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, 1999
---------------------------------
Commission file number #0-10786
------------------------------------------
Insituform Technologies, Inc.
- ----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3032158
- ----------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
702 Spirit 40 Park Drive, Chesterfield, Missouri 63005
- ----------------------------------------------------------------
(Address of Principal Executive Offices)
(636) 530-8000
- ----------------------------------------------------------------
(Registrant's telephone number including area code)
- ----------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding at November 1, 1999
- -------------------------- ---------------------------------
Class A Common Stock, 25,127,259 Shares
$0.01 par value
<PAGE>
<PAGE>
INDEX
-----
Part I Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
Part II Other Information and Signatures:
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
Index to Exhibits
<PAGE>
<PAGE>
<TABLE>
PART I. - FINANCIAL INFORMATION
-------------------------------
ITEM 1. - FINANCIAL STATEMENTS
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
Unaudited
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
--------------
Cash and cash equivalents $79,803 $76,904
Trade receivables, less allowance
for doubtful accounts of $3,082
and $2,909, respectively 49,359 52,280
Retainage under construction contracts 12,991 12,368
Costs and estimated earnings in excess
of billings 14,701 9,792
Inventories 10,258 11,282
Prepaid expenses and other 8,273 7,479
-------- --------
TOTAL CURRENT ASSETS 175,385 170,105
PROPERTY AND EQUIPMENT, less accumulated
depreciation 53,934 56,421
OTHER ASSETS
- ------------
Goodwill, less accumulated amortization of
$17,537 and $15,078, respectively 64,926 56,504
Patents and patent applications, less
accumulated amortization of $6,596 and
$5,663, respectively 9,104 11,172
Investments in licensees and affiliated
companies 4,304 5,234
Other 4,624 5,172
-------- --------
TOTAL OTHER ASSETS 82,958 78,082
-------- --------
TOTAL ASSETS $312,277 $304,608
======== ========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
Unaudited
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
-------------------
Accounts payable and accrued expenses $51,249 $45,231
Current maturities of long-term debt
and notes payable 2,717 2,918
-------- --------
TOTAL CURRENT LIABILITIES 53,966 48,149
LONG-TERM DEBT, less current maturities 115,507 112,131
OTHER LIABILITIES 1,032 1,115
-------- --------
TOTAL LIABILITIES 170,505 161,395
MINORITY INTERESTS 3,957 3,708
STOCKHOLDERS' EQUITY
--------------------
Preferred stock, undesignated, $.10 par -
shares authorized 2,000,000; none
outstanding - -
Common stock, $.01 par - shares authorized
40,000,000; shares outstanding 27,608,852
and 27,302,304 276 273
Additional paid-in capital 72,351 68,931
Retained earnings 104,986 86,355
-------- --------
177,613 155,559
Treasury stock - 2,374,301 and 991,701
shares (35,969) (13,097)
Cumulative foreign currency translation
adjustments (3,829) (2,957)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 137,815 139,505
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $312,277 $304,608
======== ========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except share amounts)
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $93,251 $81,047 $250,053 $220,308
Cost of revenue 60,702 54,664 163,760 147,597
-------- -------- -------- --------
Gross profit 32,549 26,383 86,293 72,711
Selling, administrative and
general expenses 16,915 14,599 48,898 44,656
-------- -------- -------- --------
Operating income 15,634 11,784 37,395 28,055
Other expense:
- --------------
Interest expense (2,269) (2,312) (6,713) (6,868)
Other income 624 701 2,169 2,011
-------- -------- -------- --------
Total other expense (1,645) (1,611) (4,544) (4,857)
Income before taxes on income 13,989 10,173 32,851 23,198
Taxes on income 5,975 4,094 13,674 9,263
-------- -------- -------- --------
Income before minority
interests and equity in earnings 8,014 6,079 19,177 13,935
Minority interests in net income (202) (331) (638) (581)
Equity in earnings of affiliated
companies 174 (182) 90 (333)
-------- -------- -------- --------
Net income $7,986 $5,566 $18,629 $13,021
======== ======== ======== ========
Basic earnings per share $0.31 $0.21 $0.73 $0.48
======== ======== ======== ========
Diluted earnings per share $0.31 $0.21 $0.71 $0.48
======== ======== ======== ========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<CAPTION>
For the Nine Months
Ended September 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
- -------------------------------------
Net income $18,629 $13,021
Adjustments to reconcile net income to cash used by
operating activities:
Depreciation and amortization 13,893 15,294
Miscellaneous 103 313
