995, the Company reported a net loss. Therefore, all stock options and warrants were antidilutive. Reclassifications Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the 1997 presentation. 3. BUSINESS ACQUISITIONS: Insituform Mid-America, Inc. On October 25, 1995, the Company completed the acquisition (the "IMA Merger") of Insituform Mid-America, Inc. ("IMA") through the merger into IMA of the Company's wholly owned subsidiary, ITI Acquisition Corp. As a result, IMA became a wholly owned subsidiary of the Company. The Company issued an aggregate of 12,450,896 shares of common stock to all prior holders of IMA's Class A common stock, subsequent to the conversion, in accordance with its terms, of all shares of IMA Class B common stock into IMA Class A common stock. The IMA Merger has been accounted for using the pooling-of- interests method of accounting and, accordingly, the accompanying consolidated financial statements give retroactive effect to the acquisition, as if the companies had always operated as a single entity. F-14 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 Combined and separate results of the Company and IMA are as follows (in thousands):
ITI IMA Eliminations Combined --- --- ------------ -------- January 1, 1995, to October 25, 1995: Revenues $141,381 $94,341 $(10,617) $225,105 Net income 6,312 4,142 - 10,454
Enviroq On April 18, 1995, the Company acquired the pipeline rehabilitation business of Enviroq Corporation ("Enviroq"), including Enviroq's Insituform process business conducted by its Insituform Southeast, Inc. subsidiary in Alabama, Florida, Georgia, North Carolina and South Carolina, through the merger into Enviroq of a wholly owned subsidiary of the Company. This acquisition has been accounted for using the purchase method of accounting. The base purchase price of $18,250,000 (including $3,000,000 in payment of a five-year covenant not to compete) was paid $15,250,000 in cash and $3,000,000 in a five-year subordinated promissory note. In March 1996, as a result of demands for payment and ensuing litigation, the Company discharged its obligation under such note and under arrangements to pay $1 million in consulting fees over five years, and settled such litigation for the aggregate amount of $3.1 million and the release of other claims. The following table presents summarized consolidated unaudited pro forma results of operations for 1995 as if the Enviroq acquisition had occurred at the beginning of 1995. These pro forma results are provided for comparative purposes only and do not purport to be indicative of the results which would have been obtained if these acquisitions had been effected on the dates indicated or which may be obtained in the future. Year Ended December 31, 1995 (in thousands) ------------------------------------------ Total revenues $282,742 Net loss (1,709) Basic and diluted loss per share (.06) F-15 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 Other During 1995, the Company also completed two smaller acquisitions. On February 16, 1995, the Company acquired 66% of the common stock of Insituform France, S.A., a newly formed subsidiary of its former French licensee, for approximately $1,463,000. Additionally, on November 30, 1995, the Company completed the acquisition of the UK-based Formapipe Division of Water Flow Services Limited, for $4,308,000. 4. UNUSUAL ITEMS: In 1997, the Company recorded $4.0 million in costs related to further reorganization of pipeline rehabilitation operations and corporate headquarters. These costs consisted primarily of severance, employee moving costs and expenses related to existing facilities and markets. In June 1997, a group, including Jerome Kalishman and Robert Affholder, both directors of the Company, filed an amended Schedule 13D pursuant to the Securities and Exchange Act of 1934 which stated that it was the intention of Messrs. Kalishman and Affholder to propose a slate of individuals to run for election to the Board of Directors of the Company at its 1997 annual meeting of stockholders in opposition to the slate proposed by the Company in its original proxy statement. On July 25, 1997, the Company and Messrs. Kalishman and Affholder entered into a settlement agreement to resolve the outstanding proxy contest. The Company incurred costs of $0.6 million (prior to any effect of taxes) related to legal and proxy solicitation expenses. In 1996, the Company recorded $6.5 million in costs related to the ongoing rationalization of pipeline rehabilitation operations. These costs consisted principally of the write-off of certain assets of the Paltem product line ($3.6 million), charges related to the disposition of excess facilities ($1.4 million), and costs related to reorganization of the North American contracting operations ($1.5 million). The write-off of the Paltem product line includes $2.8 million of manufacturing and installation equipment that related specifically to the gas distribution main installation market, which the Company has decided not to pursue. The Paltem product line may, however, be used in other markets. F-16 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 Costs related to the IMA Merger of approximately $6.48 million were charged to expense, primarily during the fourth quarter of 1995. (See Note 16 for information regarding the related impact on taxes on income.) The Company also recorded a pretax charge of approximately $8.06 million in the fourth quarter of 1995 for restructuring costs, including the consolidation of corrosion and abrasion protection operations under the Tite Liner process and the abandonment of certain assets related to the UltraPipe Process (approximately $2.6 million), the rationalization of certain Canadian operations to one facility in Edmonton (approximately $0.5 million), the elimination of certain duplicative management positions (approximately $0.8 million), the relocation of certain domestic employees and functions ($1.7 million) and the termination of construction on IMA's new manufacturing facility in Chesterfield, Missouri ($1.8 million). 5. ALLOWANCE FOR DOUBTFUL ACCOUNTS: Activity in the allowance for doubtful accounts is summarized as follows for the years ended December 31 (in thousands):
1997 1996 1995 ---- ---- ---- Balance, at beginning of period $ 1,031 $ 974 $ 637 Charged to expense 1,658 289 657 Uncollected balances written off, net of recoveries (102) (232) (320) ------- ------ ----- Balance, at end of period $ 2,587 $1,031 $ 974 ======= ====== =====
6. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS: Costs and estimated earnings on uncompleted contracts consist of the following at December 31 (in thousands): F-17 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995
1997 1996 ---- ---- Costs incurred on uncompleted contracts $ 123,808 $ 105,109 Estimated earnings 33,985 17,097 --------- --------- 157,793 122,206 Less-Billings to date (144,794) (103,098) --------- --------- $ 12,999 $ 19,108 ========= ========= Included in the accompanying balance sheets: Costs and estimated earnings in excess of billings $ 15,551 $ 20,127 Billings in excess of costs and estimated earnings on uncompleted contracts (Note 12) (2,552) (1,019) --------- --------- $ 12,999 $ 19,108 ========= =========
Costs and estimated earnings in excess of billings represent work performed which either due to contract stipulations or lacking contractual documentation needed, could not be billed. Substantially all unbilled amounts are expected to be collected within one year. 7. INVENTORIES: Inventories are summarized as follows at December 31 (in thousands):
1997 1996 ---- ---- Raw materials $ 2,127 $ 968 Manufactured components 2,222 1,921 Work-in-process 674 1,289 Finished products 2,565 1,988 Construction materials 4,626 9,615 -------- ------- $ 12,214 $15,781 ======== ======= F-18 /TABLE INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 8. PROPERTY AND EQUIPMENT: Property and equipment consists of the following at December 31 (in thousands):
1997 1996 ---- ---- Land and land improvements $ 2,659 $ 2,667 Buildings and improvements 15,824 15,715 Machinery and equipment 82,630 77,608 Furniture and fixtures 8,820 8,796 Autos and trucks 2,456 2,647 Construction in progress 5,987 1,730 -------- -------- 118,376 109,163 Less- Accumulated depreciation (60,393) (51,897) -------- -------- $ 57,983 $ 57,266 ======== ========
9. INVESTMENTS IN LICENSEES AND AFFILIATED COMPANIES: Investments in licensees and affiliated companies consist of the following at December 31 (in thousands):
1997 1996 ---- ---- Insituform Rohrsanierungstechnik GmbH (50%) $ 2,855 $ 2,800 Midsouth Partners (57-1/2%) 2,217 - Other 50% owned joint ventures 427 337 ------- ------- $ 5,499 $ 3,137 ======= =======
Beginning in April 1997, the Company began accounting for its investment in Midsouth Partners on the equity method, as a consequence of Midsouth's management committee comprised of a majority of members named by the minority partner. F-19 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 10. NOTES PAYABLE TO BANKS: Effective August 20, 1997, the Company entered into a Loan Agreement dated such date (the "Credit Agreement") with NationsBank, N.A. ("NationsBank"), whereby NationsBank will make available to the Company, until September 1, 2000 (the "Maturity Date"), a revolving credit line of up to $20,000,000 aggregate principal amount for working capital and permitted acquisitions, including $5,000,000 available for standby and commercial letters of credit, of which $3,466,000 was outstanding at December 31, 1997. Interest on outstanding advances accrues, at the election of the Company, at either the Lender's prime rate, payable monthly, or its LIBOR rate, plus a margin ranging from .5% to 1.5% depending on the maintenance of certain financial ratios, payable at the end of selected interest periods (from one to six months). Outstanding principal is subject to repayment on the Maturity Date, except that advances for permitted acquisitions must be repaid within six months after disbursement. The Credit Agreement obligates the Company to comply with certain financial ratios and restrictive covenants that, among other things, prohibit dividends and stock repurchases in the event of loan defaults, place limitations on operations and sales of assets by the Company and its subsidiaries, and limit the ability of the Company and its subsidiaries to incur further secured indebtedness and liens and of subsidiaries to incur additional indebtedness. The Credit Agreement also obligates certain of the Company's domestic subsidiaries to guarantee the Company's obligations, as a result of which the same subsidiaries have also delivered their guaranty with respect to the Senior Notes described in Note 11. Insituform Technologies Limited (formerly Insituform Permaline Limited) ("ITL") has a line of credit and overdraft facility of pounds sterling 473,000 (US$781,000) with National Westminister Bank Plc ("NatWest") which bears interest at NatWest's base rate (7.25% at December 31, 1997) plus 2.0%. The facility is available through July 1998, and is secured by ITL's real property and the Company's guarantee. At December 31, 1997 and 1996, respectively, pounds sterling -0- and pounds sterling 473,000 (US$800,000) were outstanding under this facility. Insituform France SA has a line of credit and overdraft facility of FF5,750,000 (US $956,000) with Societe Generale which bears interest at LIBOR plus 0.6% to 1.0%; this facility is available through April 2001 and is secured by a company guarantee. At December 31, 1997 and 1996, respectively, FF1,908,000 (US$317,000) and FF2,829,000 (US$545,000) were outstanding under this facility. F-20 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 11. LONG-TERM DEBT: Long-term debt consists of the following at December 31 (in thousands):
