FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1996
------------------
Commission file number #0-10786
--------
Insituform Technologies, Inc.
(Exact name of registrant as specified
in its charter)
Delaware 13-3032158
--------------- ----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1770 Kirby Parkway, Suite 300
Memphis, Tennessee 38138
-----------------------------------
(Address of Principal Executive Offices)
(901) 759-7473
---------------------
(Registrant's telephone number
including area code)
(Former name, former address and
former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past
90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
Class Outstanding at November 1, 1996
- -------------------- -------------------------------
Class A, Common Stock, 26,888,530 Shares
$.01 par value
<PAGE>
<PAGE>
INDEX
Page No.
Part I Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14
Part II Other Information and Signatures:
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 21
Index to Exhibits 22
<PAGE>
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTIONS>
September
December
30, 1996 31,
1995
-----------
- ---------
(Unaudited)
(in thousands)
<S> <C> <C>
Assets
- ------
Current
- -------
Cash and cash equivalents, restricted
$858 and $842 $18,582 $11,416
Receivables (Note 4) 59,883 64,717
Costs and estimated earnings in excess
of billings 20,406 14,008
Inventories (Note 5) 15,217 16,572
Deferred income taxes 4,188 4,287
Prepaid expenses and miscellaneous 7,047 9,711
------- -------
Total current assets 125,323 120,711
------- -------
Property and equipment, less
accumulated depreciation and
amortization (Note 6) 58,143 59,773
------- -------
Other assets
- ------------
Cost in excess of net assets of
businesses acquired less
accumulated amortization of $8,860
and $6,811 (Notes 2 and 3) 57,166 58,431
Patents and patent applications, less
accumulated amortization of
$3,737 and $3,270 9,552 8,963
Investments in licensees and
affiliated companies (Note 2) 2,763 1,555
Deferred income taxes 1,773 1,862
Non-compete agreements, less
accumulated amortization of
$3,083 and $2,323 2,938 3,554
Miscellaneous 5,007 5,451
------- -------
Total other assets 79,199 79,816
------- -------
$262,665 $260,300
======== ========
See accompanying summary of accounting policies and
notes to consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTIONS>
September
December
30, 1996 31,
1995
----------
- ---------
(Unaudited)
(in thousands, except share
amounts)
<S> <C> <C>
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities
- -------------------
Notes payable to banks $813
$1,053
Accounts payable and accruals 32,770
35,644
Income taxes payable 1,693
1,768
Deferred income taxes 636
627
Current maturities of long-term
debt (Note 9) 7,420
12,081
--------
- --------
Total current liabilities 43,332
51,173
Long-term debt, less current
maturities (Note 9)
- --------------------------- 83,637
82,813
Deferred income taxes 2,850
2,850
- ---------------------
Other liabilities 1,070
1,009
- ----------------- --------
- --------
Total liabilities 130,889
137,845
--------
- --------
Commitments and contingencies
(Notes 9 and 10)
- -----------------------------
Minority interests (Note 3)
- --------------------------- 5,653
5,645
--------
- --------
Stockholders' equity
- --------------------
Preferred stock, $.10 par -
shares authorized 2,000,000;
none outstanding 0
0
Common stock, $.01 par - shares
authorized 40,000,000; shares
issued 27,144,331 in 1996 and
27,104,940 in 1995 (Notes 3 and 7) 271
271
Additional paid-in capital 67,809
67,427
Retained earnings (Note 9) 64,053
54,557
--------
- --------
132,133
122,255
<PAGE>
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
</TABLE>
<TABLE>
<CAPTIONS>
September
December
30, 1996 31,
1995
----------
- ---------
(Unaudited)
(in thousands, except share
amounts)
<S> <C> <C>
Treasury stock, 255,801 shares,
at cost (Note 7) (4,029)
0
Cumulative foreign currency
translation adjustments (1,981)
(1,821)
Notes receivable from affiliates
(Note 7) 0
(3,624)
--------
- --------
Total stockholders' equity 126,123
116,810
--------
- --------
$262,665
$260,300
========
========
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
<PAGE>
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTIONS>
For the Three Months
For the Nine Months
Ended September 30,
Ended September 30,
1996 1995
1996 1995
---- ----
- ---- ----
(In thousands, except per
share amounts)
<S> <C> <C> <C>
<C>
Revenues:
Construction contracts $66,994 $64,957
$195,214 $183,349
Product sales 2,626 3,438
11,258 13,120
Royalties and license fees 1,027 1,498
4,054 5,311
------- -------
- ------- -------
Total revenues 70,647 69,893
210,526 201,780
Operating costs and expenses:
Cost of construction contracts 46,155 44,460
133,956 123,053
Cost of product sales 1,573 1,520
7,496 8,433
Royalty expense 160 189
419 294
Selling, administrative and general 14,079 14,234
43,550 41,442
Strategic marketing and product
development 2,055 1,708
5,812 5,725
------- -------
- ------- -------
Total operating costs and expenses 64,022 62,111
191,233 178,947
------- -------
- ------- -------
Operating income 6,625 7,782
19,293 22,833
Other income (expense):
Litigation settlement (Note 10) 0 0
0 (3,598)
Interest expense (1,658) (1,612)
(4,809) (4,718)
Other income (expense) 279 1,025
1,113 1,873
------- -------
- ------- -------
Total other income (expense) (1,379) (587)
(3,696) (6,443)
------- -------
- ------- -------
Income before taxes on income 5,246 7,195
15,597 16,390
Taxes on income (Note 8) 2,046 2,942
6,163 6,262
------- -------
- ------- -------
Income before equity in earnings of
affiliated companies 3,200 4,253
9,434 10,128
Minority interests (33) (208)
(256) (951)
Equity in earnings of affiliated
companies 249 178
318 609
------- -------
- ------- -------
Net income $3,416 $4,223
$9,496 $9,786
======= =======
======= =======
Earnings per share of common stock and
common stock equivalents:
Net income $0.13 $0.15
$0.35 $0.36
======= =======
======= =======
Weighted average common and common
equivalent shares outstanding 27,040 27,414
27,173 27,288
======= =======
======= =======
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.<PAGE>
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the
Nine
Months
Ended
September 30,
1996
1995
----
----
(Note 1)
(in
thousands)
<S> <C>
<C>
Cash flows from operating activities:
- ------------------------------------
Income from continuing operations $9,496
$9,786
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 9,645
9,219
Amortization 3,640
