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 March 31, 1997
------------------
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 May 1, 1997
- -------------------- -------------------------------
Class A, Common Stock, 26,915,752 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 13
Part II Other Information and Signatures:
Item 1. Litigation 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Index to Exhibits 22
<PAGE>
<PAGE>
<TABLE>
PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTIONS>
March December
31, 1997 31, 1996
----------- ---------
(Unaudited)
<S> <C> <C>
Assets
- ------
Current
- -------
Cash and cash equivalents, restricted
$608 and $573 $36,971 $13,476
Receivables (Note 3) 68,316 68,627
Costs and estimated earnings in excess
of billings 24,459 20,127
Inventories (Note 4) 15,043 15,781
Deferred income taxes 5,160 5,158
Prepaid expenses and miscellaneous 6,410 7,710
------- -------
Total current assets 156,359 130,879
------- -------
Property and equipment, less
accumulated depreciation and
amortization (Note 5) 57,558 57,266
------- -------
Other assets
- ------------
Cost in excess of net assets of
businesses acquired less
accumulated amortization of $10,438
and $9,837 (Note 2) 56,279 56,943
Patents and patent applications, less
accumulated amortization of
$4,040 and $3,889 10,283 10,049
Investments in licensees and
affiliated companies (Note 2) 3,087 3,137
Deferred income taxes 1,886 1,935
Non-compete agreements, less
accumulated amortization of
$3,566 and $3,327 2,460 2,699
Miscellaneous 5,702 5,036
------- -------
Total other assets 79,697 79,799
------- -------
$293,614 $267,944
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<CAPTIONS>
March December
31, 1997 31, 1996
---------- ---------
(Unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities
- -------------------
Notes payable to banks $2,586 $1,387
Accounts payable and accruals 39,753 40,578
Income taxes payable 1,939 2,801
Deferred income taxes 638 507
Current maturities of long-term
debt (Note 6) 2,571 6,730
-------- --------
Total current liabilities 47,487 52,003
Long-term debt, less current
maturities (Note 6)
- --------------------------- 111,892 82,384
Deferred income taxes 3,635 3,635
- ---------------------
Other long-term liabilities 1,010 1,084
- --------------------------- -------- --------
Total liabilities 164,024 139,106
-------- --------
Commitments and contingencies
(Notes 6, 7 and 8)
- -----------------------------
Minority interests 5,694 5,635
- --------------------------- -------- --------
Common stock and other stockholders'
equity
- ------------------------------------
Preferred stock, undesignated,
$.10 par - shares authorized
2,000,000; none outstanding - -
Common stock, $.01 par - shares
authorized 40,000,000; shares
outstanding 27,171,553 and
27,144,331 (Note 2) 272 271
Additional paid-in capital 67,965 67,824
Retained earnings (Note 6) 60,130 59,049
-------- --------
128,367 127,144
Treasury stock, 255,801 shares (3,269) (3,269)
Cumulative foreign currency
translation adjustments (1,202) (672)
-------- --------
Total common stock and other
stockholders' equity 123,896 123,203
-------- --------
$293,614 $267,944
======== ========
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts)
<CAPTIONS>
For the Three Months
Ended March 31,
1997 1996
------- -------
<S> <C> <C>
Revenues:
Construction contracts $69,730 $60,696
Product sales 5,766 5,760
Royalties and license fees 1,586 1,654
------- -------
Total revenues 77,082 68,110
------- -------
Operating costs and expenses:
Cost of construction contracts 52,160 42,273
Cost of product sales 3,756 3,705
Royalty expense 145 132
Selling, administrative and general 15,010 14,755
Strategic marketing and product
development 1,961 2,065
------- -------
Total operating costs and expenses 73,032 62,930
------- -------
Operating income 4,050 5,180
------- -------
Other income (expense):
Interest expense (1,909) (1,569)
Other income (expense) 272 407
------- -------
Total other income (expense) (1,637) (1,162)
------- -------
Income before taxes on income 2,413 4,018
Taxes on income 990 1,651
------- -------
Income before minority interests and
equity in earnings 1,423 2,367
Minority interests in net income (192) (174)
Equity in earnings of affiliated companies 75 57
------- -------
Income before extraordinary item 1,306 2,250
Extraordinary item - loss on early retirement
of debt (net of income tax benefits of $141)
(Note 6) (225) -
------- -------
Net income $1,081 $2,250
======= =======
Earnings (loss) per share of common stock
and common stock equivalents:
Income before extraordinary item $0.05 $0.08
Extraordinary loss, net of income tax benefits (0.01) -
------- -------
Net income $0.04 $0.08
======= =======
Weighted average common and common
equivalent shares outstanding 26,938 27,235
======= =======
See accompanying notes to consolidated financial statements.