1997 1996 ---- ---- LONG-TERM DEBT: 7.88% senior notes, payable in $15,715 annual installments beginning February 2001 through 2007, with interest payable semiannually $110,000 $ - SunTrust facilities, retired in February 1997 - 76,275 8.5% senior subordinated note, payable in $1,000 installments annually each July 1998 through 2001, with the entire remaining balance due in July 2002 with interest quarterly (net of unamortized discount of $211 and $270), retired in February 1997 - 4,789 Industrial revenue bond, quarterly payments ranging from $85 to $170 through January 2004, with interest at 90% of prime (prime was 8.25% at December 31, 1996), retired in February 1997 - 3,356 DEFERRED PURCHASE CONSIDERATION: Promissory notes to affiliates of former shareholders of Gelco companies, payable in two equal installments in October 1996 and 1997, with interest payable quarterly at lesser of prime or LIBOR + 2.75% (prime was 8.25% at December 31, 1996) - 1,425 OTHER NOTES 2,329 3,269 -------- -------- 112,329 89,114 Less- Current maturities (889) (6,730) -------- -------- $111,440 $ 82,384 ======== ========
On February 14, 1997, the Company completed a $110 million private debt offering of 7.88% Senior Notes due February 14, 2007 ("Senior Notes"). Interest is payable semiannually in August and February of each year, and each year, from February 2001 to February 2006, inclusive, the Company is required to make principal repayments of $15,715,000, together with an equivalent payment at maturity. The Senior Notes may be prepaid at the Company's option, in whole or F-21 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 in part, at any time, together with a make-whole premium, and upon specified change in control events each holder has the right to require the Company to purchase its Senior Note without any premium thereon. The agreements obligate the Company to comply with certain financial ratios and restrictive covenants that, among other things, place limitations on operations and sales of assets by the Company or its subsidiaries, and limit the ability of the Company to incur further secured indebtedness and liens. Such agreements also obligate the Company's subsidiaries to provide guarantees to the holders of the Senior Notes if guaranties are given by them to certain other lenders. Prior to its prepayment in February 1997, the SunTrust facility was due to mature in October 2000, with installments based on a five-year amortization schedule, commencing December 31, 1997. Interest on indebtedness under the facility was payable at either (i) SunTrust's prime rate, plus a margin of up to .25% in the event certain financial ratios were not maintained, or (ii) an adjusted LIBOR rate, plus a margin ranging from 1.00% to 1.75%, depending on the maintenance of certain financial ratios. Up to $5 million under the credit facility was available to be borrowed from SunTrust pursuant to a "swing line facility," which accrued interest at a rate per annum equal to 0.5% below SunTrust's prime rate. Such facility obligated the Company to comply with certain financial ratios and restrictive covenants that, among other things, limited the ability of the Company and its subsidiaries to incur indebtedness, pay dividends, make loans and encumber any properties, and required guarantees of certain domestic subsidiaries. Essentially all of the Company's retained earnings at December 31, 1996 were restricted under such covenants. Prior to its prepayment in February 1997, the 8.5% senior subordinated note was subordinated in right to the Company's bank and other institutional financing and to deferred consideration incurred in connection with business acquisitions. As discussed in Note 13, warrants to purchase 350,877 unregistered shares of Common Stock were also issued to the lender. The note was prepayable at the Company's option, at premiums until July 1998 ranging from 3% to 1% of the amount prepaid. The subordinated note also restricted the Company's ability to pay dividends and repurchase outstanding common stock. Prior to its prepayment in February 1997, the industrial revenue bond was subject to call by the holder, an institutional purchaser, in 1999 or each year thereafter until maturity. Property and equipment with a net book value of approximately F-22 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 $3,500,000 was pledged to collateralize these bonds. These bonds also restricted the Company's ability to pay dividends. Debt issuance costs of $891,000 incurred in connection with the private debt offering were recorded as deferred charges and will be amortized over the life of the Senior Notes. The net proceeds were used to repay existing indebtedness (approximately $85 million), as discussed above, and for general corporate purposes. Costs of approximately $400,000 ($225,000 after tax) associated with the prior credit facility were written off and have been classified as an extraordinary item in the 1997 results of operations. At December 31, 1997 and 1996, the estimated fair value of the Company's long-term debt was approximately $118.1 million and $89 million, respectively. Principal payments required to be made for each of the next five years and thereafter are summarized as follows (in thousands): Years ending December 31 Amount 1998 $ 889 1999 684 2000 349 2001 15,920 2002 15,917 After 2002 78,570 -------- Total $112,329 ======== 12. ACCOUNTS PAYABLE AND ACCRUALS: Accounts payable and accruals consist of the following at December 31 (in thousands): F-23 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995
1997 1996 ---- ---- Accounts payable - trade $ 8,071 $ 17,108 Compensation and profit sharing 11,466 6,759 Interest 3,232 225 Merger and restructuring 2,464 2,840 Accrued litigation and fees 2,778 1,180 Bank overdrafts - 3,369 Billings in excess of costs and earnings 2,552 1,019 Other 11,135 8,078 --------- -------- $ 41,698 $ 40,578 ========= ========
13. STOCKHOLDERS' EQUITY: In accordance with accounting for a pooling-of-interests, all prior period stockholders' equity accounts have been restated to give effect to the IMA Merger described in Note 3. Stock Option Plan Under the 1992 Employee Stock Option Plan and Director Stock Option Plan (the "Plans"), the Company may grant options to its employees and directors not to exceed 1,000,000 and 500,000 shares of common stock, respectively. In January 1998, the Company's Board of Directors approved an increase in such authorization to 1,850,000 and 1,000,000 shares, respectively, subject to stockholder approval. The plans are administered by the Board of Directors which determines the timing of awards, individuals to be granted awards, the number of options to be awarded and the price, vesting schedule and other conditions of the options. The exercise price of each option typically equals the market price of the Company's stock on the date of grant and, therefore, the Company generally makes no charge to earnings with respect to these options. Options generally vest over a five year period and have an expiration date of up to 10 years after grant. Prior to the IMA Merger, IMA had granted options to certain officers, directors and employees to acquire IMA Class A common shares. In connection with the IMA Merger, all outstanding IMA options as of the date of the acquisition, became options to purchase that number of shares of ITI Common Stock that would have F-24 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS been received had the options been exercised prior to the IMA Merger. Dividends reflected in the statements of stockholders' equity reflect those which had been declared on the IMA common shares prior to the IMA Merger. The Company applies APB Opinion No. 25, and related interpretations in accounting for stock option grants. Accordingly, no compensation cost has been recognized in the statements of operations for this stock option plan. In accordance with SFAS No. 123, the Company has estimated the fair value of each option grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used for the grants in 1997, 1996 and 1995, respectively: expected volatility of 45%, 44% and 48%; risk-free interest rates of 5.8%, 6.1% and 6.2%; expected lives of five years and no dividends. Had compensation cost for the stock options granted been determined based on their fair value at the grant dates, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):
1997 1996 1995 ---- ---- ---- Net income (loss): As reported $9,419 $4,492 $ (966) Pro forma 8,867 4,116 (1,015) Basic and diluted earnings (loss) per share: As reported .35 .17 (.04) Pro forma .33 .15 (.04)
Based on the Black-Scholes option-pricing model the weighted average fair value of options granted in 1997, 1996 and 1995 was $4.16, $3.84 and $5.91, respectively, for options granted at the market price. In 1996, for options granted above market price, the fair value was $1.82. The following table summarizes information about options outstanding at December 31, 1997: F-25 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted Number Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise at December Contractual Exercise at December Exercise Prices 31, 1997 Life Price 31, 1997 Price - -------- ----------- --------- -------- ----------- -------- $2.61 to $9.79 911,697 7.7 years $ 8.41 394,829 $ 8.37 $11.09 to $16.25 866,605 2.3 years $ 14.33 773,855 $ 14.40 $25.00 48,125 - $ 25.00 48,125 $ 25.00 ------- ------- 1,826,427 4.9 years $ 11.66 1,216,809 $ 12.86 ========= =========
Changes in options outstanding are summarized as follows:
Weighted Average Exercise Shares Price ------ -------- Balance, December 31, 1994 1,687,300 $14.80 Granted 398,210 $12.00 Exercised (393,909) $ 9.27 Canceled (292,666) $16.61 --------- Balance, December 31, 1995 1,398,935 $13.00 Granted 325,000 $ 9.14 Exercised (9,316) $ 7.92 Canceled (132,420) $15.02 --------- Balance, December 31, 1996 1,582,199 $11.37 Granted 568,900 $ 8.75 Exercised (70,387) $ 4.24 Canceled (254,285) $11.18 --------- Balance, December 31, 1997 1,826,427 $11.66 =========