3,330
Miscellaneous 170
(84)
Equity in earnings of affiliated companies (318)
(609)
Loss on disposals of property and
equipment 415
150
Minority interests in net income 256
951
Deferred income taxes 205
1,237
Translation adjustments (161)
169
Restructuring costs (896)
0
Changes in operating assets and liabilities
(net of effect of businesses purchased):
Receivables 3,259
(4,088)
Costs and estimated earnings in excess
of billings (6,397)
(29)
Inventories 1,355
(3,966)
Prepaid expenses and miscellaneous 2,513
(3,840)
Miscellaneous other assets 124
(916)
Accounts payable and accruals (108)
(5,761)
Income taxes payable 1,811
(3,123)
-----
------
Net cash provided by continuing
operations 25,009
2,426
------
------
Net cash used by discontinued operations 0
(178)
------
------
Net cash provided by operations 25,009
2,248
------
------
Cash flows from investing activities:
- ------------------------------------
Capital expenditures (11,003)
(12,534)
Proceeds on disposal of property and equipment 3
583
Investments in licensees/affiliated companies (1,129)
226
Patents and patent applications (1,097)
(388)
Purchase of business, net of cash acquired
(Note 3) 0
(16,131)
------
------
Net cash used by investing activities (13,226)
(28,244)
------
------
(continued)
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTIONS>
For
the Nine
Months Ended
September 30,
1996
1995
----
----
(Note 1)
(in
thousands)
<S> <C>
<C>
Cash flows from financing activities:
- ------------------------------------
Proceeds from issuance of common stock 74
3,415
Increase (decrease) in short-term borrowings (240)
9,714
Net borrowings (repayments) of long-term debt (3,947)
14,362
Minority interests (556)
(155)
Dividends paid 0
(1,476)
------
-------
Net cash provided (used) by financing
activities (4,669)
25,860
------
-------
Effect of exchange rates changes on cash 52
216
------
-------
Net increase in cash and cash
equivalents for the period 7,166
80
------
-------
Cash and cash equivalents, beginning of
period 11,416
18,670
------
-------
Cash and cash equivalents, end of period $18,582
$18,750
=======
=======
Supplemental disclosures of cash flows
information: 1996
1995
- -------------------------------------- ----
----
(in
thousands)
Cash paid during nine months ended
September 30, for:
- -----------------------------------
Interest $5,489
$4,113
Income taxes $3,566
$6,565
Non-cash investing and financing activities:
- -------------------------------------------
Stock issued in connection with litigation
settlement (Note 10) $322
--
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.<PAGE>
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
1. In the opinion of the Company, the accompanying consolidated
financial statements contain all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly
the financial position as of September 30, 1996 (unaudited)
and the unaudited results of operations and cash flows for the
three and nine months ended September 30, 1996 and 1995. The
financial statements have been prepared in accordance with the
requirements of Form 10-Q and consequently do not include all
the disclosures normally made in an Annual Report on Form
10-K. Accordingly, the consolidated financial statements
included herein should be reviewed in conjunction with the
financial statements and the footnotes thereto included in the
Company's 1995 Annual Report on Form 10-K.
As discussed in Note 3 below, the consolidated financial
statements give retroactive effect to the Company's
acquisition of Insituform Mid-America, Inc. ("IMA") in October
1995, which has been accounted for as a pooling-of-interests.
Reclassifications of prior period amounts have been made to
conform with current period presentation.
The results of operations for the three and nine months ended
September 30, 1996 and 1995 are not necessarily indicative of
the results to be expected for the full year.
2. The consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries, including a
51% owned United Kingdom subsidiary, Insituform Linings, Plc.,
a 60% owned Chilean subsidiary, United Sistema de Tuberias,
Ltda., a 66% owned French subsidiary, Insituform France, S.A.,
a 55% owned Mexican subsidiary, United Pipeline de Mexico S.A.
de C.V., and a 57.5% owned domestic partnership, Midsouth
Partners (see Note 3). All material intercompany balances,
transactions and stockholdings are eliminated.
The net assets of businesses purchased are recorded at their
fair value at the acquisition date and the financial
statements include their operations only from that date. Any
excess of acquisition costs over the fair value of net assets
acquired is included in the balance sheet as "Cost in excess
of net assets of businesses acquired."
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 no greater than 50% are accounted for on the
equity method. Intercompany profits and losses are eliminated
for those investments carried on the equity method.
<PAGE>
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
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 have been computed based upon the weighted
average number of common shares and common equivalent shares
outstanding during the respective periods. Common equivalent
shares include shares from the assumed exercise of common
stock options.
3. On October 25, 1995, the Company completed the acquisition
(the "IMA Merger") of IMA through the merger into IMA of the
Company's wholly-owned subsidiary, ITI Acquisition Corp., as
a result of which IMA became a wholly-owned subsidiary of the
Company. The Company issued an aggregate of 12,450,896 shares
of its class A common stock, $.01 par value ("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.
On April 18, 1995, the Company acquired the pipeline
rehabilitation business of Enviroq Corporation ("Enviroq"),
including Enviroq's Insituform(R) process business conducted by
its Insituform Southeast, Inc. subsidiary in Alabama, Florida,
Georgia, North Carolina and South Carolina, through the merger
into Enviroq of a wholly-owned subsidiary of the Company.
The base purchase price of $18,250,000 (including $3,000,000
in payment of a five-year covenant not to compete) was paid
$15,250,000 in cash and $3,000,000 in a five-year subordinated
promissory note. As a result of demands for payment of such
note and ensuing litigation, in March 1996 the Company
discharged its obligation under such note and under
arrangements to pay $1 million in consulting fees, and settled
such litigation, for the aggregate amount of $3.4 million and
the release of other claims.