</TABLE> <PAGE>
<PAGE>
<TABLE>
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<CAPTIONS>
For the Three
Months Ended
March 31,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
- ------------------------------------
Net Income $1,081 $2,250
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 3,500 3,416
Amortization 1,173 1,083
Miscellaneous (549) (120)
Equity in earnings of affiliated companies (75) (57)
Minority interests 192 174
Deferred income taxes 130 59
Changes in operating assets and liabilities:
Receivables 748 9,077
Costs and estimated earnings in excess of billings (4,332) (7,313)
Inventories 738 307
Prepaid expenses and miscellaneous 1,300 1,412
Miscellaneous other assets (763) (266)
Accounts payable and accruals (509) 890
Income taxes payable (1,275) 1,416
----- ------
Net cash provided by operations 1,359 12,328
------ ------
Cash flows from investing activities:
- ------------------------------------
Capital expenditures (4,086) (3,744)
Proceeds on disposal of property and equipment 64 -
Investments in licensees/affiliated companies - 109
Patents and patent applications (342) (97)
------ ------
Net cash used by investing activities (4,364) (3,732)
------ ------
(continued)
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<CAPTIONS>
For the Three
Months Ended
March 31,
1997 1996
---- ----
<S> <C> <C>
Cash flows from financing activities:
- ------------------------------------
Proceeds from issuance of common stock 141 17
Increase in short-term borrowings 1,199 346
Proceeds from issuance of long-term debt (Note 6) 110,069 11
Repayments of long-term debt (Note 6) (84,695) (5,070)
Minority interests (75) (254)
Net cash provided (used) by financing activities 26,639 (4,950)
------ -------
Effect of exchange rates changes on cash (139) (48)
------ -------
Net increase in cash and cash
equivalents for the period 23,495 3,598
------ -------
Cash and cash equivalents, beginning of period 13,476 11,416
------ -------
Cash and cash equivalents, end of period $36,971 $15,014
======= =======
Supplemental disclosures of cash flows
information: 1997 1996
- -------------------------------------- ---- ----
Cash paid during three months ended March 31, for:
-------------------------------------------------
Interest $1,236 $1,903
Income taxes $2,087 $197
Non-cash investing and financing activities:
-------------------------------------------
Stock issued in connection with litigation
settlement - $322
See accompanying notes to consolidated financial statements.
</TABLE> <PAGE>
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1997
1. GENERAL
In the opinion of the Company, the accompanying consolidated
financial statements contain all adjustments (consisting of
only normal recurring adjustments) necessary to present
fairly the financial position as of March 31, 1997
(unaudited) and the unaudited results of operations and cash
flows for the three months ended March 31, 1997 and 1996.
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 1996 Annual Report on Form
10-K.
The results of operations for the three months ended March
31, 1997 and 1996 are not necessarily indicative of the
results to be expected for the full year.