Equity in earnings of affiliated companies (90) 333
Minority interests 638 581
Translation adjustments (872) (751)
Deferred income taxes (244) (200)
Changes in operating assets and liabilities, net of
assets acquired:
Receivables 2,019 6,519
Costs and estimated earnings in excess of billings (4,885) (2,573)
Inventories 1,158 476
Prepaid expenses and other (1,823) 677
Other assets (62) 989
Accounts payable and accrued expenses 5,865 (5,337)
------- ------
Net cash provided by operating activities 34,329 29,342
Cash flows from investing activities:
- -------------------------------------
Capital expenditures (7,957) (9,996)
Proceeds on disposal of property and equipment 1,791 803
Purchase of business, net of cash acquired (11,775) (1,444)
Investments in licensees and affiliated companies 1,171 76
Patents and patent applications 1,090 (935)
------- ------
Net cash used by investing activities (15,680) (11,496)
(continued)
See accompanying summary of accounting policies and notes to consolidated
financial statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<CAPTION>
For the Nine Months
Ended September 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from financing activities:
- -------------------------------------
Proceeds from issuance of common stock 3,422 774
Purchases of treasury stock (22,872) (7,906)
Decrease in short-term borrowings (659) (131)
Proceeds from long-term debt 6,128 -
Repayments of long-term debt (2,186) (1,547)
-------- --------
Net cash used by financing activities (16,167) (8,810)
Effect of exchange rates changes on cash 417 75
-------- --------
Net increase in cash and cash equivalents for
the period 2,899 9,111
-------- --------
Cash and cash equivalents, beginning of period 76,904 45,734
-------- --------
Cash and cash equivalents, end of period $79,803 $54,845
======== ========
Supplemental disclosures of cash flows information:
- ---------------------------------------------------
1999 1998
---- ----
Cash paid during nine months ended September 30, for:
-----------------------------------------------------
Interest $8,730 $8,945
Income taxes $10,984 $9,079
Non-cash investing and financing activities:
--------------------------------------------
Deferred consideration for business acquired - $3,571
See accompanying summary of accounting policies and notes to consolidated
financial statements.
</TABLE>
<PAGE>
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1999
1. GENERAL
In the opinion of the Company, the accompanying consolidated
financial statements contain all adjustments (consisting of
only normal recurring adjustments) necessary to present
fairly the financial position as of September 30, 1999
(unaudited), the unaudited results of operations for the
three and nine months ended September 30, 1999 and 1998, and
the cash flows for the nine months ended September 30, 1999
and 1998. The financial statements have been prepared in
accordance with the requirements of Form 10-Q and
consequently do not include all the disclosures normally
made in an Annual Report on Form 10-K. Accordingly, the
consolidated financial statements included herein should be
reviewed in conjunction with the financial statements and
the footnotes thereto included in the Company's 1998 Annual
Report on Form 10-K.
The results of operations for the three and nine months
ended September 30, 1999 and 1998 are not necessarily
indicative of the results to be expected for the full year.
2. COMPREHENSIVE INCOME
For the quarters ended September 30, 1999 and 1998,
comprehensive income was $8.3 million and $5.4 million,
respectively. For the nine months ended September 30, 1999
and 1998, comprehensive income was $17.8 million and $12.1
million, respectively. The Company's adjustment to
comprehensive income consists solely of cumulative foreign
currency translation adjustments.
3. EARNINGS PER SHARE
Earnings per share has been calculated using the following
share information:
Three Months Ended September 30,
1999 1998
---- ----
Weighted average number of
common shares used for basic
EPS 25,365,394 26,780,368
Effect of dilutive stock
options and warrants 689,026 332,828
---------- ----------
Weighted average number of
common shares and dilutive
potential common stock 26,054,420 27,113,196
========== ==========
<PAGE>
<PAGE>
Nine Months Ended September 30,
1999 1998
---- ----
Weighted average number of
common shares used for basic
EPS 25,587,396 26,905,340
Effect of dilutive stock
options and warrants 579,899 243,891
---------- ----------
Weighted average number of
common shares and dilutive
potential common stock 26,167,295 27,149,232
========== ==========
4. SEGMENT REPORTING
The Company has principally three operating segments:
rehabilitation, tunneling and corrosion and abrasion ("Tite
Liner(R)"). These operating units represent strategic
business units that offer distinct products and services and
serve different markets.