<PAGE>
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
Prior to April 18, 1995, a 15% general partnership interest in
Midsouth Partners, an Insituform licensee in Tennessee,
Kentucky and northern Mississippi, was held by Insituform
Southwest, Inc. (formerly named Insituform California, Inc.;
"ISW"), a subsidiary of the Company, and a 42.5% interest
therein was held by E-Midsouth, Inc. ("E-Midsouth"), a
subsidiary of Enviroq. As a result of the Enviroq
acquisition, the Company holds a majority ownership (57.5%) in
Midsouth Partners and has accordingly consolidated the
accounts of Midsouth Partners since April 18, 1995. In June
1996, the arbitration panel in previously reported proceedings
commenced by the remaining partner, Insitu, Inc. ("Insitu"),
a wholly-owned subsidiary of Insituform East, Incorporated,
determined that E-Midsouth but not ISW was in default of its
obligations under the Midsouth Partners partnership agreement
and that, as a consequence thereof, Insitu had the right
unilaterally to appoint a representative to the seven-member
management committee of the partnership, in place of a
representative appointed by E-Midsouth and in addition to the
three members previously appointed by Insitu.
The following table presents summarized consolidated unaudited
pro forma results of operations for the first nine months of
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 (in thousands except per share
amounts).
Total revenues $208,838
Income from continuing operations $9,042
Income from continuing operations
per common and common equivalent
share $0.33
On February 16, 1995, the Company acquired two-thirds of the
common stock of Insituform France S.A., a newly-formed
subsidiary of its former French licensee, for FF7,400,000
(U.S.$1,431,000). The purchase price was funded by the
Company's debt facility with SunTrust Bank, Nashville, N.A.
("SunTrust") (see Note 9).
In April 1996, the Company entered into arrangements whereby,
in exchange for payments in the approximate amount of $1
million funded by the Company's SunTrust facility, the Company
increased its share of the equity of its German licensee from
one-third to one-half, effective January 1, 1996.
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
4. Receivables consist of the following (in thousands):
<PAGE>
<TABLE>
<CAPTIONS>
September 30, 1996 December
31, 1995
------------------
- -----------------
<S> <C> <C>
Trade, less allowance for
possible losses of
$882 and $974 $48,192
$51,049
Retainage under construction
contracts 11,089
11,395
Refundable income taxes 602
2,273
-------
- -------
$59,883
$64,717
=======
=======
</TABLE>
5. Inventories are valued at the lower of cost or market.
Maintenance and office supplies are not inventoried.
Inventories are summarized as follows (in thousands):
<TABLE>
<CAPTIONS>
September 30, 1996 December
31, 1995
------------------
- -----------------
<S> <C> <C>
Finished goods $1,156
$822
Work-in-process 1,306
1,053
Construction materials 9,164
9,608
Raw materials 3,591
5,089
------
- -----
$15,217
$16,572
=======
=======
</TABLE>
6. Property and equipment consists of the following (in
thousands):
<TABLE>
<CAPTIONS>
September 30, 1996 December
31, 1995
------------------
- -----------------
<S> <C> <C>
Land and land improvements $2,379
$3,474
Buildings and improvements 15,274
15,264
Machinery and equipment 72,750
64,980
Furniture and fixtures 8,189
7,967
Autos and trucks 4,169
3,685
<PAGE>
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
Construction in progress 4,865
5,168
------
- ------
107,626
100,538
Less: accumulated depreciation (49,483)
(40,765)
-------
- -------
$58,143
$59,773
=======
=======
</TABLE>
7. On July 3, 1992, Ringwood Limited ("Ringwood") and Douglas K.
Chick and Brian Chandler, both directors of the Company,
entered
into an agreement with the Company whereby Ringwood executed
to
the Company its secured, non-recourse promissory note (the
"Note") in the amount of $3,624,000, which bore interest at
Citibank's prime rate plus 2-1/2%, originally was 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. Chandler and Chick under the Note and the Pledge. The
amount of the Note plus accrued interest to the date of
foreclosure has been recorded as treasury stock.
8. Provision for federal and state income taxes in the
consolidated
statements of income are made up of the following components
(in
thousands) for the nine months ended September 30, 1996 and
1995, respectively:
<TABLE>
<CAPTIONS>
September 30,
1996 1995
---- ----
<S> <C> <C> <C>
Current:
Federal $4,023 $2,580
Foreign 1,248 2,312
State 687 477
----- -----
5,958 5,369
----- -----
Deferred:
Federal $105 $485
Foreign 100 408
State -- --
----- -----
205 893
----- -----
Total taxes on income $6,163 $6,262
===== =====
</TABLE>
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
The effective tax rate on income before taxes for the nine months
ended September 30, 1996 and 1995 was different than the United
States ("U.S.") federal statutory tax rate. The following summary
reconciles taxes at the U.S. federal statutory tax rate with the
actual taxes (in thousands) and the effective rate:
<PAGE>
<TABLE>
<CAPTIONS>
1996
1995
Amount Percent Amount
Percent
------ ------- ------
-------
<S> <C> <C> <C>
<C>
Taxes on income at U.S.
federal statutory rate $5,302 34.0% $5,572
34.0%
Increase (decrease) in
taxes resulting from:
State income taxes, net of
federal income tax benefit 454 2.9 463
2.8
Effect of foreign income
taxed at foreign rates 210 1.3 38
0.2
Tax amortization of
intangibles (462) (3.0) (492)
(3.0)
Tax benefit not currently
recognizable on losses of
subsidiaries 387 2.5 276
1.7
Utilization of net operating
losses and other
carryforwards (181) (1.2) (191)
1.2
Amortization of goodwill, not
allowed for tax purposes 384 2.5 443
2.7
Other items 69 (0.5) 153
(1.0)
----- ----- -----
- -----
Total taxes on income $6,163 39.5% $6,262
38.2%
===== ===== =====
=====
</TABLE>
9. At September 30, 1996, the Company had outstanding borrowings
of $72.6 million under its credit agreement with SunTrust
entered into in October 1995, which provides for advances
through 1997 on a revolving basis aggregating up to $105
million (including a $5.0 million standby letter of credit
facility). Of such amount, approximately $66.4 million was
applied to refinance existing debt under the Company's prior
arrangements with SunTrust (approximately $35.9 million), IMA's
term loans with Boatmen's National Bank and Mark Twain Bank
($14.5 million), and short-term debt under IMA's line of credit
facility ($16.0 million). Additional advances are available
for the expansion of the Company's business and for general
corporate purposes.