2. CONDENSED SUMMARY OF ACCOUNTING POLICIES
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. 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 (Continued)
(Unaudited)
March 31, 1997
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. RECEIVABLES
Receivables consist of the following (in thousands):
<TABLE>
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Trade, less allowance for
possible losses of
$1,006 and $1,031 $52,116 $52,030
Retainage under construction
contracts 11,647 12,456
Refundable income taxes 4,553 4,141
------- -------
$68,316 $68,627
======= =======
</TABLE>
4. INVENTORIES
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>
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Construction materials $7,815 $9,615
Raw materials 1,837 968
Manufactured components 1,809 1,921
Work-in-process 1,960 1,289
Finished goods 1,622 1,988
------- -------
$15,043 $15,781
======= =======
/TABLE
<PAGE>
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
March 31, 1997
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in
thousands):
<TABLE>
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Land and land improvements $2,657 $2,667
Buildings and improvements 15,699 15,715
Machinery and equipment 80,979 77,608
Furniture and fixtures 8,825 8,796
Autos and trucks 2,618 2,647
Construction in progress 2,250 1,730
------- -------
113,028 109,163
Less: accumulated depreciation (55,470) (51,897)
------- -------
$57,558 $57,266
======= =======
</TABLE>
6. LONG-TERM DEBT
In October 1995, the Company obtained a credit facility from
SunTrust Bank, Nashville, N.A. ("SunTrust"), as agent, and a
group of participating lenders which provided for advances
through October 1997 on a revolving basis aggregating up to
$105 million (including a $5.0 million standby letter of
credit facility). Of such amount, approximately
$66.4 million was applied to refinance existing debt under
the Company's prior arrangements with SunTrust (approximately
$35.9 million), other term loans ($14.5 million), and short-
term debt under line of credit facilities ($16.0 million).
Additional advances were available for the expansion of the
Company's business and for general corporate purposes.
Prior to its prepayment in February 1997, the SunTrust
facility was due to mature in October 2000, with installments
based on a five-year amortization schedule, commencing
December 31, 1997. Interest on indebtedness under the
facility was payable at either (i) SunTrust's prime rate
(8.25% at December 31, 1996), plus a margin of up to .25% in
the event certain financial ratios were not maintained, or
(ii) an adjusted LIBOR rate, 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<PAGE>
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
March 31, 1997
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.
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. 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.
On February 14, 1997 the Company completed a $110 million
private debt offering of 7.88% Senior Notes due February 14,
2007 ("Senior Notes"). Interest is payable semi-annually in
August and February of each year, and each year, from
February 2001 to February 2006, inclusive, the Company is
required to make principal repayments of $15,715,000,
together with an equivalent payment at maturity. The Senior
Notes may be prepaid at the Company's option, in whole or in
part, at any time, together with a make-whole premium, and
upon specified change in control events each holder has the
right to require the Company to purchase its Senior Note
without any premium thereon. The agreements pursuant to
which the Senior Notes were acquired obligate the Company to
comply with certain financial ratios and restrictive
covenants that, among other things, place limitations on
operations and sales of assets by the Company or its
subsidiaries, and limit the ability of the Company to incur
further secured indebtedness and liens and of subsidiaries to
incur indebtedness, and, in the event of default under the
Senior Notes, limit the ability of the Company to pay cash
dividends or make other distributions to the holders of its
capital stock or to redeem such stock. Such agreements also
obligate the Company's subsidiaries to provide guarantees to
the holders of the Senior Notes if guaranties are given by
them to certain other lenders.
The transaction costs of $891,000 incurred in connection with
the private debt offering were recorded as deferred charges
and will be amortized over the life of the Senior Notes. The
net proceeds were used to repay existing indebtedness
(approximately $85 million), as discussed above, and for
general corporate purposes. Certain capitalized costs
related to prior existing borrowing arrangements of
$0.4 million were written off as a result. This writeoff has
been classified as an extraordinary loss from early
extinguishment of debt.<PAGE>
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
March 31, 1997
7. LITIGATION
The Company is involved in certain litigation incidental to
the conduct of its business. In the Company's opinion, none
of these proceedings will have a material adverse effect on
the Company's financial position, results of operations and
liquidity. The financial statements include the estimated
amounts of liabilities that are likely to be incurred from
these and various other pending litigation and claims.
8. SUBSEQUENT EVENT
The Company has announced that it will combine its corporate
headquarters, engineering and development center, and North
American contracting headquarters in Chesterfield, Missouri,
a suburb of St. Louis. The location will also include the
offices of Affholder, Inc., the Company's subsidiary
responsible for tunneling, and the main operations base for
the central region of the Company's domestic pipeline
rehabilitation operations. Severance costs related to the
move are expected to be $0.5 to $0.8 million. The cost of
moving employees and offices is estimated at $2.5 to
$3 million. These costs will be incurred as the move takes
place in stages during the balance of 1997.
