<PAGE> 1
SCHEDULE 14A INFORMATION
INFORMATION REQUIRED IN PROXY STATEMENT
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
<TABLE>
<S> <C>
/ / Preliminary Proxy Statement / / Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Materials Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
INSITUFORM MID-AMERICA, INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Class A Common Stock, $.01 par value, of Insituform Technologies, Inc.
--------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
12,914,238 shares*
--------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
**
--------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$169,640,695.38**
--------------------------------------------------------------------------------
(5) Total fee paid:
$33,928.14 (see below)
--------------------------------------------------------------------------------
*Based upon the maximum number of shares of the Class A Common Stock of
Insituform Technologies, Inc. ("ITI") issuable in the Merger to holders of
Class A Common Stock of the Registrant (including shares issuable upon
conversion of outstanding shares of Class B Common Stock of the Registrant and
shares issuable upon the exercise of outstanding stock options of the
Registrant and options permitted to be granted by the Registrant prior to
consummation of the Merger), as reduced in Amendment No. 2.
**Estimated solely for the purpose of calculating the filing fee and, with
respect to 12,916,806 shares covered by ITI's preliminary proxy filing on July
7, 1995, based upon $13.125, the average of the high and low prices reported
on The Nasdaq Stock Market on June 30, 1995, which fell within five business
days of such filing, and, with respect to an additional 6,779 shares covered
by Amendment No. 1 filed on August 24, 1995, based upon $15.875, the average
of the high and low prices reported on the Nasdaq Stock Market on August 18,
1995, which fell within five business days of such filing.
/ / Fee paid previously with preliminary materials.
/X/ Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$33,928.14
--------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
Schedule 14A
--------------------------------------------------------------------------------
(3) Filing Party:
Insituform Technologies, Inc.
--------------------------------------------------------------------------------
(4) Date Filed:
July 7, 1995, amended August 24, 1995, September 6, 1995 and September 15, 1995
--------------------------------------------------------------------------------
<PAGE> 2
INSITUFORM MID-AMERICA, INC.
September 15, 1995
Dear Fellow Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders (the
"IMA Meeting") of Insituform Mid-America, Inc. ("IMA") to be held on October 12,
1995 at 10:00 a.m., local time, at the Sheraton West Port Plaza Hotel, 900 West
Port Plaza, St. Louis, Missouri. At this important meeting you will be asked to
approve an Agreement and Plan of Merger dated as of May 23, 1995 (the "Merger
Agreement"), providing for the merger (the "Merger") of ITI Acquisition Corp., a
Delaware corporation ("ITI Sub") and a wholly-owned subsidiary of Insituform
Technologies, Inc., a Delaware corporation ("ITI"), with and into IMA, as a
result of which IMA would become a wholly-owned subsidiary of ITI. Pursuant to
the terms of the Merger Agreement, holders of Class A Common Stock, $.01 par
value ("IMA Class A Common Stock"), of IMA will be entitled to receive 1.15
shares of Class A Common Stock, $.01 par value ("ITI Common Stock"), of ITI for
each share of IMA Class A Common Stock held (the "Conversion Ratio"). In
connection with the Merger, the holders of Class B Common Stock, $.01 par value
(the "IMA Class B Common Stock"), of IMA have agreed to convert their shares
into IMA Class A Common Stock on a share-for-share basis immediately prior to
the consummation of the Merger.
At the IMA Meeting, you will also be asked to authorize the Board of
Directors to adjourn the IMA Meeting to permit the further solicitation of
proxies, if necessary.
YOUR BOARD OF DIRECTORS CAREFULLY CONSIDERED AND UNANIMOUSLY APPROVED THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS THAT
YOU VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY AND FOR AUTHORIZATION OF THE BOARD OF DIRECTORS TO ADJOURN THE IMA
MEETING TO PERMIT THE FURTHER SOLICITATION OF PROXIES, IF NECESSARY.
Schroder Wertheim & Co. Incorporated, IMA's financial advisor, has rendered
its opinion that, at the date of the attached Joint Proxy Statement/Prospectus,
the Conversion Ratio is fair, from a financial point of view, to the
stockholders of IMA.