The current SunTrust facility matures in October 2000, with
installments based on a five-year amortization schedule,
commencing December 31, 1997. Interest on indebtedness under
the facility is payable at either (i) SunTrust's prime rate
(8.25% at September 30, 1996), plus a margin of up to .25% in
the event certain financial ratios are not maintained, or (ii)
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
an adjusted LIBOR rate (5.4% at September 30, 1996), plus a
margin ranging from 1.00% to 1.75%, depending on the
maintenance of certain financial ratios. Up to $5 million
under the credit facility may be borrowed from SunTrust
pursuant to a "swing line facility," which accrues interest at
a rate per annum equal to 0.5% below SunTrust's prime rate.
The SunTrust facility obligates the Company to comply with
certain financial ratios and restrictive covenants that, among
other things, limit the ability of the Company and its
subsidiaries to incur further indebtedness, pay dividends, make
loans and encumber any properties, and requires guarantees of
certain domestic subsidiaries. Essentially all of the
Company's retained earnings at September 30, 1996 are
restricted under such covenants.
In July 1993, in order to complete the financing for the
acquisition of Insituform Midwest, the Company also issued an
8.5% senior subordinated note, subordinated in right to the
Company's bank and other institutional financing and to
deferred consideration incurred in connection with business
acquisitions. Warrants to purchase 350,877 unregistered shares
of Common Stock were also issued to the lender. The note is
prepayable at the Company's option, at premiums until July 1998
ranging from 3% to 1% of the amount prepaid. The subordinated
note also restricts the Company's ability to pay dividends and
repurchase outstanding Common Stock.
The Company's subsidiaries, Insituform Canada Limited,
Insituform Technologies Limited (formerly Insituform Permaline
Limited), Insituform France S.A., and Insituform Japan KK, also
maintain certain revolving line of credit facilities. The
aggregate amount outstanding under these facilities was
$813,000 at September 30, 1996.
10. On May 23, 1995, the Company, notwithstanding its belief that
it had defenses to plaintiff's claim that were well grounded in
fact and law, entered into a memorandum of understanding to
settle the previously disclosed stockholder class action
against the Company in the United States District Court for the
Western District of Tennessee alleging various misstatements
and omissions, relating to, among other things, acquisition and
restructuring costs arising from the acquisition of Insituform
Group Limited in December 1992, in public disclosures by the
Company during the period from October 28, 1992 to May 12, 1993
in violation, among other things, of Rule 10b-5 under the
Securities Exchange Act of 1934. Under the settlement, the
Company has made a cash payment to class members in the amount
of $3.2 million and (in January 1996) issued to class members
30,000 shares of Common Stock.
<PAGE>
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
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.
<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial
condition and results of operations during the periods included in
the accompanying consolidated financial statements.
General
- -------
The Company's revenues include construction revenues from direct
installation and other contracting activities, product sales of
materials and equipment to licensees and royalty income and initial
license fees received from licensees for the use of the Company's
trenchless rehabilitation processes. Product sales consist
primarily of sales of Insitutubes(R) and NuPipe(R) to licensees.
Construction contract revenue is generated primarily by the
Company's subsidiaries operating in the United States, Canada,
France, the United Kingdom and Chile. Royalties and license fees
are paid by the Company's 34 unaffiliated Insituform(R) licensees
and sub-licensees and its ten unaffiliated NuPipe(R) licensees.
Product sales and royalties are primarily a function of the
contracts performed by the Company's licensees. However, changes
in product sales may vary from changes in royalties because of
several factors, including differences between the timing of
Insitutube sales and contract performance by licensees and the
accrual by the Company of minimum royalties in excess of royalties
otherwise due for work performed. The Company's consolidated
subsidiaries obtain supplies of Insitutubes and related materials
from the Company.
The Company was incorporated in Delaware in 1980 in order to act as
the exclusive licensee of the Insituform Process in most of the
United States. In October 1995, the Company consummated the IMA
Merger, which has been accounted for as a pooling-of-interests.
Under the pooling-of-interests method of accounting, the historical
financial statements of the combining companies are retroactively
combined (after adjustments to eliminate intercompany balances and
transactions, and to conform accounting methods) as if the
companies had operated as a single entity.
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. See "Results of
Operations" below. 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.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
At September 30, 1996, the Company had $18.5 million in cash, U.S.
treasury bills, and short-term investments, as compared to $11.4
million at December 31, 1995. Cash and cash equivalents increased
$7.1 million as a result of cash provided by operations of $24.0
million offset by cash used for capital expenditures of $11.0
million and net repayments of long-term debt of $3.9 million. The
Company's working capital ratio was 2.9-to-1.0 at September 30,
1996, representing an increase from 2.4-to-1.0 at December 31,
1995.
Operations provided cash of $24.0 million during the nine months
ended September 30, 1996, as compared to cash provided of $2.2
million during the same period in 1995. Unlike the first nine
months of 1995, in which increases of inventories were in the
amount of $4.0 million, prepaid expenses and miscellaneous in the
amount of $3.8 million, and reductions of accrued income taxes in
the amount of $3.1 million, the first nine months of 1996 resulted
in a decrease in inventories of $1.4 million, a decrease in prepaid
expenses and miscellaneous of $2.5 million, and an increase in
accrued income taxes of $1.8 million. In addition, depreciation
and amortization increased by approximately $0.7 million primarily
associated with the acquisition of the pipeline business of
Enviroq, as well as from continuing capital expenditures.