<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, Chile, Argentina and Mexico.
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At March 31, 1997, the Company had $37.0 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 $23.5 million primarily as a result of the Company's
completion in February 1997 (the "Senior Note Closing") of the<PAGE>
<PAGE>
ITEM 2. (CONTINUED) MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
sale, in a private 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 3.3-to-1.0
at March 31, 1997 representing an increase from 2.5-to-1.0 at
December 31, 1996.
Operations provided cash of $1.4 million during the three months
ended March 31, 1997, as compared to cash provided of $12.3
million during the same period in 1996. This decrease is due
primarily to an increase in trade receivables (including costs
and estimated earnings in excess of billings) of $3.6 million in
first quarter 1997, as compared to a decrease of $1.8 million in
the prior year. Furthermore, unlike first quarter 1996 in which
increases in accounts payable and accruals, and income taxes,
provided $2.3 million in cash, during first quarter 1997 accounts
payable and accruals, and income taxes, decreased $1.8 million.
Trade receivables, including costs and estimated earnings in
excess of billings, increased 4.3% to $88.2 million from $84.6
million at December 31, 1996, reflecting a $0.1 million increase
in trade receivables, a $0.8 million decrease in retainage
receivables, and an increase of $4.3 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. In the
United States, retainage receivables are generally received
within 60 to 90 days after the completion of a contract.
Capital expenditures were $4.1 million in first quarter 1997, as
compared to $3.7 million in first quarter 1996. Capital
expenditures generally reflect replacement equipment required by
the Company's contracting subsidiaries. The Company plans,
during 1997, to combine its corporate headquarters, engineering
and development center, and North American contracting
headquarters in Chesterfield, Missouri, a suburb of St. Louis.
Severance costs related to the move are expected to be $0.5 to
$0.8 million. The cost of moving the employees and offices is
estimated at $2.5 to $3 million. These costs will be incurred as
the move takes place during the balance of 1997. In addition,
during 1997 the Company plans capital expenditures in
Chesterfield of $3.5 million in connection with construction of a
new research and development facility.
Financing activities provided $26.6 million in cash in the first
quarter of 1997 as compared to cash used of $5.0 million in the
prior year. This difference is primarily related to the cash
generated from the Senior Notes of approximately $25.0 million in<PAGE>
<PAGE>
ITEM 2. (CONTINUED) MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
February 1997, as compared to first quarter 1996, in which the
Company made principal payments totaling $5.1 million relating to
the Company's prior existing credit facility with SunTrust Bank,
Nashville, N.A. ("SunTrust") and repayment of the subordinated
note issued in connection with the Enviroq acquisition.
At December 31, 1996, $76.3 million was outstanding under the
Company's credit agreement dated October 25, 1995 (the "Credit
Agreement") with SunTrust Bank, as agent, and a group of
participating lenders (the "Lenders"), which provided for
advances by the Lenders through October 1997 on a revolving basis
aggregating up to $105 million (including a $5 million standby
letter of credit facility). Indebtedness pursuant to the Credit
Agreement was due to mature in October 2000, with installments
based on a five-year amortization schedule, commencing December
31, 1997. Interest on indebtedness under the Credit Agreement
was payable at a rate per annum selected by the Company as either
SunTrust's prime rate, plus a margin ranging from 1.00% to 1.75%,
depending on the maintenance of certain financial ratios. Up to
$5 million under the Credit Agreement was available for
borrowings from SunTrust pursuant to a swing-line facility, and
would accrue interest at a rate per annum equal to 0.5% below
SunTrust's prime rate. The Credit Agreement obligated the
Company to comply with certain financial ratios and restrictive
covenants that, among other things, limited the ability of the
Company and its subsidiaries to incur further indebtedness, pay
dividends, make loans and encumber any properties, and required
guarantees of certain domestic subsidiaries. At the Senior Note
Closing, all outstanding indebtedness to the Lenders under the
Credit Agreement, and outstanding indebtedness owed to SunTrust
under an industrial revenue bond encumbering the Company's
Batesville facility ($3.4 million principal amount recorded at
December 31, 1996), was prepaid.