F-26 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In July 1993, the Company issued to Hanseatic Corporation warrants to purchase 350,877 unregistered shares of Common Stock in connection with the issuance of subordinated debt (see Note 11). The warrants are exercisable at $14.25 per share and expire on July 26, 1998. Paul Biddelman, a director of the Company, is an officer of Hanseatic. At December 31, 1997, 2,300,113 shares of Common Stock were reserved pursuant to stock option plans and warrants. 14. RELATED PARTY TRANSACTIONS: On July 3, 1992, Ringwood Limited ("Ringwood"), and Douglas K. Chick and Brian Chandler, both directors of the Company, entered into an agreement whereby Ringwood executed to the Company a secured, nonrecourse promissory note (the "Note") in the amount of $3,624,000 which bore interest at Citibank's prime rate plus 2-1/2%, was originally due July 3, 1995, and was secured by a pledge (the "Pledge") to the Company by Ringwood and Messrs. Chick and Chandler of 255,801 shares (the "Shares") of the Company's stock beneficially owned by them. On May 21, 1995, the Company extended the maturity date of the Note to July 3, 1996 (the "Maturity Date"), and in December 1995 the interest payment otherwise due in January 1996 was postponed to be due on a date (the "Extension Date") no later than 30 days after the date of first publication of the Company's operating results covering at least a 30-day period after the consummation of the IMA Merger. At the Extension Date, Ringwood had defaulted in the payment to the Company of its interest payment postponed as aforesaid, and on the Maturity Date had defaulted in payment of the principal amount of the Note. Effective in August 1996, the Company foreclosed on the Shares in full satisfaction of the obligation of Ringwood and Messrs. Chick and Chandler under the Note and the Pledge. The amount of the Note plus accrued interest to the date of foreclosure has been recorded in treasury stock. Krugman Chapnick and Grimshaw LLP provides legal services to the Company. The Company paid Krugman Chapnick and Grimshaw LLP, $664,000, $815,000 and $1,766,000 in 1997, 1996 and 1995, respectively, for legal services provided, together with reimbursement of out-of-pocket expenses of $141,000, $151,000 and $248,000, respectively. James D. Krugman, a partner at Krugman Chapnick and Grimshaw LLP, was a director of the Company prior to October 1997. F-27 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. OTHER INCOME (EXPENSE): Other income (expense) is comprised of the following at December 31 (in thousands):
1997 1996 1995 ---- ---- ---- Investment income $ 1,842 $ 1,059 $ 1,177 Litigation settlement (Note 17) - - (3,547) Casualty gain - - 722 Reserve for excess equipment (722) - - Other (473) 231 (79) ------- ------- ------- $ 647 $ 1,290 $(1,727) ======= ======= =======
16. TAXES ON INCOME: Net deferred tax assets consist of the following at December 31 (in thousands):
1997 1996 ---- ---- DEFERRED INCOME TAX ASSETS: Net operating loss carryforwards $ 5,276 $ 5,527 Foreign tax credit carryforwards - 828 Accrued compensation 1,570 1,005 Inventory valuation 675 752 Accrual for pending litigation and claims 159 356 Restructuring provision 1,056 2,580 Accrued contingencies 1,545 236 Allowance for doubtful accounts 609 50 Accrued losses on incomplete contracts 362 - other 991 821 ------- ------- Gross deferred income tax assets 12,243 12,155 VALUATION ALLOWANCE (3,266) (3,056) ------- ------- Total deferred income tax assets 8,977 9,099 ------- -------
F-28 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997 1996 ---- ---- DEFERRED INCOME TAX LIABILITIES: Depreciation (4,041) (4,219) Patent defense cost (1,643) (905) Other (1,112) (1,024) ------- ------- Total deferred income tax liabilities (6,796) (6,148) ------- ------- Net deferred income tax assets $ 2,181 $ 2,951 ======= =======
The Company has recorded deferred tax assets of $2,181,000 reflecting the benefit of $5,276,000 in loss carryforwards. Realization is dependent upon generating sufficient taxable income in the applicable jurisdictions and, in some instances, prior to the expiration of the carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward periods, as applicable are reduced. Income (loss) from continuing operations before taxes on income is as follows for the years ended December 31 (in thousands):
1997 1996 1995 ---- ---- ---- Domestic $ 9,432 $10,182 $ 1,897 Foreign 7,495 (769) 1,733 ------- ------- ------- Totals $16,927 $ 9,413 $ 3,630 ======= ======= =======
Provisions for taxes on income from continuing operations consist of the following components for the years ended December 31 (in thousands): F-29 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997 1996 1995 ---- ---- ---- Current: Federal $ 2,498 $ 2,968 $ 1,225 Foreign 280 1,708 2,154 State 3,519 735 827 ------- ------- ------- 6,297 5,411 4,206 ------- ------- ------- Current tax benefit related to exercise of stock options - - 530 ------- ------- ------- Deferred: Federal 900 1,334 (622) Foreign (302) (569) (54) State 172 (243) (73) Adjustments to beginning of year valuation allowance - (948) - ------- ------- ------- 770 (426) (749) ------- ------- ------- Total taxes on income $ 7,067 $ 4,985 $ 3,987 ======= ======= =======
A reconciliation between the U.S. federal statutory tax rate and the effective tax rate follows:
1997 1996 1995 ---- ---- ---- Income taxes at U.S. federal statutory tax rate 34.0% 34.0% 34.0% Increase (decrease) in taxes resulting from: State income taxes, net of federal income tax benefit 1.1 2.6 13.7 Tax amortization of intangibles (4.7) (8.4) (21.5) Tax benefit not currently recognizable on losses of subsidiaries - - 10.0 Merger costs capitalized for tax purposes - - 59.1 Goodwill amortization 3.2 8.2 18.3 Effect of foreign income taxed at foreign rates 3.0 7.4 (4.4) Other 5.1 9.2 0.6 ---- ---- ---- Total taxes on income 41.7% 53.0% 109.8% ==== ==== =====
F-30 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Subject to the future taxable income on certain of the Company's subsidiaries, the Company has available tax operating loss carryforwards as follows:
Expiration Jurisdiction Amount Date - ------------ ------ ---------- (in thousands) United Kingdom $10,843 Indefinite France 254 2001-2002 Puerto Rico 1,779 2000-2003 U.S. State 11,967 2004-2010 U.S. Federal 2,924 2001-2011
17. COMMITMENTS AND CONTINGENCIES: Leases The Company leases a number of its administrative operations facilities under noncancellable operating leases expiring at various dates through 2020. In addition, the Company also leases certain construction and automotive equipment on a multiyear, monthly or daily basis. Rent expense under all operating leases for 1997, 1996 and 1995 was $9,960,000, $8,837,000 and $6,000,000, respectively. At December 31, 1997, the future minimum lease payments required under the noncancellable operating leases were as follows (in thousands):
Year Ending December 31 Minimum Lease Payments 1998 $ 3,079 1999 2,264 2000 1,419 2001 807 2002 520 After 2002 840 --------- Total $ 8,929 ======= Minimum payments have not been reduced by minimum sublease rentals of $635,000 due in the future under noncancelable subleases. F-31 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Employment Agreements The Company and certain of its subsidiaries have employment contracts with various officers with remaining terms ranging from six months to three years at amounts approximating their current levels of compensation. The Company's minimum aggregate commitment at December 31, 1997, under such contracts was approximately $2,791,000. On June 19, 1997, the Company entered into severance agreements with Anthony W. Hooper, William A. Martin and Robert L. Kelley which provide that, subsequent to the occurrence of specified events during a period of three years after the date of such agreements, if the employment of such officer is terminated without "cause" or such officer resigns with "good reason" (as those terms are defined under such agreements), or such officer resigns for any reason during a 30-day period following the anniversary of the specified events, such officer is entitled to the benefits set forth in the agreement. The election of two members of the Board of Directors in October 1997 outside of the procedure provided under the Company's merger agreement with IMA was one of the specified events. The benefits to which each officer would be entitled upon severance from the Company as aforesaid include an amount, payable within 30 days after severance, equal to three times compensation (including base salary and bonus, as defined, and accrued retirement benefits) plus amounts to cover any excise tax due, if any, and coverage for a period of three years under the Company's welfare plans (or equivalent coverage). Litigation On May 23, 1995, the Company, notwithstanding its belief that it had defenses to plaintiff's claim that were well grounded in fact and law, settled a stockholder class action against the Company arising from the acquisition of Insituform Group Limited in December 1992. The Company made a cash payment to class members in the amount of $3.2 million and (in January 1996) issued to class members 30,000 shares of the Company's class A common stock. The Company is involved in certain additional litigation incidental to the conduct of its business. In the Company's opinion, none of these proceedings will have a material adverse effect on the Company's financial position, results of operations and liquidity. The financial statements include the estimated amounts of liabilities that are likely to be incurred from these and various other pending litigation and claims. F-32 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Retirement Plans The Company maintains profit sharing/401(k) plans which cover substantially all eligible domestic employees. Company profit sharing contributions are discretionary. Under the terms of its 401(k) features, the plan also provides for the Company to contribute 100% of the participating employee's contribution up to 3% of the employee's salary, and 50% of the next 2% of the employee's salary. Total contributions to the domestic plans were $2,496,000, $2,447,000 and $1,401,000 for the years ended December 31, 1997, 1996 and 1995, respectively. In addition, certain foreign subsidiaries maintain various other defined contribution retirement plans. Company contributions to such plans for the years ended December 31, 1997, 1996 and 1995, were $132,000, $107,000 and $136,000, respectively. 