The following disaggregated financial results have been
prepared using a management approach, which is consistent
with the basis and manner with which management internally
disaggregates financial information for purposes of
assisting in making internal operating decisions.
Financial information by segment is as follows (in
thousands):
Three Months Ended September 30,
1999 1998
---- ----
Revenues
Rehabilitation $78,176 $58,758
Tunneling 10,059 8,225
Tite Liner(R) 5,016 14,064
------- -------
Total Revenues $93,251 $81,047
======= =======
Operating Income
Rehabilitation $15,013 $10,158
Tunneling 1,332 892
Tite Liner(R) (711) 734
------- -------
Total Operating Income $15,634 $11,784
======= =======
<PAGE>
<PAGE>
Nine Months Ended September 30,
1999 1998
---- ----
Revenues
Rehabilitation $200,886 $164,316
Tunneling 30,637 23,823
Tite Liner(R) 18,530 32,169
------- -------
Total Revenues $250,053 $220,308
======== ========
Operating Income
Rehabilitation $35,143 $24,328
Tunneling 3,993 2,430
Tite Liner(R) (1,741) 1,297
------- -------
Total Operating Income $37,395 $28,055
======= =======
5. ACQUISITION
In June 1999, the Company completed its acquisition of all
of the shares of Riooltechnieken Nederland B.V., its
exclusive licensee of the Insituform(R) Process in the
Netherlands, from BFI Holdings B.V. The purchase price was
NGL 25 million (approximately US$11.8 million), which was
paid in cash at closing.
6. CURRENT EVENTS
In July 1999, the Company entered into a settlement
agreement with Insituform East, Inc. ("East") and its
affiliates, providing for dismissal of the pending actions
before the Delaware Chancery Court and the American
Arbitration Association involving the parties and their
joint venture doing business under the name Midsouth
Partners ("Midsouth"). Under the settlement, the Company
and its subsidiary withdrew as partners in Midsouth, and the
licenses from the Company to Midsouth with respect to the
Insituform(R) process and the NuPipe(R) process were
terminated. Pursuant to the settlement, East paid to the
Company an amount equal to the book value of the interests
of the Company and its subsidiary in Midsouth ($1.2
million), and paid to the Company outstanding loans to
Midsouth (in the amount of $400,000). Under the settlement,
the Company and its affiliates and licensees may operate in
Midsouth's former exclusive territory (consisting of
Tennessee and portions of Mississippi and Kentucky) without
any obligation to East or its affiliates.
<PAGE>
<PAGE>
7. LITIGATION
On October 6, 1999, the Company announced the settlement of
patent infringement proceedings initiated by the Company
against J.F. Pacific Liners, Inc., American Pipe & Plastics,
Inc. ("APP"), and AM-Liner USA, Inc. ("AM-Liner"). The
court had previously found that the defendants had infringed
one or more patents owned by the Company relating to the
NuPipe(R) pipe rehabilitation process, issued a permanent
injunction against the defendants and assessed damages in
favor of the Company. Under the terms of the settlement,
the defendants acknowledged the validity of the Company's
patents and agreed not to challenge their validity in the
future. AM-Liner and APP further agreed to pay the Company
$2.7 million, of which $1.2 million was paid immediately and
the balance (secured by a letter of credit) over 42 months.
Such payments will be recognized over the remaining life of
the patents.
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.
<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 are derived primarily from
rehabilitation, tunneling and Tite Liner(R) operations,
generated by the Company's subsidiaries conducting business in
the United States, Canada, France, the United Kingdom, Chile,
Argentina and Mexico, and include product sales to, and
royalties and license fees paid by, the Company's unaffiliated
Insituform(R) licensees and sub-licensees and its unaffiliated
NuPipe(R) licensees. During the three years ended December 31,
1998, 1997 and 1996, approximately 63.8%, 62.5% and 69.7%,
respectively, of the Company's consolidated revenues related to
the Insituform(R) Process.
Statements contained in and preceding management's discussion
and analysis include various forward-looking information that is
based on data currently available to management and management's
beliefs and assumptions. When used in this document, the words
"anticipate," "estimate," "believes," "plans," and similar
expressions are intended to identify forward-looking statements,
but are not the exclusive means of identifying such statements.
Such statements are subject to risks and uncertainties, and the
Company's actual results may vary materially from those
anticipated, estimated or projected due to a number of factors,
including, without limitation, the competitive environment for
the Company's products and services, the geographical
distribution and mix of the Company's work, and other factors
set forth in reports and other documents filed by the Company
with the Securities and Exchange Commission from time to time.