Receivables, together with costs and estimated earnings in excess
of billings, used $3.1 million of cash during 1996, compared to
using $4.1 million in 1995. Receivables, including costs and
estimated earnings in excess of billings, increased to $79.7
million at September 30, 1996 from $76.4 million at December 31,
1995, reflecting a $2.9 million decrease in trade receivables, a
$0.3 million decrease in retainage receivables, offset by an
increase of $6.4 million in costs and estimated earnings in excess
of billings on construction contracts. The collection cycle for
construction receivables is generally longer than for the Company's
other operations due to provisions for retainage, often 5% to 10%
of the contract amount, as well as the slow internal review
processes often employed by the construction subsidiaries'
municipal customers. Retainage receivables are generally received
within 60 to 90 days after the completion of a contract.
During 1996, increases in accounts payable and accruals (including
restructuring payments) provided $1.7 million in cash as compared
to 1995, in which $5.8 million was used due primarily to lower
payments for employee bonuses made in 1996. Additional accruals of
income taxes added $1.8 million to cash in 1996, as compared to a
reduction in accruals of $3.1 million in 1995.
<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital expenditures were $11.0 million in the first nine months of
1996, as compared to $12.5 million in the same period in 1995.
Capital expenditures generally reflect replacement equipment
required by the Company's contracting subsidiaries. In August, the
Company approved plans to pursue construction of a new, expanded
research and development center in Memphis.
In April 1996, the Company entered into arrangements whereby, in
exchange for payments in the approximate amount of $1 million, the
Company increased its share of the equity of its German licensee
from one-third to one-half, effective January 1, 1996.
Financing activities used $4.4 million in cash during the first
nine months of 1996 as compared to cash provided of $25.9 million
in the comparable period in 1995. During 1996, the Company made
principal payments of $5.1 million relating to the Company's credit
facility with SunTrust and repaid the subordinated note issued in
connection with the Enviroq acquisition. In March 1996, as a
result of demands for payment of the Company's $3 million five-year
subordinated note issued in April 1995 as part of the $18.3 million
purchase price in the Enviroq acquisition, and ensuing litigation,
the Company discharged its obligation under such note and under
arrangements to pay $1 million in consulting fees over five years,
and settled such litigation, for the aggregate amount of $3.1
million and the release of other claims. In April 1995, the Company
utilized proceeds from issuance of additional term debt in the
amount of $15.3 million to complete the Enviroq acquisition.
In October 1995, the Company entered into a credit agreement dated
such date (the "Credit Agreement") with SunTrust, as agent, and a
group of participating lenders (the "Lenders"), which provides for
advances by the Lenders through October 1997 on a revolving basis
aggregating up to $105 million (including a $5 million standby
letter of credit facility). Of such amount, approximately $35.9
million was applied to refinance the prior existing debt of the
Company to SunTrust and approximately $14.5 million to IMA's prior
existing term loan and approximately $15.9 million to short-term
debt of IMA under credit lines replaced with the new facility.
Additional advances may be used for the expansion of the Company's
business and for general corporate purposes.
Indebtedness pursuant to the Credit Agreement matures five years
after closing, with installments based on a five-year amortization
schedule, commencing December 31, 1997. Interest on indebtedness
under the Credit Agreement is payable at a rate per annum selected
by the Company as either SunTrust's prime rate, plus a margin up to
0.25% in the event certain financial ratios are not maintained, or
an adjusted LIBOR rate, plus a margin ranging from 1.00% to 1.75%,
depending on the maintenance of certain financial ratios. Up to $5
million under the Credit Agreement may be borrowed from SunTrust
pursuant to a swing-line facility, and would accrue interest at a
rate per annum equal to 0.5% below SunTrust's prime rate. The
Credit Agreement obligates the Company to comply with certain
financial ratios and restrictive covenants that, among other
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
things, limit the ability of the Company and its subsidiaries to
incur further indebtedness, pay dividends, make loans and encumber
any properties, and requires guarantees of certain domestic
subsidiaries.
The Company's senior subordinated note in the principal amount of
$5 million acquired by Hanseatic Corporation in July 1993 requires
quarterly payments of interest at 8.5% per annum and installments
of principal in the amount of $1 million on each of the fifth
through eighth anniversary dates of closing, with the entire
remaining principal due nine years after closing. The note is
subordinated to bank and other institutional financing (including
the Credit Agreement), and purchase money debt incurred in
connection with acquisitions of businesses. The note is
pre-payable at the option of the Company, at premiums until the
fifth anniversary of closing ranging from 3% to 1% of the amount
prepaid. Warrants with respect to 350,877 shares of Common Stock
issued in connection with such note are exercisable, at the
election of the holder, through July 25, 1998, at a price per share
of Common Stock of $14.25, and such shares are entitled to demand
and incidental registration rights.
In October 1996, the Company completed payments on its notes issued
in connection with the acquisition, in October 1994, of all of the
outstanding stock of Gelco and affiliates, originally representing
the one-half of the purchase price of $18 million not paid in cash
at closing, such notes due on the first and second anniversaries of
closing. In addition, the Company issued promissory notes,
aggregating $2.85 million, at closing, to the former Gelco
shareholders and their affiliates, representing net current
liabilities of the acquired companies to related parties and a
portion of working capital at closing, the remaining one-half of
the principal amount of which becomes due on the third anniversary
of closing. The notes issued in the Gelco closing are secured by
the assets acquired, subject to the rights of SunTrust, as agent,
under its loan arrangements with the Company.
In May 1995, the Company had agreed to extend by one year, through
July 3, 1996 (the "Maturity Date"), the maturity of the secured,
non-recourse promissory note (the "Note") held by the Company
issued by Ringwood Limited ("Ringwood"), an affiliate of Brian
Chandler and Douglas Chick, directors of the Company, in the
principal amount of $3.624 million, 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 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
255,801 shares of Common Stock beneficially owned by Ringwood and
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Messrs. Chandler and Chick, and pledged as security for the Note
(the "Pledge"), in full satisfaction of the obligation of Ringwood
and Messrs. Chandler and Chick under the Note and the Pledge. See
Note 7 of the Notes to Consolidated Financial Statements included
elsewhere herein.