18. SEGMENT AND GEOGRAPHIC INFORMATION: The Company's continuing operations include the following reportable segments: "Pipeline Technology" - includes licensing, selling and servicing trenchless, on-site pipeline reconstruction technology and products. "Construction" - includes the installation of trenchless pipeline reconstruction materials as well as nontrenchless pipeline construction. Operating profit (loss) by business segment and by geographic area are defined as revenues less operating costs and expenses. Income and expense not allocated to business segments or geographic areas include investment income and corporate expenses. Identifiable assets are those assets used exclusively in the operations of each business segment or geographic area, or which are allocated, when used jointly. Corporate assets are principally comprised of cash equivalents and investments. Financial information by industry segment is as follows at December 31 (in thousands): F-33 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1997 1996 1995 ------- ------- ------- (In thousands, except per share amounts) PIPELINE TECHNOLOGY: Revenues- Unaffiliated companies $ 25,730 $ 21,735 $ 25,299 Intersegment 45,235 51,420 45,582 -------- -------- -------- Total revenues 70,965 73,155 70,881 -------- -------- -------- Operating income 13,099 18,428 16,642 Identifiable assets 35,960 25,494 29,699 Capital expenditures 754 2,133 750 Depreciation and amortization 1,828 1,628 1,569 CONSTRUCTION: Revenues $294,910 $268,198 $246,904 Operating income 25,222 7,908 5,479 Identifiable assets 218,517 218,096 211,543 Capital expenditures 15,618 15,881 15,557 Depreciation and amortization 16,945 17,141 14,961 ELIMINATIONS AND CORPORATE ITEMS: Revenues $(45,235) $(51,420)$(45,582) Operating loss (13,291) (11,990) (10,371) Identifiable assets 43,375 21,912 19,058 Capital expenditures 180 173 190 Depreciation and amortization 467 411 269 CONSOLIDATED: Revenues $320,640 $289,933 $272,203 Operating income 25,030 14,346 11,750 Identifiable assets 297,852 265,502 260,300 Capital expenditures 16,552 18,187 16,497 Depreciation and amortization 19,240 19,180 16,799 Financial information by geographic area is as follows at December 31 (in thousands): 1997 1996 1995 ------- ------- ------- UNITED STATES: Revenues- Unaffiliated companies $227,900 $220,848 $202,555 Between geographic areas 37,515 43,986 40,243 -------- -------- -------- Total revenues 265,415 264,834 242,798 -------- -------- -------- Operating income 26,965 19,291 11,055 Identifiable assets 231,212 204,598 202,165 F-34 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1997 1996 1995 ------- ------- ------- (In thousands, except per share amounts) EUROPEAN COMMUNITY: Revenues- Unaffiliated companies $ 31,226 $ 32,934 $ 21,566 Between geographic areas 4,928 4,516 2,325 -------- -------- -------- Total revenues 36,154 37,450 23,891 -------- -------- -------- Operating income 2,738 4,018 8,253 Identifiable assets 26,109 29,533 20,959 CANADA: Revenues- Unaffiliated companies $ 23,386 $ 16,955 $ 28,620 Between geographic areas 1,338 1,305 1,617 -------- -------- -------- Total revenues 24,724 18,260 30,237 -------- -------- -------- Operating income 5,521 2,179 1,674 Identifiable assets 20,179 18,541 21,233 OTHER FOREIGN: Revenues- Unaffiliated companies $ 38,128 $ 19,196 $ 19,462 Between geographic areas 1,536 1,613 1,397 -------- -------- -------- Total revenues 39,664 20,809 20,859 -------- -------- -------- Operating income (loss) 3,097 848 430 Identifiable assets 16,074 10,155 8,968 ELIMINATIONS AND CORPORATE ITEMS: Revenues- Between geographic areas $(45,317) $(51,420)$(45,582) Operating loss (13,291) (11,990) (9,662) Identifiable assets 4,278 2,675 6,975 CONSOLIDATED: Revenues $320,640 $289,933 $272,203 Operating income 25,030 14,346 11,750 Identifiable assets 297,852 265,502 260,300
F-35 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
1st 2nd 3rd 4th --- --- --- --- (In thousands, except per share data) Year ended December 31, 1997: Revenues $77,082 $75,316 $85,490 $82,752 Operating income 4,050 2,513 9,666 8,801(a) Income before extraordinary item 1,306 214 4,282 3,842 Extraordinary loss (225) - - - Net income 1,081 214 4,282 3,842(a) Basic and diluted earnings (loss) per share: Income before extraordinary item .05 .01 .16 .14 Extraordinary loss (.01) - - - Net income .04 .01 .16 .14 Year ended December 31, 1996: Revenues $68,110 $71,769 $70,647 $79,407 Operating income (loss) 5,180 7,489 6,625 (4,948)(a) Net income (loss) 2,250 3,830 3,416 (5,004)(a) Basic and diluted earnings (loss) per share .08 .14 .13 (.19) (a) See Note 4 for information relative to unusual charges recorded in 1997 and 1996. F-36
INDEX TO EXHIBITS(1)(2) 3.1 - Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3(a) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 3.2 - By-Laws of the Company (Incorporated by reference to Exhibit 3(b) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.1 - Agreement and Plan of Merger dated as of May 23, 1995 among the Company, ITI Acquisition Corp. and Insituform Mid- America, Inc. (Incorporated by reference to Exhibit 5(a) to the Current Report on Form 8-K dated May 23, 1995). 10.2 - Merger Agreement dated as of November 2, 1994 by and among Insituform Mid-America, Inc., IMA Merger Sub, Inc., Enviroq Corporation and New Enviroq Corporation (Incorporated by reference to Exhibit 10(a) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). ____________________ 1 The Company's current, quarterly and annual reports are filed with the Securities and Exchange Commission under file no. 0- 10786 2 Pursuant to Reg. Section 229.601, does not include certain instruments with respect to long-term debt of the Company and its consolidated subsidiaries not exceeding 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company undertakes to furnish to the Securities and Exchange Commission, upon request, a copy of all long-term debt instruments not filed herewith. E-1 INDEX TO EXHIBITS(1)(2) 10.3 - Note Purchase Agreements dated as of February 14, 1997 among the Company and, respectively, each of the lenders listed therein (Incorporated by reference to Exhibit 10.6 to the Annual Report on Form 10-K for the year ended December 31, 1996), together with First Amendment dated as of August 20, 1997, Guaranty Agreement dated as of August 20, 1997 by each of the subsidiaries named therein, and Intercreditor Agreement dated as of August 20, 1997 among NationsBank, N.A. and such lenders (Incorporated by reference to Exhibit 10(a) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.4 - Loan Agreement dated as of August 20, 1997 between NationsBank, N.A. and the Company together with Unlimited Guaranty dated as of August 20, 1997 by each of the subsidiaries named therein and Contribution Agreement dated August 20, 1997 between NationsBank, N.A. and such guarantors (Incorporated by reference to Exhibit 10(b) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.5 - Amendment No. 1 to Loan Agreement dated as of August 20, 1997 between NationsBank, N.A. and the Company. ____________________ 1 The Company's current, quarterly and annual reports are filed with the Securities and Exchange Commission under file no. 0- 10786 2 Pursuant to Reg. Section 229.601, does not include certain instruments with respect to long-term debt of the Company and its consolidated subsidiaries not exceeding 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company undertakes to furnish to the Securities and Exchange Commission, upon request, a copy of all long-term debt instruments not filed herewith. E-2 INDEX TO EXHIBITS(1)(2) 10.6 - Agreement dated July 25, 1997 among Jerome Kalishman, Nancy F. Kalishman, Robert W. Affholder, Xanadu Investments L.P., The Jerome and Nancy Kalishman Family Fund, Paul A. Biddelman, Stephen P. Cortinovis, Anthony W. Hooper, Silas Spengler, Sheldon Weinig and Russell B. Wight, Jr. (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K dated July 25, 1997), together with Amendment No. 1 thereto (Incor- porated by reference to Exhibit 10(d) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.7 - Letter Agreement dated November 18, 1996 between the Company and Anthony W. Hooper (Incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K for the year ended December 31, 1996). 10.8 - Severance Agreement dated as of June 19, 1997 between the Company and Anthony W. Hooper (Incorporated by reference to Exhibit 10(a) to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).(3) _________________ 1 The Company's current, quarterly and annual reports are filed with the Securities and Exchange Commission under file no. 0- 10786 2 Pursuant to Reg. Section 229.601, does not include certain instruments with respect to long-term debt of the Company and its consolidated subsidiaries not exceeding 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company undertakes to furnish to the Securities and Exchange Commission, upon request, a copy of all long-term debt instruments not filed herewith. 3 Management contract or compensatory plan or arrangement. E-3 INDEX TO EXHIBITS(1)(2) 10.9 - Agreement dated October 25, 1995 between the Company and Jerome Kalishman (Incorporated by reference to Exhibit 2(b) to the Current Report on Form 8-K dated October 25, 1995), together with Amendment dated November 18, 1996 (In- corporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K for the year ended December 31, 1996) and Amendment No. 2 dated October 8, 1997 (Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter dated September 30, 1997).(3) 10.10 - Consulting Agreement dated October 25, 1995 between the Company and Jerome Kalishman (Incorporated by reference to Exhibit 2(c) to the Current Report on Form 8-K dated October 25, 1995).(3) 10.11 - Employment Agreement dated October 25, 1995 between the Company and Robert W. Affholder (Incorporated by reference to Exhibit 2(d) to the Current Report on Form 8-K dated October 25, 1995).(3) 10.12 - Severance Agreement dated as of June 19, 1997 between the Company and William A. Martin (Incorporated by reference to Exhibit 10(b) to the Quarterly Report on Form 10-Q for the period ended June 30, 1997).(1) _________________ 1 The Company's current, quarterly and annual reports are filed with the Securities and Exchange Commission under file no. 0- 10786 2 Pursuant to Reg. Section 229.601, does not include certain instruments with respect to long-term debt of the Company and its consolidated subsidiaries not exceeding 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company undertakes to furnish to the Securities and Exchange Commission, upon request, a copy of all long-term debt instruments not filed herewith. 3 Management contract or compensatory plan or arrangement. E-4 INDEX TO EXHIBITS(1)(2) 10.13 - Severance Agreement dated as of June 19, 1997 between the Company and Robert L. Kelley (Incorporated by reference to Exhibit 10(c) to the Quarterly Report on Form 10-Q for the period ended June 30, 1997).(3) 10.14 - Registration Rights Agreement dated as of October 19, 1992, among the Company, Interstate Properties, and the Ringwood Group consisting of Parkwood Limited, as trustee of the Anthony Basmadjian "P" Settlement, Barford, as trustee of the Anthony Basmadjian Settlement, Ringwood Limited, Brian Chandler and Douglas K. Chick (Incorporated by reference to Exhibit 10.54 of Registra- tion Statement on Form S-4 No. 33-53772). 10.15 - Registration Rights Agreement dated as of September 1, 1995 among the Company, Xanadu Investments L.P. and Robert W. Affholder (Incorporated by reference to Exhibit 10.29 of Registration Statement on Form S-4 No. 33-62677). 10.16 - Equipment Lease dated as of October 10, 1989 between A-Y-K-E Partnership and Affholder, Inc. (Incorporated by reference to Exhibit 10.20 to the Annual Report on Form 10-K for the year ended December 31, 1995). _________________ 1 The Company's current, quarterly and annual reports are filed with the Securities and Exchange Commission under file no. 0- 10786 2 Pursuant to Reg. Section 229.601, does not include certain instruments with respect to long-term debt of the Company and its consolidated subsidiaries not exceeding 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company undertakes to furnish to the Securities and Exchange Commission, upon request, a copy of all long-term debt instruments not filed herewith. 