At the Senior Note Closing, the Company also prepaid amounts
outstanding under the Company's senior subordinated note acquired
by Hanseatic Corporation ("Hanseatic") in July 1993 ($4.8 million
principal amount recorded at December 31, 1996), which required
quarterly payments of interest at 8.5% per annum and installments
of principal in the amount of $1 million on each of the fifth
through eighth anniversary dates of closing, with the entire
remaining principal due nine years after closing. The note was
subordinated to bank and other institutional financing, and
purchase money debt incurred in connection with acquisitions of
businesses. The note was pre-payable at the option of the
Company, at premiums until the fifth anniversary of closing
ranging from 3% to 1% of the amount prepaid ($100,000 paid at the
Senior Note Closing). Warrants with respect to 350,877 shares of
Common Stock issued in connection with such note are exercisable,
at the election of the holder, through July 25, 1998, at a price
per share of Common Stock of $14.25, and such shares are entitled
to demand and incidental registration rights.
<PAGE>
<PAGE>
ITEM 2. (CONTINUED) MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 and 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 guaranties 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.
The Company also remains obligated on certain notes issued in
connection with the acquisition in October 1994, of all of the
outstanding stock of Gelco and affiliates, aggregating $1.4
million, to the former Gelco shareholders and their affiliates,
representing net current liabilities of the acquired companies to
related parties and a portion of working capital at closing. The
notes issued in the Gelco closing are secured by the assets
acquired.
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 is seeking to implement an additional
revolving credit facility for general corporate purposes.
<PAGE>
<PAGE>
ITEM 2. (CONTINUED) MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Company does not believe the
provisions of SFAS 128 and SFAS 129, and its adoption thereof
will have a material effect on the Company's financial
statements.
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended March 31, 1997 Compared to Three Months Ended
March 31, 1996
Revenues. Revenues increased 13.2% to $77.1 million from $68.1
million in the prior year, primarily as a result of an increase
in construction revenues. Fluctuations in currency exchange
rates of the Japanese yen, British pound sterling, and Canadian
dollar to the United States dollar negatively impacted total
revenues by approximately $0.2 million in the first quarter of
1997.
Construction revenues increased 14.8% to $69.7 million from
$60.7 million in 1996. The increase was primarily a result of
increased activity in the Company's corrosion and abrasion
operations, along with increased volume in the United States in
the Company's core trenchless rehabilitation operations
(consisting of Insituform(R) and NuPipe(R) installations in the
municipal wastewater market). Fluctuations in currency exchange
rates of the British pound sterling and Canadian dollar to the
United States dollar positively impacted construction revenues by
approximately $0.1 million in the first quarter of 1997.
Product sales remained virtually unchanged from the first quarter
of 1996. While shipments of product increased in the Company's
offshore manufacturing operations, fluctuations in currency
exchange rates to the United States dollar negatively impacted
product sales to the extent of the volume increases. Royalty and
license fees also remained virtually unchanged from 1996.
<PAGE>
<PAGE>
ITEM 2. (CONTINUED) MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating costs and expenses. Cost of construction contracts
increased 23.4% to $52.2 million from $42.3 million in 1996,
primarily as a result of increased volume. Construction costs as
a percentage of construction revenues increased to 74.9% as
compared to 69.7% in the same period last year, due principally
to lower margins achieved by the Company's trenchless
rehabilitation operations, along with increased volume by the
Company's corrosion and abrasion operations, which traditionally
achieve lower margins.
Cost of product sales increased 2.7% to $3.8 million from
$3.7 million in the same period last year, in line with increased
volume by the Company's offshore manufacturing operations. Cost
of product sales as a percentage of product sales increased to
65.1% from 64.3% in 1996, due principally to these same
operations, which traditionally carry lower margins than in the
United States.