RESULTS OF OPERATIONS
- ---------------------
Three and Nine Months Ended September 30, 1999 and 1998
Total revenues for the third quarter increased 15.1% to $93.3
million from $81.0 million in 1998, which contributed to an
increase in revenues for the first nine months of 1999 of 13.5%
to $250.1 million from $220.3 million in the prior year. The
majority of the increased volume for the third quarter and
nine-month period continued to come from the Company's
installation operations within North America and Europe in
addition to tunneling operations. The Company's Tite Liner(R)
operation's revenues for third quarter 1999 decreased 55.4%
compared to the same quarter in the prior year, and decreased
33.3% for the first nine months compared to the same period in
<PAGE>
<PAGE>
the prior year. This decline is due to lower volume in the
United States, Canada and South America.
The Company's gross profit during the third quarter increased
23.4% to $32.5 million from $26.4 million in the third quarter
of 1998, and for the first nine months of 1999 increased 18.7%
to $86.3 million from $72.7 million during the first nine months
of 1998. This increase was due to increased revenues as well as
increased profitability from the Company's North American and
European rehabilitation operations as well as the tunneling
operations. The improvement in rehabilitation operations was
offset somewhat by a decrease in gross profit from the Company's
Tite Liner(R) operations due to the revenue volume decrease as
well as decreased profitability. The overall gross profit
margin for third quarter 1999 was 34.9% compared to 32.6% in the
third quarter of 1998 and for the first nine months of 1999 was
34.5% compared to 33.0% in the prior year. This improved
profitability for the third quarter and the first nine months
was due to improved efficiencies in the North American
rehabilitation and tunneling operations.
For the third quarter, selling, administrative and general
expenses increased 15.9% to $16.9 million from $14.6 million in
the same quarter in the prior year, and for the first nine
months of 1999 increased 9.5% to $48.9 million from $44.7
million in the same period in the prior year. This increase was
primarily due to increased costs related to North American
rehabilitation administration to meet current and future
demands. In addition, at the corporate level there were
increased costs in compensation and legal fees, and ongoing
costs related to the Company's management information system's
improvements. As a percentage of revenues, selling,
administrative and general expenses increased in the third
quarter of 1999 to 18.1% from 18.0% in the comparable quarter of
the prior year and for the nine months of 1999 decreased to
19.6% from 20.3% in first nine months of 1998. This slight
increase in the third quarter is primarily attributable to the
aforementioned reasons, partially offset by the revenue volume
increase.
Interest expense in third quarter 1999 remained relatively flat
compared to third quarter 1998. For the first nine months of
1999, interest expense decreased 2.3% to $6.7 million from $6.9
million in the prior year, due primarily to lower revolving
credit borrowings in the Company's subsidiaries.
Other income decreased in third quarter 1999 to $0.6 million
from $0.7 million in third quarter 1998, due primarily to
miscellaneous nonoperational expenses offset somewhat by
increased investment income due to a greater amount of invested
cash.
<PAGE>
<PAGE>
In the third quarter of 1999, taxes on income increased to $6.0
million from $4.1 million in 1998 due principally to the
increase in income before taxes on income and a higher effective
tax rate primarily due to losses in South America where tax
rates are lower. In the first nine months of 1999, taxes on
income increased to $13.7 million from $9.3 million due
principally to the increase in income before taxes on income of
$9.7 million from the first nine months of 1998 and an increased
effective tax rate because of the aforementioned reason.
As a result of the foregoing, net income for third quarter 1999
increased 43.5% to $8.0 million, representing a 8.6% return on
revenue, compared to $5.6 million for third quarter 1998, when a
6.9% return on revenue was achieved. For the first nine months
of 1999, net income was $18.6 million, or a 7.5% return on
revenue, compared to $13.0 million in the first nine months of
1998, when a 5.9% return on revenue was achieved.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At September 30, 1999, the balance of cash, U.S. Treasury bills,
and short-term investments was $79.8 million, compared to $76.9
million at December 31, 1998. The increase in cash and cash
equivalents in 1999 resulted from the Company's continued strong
positive generation of cash from operating activities of $34.3
million and financing in connection with the acquisition of the
Company's Netherlands licensee of $6.1 million. This positive
cash generation was offset by the Company's previously reported
stock repurchase program, which used cash in the amount of $22.9
million in the first nine months of 1999, cash outlays for
capital spending of $8.0 million, and $11.8 million for the
acquisition of the Netherlands operations.