3 Management contract or compensatory plan or arrangement. E-5 INDEX TO EXHIBITS(1)(2) 10.17 - 1992 Employee Stock Option Plan of the Company.(1) 10.18 - 1992 Director Stock Option Plan of the Company.(3) 10.19 - Insituform Mid-America, Inc. Stock Option Plan, as amended (Incorporated by reference to Exhibit 4(i) to the Registration Statement on Form S-8 No. 33-63953).(3) 10.20 - Form of Directors' Indemnification Agreement (Incorporated by reference to Exhibit 10.47 to the Annual Report on Form 10-K for the year ended December 31, 1988).(1) 21 - Subsidiaries of the Company. 23.1 - Consent of Arthur Andersen LLP. 23.2 - Consent of BDO Seidman, LLP. 24 - Power of Attorney (See "Power of Attorney" in the Annual Report on Form 10-K). 27 - Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information only and not filed. 99 - Pages 6 through 9 of the Company's Proxy Statement dated August 25, 1997 (In- corporated by reference to Exhibit 99 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). ________________ 1 The Company's current, quarterly and annual reports are filed with the Securities and Exchange Commission under file no. 0- 10786 2 Pursuant to Reg. Section 229.601, does not include certain instruments with respect to long-term debt of the Company and its consolidated subsidiaries not exceeding 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company undertakes to furnish to the Securities and Exchange Commission, upon request, a copy of all long-term debt instruments not filed herewith. 3 Management contract or compensatory plan or arrangement. E-6 EX-10.5 2 Exhibit 10.5 AMENDMENT NUMBER ONE TO LOAN AGREEMENT Effective August 20, 1997 by and between NATIONSBANK, N.A. and INSITUFORM TECHNOLOGIES, INC. In consideration of their mutual agreements herein and for other sufficient consideration, the receipt of which is hereby acknowledged, INSITUFORM TECHNOLOGIES, INC. ("Borrower") and NATIONSBANK, N.A. ("Lender") agree as follows: 1. Definitions; Section References. The term "Original Loan Agreement" means the Loan Agreement Effective August 20, 1997, between Borrower and Lender. The term "this Amendment" means this Amendment. The term "Loan Agreement" means the Original Loan Agreement as amended by this Amendment. Capitalized terms used and not otherwise defined herein have the meanings defined in the Loan Agreement. 2. Effective Date of this Amendment. This Amendment will be effective as of August 20, 1997, and is intended to correct a scrivener's error in the Original Loan Agreement. 3. Amendments to Loan Agreement. Section 17.4 of the Original Loan Agreement is amended to read in its entirety as follows: "17.4 Maximum Funded Debt to EBITDA Ratio. The ratio of Borrower's Funded Debt as of the end of any fiscal quarter of Borrower to Borrower's EBITDA for the four consecutive fiscal quarters then ended shall not be greater than 3.5 to 1.0." 4. Effect of Amendment. The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of Lender under the Loan Agreement or any of the other Loan Documents, nor constitute a waiver of any provision of the Loan Agreement, any of the other Loan Documents or any Existing Default. Each reference in the Loan Agreement to "the Agreement", "hereunder", "hereof", "herein", or words of like import, shall be read as referring to the Loan Agreement as amended hereby. 5. Reaffirmation. Borrower hereby acknowledges and confirms that except as expressly amended hereby the Original Loan Agreement and other Loan Documents remain in full force and effect. 6. Counterparts. This Amendment may be executed by the parties hereto on any number of separate counterparts, and all such counterparts taken together shall constitute one and the same instrument. It shall not be necessary in making proof of this Amendment to produce or account for more than one counterpart signed by the party to be charged. 7. Counterpart Facsimile Execution. This Amendment, or a signature page thereto intended to be attached to a copy of this Amendment, signed and transmitted by facsimile machine or telecopier shall be deemed and treated as an original document. The signature of any person thereon, for purposes hereof, is to be considered as an original signature, and the document transmitted is to be considered to have the same binding effect as an original signature on an original document. At the request of any party hereto, any facsimile or telecopy document is to be re-executed in original form by the Persons who executed the facsimile or telecopy document. No party hereto may raise the use of a facsimile machine or telecopier or the fact that any signature was transmitted through the use of a facsimile or telecopier machine as a defense to the enforcement of this Amendment. 8. Governing Law; No Third party Rights. This Amendment and the rights and obligations of the parties hereunder shall be governed by and construed and interpreted in accordance with the internal laws of the State of Missouri applicable to contracts made and to be performed wholly within such state, without regard to choice or conflict of laws provisions. 9. Incorporation by Reference. Lender and Borrower hereby agree that all of the terms of the Loan Documents are incorporated in and made a part of this Amendment by this reference. 10. Statutory Notice. The following notice is given pursuant to Section 432.045 of the Missouri Revised Statutes; nothing contained in such notice will be deemed to limit or modify the terms of the Loan Documents or this Amendment. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE. TO PROTECT YOU (BORROWER(S)) AND US (CREDITOR) FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS WE REACH COVERING SUCH MATTERS ARE CONTAINED INT HIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT AS WE MAY LATER AGREE IN WRITING TO MODIFY IT. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by appropriate duly authorized officers as of the effective date first above written. INSITUFORM TECHNOLOGIES, INC. NATIONSBANK, N.A. by its Senior Vice President by its Vice President s/William A. Martin s/Emil A. Krueger - ------------------------------ ----------------------------- Name: Name: EX-10.17 3 Exhibit 10.17 INSITUFORM TECHNOLOGIES, INC. 1992 EMPLOYEE STOCK OPTION PLAN 1. Purposes of Plan. The purposes of this Plan, which shall be known as the Insituform Technologies, Inc. 1992 Employee Stock Option Plan, and is hereinafter referred to as the "Plan", are (i) to provide incentives for key employees of Insituform Technologies, Inc. (the "Company") and any parent and subsidiary corporations (within the respective meanings of Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended (the "Code"), and referred to herein as "Parent" and "Subsidiary," respectively), and to consultants and other individuals providing services to such companies, by encouraging their ownership of the class A common stock, $.01 par value (the "Common Stock"), of the Company, and (ii) to aid the Company in retaining such key employees and other persons, upon whose efforts the Company's success and future growth depends, and attracting other such employees and other persons. 2. Administration. The Plan shall be administered by the Board of Directors of the Company or, as determined by the Board of Directors in its sole discretion, by a committee from time to time appointed by the Board of Directors and consisting of not less than two of its members (the Board of Directors, or such committee, for purposes of this Plan hereinafter referred to as the "Committee"), as hereinafter provided. Subject to the terms of the Plan, the Committee shall have plenary authority to determine the key employees, consultants and other individuals to whom options are to be granted under the Plan, the number of shares to be subject to each such option, the terms and conditions upon which the options are granted and are exercisable and whether such options will be incentive stock options or non-qualified stock options. For purposes of administration, the Committee, subject to the terms of the Plan, shall have plenary authority to establish such rules and regulations, make such determinations and interpretations and take such other administrative actions as it deems necessary or advisable. All determinations and interpretations made by the Committee shall be final, conclusive and binding on all persons, including Optionees (as hereinafter defined) and their legal representatives and beneficiaries. The Board of Directors shall designate one of the members of the Committee as its Chairman. The Committee shall hold its meetings at such times and at such places as it may determine. A majority of its members shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members. Any decision or determination reduced to writing and signed by all members shall be as effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary (who need not be a member of the Committee). No member of the Committee shall be liable for any act or omission with respect to his service on the Committee if he acts in good faith and in a manner he reasonably believes to be in or not opposed to the best interests of the Company. Service on the Committee shall constitute service as a director of the Company for all purposes. The Committee may, in its sole discretion, authorize the Non-Insider Stock Option Committee (the "Non-Insider Committee") of the Board of Directors to determine the key employees, consultants and other individuals to whom options otherwise authorized by the Committee are to be granted, in each case subject to the terms of the Plan and such authorization by the Committee and insofar as such optionees do not constitute "officers", for purposes of Section 16 of the Securities and Exchange Act of 1934; and, in the event the Non-Insider Committee does not determine such individuals, shares of Common Stock otherwise covered by options authorized by the Committee and submitted to the Non-Insider Stock Option Committee shall be available for further options hereunder. The Non-Insider Committee shall be appointed from time to time by the Board of Directors and shall consist of one or more of its members, who need not be members of the Committee. The Non- Insider Committee shall hold its meetings at such times and at such places as it may determine. A majority of its members shall constitute a quorum. All determinations made by the Non-Insider Committee shall be made by a majority of its members. Any decision or determination reduced to writing and signed by all members shall be effective as if it had been made by a majority vote at a meeting duly called and held. The Non-Insider Committee may appoint a Secretary (who need not be a member of the Committee). No member of the Non-Insider Committee shall be liable for any act or omission with respect to his service on the Committee if he acts in good faith and in a manner he reasonably believes to be in or not opposed to the best interests of the Company. Service on the Non- Insider Committee shall constitute service as a director of the Company for all purposes. 