In October 1992, prior to its acquisition by the Company, Naylor
Industries, Inc. ("Naylor") sold all of the common stock of its
industrial services subsidiary, and as part of the sale remains
obligated to indemnify the purchaser, with certain exceptions and
subject to specified limitations, against certain claims, including
certain pending or threatened litigation known to Naylor as of the
date of the purchase. There can be no assurance that any claims, if
successful, are or will be wholly or partially insured, or covered
by financial reserves, or that such claims will not result in
retroactive adjustments in Naylor's insurance premiums based on the
terms of its retrospective rated policies. The Company's financial
statements reflect management's estimate of the likely amounts of
such remaining premiums. The Company has also provided in its
financial statements for the estimated amount of liabilities that
are likely to be incurred from pending litigation and claims
involving Naylor.
Management believes its working capital and its existing credit
availability will be adequate to meet its capital requirements for
the foreseeable future. In connection with any plans for the
expansion of the Company's business and for general corporate
purposes, the Company may consider an offering of shares of Common
Stock or convertible or other debt. The Company has not reached
any determination with respect to the size or nature of any such
offering or whether any such offering will be undertaken, and there
can be no assurance that any such offering will be made.
Recently Issued Accounting Standards
- ------------------------------------
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123"), issued by the Financial
Accounting Standards Board is effective for transactions entered
into in fiscal years that begin after December 15, 1995. The
disclosure requirements of SFAS No. 123 are also effective for
financial statements for fiscal years beginning after December 15,
1995. The new standard encourages entities to adopt a fair value
method of accounting for employee stock-based compensation plans
and requires such accounting for transactions in which an entity
acquires goods or services from non-employees through issuance of
equity instruments. As allowed under the provisions of SFAS No.
123, the Company will continue to measure compensation cost for
employee stock-based compensation plans using the intrinsic value
based method of accounting prescribed by the Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. As
such, the Company will make pro forma disclosures in its annual
financial statements of net income and earnings per share as if the
fair value based method of accounting had been applied.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Nine Months Ended September 30, 1996
Compared to Nine Months Ended September 30, 1995
Revenues. Revenues for the third quarter of 1996 increased 1.1% to
$70.6 million from $69.9 million in the prior year, while revenues
for the first nine months of 1996 increased 4.3% to $210.5 million
from $201.8 million in the prior year. This increase was a result
of an increase in construction revenues, offset by decreases in
product sales to and royalties and license fees from independent
licensees. The increase in construction revenues for the first
nine of 1996 reflects the April 1995 acquisition of the pipeline
rehabilitation business of Enviroq, including Insituform Southeast,
Inc. (and the consequent consolidation of Midsouth Partners),
resulting in the elimination of the related product sales and
royalty revenues. Fluctuations in currency exchange rates of the
Japanese yen, British pound sterling, French franc and Canadian
dollar to the United States dollar negatively impacted total
revenues by approximately $1.3 million in the first nine months of
1996.
Construction revenues during the third quarter increased 3.1% to
$67.0 million from $65.0 million in 1995, while, for the first nine
months of 1996, construction revenues increased by 6.5% to $195.2
million from $183.3 million in the prior year. The increase
reflects the acquisition of Insituform Southeast in April 1995,
which together with the consolidation of Midsouth Partners,
contributed $8.9 million and $23.6 million, respectively, to the
three and nine months ended September 30, 1996, as compared to $7.1
million and $14.4 million in the prior year subsequent to the
acquisition. See Note 3 of the Notes to Consolidated Financial
Statements for information describing the Company's majority
interest in Midsouth Partners resulting from the Enviroq
acquisition, and the June 1996 decision in arbitration regarding
Midsouth's management committee.
Construction revenues also reflect increases for the quarter and
nine-month periods by operations in the United States from the
Company's western region of $2.4 million and $9.1 million,
respectively, and its central region of $0.1 million and $7.3
million, respectively. In addition, United Kingdom revenues
increased by $2.3 million and $9.8 million, respectively, for the
three and nine-month periods, which primarily reflect volume
increases resulting from the acquisition of the FormaPipe business
in November 1995. These increases were offset by decreases in
revenues by the Company's domestic Plains region of $5.2 million
and $6.3 million respectively, for the three and nine-month
periods. Fluctuations in currency exchange rates of the British
pound sterling and Canadian dollar to the United States dollar
negatively impacted total construction revenues by approximately
$0.5 million in the first nine months of 1996.
<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Product sales for the third quarter decreased 23.6% to $2.6 million
in 1996 from $3.4 million in 1995, and for the first nine months of
1996 decreased 14.2% to $11.3 million from $13.1 million in 1995.
For the first nine months of 1995, product sales included $1.2
million in pre-acquisition sales to Insituform Southeast and
Midsouth Partners. The decrease in product sales was also
attributable to decreases in sales to independent European
licensees of $0.4 million, and decreases in sales in Japan of $0.3
million, for the nine-month period. Fluctuations in currency
exchange rates of the Japanese yen and British pound sterling to
the United States dollar negatively impacted total product sales by
approximately $0.9 million for the first nine months of 1996.
Royalty and license fees for the third quarter of 1996 decreased
31.4% to $1.0 million compared to $1.5 million in 1995, and for the
first nine months of 1996 decreased 23.7% to $4.1 million from $5.3
million in 1995. The decrease in the first nine months of 1996 was
primarily attributable to lower royalties collected from
independent licensees in the United States, coupled with the
elimination of intercompany royalties from recently-acquired
subsidiaries.
During the first nine months of 1996, the Company signed license
agreements for Insituform in Taiwan and for NuPipe in Germany, and
recognized $0.3 million in license fee revenue, while in the first
nine months of 1995, the Company signed license agreements in
Poland and South Africa, and recognized $0.2 million in license fee
revenue.