Operating activities generated cash of $34.3 million during the
first three quarters of 1999 while $29.3 million was generated
in the first three quarters of 1998. The principal reason for
the $5.0 million increase was increased net income of $5.6
million, offset somewhat by lower depreciation and amortization
in 1999.
Trade receivables, together with costs and estimated earnings in
excess of billings and retainage under construction contracts,
increased to $77.1 million from $74.4 million at December 1998.
This 4% increase was primarily due to strong management control
over collections, despite a 15% increase in revenue during the
third quarter of 1999. The collection of installation
receivables involves contractual provisions for retainage by the
project owner, often 5% to 15% of the contract amount, which
extends the collection process. Collections are also sometimes
further prolonged by the slow internal review processes often
employed by the Company's municipal customers. In the United
States, retainage receivables are generally received within 60
to 90 days after the completion of a contract.
<PAGE>
<PAGE>
Capital expenditures were $8.0 million in the first nine months
of 1999, compared to $10.0 million in the first nine months of
1998. Capital expenditures generally reflect replacement
equipment required by the Company's installation operations.
During the first nine months of 1998, capital expenditures also
reflected approximately $0.5 million related to the completion
of the Company's new research and development center.
While the Company expects that routine capital spending will
continue at the current level in the foreseeable future, the
Company has several information system improvement initiatives
underway that will require increased expenditures during the
next several years. These initiatives, which began principally
in 1997, include expenditures of approximately $1.6 million in
connection with the installation of an electronic data
collection system in each of the Company's North American
rehabilitation operations during the course of 1999, of which
$1.0 million was spent during the first nine months of 1999.
See "Year 2000" below for information concerning the impact of
year 2000 issues on the Company's operations. In addition, for
the balance of 1999 and during 2000, the Company plans to
increase expenditures related to field crew capacity expansion
to meet rising volume demands.
In June 1999, the Company completed its acquisition of all of
the shares of Riooltechnieken Nederland B.V., its exclusive
licensee of the Insituform(R) process in the Netherlands, from
BFI Holdings, B.V. The purchase price was NGL 25 million
(approximately US$11.8 million), which was paid in cash at
closing. Included in the acquisition was a 10% stockholding
owned by the licensee in Insituform Linings PLC, a joint venture
between the Company and certain European licensees, which
manufactures the Insituform(R) tubes used by the Company's
operations and licensees in Europe and Asia.
Financing activities used $16.2 million in the first nine months
of 1999, as compared to cash used of $8.7 million in the first
nine months of 1998. In July 1998, the Company announced that
its Board of Directors had authorized the repurchase of up to
2,700,000 shares of the Company's class A common stock, $.01 par
value, to be made from time to time over five years in open
market transactions and, in October 1999, announced expansion of
the program authorization from 2,700,000 to 4,700,000 shares.
The amount and timing of purchases will be dependent upon a
number of factors, including the price and availability of the
Company's shares, general market conditions and competing
alternative uses of funds, and may be discontinued at any time.
During the first nine months of 1999, the Company used cash in
the amount of $22.9 million for the repurchase of 1,382,600
shares. The Company has used cash in the cumulative amount of
$32.7 million for the repurchase of 2,108,500 shares through
September 30, 1999 since inception of the stock repurchase
program. The repurchased shares will be held as treasury stock.
<PAGE>
<PAGE>
In the first nine months of 1999, the Company made principal
payments totaling $2.2 million relating to the Company's
existing debt, as compared to $1.5 million in the first nine
months of 1998. The Company generated $3.4 million from the
issuance of common stock from stock options granted to
employees, as compared to $0.8 million in the first nine months
of 1998.
The Company's $110 million principal amount of Senior Notes,
Series A, due February 14, 2007 (the "Senior Notes") bear
interest, payable semi-annually in August and February of each
year, at the rate per annum of 7.88%. Each year, from February
2001 to February 2006, inclusive, the Company will be required
to make principal payments of $15.7 million, together with an
equivalent payment at maturity. The Senior Notes may be prepaid
at the Company's option, in whole or in part, at any time,
together with a make whole premium, and upon specified change in
control events each holder has the right to require the Company
to purchase its Senior Note without any premium thereon.
The Company has a credit agreement (the "Credit Agreement")
whereby the lender will make available to the Company, until
September 1, 2001 (the "Maturity Date"), a revolving credit line
of up to $20,000,000 aggregate principal amount for working
capital and permitted acquisitions, including $10,000,000
available for standby and commercial letters of credit.