3. Stock Available for Options. There shall be available for options under the Plan the total of 1,850,000 shares of Common Stock, subject to any adjustments which may be made pursuant to Section 5(f) hereof.* Shares of Common Stock used for purposes of the Plan may be either authorized and unissued shares, or previously issued shares held in the treasury of the Company, or both. Shares of Common Stock covered by options which have terminated or expired prior to exercise shall be available for further options hereunder. 4. Eligibility. Options under the Plan may be granted to key employees of the Company or any Parent or Subsidiary _______________ * Increase from 1,000,000 to 1,850,000 subject to stockholder approval. thereof, including officers of the Company or any Parent or Subsidiary thereof, and to consultants and other individuals providing services to the Company or any Parent or Subsidiary. Options may not be granted under the Plan to any member of the Board of Directors of the Company (whether or not a key employee of, or a consultant or other individual providing services to, the Company or any Parent or Subsidiary). Options may be granted to eligible individuals whether or not they hold or have held options previously granted under the Plan or otherwise granted or assumed by the Company. In selecting individuals for options, the Committee (with reference to any action of the Non-Insider Committee, if and to the extent authorized pursuant to Section 2) may take into consideration any factors it may deem relevant, including its estimate of the individual's present and potential contributions to the success of the Company and/or any Parent or Subsidiary thereof. Service as a consultant of or to the Company or any Parent or Subsidiary shall be considered employment for purposes of the Plan (and the period of such service shall be considered the period of employment for purposes of Section 5(d) of the Plan); provided, however, that incentive stock options may be granted under the Plan only to an individual who is an "employee" (as such term is used in Section 422 of the Code) of the Company or any Subsidiary or Parent. 5. Terms and Conditions of Options. The Committee (with reference to any action of the Non-Insider Committee, if and to the extent authorized pursuant to Section 2) shall, in its discretion, prescribe the terms and conditions of the options to be granted hereunder which terms and conditions need not be the same in each case, subject to the following: (a) Option Price. The price at which each share of Common Stock covered by an option granted under the Plan may be purchased shall be determined by the Committee (with reference to any action of the Non-Insider Committee, if and to the extent authorized pursuant to Section 2) and shall not be less than the lesser of (i) the tangible book value per share of Common Stock, determined in accordance with generally accepted accounting principles, as of the end of the fiscal quarter of the Company immediately preceding the fiscal quarter in which the option is granted, or (ii) the market value per share of Common Stock on the date of grant of an option as determined pursuant to Section 5(c). The date of the grant of an option shall be the date specified by the Committee (with reference to any action of the Non-Insider Committee, if and to the extent authorized pursuant to Section 2) in its grant of the option. (b) Option Period. The period for exercise of an option shall in no event be more than ten years from the date of grant. Options may, in the discretion of the Committee, be made exercisable in installments during the option period. Any shares not purchased on any applicable installment date may be purchased thereafter at any time before the expiration of the option period. (c) Exercise of Options. In order to exercise an option, the holder thereof (the "Optionee") shall deliver to the Company written notice specifying the number of shares of Common Stock to be purchased, together with cash or a certified or bank cashier's check payable to the order of the Company in the full amount of the purchase price therefor; provided that, for the purpose of assisting an Optionee to exercise an option, the Company may make loans to the Optionee or guarantee loans made by third parties to the Optionee, on such terms and conditions as the Board of Directors may authorize and approve; and provided further that such purchase price may be paid in shares of Common Stock owned by the Optionee having a market value on the date of exercise equal to the aggregate purchase price, or in a combination of cash and Common Stock. For purposes of the Plan, the market value per share of Common Stock shall be the last sale price regular way on the date of reference, or, in case no sale takes place on such day, the average of the closing bid and asked prices regular way, in either case on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or if the Common Stock is not listed or admitted to trading on any national securities exchange, the last sale price of the Common Stock as reported on the National Association of Securities Dealers Automated Quotation ("NASDAQ") National Market System on such date, or if the Common Stock is not so reported, the average of the closing high bid and low asked prices of the Common Stock in the over-the-counter market on such date, as reported on the NASDAQ system, or if there are no such prices reported on the NASDAQ system on such date, as furnished to the Committee by a New York Stock Exchange member selected from time to time by the Committee for such purpose. If there is no bid or asked price reported on any such date, the market value shall be determined by the Committee in accordance with the regulations promulgated under Section 2031 of the Code, or by any other appropriate method selected by the Committee. An Optionee shall have none of the rights of a stockholder until the shares of Common Stock are issued to him. An option may not be exercised for less than ten shares of Common Stock, or the number of shares of Common Stock remaining subject to such option, whichever is smaller. (d) Effect of Termination of Employment. An option may not be exercised after the Optionee has ceased to be in the employ of the Company or any Parent or Subsidiary, except in the following circumstances: (i) if the Optionee's employment is terminated by action of his employer, or by reason of disability or retirement under any retirement plan maintained by the Company or any Parent or Subsidiary thereof, the option may be exercised by the Optionee within 30 days after such termination, but only as to any shares exercisable on the date the Optionee's employment so terminates; (ii) in the event of the death of the Optionee during the 30-day period after termination of employment covered by (i) above, the person or persons to whom his rights are transferred by will or the laws of descent and distribution shall have a period of one year from the date of his death to exercise any options which were exercisable by the Optionee at the time of his death; (iii) in the event of the death of the Optionee while employed, the option shall thereupon become exercisable in full, and the person or persons to whom the Optionee's rights are transferred by will or the laws of descent and distribution shall have a period of one year from the date of the Optionee's death to exercise such option. The provisions of the foregoing clause (iii) shall apply to any outstanding options which are incentive stock options to the extent permitted by Section 422(d) of the Code and such outstanding options in excess thereof shall, immediately upon the occurrence of the event described in the foregoing clause (iii), be treated for all purposes of the Plan as nonstatutory stock options and shall be immediately exercisable as such as provided in the foregoing clause (iii). In no event shall any option be exercisable more than ten years from the date of grant thereof. Nothing in the Plan or in any option granted pursuant to the Plan (in the absence of an express provision to the contrary) shall confer on any individual any right to continue in the employ of the Company or any Parent or Subsidiary thereof or interfere in any way with the right of the Company to terminate his employment at any time. (e) Nontransferability of Options. During the lifetime of an Optionee, options held by such Optionee shall be exercisable only by him. No option shall be transferable other than by will or by the laws of descent and distribution. (f) Adjustments for Change in Stock Subject to Plan and Other Events. In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, rights offering, or any other change in the corporate structure or shares of the Company, the Committee shall make such adjustments, if any, as it deems appropriate in the number and kind of shares subject to the Plan, in the number and kind of shares covered by outstanding options, or in the option price per share. (g) Registration, Listing and Qualification of Shares of Stock. Each option shall be subject to the requirement that if at any time the Board of Directors shall determine that the registration, listing or qualification of the shares of Common Stock covered thereby upon any securities exchange or under any federal or state law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the granting of such option or the purchase of shares of Common Stock thereunder, no such option may be exercised unless and until such registration, listing, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board of Directors. The Company may require that any person exercising an option shall make such representations and agreements and furnish such information as it deems appropriate to assure compliance with the foregoing or any other applicable legal requirement. (h) Other Terms and Conditions. The Committee may impose such other terms and conditions, not inconsistent with the terms hereof, on the grant or exercise of options, as it deems advisable. 6. Provisions Applicable to Incentive Stock Options. The Committee (with reference to any action of the Non-Insider Committee, if and to the extent authorized pursuant to Section 2) may, in its discretion, grant "incentive stock options" (within the meaning of Section 422 of the Code) under the Plan to eligible employees, provided, however, that: (a) no such incentive stock option shall be granted at an option price which is less than the market value per share of Common Stock on the date of the grant; (b) no such incentive stock option shall be issued to any one Optionee if the aggregate fair market value, determined at the time of the grant of such incentive stock options, of the shares with respect to which such incentive stock options are exercisable for the first time by such Optionee during any calendar year, together with all options under any other incentive stock option plan of the Company exercisable during such year, exceeds $100,000; (c) no such incentive stock option shall be granted to any Optionee who at the time such option is granted owns more than 10 percent of the total combined voting stock of the Company unless (i) the option price is not less than 110 percent of the fair market value per share of stock on the date of the grant, and (ii) the option is not exercisable after five years from the date such option is granted; and (d) Section 5(d)(ii) hereof shall not apply to any incentive stock option. 