Operating Costs and Expenses. In the third quarter of 1996, cost
of construction contracts increased 3.8% to $46.2 million from
$44.5 million in 1995, while, in the first nine months of 1996,
cost of construction contracts increased 8.9% to $134.0 million
from $123.1 million in 1995. The increases were primarily
attributable to newly-acquired licensees, which added,
collectively, $5.5 million to costs in the nine-month period in
1996. Increases in construction costs in the United States by the
central region of $0.9 million and $7.0 million, respectively, and
in the western region of $1.4 million and $8.5 million,
respectively, for the three and nine-month periods, are reflective
of increased volume and lower margins due to competition in 1996.
The Company's Plains operation experienced a decrease in costs in
the three and nine-month periods of 1996 of $6.1 million and $8.0
million. The Company's corrosion and abrasion activities in the
United States and Chile experienced a decline in costs of $1.0
million for the nine-month period due primarily to a decrease in
volume as a result of lower workable backlog.
Construction costs as a percentage of construction revenues
increased during the third quarter to 68.9% as compared to 68.4% in
the third quarter of 1995. For the nine-month period, construction
costs as a percentage of construction revenues increased to 68.6%
as compared to 67.1% in 1995. These increases are principally due
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
to lower margins achieved by newly-acquired subsidiaries, and
installation difficulties in the Southeastern region, coupled with
lower margins in certain other regions of the United States which
have resulted from poor weather conditions and competitive bidding
conditions.
Cost of product sales increased 3.5% to $1.6 million in the third
quarter of 1996 from $1.5 million in 1995, due primarily to the
favorable impact of a vendor volume rebate of $0.5 million recorded
in the third quarter of 1995. During the first nine months of
1996, cost of product sales decreased 11.1% to $7.5 million from
$8.4 million in 1995. This was primarily due to decreased product
sales in 1996. For the first nine months of 1996, cost of product
sales as a percentage of product sales increased to 66.6% in 1996,
from 64.2% in 1995. This increase was primarily due to decreased
product sales, the aforementioned 1995 volume rebate, and increased
costs of the Company's manufacturing operations in Japan.
As a percentage of revenues, selling, administrative and general
expenses in the third quarter were 19.9% compared to 20.4% in 1995,
while, for the first nine months of 1996, selling, administrative
and general expenses as a percentage of revenues were 20.7%
compared to 20.5% in the first nine months of 1995. The decrease
in the third quarter was primarily due to third quarter 1995
inventory writedowns. The increase for the nine months as a
percentage of revenues is attributable primarily to higher costs of
operations in the newly-acquired subsidiaries, coupled with
management's investment in stronger operations and sales
management, improvement in quality (ISO 9000), and focus on the
industrial market in 1996, offset somewhat by the third quarter
1995 writeoffs. In the third quarter of 1996, selling,
administrative and general costs decreased 1.1% to $14.1 million
compared to $14.2 million in 1995, while, in the first nine months
of 1995, selling, administrative and general expenses increased
5.1% to $43.6 million as compared to $41.4 million in 1995. The
increase during the first nine months of 1996 is due, in large
part, to the incremental costs of operations for recently acquired
entities of $1.0 million (of which $0.3 million related to
incremental goodwill and non-compete amortization). Other
increases were attributable to added personnel costs in the
Company's contracting operations in the United States principally
in the areas of industrial sales, and operations and project
management.
Strategic marketing and product development costs increased 20.3%
to $2.1 million in the third quarter of 1996 compared to $1.7
million during the third quarter of 1995, and, for the first nine
months of 1996, strategic marketing and product development costs
increased 1.5% to $5.8 million as compared to $5.7 million in the
prior year. The increase is primarily due to increased costs
related to the focus on industrial marketing, along with increased
costs of patent defense and maintenance, offset somewhat by
controlled spending in advertising and research projects.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Litigation Settlement. As more fully described in Note 10 of the
Notes to Consolidated Financial Statements, during the second
quarter of 1995 the Company entered into a memorandum of
understanding to settle a pending shareholder class action lawsuit.
Under the settlement, the Company made a cash payment to class
members in the amount of $3.2 million, and issued 30,000 shares of
Common Stock. Accordingly, the Company charged earnings for $3.6
million during the second quarter of 1995.
Interest expense. In the third quarter of 1996, interest expense
increased 2.9% to $1.7 million from $1.6 million in 1995, while for
the first nine months of 1996, interest expense increased 1.9% to
$4.8 million from $4.7 million in 1995. This increase was due
primarily to interest on debt used to finance the Enviroq
acquisition incurred in April 1995 and the April 1996 increase in
the Company's share of the equity of its German licensee, somewhat
offset by reduced principal and lower interest rates on other
existing debt.
Other income. In the third quarter, other income decreased 72.8%
to $0.3 million from $1.0 million in 1995, while for first nine
months of 1996, other income decreased 40.6% to $1.1 million from
$1.9 million in 1995. This decrease was primarily due to the 1995
casualty gain of $0.7 million recorded on insurance settlement in
connection with the flood of the Company's Chesterfield facility in
1993.
Taxes on Income. In the third quarter, taxes on income decreased
30.5% to $2.0 million from $2.9 million in 1995, while, in the
first nine months of 1996, taxes on income decreased 1.6% to $6.2
million from $6.3 million in 1995. The decrease in the third
quarter and first nine months of 1996 was due to a decrease of
$1.9 million and $0.8 million, respectively, in income before taxes
on income compared to the prior periods, coupled with an increase
in the effective tax rate to 39.5% from 38.2% during the first nine
months of 1995. This increase was primarily due to a shift in
earnings mix in 1996 to jurisdictions with higher tax rates.
Net Income. Total revenues for the third quarter increased by $0.8
million, or 1.1%, in 1996 over 1995, which was offset by a decrease
in gross profit of $0.9 million, or 4.1%, coupled with increased
operating costs of $0.2 million, or 1.2%. These factors
contributed to a decrease in operating income of $1.2 million, or
14.9%. An increase in interest expense of $0.1 million, coupled
with a decrease in other income of $0.7 million, offset by an
increase in taxes on income of $0.9 million, resulted in a decrease
in income from continuing operations of $1.1 million, or 24.8%.