Interest on outstanding advances accrues, at the election of the
Company, at either the lender's prime rate, payable monthly, or
its LIBOR rate, plus a margin ranging from .5% to 1.5% depending
on the maintenance of certain financial ratios, payable at the
end of selected interest periods (from one to six months).
Outstanding principal is subject to repayment on the Maturity
Date, except that advances for permitted acquisitions must be
repaid within six months after disbursement.
The note purchase agreements pursuant to which the Senior Notes
were acquired, and the Credit Agreement, obligate the Company to
comply with certain financial ratios and restrictive covenants
that, among other things, place limitations on operations and
sales of assets by the Company or its subsidiaries, and limit
the ability of the Company to incur further secured indebtedness
and liens and of subsidiaries to incur indebtedness, and, in the
event of default, limit the ability of the Company to pay cash
dividends or make other distributions to the holders of its
capital stock or to redeem such stock. The Credit Agreement
also obligates certain of the Company's domestic subsidiaries to
guaranty the Company's obligations, as a result of which the
same subsidiaries have also delivered their guaranty with
respect to the Senior Notes.
<PAGE>
<PAGE>
In July 1999, the Company borrowed $6.1 million in order to
refinance a portion of the purchase price for its Netherlands
licensee. Such amount is repayable in seven equal installments
annually on each July 31, and accrues interest, payable
quarterly, at the rate of 5.5% per annum.
In July 1999, the Company entered into a settlement agreement
with Insituform East, Inc. ("East") and its affiliates,
providing for dismissal of the pending actions before the
Delaware Chancery Court and the American Arbitration Association
involving the parties and their joint venture doing business
under the name Midsouth Partners ("Midsouth"). Under the
Agreement, the Company and its subsidiary withdrew as partners
in Midsouth, and the licenses from the Company to Midsouth with
respect to the Insituform(R) process and the NuPipe(R) process
were terminated. Pursuant to the Agreement, East has paid to
the Company an amount equal to the book value of the interests
of the Company and its subsidiary in Midsouth ($1.2 million),
and has repaid to the Company outstanding loans to Midsouth (in
the amount of $400,000).
The Agreement expressly provides that the Company and its
affiliates and licensees may operate in Midsouth's former
exclusive territory (consisting of Tennessee and portions of
Mississippi and Kentucky) without any obligation to East or its
affiliates. Under the Agreement, a subsidiary of East retains a
non-exclusive right in Midsouth's former territory to utilize
the cured-in-place process and technology in the condition and
state as commercially practiced under license on the date of
settlement. The Agreement further provides that such
subsidiary: (i) retains no rights to use the trademark
"Insituform"; (ii) is not entitled to receive from the Company
any further improvements or modifications to the cured-in-place
process or technology, nor any technical or marketing support;
and (iii) may not use any of the rights granted outside of such
territory unless such use is inadvertent and de minimis. Any
breach of the foregoing limitations results in immediate
abrogation of the rights granted.
In March 1998, the Company completed the acquisition of the
entire minority interest in its Chilean subsidiary for an
aggregate purchase price of approximately $2.1 million, $1.0
million of which was paid in connection with closing, $0.6
million of which was paid in March 1999, the first anniversary
of closing, and the remainder of which is due on the second
anniversary of closing. In September 1998, the Company
completed its acquisition of 80% of the shares of Video
Injection S.A. The purchase price for the shares was $5.0
million, $2.4 million of which was paid at closing, $1.3 million
of which is due on the first anniversary of closing, and $1.3
million of which is due on the second anniversary of closing,
such additional installments secured by the Company's letter of
credit arrangements. On the fifth anniversary of closing (or
<PAGE>
<PAGE>
earlier, in specified events), the Company will purchase the
remaining 20% of the shares of Video Injection pursuant to a
formula based on Video Injection's results of operations.
Management believes its current working capital will be adequate
to meet its requirements for the foreseeable future.
YEAR 2000
- ---------
The "year 2000" problem relates to computer systems that have
time and date-sensitive programs that were designed to read
years beginning with "19," but may not properly recognize the
year 2000. If a computer system or software application used by
the Company or a third party dealing with the Company fails
because of the inability of the system or application to
properly read the year "2000," the results may adversely affect
the Company.
Accordingly, the Company continues to review its internal
computer programs and systems to ensure year 2000 compliance.