7. Withholding Tax. Upon the disposition by any person of shares of Common Stock acquired pursuant to the exercise of an option granted pursuant to the Plan, the Company shall have the right to require such person to pay the Company the amount of any taxes which the Company may be required to withhold with respect to such shares. 8. Amendment and Termination. Unless the Plan shall theretofore have been terminated as hereinafter provided, the Plan shall terminate on, and no option shall be granted thereunder after March 31, 2002; provided, however, that the Board of Directors may at any time prior to that date terminate the Plan. The Board of Directors may at any time amend the Plan; provided, however, that, except as contemplated in Section 5(f) hereof, the Board of Directors shall not, without approval by a majority of the votes cast by the stockholders of the Company at a meeting of stock- holders at which a proposal to amend the Plan is voted upon: (i) increase the maximum number of shares of Common Stock for which options may be granted under the Plan, (ii) change the formula as to minimum option prices, (iii) extend the period during which options may be granted or exercised, or (iv) amend the requirements as to the class of persons eligible to receive options. No termination or amendment of the Plan may, without the consent of an Optionee, adversely affect the rights of such Optionee under any option held by such Optionee. 9. Effectiveness of Plan. The Plan will not be made effective unless approved by a majority of the votes cast by the stockholders of the Company at a meeting of stockholders within twelve (12) months from the date the Plan is adopted by the Board of Directors, duly called and held for such purpose, and no option granted hereunder shall be exercisable prior to such approval. 10. Other Actions. Nothing contained in the Plan shall be construed to limit the authority of the Company to exercise its corporate rights and powers, including but not by way of limitation, the right of the Company to grant or assume options for proper corporate purposes other than under the Plan with respect to any employee or other person, firm, corporation or association. EX-10.18 4 Exhibit 10.18 INSITUFORM TECHNOLOGIES, INC. 1992 DIRECTOR STOCK OPTION PLAN 1. Purposes of Plan. The purposes of this Plan, which shall be known as the Insituform Technologies, Inc. 1992 Director Stock Option Plan, and is hereinafter referred to as the "Plan", are (i) to provide incentives for members of the Board of Directors of Insituform Technologies, Inc. (the "Company") by encouraging their ownership of the class A common stock, $.01 par value (the "Common Stock"), of the Company, and (ii) to aid the Company in retaining such directors, upon whose efforts the Company's success and future growth depends, and attracting other such directors. 2. Administration. The Plan shall be administered by the Board of Directors of the Company or, as determined by the Board of Directors in its sole discretion, by a committee from time to time appointed by the Board of Directors and consisting of not less than two of its members (the Board of Directors, or such committee, for purposes of this Plan hereinafter referred to as the "Committee"), as hereinafter provided. Subject to the terms of the Plan, the Committee shall have plenary authority to determine the directors to whom options are to be granted, the number of shares to be subject to each such option, the terms and conditions upon which the options are granted and are exercisable, and whether such options will be incentive stock options or non-qualified stock options. For purposes of administration, the Committee, subject to the terms of the Plan, shall have plenary authority to establish such rules and regulations, make such determinations and interpretations, and take such other administrative actions as it deems necessary or advisable. All determinations and interpretations made by the Committee shall be final, conclusive and binding on all persons, including Optionees (as hereinafter defined) and their legal representatives and beneficiaries. The Board of Directors shall designate one of the members of the Committee as its Chairman. The Committee shall hold its meetings at such times and at such places as it may determine. A majority of its members shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members. Any decision or determination reduced to writing and signed by all members shall be as effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary (who need not be a member of the Committee). No member of the Committee shall be liable for any act or omission with respect to his service on the Committee if he acts in good faith and in a manner he reasonably believes to be in or not opposed to the best interests of the Company. Service on the Committee shall constitute service as a director of the Company for all purposes. 3. Stock Available for Options. There shall be available for options under the Plan a total of 1,000,000 shares of Common Stock, subject to any adjustments which may be made pursuant to Section 5(f) hereof.* Shares of Common Stock used for purposes of the Plan may be either authorized and unissued shares, or previously issued shares held in the treasury of the Company, or both. Shares of Common Stock covered by options which have terminated or expired prior to exercise shall be available for further options hereunder. 4. Eligibility. Options under the Plan may be granted to directors of the Company (including officers, key employees and consultants of the Company). Options may be granted to such directors whether or not they hold or have held options previously granted under the Plan or otherwise granted or assumed by the Company. In selecting directors for options, the Committee may take into consideration any factors it may deem relevant, including its estimate of the director's present and potential contributions to the success of the Company. 5. Terms and Conditions of Options. The Committee shall, in its discretion, prescribe the terms and conditions of the options to be granted hereunder which terms and conditions need not be the same in each case, subject to the following: (a) Option Price. The price at which each share of Common Stock covered by an option granted under the Plan may be purchased shall be determined by the Committee and shall not be less than the lesser of (i) the tangible book value per share of Common Stock, determined in accordance with generally accepted accounting principles, as of the end of the fiscal quarter of the Company immediately preceding the fiscal quarter in which the option is granted, or (ii) the market value per share of Common Stock on the date of grant of an option as determined pursuant to Section 5(c). The date of the grant of an option shall be the date specified by the Committee in its grant of the option. (b) Option Period. The period for exercise of an option shall in no event be more than ten years from the date of grant. Options may, in the discretion of the Committee, be made exercisable in installments during the option period. Any shares not purchased on any applicable installment date may be purchased thereafter at any time before the expiration of the option period. (c) Exercise of Options. In order to exercise an option, the holder thereof (the "Optionee") shall deliver to the Company written notice specifying the number of shares of Common Stock to be purchased, together with cash or a certified or bank ________________ * Increase from 500,000 to 1,000,000 subject to stockholder approval. cashier's check payable to the order of the Company in the full amount of the purchase price therefor; provided that, for the purpose of assisting an Optionee to exercise an option, the Company may make loans to the Optionee or guarantee loans made by third parties to the Optionee, on such terms and conditions as the Board of Directors may authorize; and provided further that such purchase price may be paid in shares of Common Stock owned by the Optionee having a market value on the date of exercise equal to the aggregate purchase price, or in a combination of cash and Common Stock. For purposes of the Plan, the market value per share of Common Stock shall be the last sale price regular way on the date of reference, or, in case no sale takes place on such day, the average of the closing bid and asked prices regular way, in either case on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or if the Common Stock is not listed or admitted to trading on any national securities exchange, the last sale price of the Common Stock as reported on the National Association of Securities Dealers Automated Quotation ("NASDAQ") National Market System on such date, or if the Common Stock is not so reported, the average of the closing high bid and low asked prices of the Common Stock in the over-the-counter market on such date, as reported on the NASDAQ system, or if there are no such prices reported on the NASDAQ system on such date, as furnished to the Committee by a New York Stock Exchange member selected from time to time by the Committee for such purpose. If there is no bid or asked price reported on any such date, the market value shall be determined by the Committee in accordance with the regulations promulgated under Section 2031 of the Code, or by any other appropriate method selected by the Committee. An Optionee shall have none of the rights of a stockholder until the shares of Common Stock are issued to him. An option may not be exercised for less than 1,000 shares of Common Stock, or the number of shares of Common Stock remaining subject to such option, whichever is smaller. (d) Effect of Termination of Service. An option may not be exercised after the Optionee has ceased to be in the service of the Company or any parent or subsidiary corporations (within the respective meanings of Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended [the "Code"], and referred to herein as "Parent" or "Subsidiary", respectively), whether as a director of the Company or an employee or consultant of the Company or any Parent or Subsidiary thereof, except in the following circumstances: (i) if (x) the Optionee's service as a director is terminated for any reason, and (y) the Optionee is not an employee or consultant of the Company or any Parent or Subsidiary thereof, or his employ is terminated by action of the Company or by reason of disability or retirement under any retirement plan maintained by the Company or any Parent or Subsidiary thereof, the option may be exercised by the Optionee within 30 days after the last such termination, but only as to any shares exercisable on the date the Optionee's service and/or employment so terminates; (ii) in the event of the death of the Optionee during the 30-day period after termination of service and/or employment covered by (i) above, the person or persons to whom his