The determination of whether to vote in favor of the Merger and acquire
shares of ITI Common Stock involves the consideration by you of certain risk
factors, among them: the reliance of ITI's business on the Insituform(R)
Process; ITI's dependence on a licensee network to distribute its products, and
on governmental and quasi-governmental customers; ITI's international
operations; the limited protection afforded by patents; the fluctuations in
ITI's operating results and the possible volatility of the ITI Common Stock; the
uncertainties and costs of litigation between IMA and ITI; other litigation to
which ITI is a party; ITI's dividend policy; the interests of certain affiliates
of ITI in the transaction; the composition of ITI's Board following the
consummation of the transaction; certain conflicts of interest; the effect of
anti-takeover provisions contained in ITI's Certificate of Incorporation and
By-Laws; the federal income tax consequences of whether the conversion of shares
contemplated by the Merger Agreement will constitute a tax-free reorganization;
and the effect on the market for ITI Common Stock of the shares of ITI Common
Stock eligible for future sale. For a more detailed discussion of these and
other factors relating to acquiring ITI Common Stock, see "Risk
Factors -- Certain Considerations Relating to Acquiring Shares of ITI Common
Stock" in the enclosed Joint Proxy Statement/Prospectus.
The enclosed Joint Proxy Statement/Prospectus and related proxy materials
set forth financial data and other important information relating to IMA and ITI
and describe the terms and conditions of the proposed Merger. The Board of
Directors recommends that you carefully review the materials before completing
the enclosed proxy card or attending the IMA Meeting.
Please complete, sign and date the enclosed proxy card and return it in the
enclosed, pre-addressed envelope which requires no postage if mailed within the
United States. If you later decide to attend the IMA Meeting and vote in person,
or if you wish to revoke your proxy for any reason prior to the vote at the IMA
<PAGE> 3
Meeting, you may do so by following the procedures set forth in the Joint Proxy
Statement/Prospectus and your proxy will have no further effect.
YOUR VOTE IS IMPORTANT. The affirmative vote of holders of a majority of
the outstanding shares of IMA Class A Common Stock and IMA Class B Common Stock
voting together as one class will be required to approve the Merger Agreement
and the transactions contemplated thereby. Approval of the proposal to authorize
the Board of Directors to adjourn the IMA Meeting to permit the further
solicitation of proxies, if necessary, requires the affirmative vote of holders
of a majority of the outstanding shares of IMA Class A Common Stock and IMA
Class B Common Stock present in person or represented by proxy and entitled to
vote at the IMA Meeting voting together as one class. Whether or not you plan to
attend the IMA Meeting, it is important that your shares be represented.
Sincerely,
JEROME KALISHMAN
Chairman of the Board
<PAGE> 4
INSITUFORM TECHNOLOGIES, INC.
September 15, 1995
Dear ITI Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders (the
"ITI Meeting") of Insituform Technologies, Inc. ("ITI") to be held on October
12, 1995 at 10:00 a.m., local time, at The Hilton-Memphis East, 5069 Sanderlin
Avenue, Memphis, Tennessee. At this important meeting you will be asked to
approve an Agreement and Plan of Merger dated as of May 23, 1995 (the "Merger
Agreement"), providing for the merger (the "Merger") of ITI Acquisition Corp., a
Delaware corporation and a wholly-owned subsidiary of ITI ("ITI Sub"), with and
into Insituform Mid-America, Inc., a Delaware corporation ("IMA"), as a result
of which IMA would become a wholly-owned subsidiary of ITI. Pursuant to the
Merger Agreement, holders of Class A Common Stock, $.01 par value ("IMA Class A
Common Stock"), of IMA will be entitled to receive 1.15 shares of Class A Common
Stock, $.01 par value ("ITI Common Stock"), of ITI for each share of IMA Class A
Common Stock held. In connection with the Merger, the holders of Class B Common
Stock, $.01 par value (the "IMA Class B Common Stock"), of IMA have agreed to
convert their shares into IMA Class A Common Stock on a share-for-share basis
immediately prior to the consummation of the Merger.