In 1998, the Company established a project team to address year
2000 risks facing the Company, and its customers and suppliers,
and engaged an internationally-recognized consulting firm to
assist the team with implementing programs addressing
preparedness of the Company. The project team has completed its
coordination of identification and implementation of changes to
computer hardware and software applications that will attempt to
ensure the availability and integrity of the Company's
information systems. The project team has completed its review
and analyzation of voice and data communications systems,
building systems, manufacturing and operations equipment with
embedded components (including HVAC, security and fire
protection), and field operations equipment to ensure the
reliability of operational systems and manufacturing processes,
both in North America and in Europe.
The project team has identified the Company sites and entities
that may harbor assets at risk, collecting pertinent
information, establishing year 2000 disposition strategies and
assessing and reporting risks. The Company's manufacturing
system has been modified so as to achieve year 2000 compliance
in all material respects, and the Company has identified
additional systems that will be replaced by year end.
The Company also faces risk to the extent that suppliers of
products, services and systems purchased by the Company and
others with whom the Company transacts business on a worldwide
basis do not comply with year 2000 requirements. Principal
areas of the Company's review are banking systems (and the
effects on receivables, payables and payroll), tele-
communications, suppliers to the Company's manufacturing and
operating units (such as felt and resin), transportation systems
(both inbound and outbound), and customer information systems
<PAGE>
<PAGE>
for order placement and release and payment of invoices. The
Company has received assurances from these third party entities
that they have achieved year 2000 compliance. The Company's
project team has had formal communications with representatives
from significant outside parties that transact with the Company
to determine the extent to which the Company is vulnerable to
failure by them to remediate their own year 2000 issues. In the
case of suppliers to the Company's manufacturing and operating
units, verification includes site visits. The Company's
strategy entails proactive compliance assessment in the case of
these parties when appropriate, as well as maintaining paper
records of transactions when advisable and inventory stocks of
key materials.
The Company expects to complete its year 2000 compliance program
prior to year-end and, based on information collected, presently
believes that any significant issues within its own operations
and facilities will be addressed in a timely manner. However,
while the Company has not identified material difficulties
presented by its suppliers or in its financial or communications
support that are not being addressed, and while the estimated
cost of the Company's efforts is not expected to be material to
the Company's financial position or any year's results of
operations, there can be no assurance to this effect.
Based on management's current assessment that no material
exposure to significant business interruption exists, the
Company has not adopted any formal contingency plan in the event
its year 2000 project is not completed in a timely manner, or in
the event unforeseen difficulties arise. The Company will
appropriately modify its strategy as additional circumstances
come to its attention, but there can be no assurance that the
Company will timely identify and remediate all significant year
2000 problems, and that remedial efforts will not involve
significant time and expense, or that such problems will not
have a material adverse effect on the Company's business,
results of operations or financial position.
MARKET RISK
- -----------
The Company conducts its rehabilitation activities on a
worldwide basis, giving rise to exposures related to changes in
foreign currency exchange rates. For example, foreign currency
exchange rate movements may create a degree of risk to the
Company's operations by affecting: (i) the U.S. dollar value of
sales made in foreign currencies, and (ii) the U.S. dollar value
of costs incurred in foreign currencies. In addition, the
Company is exposed to market risks related to changes in
interest rates. The Company's objective is to minimize the
volatility in earnings and cash flow from these risks.
<PAGE>
<PAGE>
The Company has selectively used, and will continue to use,
forward exchange contracts in order to manage its currency
exposure. Forward exchange contracts are executed by the
Company only with large, reputable banks and financial
institutions and are denominated in currencies of major
industrial countries. Given its assessment of such risk, the
Company has not deemed it necessary to offset any interest rate
exposure. Furthermore, the Company does not enter into
transactions involving derivative financial instruments for
speculative trading purposes.
Based on the Company's overall currency exchange rate and
interest rate exposure at September 30, 1999, a ten percent
weakening in the U.S. dollar across all currencies or ten
percent increase in interest rates would not have a material
impact on the financial position, results of operations or cash
flows of the Company. These effects of hypothetical changes in
currency exchange rates and in interest rates, however, ignore
other effects the same movement may have arising from other
variables, and actual results could differ from the sensitivity
calculations of the Company. The Company regularly assesses
these variables, establishes policies and business practices to
protect against the adverse effects of foreign currency and
interest rate fluctuations and does not anticipate any material
losses generated by these risks.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
For information concerning this item, see "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Market Risk," which information is incorporated
herein by reference.