rights are transferred by will or the laws of descent and distribution shall have a period of one year from the date of his death to exercise any options which were exercisable by the Optionee at the time of his death; (iii) in the event of the death of the Optionee while serving as a director or employed, the option shall thereupon become exercisable in full, and the person or persons to whom the Optionee's rights are transferred by will or the laws of descent and distribution shall have a period of one year from the date of the Optionee's death to exercise such option. The provisions of the foregoing clause (iii) shall apply to any outstanding options which are incentive stock options to the extent permitted by Section 422(d) of the Code and such outstanding options in excess thereof shall, immediately upon the occurrence of the event described in the foregoing clause (iii), be treated for all purposes of the Plan as nonstatutory stock options and shall be immediately exercisable as such as provided in the foregoing clause (iii). For purposes of this Section 5(d), service as a consultant of or to the Company or any Parent or Subsidiary shall be considered employment, and the period of such service shall be considered the period of employment; provided, however, that incentive stock options may be granted under the Plan only to a director who is an "employee" (as such term is used in Section 422 of the Code) of the Company or any Subsidiary or Parent. In no event shall any option be exercisable more than ten years from the date of grant thereof. Nothing in the Plan or in any option granted pursuant to the Plan (in the absence of an express provision to the contrary) shall confer on any individual any right to continue in the service of the Company or any Parent or Subsidiary thereof or interfere in any way with the right of the Company to terminate his service. (e) Nontransferability of Options. During the lifetime of an Optionee, options held by such Optionee shall be exercisable only by him. No option shall be transferable other than by will or by the laws of descent and distribution. (f) Adjustments for Change in Stock Subject to Plan and Other Events. In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, rights offering, or any other change in the corporate structure or shares of the Company, the Committee shall make such adjustments, if any, as it deems appropriate in the number and kind of shares subject to the Plan, in the number and kind of shares covered by outstanding options, or in the option price per share. (g) Registration, Listing and Qualification Shares of Stock. Each option shall be subject to the requirement that if at any time the Board of Directors shall determine that the registration, listing or qualification of the shares of Common Stock covered thereby upon any securities exchange or under any federal or state law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the granting of such option or the purchase of shares of Common Stock thereunder, no such option may be exercised unless and until such registration, listing, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board of Directors. The Company may require that any person exercising an option shall make such representations and agreements and furnish such information as it deems appropriate to assure compliance with the foregoing or any other applicable legal requirement. (h) Other Terms and Conditions. The Committee may impose such other terms and conditions, not inconsistent with the terms hereof, on the grant or exercise of options, as it deems advisable. 6. Provisions Applicable to Incentive Stock Options. The Committee may, in its discretion, grant "incentive stock options" (within the meaning of Section 422 of the Code), under the Plan to directors provided, however, that: (a) no such incentive stock option shall be issued to a director of the Company who is not also an employee or officer of the Company; (b) no such incentive stock option shall be granted at an option price which is less than the market value per share of Common Stock on the date of the grant; (c) no such incentive stock option shall be issued to any one Optionee if the aggregate fair market value, determined at the time of the grant of such incentive stock options, of the shares with respect to which such incentive stock options are exercisable for the first time by such Optionee during any calendar year, together with all options under any other incentive stock option plan of the Company exercisable during such year, exceeds $100,000; (d) no such incentive stock option shall be granted to any Optionee who at the time such option is granted owns more than 10 percent of the total combined voting stock of the Company unless (i) the option price is not less than 110 percent of the fair market value per share of stock on the date of the grant, and (ii) the option is not exercisable after five years from the date such option is granted; and (e) Section 5(d)(ii) hereof shall not apply to any incentive stock option. 7. Withholding Tax. Upon the disposition by any person of shares of Common Stock acquired pursuant to the exercise of an option granted pursuant to the Plan, the Company shall have the right to require such person to pay the Company the amount of any taxes which the Company may be required to withhold with respect to such shares. 8. Amendment and Termination. Unless the Plan shall theretofore have been terminated as hereinafter provided, the Plan shall terminate on, and no option shall be granted thereunder after March 31, 2002; provided, however, that the Board of Directors may at any time prior to that date terminate the Plan. The Board of Directors may at any time amend the Plan; provided, however, that, except as contemplated in Section 5(f) hereof, the Board of Directors shall not, without approval by a majority of the votes cast by the stockholders of the Company at a meeting of stock-holders at which a proposal to amend the Plan is voted upon: (i) increase the maximum number of shares of Stock for which options may be granted under the Plan, (ii) change the formula as to minimum option prices, (iii) extend the period during which options may be granted or exercised, or (iv) amend the requirements as to the class of persons eligible to receive options. No termination or amendment of the Plan may, without the consent of an Optionee, adversely affect the rights of such Optionee under any option held by such Optionee. 9. Effectiveness of Plan. The Plan will not be made effective unless approved by a majority of the votes cast by the stockholders of the Company at a meeting of stockholders within twelve (12) months from the date the Plan is adopted by the Board of Directors, duly called and held for such purpose, and no option granted hereunder shall be exercisable prior to such approval. 10. Other Actions. Nothing contained in the Plan shall be construed to limit the authority of the Company to exercise its corporate rights and powers, including but not by way of limitation, the right of the Company to grant or assume options for proper corporate purposes other than under the Plan with respect to any employee or other person, firm, corporation or association. EX-21 5 EXHIBIT 21 SUBSIDIARIES OF INSITUFORM TECHNOLOGIES, INC. The following table sets forth certain information as of December 31, 1997 concerning the Company and certain of its subsidiaries. Unless otherwise indicated all securities of such subsidiaries are owned by the Company:
% of Name Place of Incorporation Voting Securities ---- ---------------------- ----------------- Affholder, Inc. Missouri 100(1) INA Acquisition Corp. Delaware 100 Insituform Central, Inc. Delaware 100(1) Insituform France S.A. France 66.6 Insituform Gulf South, Inc. Delaware 100(2) Insituform Holdings (UK) United Kingdom 100(3) Ltd. Insituform Japan K.K. Japan 100(3) Insituform Licensees B.V./S.A. Netherlands and Delaware 100(3) Insituform Linings Plc. United Kingdom 51(4) Insituform Mid-America, Inc. Delaware 100 Insituform Midwest, Inc. Delaware 100 Insituform Missouri, Inc. Delaware 100(1) Insituform (Netherlands) B.V. Netherlands and Delaware 100(5) Insituform of New England, Massachusetts Inc. 100 Insituform North, Inc. Delaware 100(1) Insituform Plains, Inc. Delaware 100(1) Insituform de Puerto Rico, Inc. Puerto Rico 100(1) Insituform Rockies, Inc. Delaware 100(1) Insituform Southeast, Inc. Florida 100(1) Insituform Southwest, Inc. Delaware 100 Insituform Technologies Limited Alberta 100(1) Insituform Technologies Limited United Kingdom 100(4) Insituform Texark, Inc. Delaware 100(1) Insituform West, Inc. Oregon 100(3) Insituform Mar-Tech Limited British Columbia 100(3) Midsouth Partners (partnership) Tennessee (Partnership) 57.5(6) NuPipe, Inc. Oregon 100 NuPipe International, Inc. Delaware 100(7) NuPipe Limited United Kingdom 100(4) % of Name Place of Incorporation Voting Securities ---- ---------------------- ----------------- PALTEM Systems, Inc. Delaware 100(1) Tite Liner NRO Corp. Alberta 100(1) United Pipelines Argentina Argentina 100(1) S.A. United Pipeline de Mexico Mexico 55(1) S.A. de C.V. United Pipeline Systems USA, Inc. Delaware 100(1) United Sistema de Tuberias Ltda. Chile 60(1) Other subsidiaries of the Company are not named in the table above. Such unnamed subsidiaries considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. - ------------------- (1) Securities are owned by Insituform Mid-America, Inc. (2) Securities are owned by Naylor Industries, Inc. (3) Securities are owned by INA Acquisition Corp. (4) Securities are owned by Insituform Holdings (UK) Ltd. (5) Securities are owned by Insituform Licensees B.V./S.A. (6) Securities are owned 42.5% by E-Midsouth, Inc., a wholly-owned subsidiary of the Company, and 15% by Insituform Southwest, Inc. (7) Securities are owned by NuPipe, Inc.
EX-23.1 6 Exhibit 23.1 Consent of Independent Certified Public Accountants Insituform Technologies, Inc. Chesterfield, Missouri As independent public accountants, we hereby consent to the incorporation of our report, dated March 4, 1998, included in Insituform Technologies, Inc.'s 1997 Form 10-K, into the Company's previously filed Registration Statements on Form S-8 Nos. 33-82486, 33-82488 and 33-63953. Arthur Andersen LLP St. Louis, Missouri March 27, 1998 EX-23.2 7 Exhibit 23.2 Consent of Independent Certified Public Accountants Insituform Technologies, Inc. Chesterfield, Missouri We hereby consent to the incorporation by reference in Registration Statement No. 33-82486 on Form S-8, Registration Statement No. 33-82488 on Form S-8 and Registration Statement No. 33-63953 on Form S-8 of our report dated March 8, 1996, except for Note 13 which is as of March 26, 1997, relating to the consolidated financial statements of Insituform Technologies, Inc. appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. BDO SEIDMAN, LLP Memphis, Tennessee March 26, 1998 EX-27 8
5 12-MOS DEC-31-1997 DEC-30-1997 45,734 1 76,827 1,136 12,214 161,273 57,983 60,393 297,852 46,990 0 0 0 272 136,587 297,852 20,336 320,640 14,198 226,152 69,458 0 8,750 16,927 7,067 9,644 0 225 0 9,419 0.350 0.350
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