As a percentage of revenues, selling, administrative and general
expenses in the first quarter were 19.5% compared to 21.7% in the
same period last year. The decrease is attributable primarily to
economies of scale resulting from higher volume, along with
management's effort to control overhead costs throughout the
Company's operations, principally in the United States. Selling,
administrative and general expenses increased 1.4% to
$15.0 million compared to $14.8 million in the same period last
year. The nominal increase was primarily due to increased
overhead costs related to the buildup of personnel for the
Company's corrosion and abrasion operations in Argentina and
Mexico, which were not in existence in the first quarter of 1996.
Strategic marketing and product development costs decreased 4.8%
to $2.0 million compared to $2.1 million in the same period last
year. The decrease is primarily due to controlled spending in
advertising and research projects.
Other income (expense). Interest expense increased 18.8% to
$1.9 million from $1.6 million in the same period last year,
primarily due to interest attributable to the Senior Notes since
issuance in February 1997. Other income decreased to
$0.3 million from $0.4 million in the same period last year,
primarily due to an increase in miscellaneous expenses incurred
by the Company's operations in the United States.
Taxes on income. Taxes on income decreased 52.9% to $0.8 million
from $17 million in the same period last year, due primarily to a
decrease in income before taxes on income of 50.0%, or $2.0
million. The Company's effective tax rate for the first quarter
of 1997 was 41.0%, compared to 41.1% in the same period last
year.
<PAGE>
<PAGE>
ITEM 2. (CONTINUED) MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Extraordinary item. In February 1997, as a result of the closing
of the Senior Notes financing, certain previous debt facilities
were retired. Costs of $0.4 million ($0.2 million after-tax)
associated with these debt facilities which had been capitalized
were written off.
Net income. As a result of the foregoing, net income for the
first quarter of 1997 was $1.1 million, a decrease of
$1.2 million, or 52.2%, from the first quarter of 1996. Without
the effect of the extraordinary item (after-tax charge of
$0.2 million), net income would have been approximately
$1.3 million for the first quarter of 1997, representing a
decrease of $1.0 million, or 43.4%.
<PAGE>
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 1. Litigation.
-----------
As previously reported by the Company, in March 1997, in
proceedings initiated by the Company in the United States
District Court for the Southern District of Texas, Houston
Division, against Cat Contracting, Inc., et al. (Civil Action No.
H-90-1690) alleging patent infringement, defendants filed a
petition for a writ of certiorari in the U.S. Supreme Court with
respect to the November 1996 ruling of the Court of Appeals for
the Federal Circuit. Such ruling 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 U.S. Supreme Court has denied defendant's
petition.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) No exhibits are filed as part of this Quarterly Report
on Form 10-Q.
(b) During the quarter ended March 31, 1997, the Company
filed a Current Report on Form 8-K dated February 14, 1997 which,
under "Item 5. Other Events" thereunder, reported the completion
of the Company's private sale of 7.88% Senior Notes, Series A,
due February 14, 2007. In addition, the Company has filed a
Current Report on Form 8-K dated April 1, 1997 which, under "Item
5. Other Events" thereunder, reported the Company's plan to
combine its corporate headquarters, engineering and development
center and North American contracting headquarters. No financial
statements were filed as part of either such report.
<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.
May 14, 1997 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 36,971
<SECURITIES> 1
<RECEIVABLES> 68,316
<ALLOWANCES> 1,006
<INVENTORY> 15,043
<CURRENT-ASSETS> 156,359
<PP&E> 57,558
<DEPRECIATION> 55,470
<TOTAL-ASSETS> 293,614
<CURRENT-LIABILITIES> 47,487
<BONDS> 0
0
0
<COMMON> 272
<OTHER-SE> 123,624
<TOTAL-LIABILITY-AND-EQUITY> 293,614
<SALES> 5,766
<TOTAL-REVENUES> 77,082
<CGS> 3,756
<TOTAL-COSTS> 56,061
<OTHER-EXPENSES> 16,971
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,909
<INCOME-PRETAX> 2,413
<INCOME-TAX> 990
<INCOME-CONTINUING> 1,306
<DISCONTINUED> 0
<EXTRAORDINARY> 225
<CHANGES> 0
<NET-INCOME> 1,081
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