Minority interests decreased by $0.2 million, coupled with an
increase in equity in earnings of affiliated companies of $0.1
million. As a result of the foregoing, net income for the third
quarter of 1996 was $3.4 million, a decrease of $0.8 million, or
19.1%, from 1995.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the first nine months of 1996, total revenues increased $8.7
million, or 4.3%, over the first nine months of 1995, which was
offset by a decrease in gross profit of $1.3 million, or 1.9%, and
an increase of operating expenses of $2.2 million, or 4.7%. These
factors resulted in a decrease in operating profit of $3.5 million,
or 15.5%. The litigation loss of $3.6 million in 1995 was offset by
increased interest expense and declined other income of $0.9
million, collectively. These factors were offset by decreased
taxes on income of $0.1 million, which resulted in a decrease in
income before minority interests and equity in earnings of
affiliated companies of $0.7 million, or 6.9%. A decrease in
minority interests of $0.7 million was offset by a decrease in
equity in earnings of affiliated companies of $0.3 million. As a
result of the foregoing, net income for the first nine months of
1996 was $9.5 million, a decrease of $0.3 million from net income
of $9.8 million in the first nine months of 1995.
<PAGE>
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings.
------------------
In previously reported proceedings initiated by the Company in
the United States District Court for the Southern District of
Texas, Houston Division (the "District Court"), against Cat
Contracting, Inc., et al. (Civil Action No. M-90-1690 [the "Texas
Proceedings"]), in November 1996 the Court of Appeals for the
Federal Circuit affirmed the District Court in declining to declare
the Company's serial impregnation patent invalid and found that the
jury's rejection of defendants' challenge to the validity of that
patent was supported by the evidence. The Court of Appeals further
affirmed the District Court in granting defendants' judgment
notwithstanding the jury verdict on the issue of literal
infringement of the patent, and vacated the District Court's
finding of infringement under the doctrine of equivalency, holding
that the District Court had used an incorrect claim construction
and remanding the case to the District Court for new findings
regarding such issue. The Company intends to file a petition
seeking a rehearing before the Court of Appeals.
In October 1996, two of the defendants in the Texas Proceedings
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 Texas Proceedings with
knowledge that the Company's serial impregnation patent was invalid
and gave false testimony in the Texas Proceedings. The suit
further alleges that the Company committed various infractions of
the antitrust laws, including conduct by the Company constituting
unreasonable restraints of trade and monopolization of its market,
in violation of Sections 1 and 2 of the Sherman Act, made false or
misleading representations in violation of 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 will take appropriate measures in a timely
manner in order to vigorously defend itself in this matter.
In previously reported proceedings initiated by the Company in
the United States District Court for the Central District of
California against Spiniello Limited, Inc., et al. (Civil Action
No. 95-5484 (GHK)), the court, in August 1996: (i) granted the
Company's motion to file a supplemental complaint alleging
infringement of an additional Insituform patent and to compel
discovery, (ii) denied the Company's motions to hold defendants in
contempt of the court's previously issued preliminary injunction,
(iii) denied the Company's motion to enjoin using or disclosing
additional trade secrets of the Company, and (iv) established
procedures for monitoring compliance with the court's prior
preliminary injunction.
<PAGE>
PART II - OTHER INFORMATION
---------------------------
In October 1996, Western Slope Utilities, Inc., which utilizes
a serial impregnation process licensed from Inliner, U.S.A., one of
the defendants in the Texas Proceedings, commenced an action
against the Company in the United States District Court for the
District of Colorado (Western Slope Utilities, Inc. v. Insituform
Technologies, Inc. and Insituform (Netherlands) B.V. [Civil Action
No. 96-N-2394]), seeking, among other things, a judgment declaring
the Company's serial impregnation patent invalid, unenforceable and
not infringed by plaintiff's current activities, and injunctive
relief enjoining the Company from charging plaintiff or any of its
customers or suppliers with infringing that patent. The Company
intends to take appropriate measures in a timely manner in order to
vigorously defend itself in this matter.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) The exhibits filed or incorporated by reference as part of
this Quarterly Report on Form 10-Q are listed on the attached Index
to Exhibits.
(b) During the quarter ended September 30, 1996, the Company
filed a Current Report on Form 8-K dated July 17, 1996 addressing,
under "Item 4. Changes in Registrant's Certifying Accountants"
thereunder, the change of independent auditors from BDO Seidman,
LLP to Arthur Andersen, LLP. There were no disagreements between
the Company and BDO Seidman, LLP during the two most recent fiscal
years or any subsequent interim period prior to July 17, 1996 on
any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of the prior
independent auditors, would have caused them to make reference in
connection with their report to the subject matter of their
disagreement. No financial statements were filed with such Current
Report on Form 8-K.
<PAGE>
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
INSITUFORM TECHNOLOGIES, INC.
November 13, 1996 By: s/William A. Martin
-----------------------------
William A. Martin
Senior Vice President and
Principal Financial and
Accounting Officer
<PAGE>
<PAGE>
INDEX TO EXHIBITS
-----------------
27 - Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and is not filed.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 18,582
<SECURITIES> 1
<RECEIVABLES> 59,883
<ALLOWANCES> (882)
<INVENTORY> 15,217
<CURRENT-ASSETS> 125,323
<PP&E> 59,143
<DEPRECIATION> 49,483
<TOTAL-ASSETS> 262,665
<CURRENT-LIABILITIES> 43,332
<BONDS> 0
0
0
<COMMON> 269
<OTHER-SE> 122,854
<TOTAL-LIABILITY-AND-EQUITY> 262,665
<SALES> 11,258
<TOTAL-REVENUES> 210,526
<CGS> 7,496
<TOTAL-COSTS> 141,871
<OTHER-EXPENSES> 49,362
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,809
<INCOME-PRETAX> 15,597
<INCOME-TAX> 6,163
<INCOME-CONTINUING> 9,434
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,496
<EPS-PRIMARY> 0.350
<EPS-DILUTED> 0.350
</TABLE>