<PAGE>
<PAGE>
PART II. - OTHER INFORMATION
----------------------------
ITEM 1. LEGAL PROCEEDINGS
CAT Proceeding. In previously reported patent
infringement proceedings initiated by the Company in the United
States District Court for the Southern District of Texas
against CAT Contracting, Inc. ("CAT"), Michigan Sewer
Construction Company, FirstLiner U.S.A. ("FirstLiner") (formerly
InLiner U.S.A.) and Kanal Sanierung Hans Muller GmbH & Co., the
court in September 1999 rendered its final judgment and awarded
damages to the Company in the amount of approximately $9.5
million. The court also named Giulio Catallo, the owner and
chief executive officer of CAT and FirstLiner, as an individual
party defendant in the proceedings. The Company is currently
unable to ascertain the ability of the defendants to satisfy the
judgment or whether defendants will elect to appeal.
AM-Liner Proceeding. In October 1999, the Company
announced the settlement of previously reported patent
infringement proceedings initiated by the Company against J.F.
Pacific Liners, Inc., American Pipe & Plastics, Inc. ("APP") and
AM-Liner USA, Inc. ("AM-Liner") in the U.S. District Court for
the Northern District of California (Civil Action No. C-95-01511
CAL) (the "Initial Proceedings"), and against APP in the U.S.
District Court for the Central District of California (Civil
Action No. SACV 99-909 DOC (EEx)) (the "Additional
Proceedings"). The court in the Initial Proceedings had
previously found that defendants had infringed one or more
patents owned by the Company relating to the NuPipe(R) pipe
rehabilitation process, issued a permanent injunction against
the defendants and their licensees and assessed damages in favor
of the Company. Appeals and cross appeals were pending.
Under the terms of the settlement, defendants
acknowledge the validity of the Company's patents and agree not
to challenge their validity in the future. AM-Liner and APP
have further agreed to pay the Company $2.7 million, of which
$1.2 million has been paid and the balance (secured by a letter
of credit) will be paid over 42 months. Under the settlement,
the permanent injunction issued by the court in the Initial
Proceedings remains in place. The Company also retains the
right to take further legal action if the product or process at
issue in the Additional Proceedings is modified in a manner that
creates an infringement of the Company's patents.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this Quarterly
Report on Form 10-Q are listed on the annexed Index to Exhibits.
<PAGE>
<PAGE>
(b) During the quarter ended September 30, 1999, the
Company filed a Current Report on Form 8-K dated July 20, 1999
which, under "Item 5. Other Events" thereunder, reported the
settlement agreement between the Company and Insituform East,
Inc. and its affiliates, and a Current Report on Form 8-K dated
September 7, 1999 which, under "Item 5. Other Events"
thereunder, reported the final judgment and damages awarded to
the Company in the CAT proceeding in the amount of approximately
$9.5 million. The Company has also filed a Current Report on
Form 8-K dated October 6, 1999 which, under "Item 5. Other
Events" thereunder, reported the settlement agreement between
the Company and J.F. Pacific Liners, Inc., APP and AM-Liner in
the AM-Liner Proceeding, and a Current Report on Form 8-K dated
October 21, 1999 which under "Item 5. Other Events" thereunder,
announced the expansion of its existing stock repurchase
authorization first announced in the third quarter of 1998. No
financial statements were filed as part of any 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.
November 12, 1999 By: s/Joseph A. White
---------------------------------
Joseph A. White
Vice President - Chief Financial Officer
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-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 79,803
<SECURITIES> 1
<RECEIVABLES> 49,359
<ALLOWANCES> 3,082
<INVENTORY> 10,258
<CURRENT-ASSETS> 175,385
<PP&E> 53,934
<DEPRECIATION> 71,556
<TOTAL-ASSETS> 312,277
<CURRENT-LIABILITIES> 53,966
<BONDS> 0
0
0
<COMMON> 276
<OTHER-SE> 137,539
<TOTAL-LIABILITY-AND-EQUITY> 312,277
<SALES> 12,293
<TOTAL-REVENUES> 250,053
<CGS> 7,996
<TOTAL-COSTS> 163,760
<OTHER-EXPENSES> 48,898
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,713
<INCOME-PRETAX> 32,851
<INCOME-TAX> 13,674
<INCOME-CONTINUING> 18,629
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,629
<EPS-BASIC> 0.73
<EPS-DILUTED> 0.71
</TABLE>