In addition, as contemplated by the Merger Agreement, at the ITI Meeting
you will be asked (i) to approve a proposed amendment of the Certificate of
Incorporation of ITI, effective as of the effective time of the Merger (the
"Effective Time"), to increase the number of authorized shares of ITI Common
Stock from 25,000,000 shares to 40,000,000 shares (the "Capitalization
Amendment"), and (ii) to approve a proposed amendment to the Certificate of
Incorporation of ITI, effective as of the Effective Time, to provide for the
filling of vacancies in the Board of Directors of ITI in accordance with Section
7.3 of the Merger Agreement (the "Board Vacancy Amendment"). The Capitalization
Amendment will provide for a sufficient number of shares of ITI Common Stock to
permit ITI to issue the shares that will be issued to holders of IMA Class A
Common Stock in the Merger, the additional shares necessary to effectuate the
exercise following the consummation of the Merger of options and warrants with
respect to ITI Common Stock and otherwise to address future corporate purposes.
Upon amendment of the Certificate of Incorporation of ITI as contemplated
by the proposed Board Vacancy Amendment, and as a condition to effectuation of
the Merger, ITI's Board of Directors will be expanded to consist of thirteen
members, ten of whom, Paul A. Biddelman, Brian Chandler, Douglas K. Chick,
William Gorham, James D. Krugman, Jean-Paul Richard, Steven Roth, Silas
Spengler, Sheldon Weinig and Russell B. Wight, Jr., are current ITI directors,
and three of whom, Jerome Kalishman, Robert W. Affholder and Alvin J. Siteman,
were designated by IMA and are current directors of IMA. Messrs. Affholder and
Kalishman, together with his associates, are the largest stockholders of IMA.
It is expected that the Merger will combine complementary strengths of the
companies and create a larger enterprise which should have better economies of
scale, greater operations flexibility, and the enhanced ability to fund
strategic initiatives such as technology development, industrial marketing and
overseas territorial expansion.
At the ITI Meeting, you will be asked to approve, in separate proposals,
the Merger Agreement and the transactions contemplated thereby, the proposed
Capitalization Amendment and the proposed Board Vacancy Amendment. Also, you
will be asked to elect four Class III Directors of ITI for the ensuing
three-year term, and to authorize the Board of Directors to adjourn the ITI
Meeting to permit the further solicitation of proxies, if necessary. The
consummation of the Merger is subject to approval of the proposed Capitalization
Amendment and the proposed Board Vacancy Amendment, neither of which will become
effective until consummation of the Merger.
YOUR BOARD OF DIRECTORS BELIEVES THAT THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY, THE PROPOSED CAPITALIZATION AMENDMENT AND THE
PROPOSED BOARD VACANCY AMENDMENT ARE IN THE BEST INTERESTS
<PAGE> 5
OF ITI AND ITS STOCKHOLDERS. THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE
TERMS OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, THE
PROPOSED CAPITALIZATION AMENDMENT AND THE PROPOSED BOARD VACANCY AMENDMENT AND
RECOMMENDS THAT YOU VOTE FOR APPROVAL OF EACH SUCH PROPOSAL, FOR THE ELECTION OF
THE FOUR CLASS III DIRECTORS OF ITI NAMED IN THE ATTACHED JOINT PROXY
STATEMENT/PROSPECTUS AND FOR AUTHORIZATION OF THE BOARD OF DIRECTORS TO ADJOURN
THE ITI MEETING TO PERMIT THE FURTHER SOLICITATION OF PROXIES, IF NECESSARY.
Merrill Lynch & Co., ITI's financial advisor, has rendered an opinion to
the Board of Directors of ITI to the effect that, at the date of the attached
Joint Proxy Statement/Prospectus, based upon the assumptions made, the matters
considered and the limitations on the review undertaken, the consideration to be
paid by ITI pursuant to the Merger is fair to ITI from a financial point of
view.
The determination of whether to vote in favor of the Merger involves the
consideration by you of certain risk factors, among them: IMA's
non-Insituform(R) operations; competition and IMA's development of additional
products; IMA's western hemisphere operations; IMA's dependence on significant
governmental customers; outstanding issues between ITI and IMA; certain
conflicts of interest between IMA and its principal stockholders and directors;
effects of environmental regulation and inclement weather on operations; and the
occurrence of unanticipated events and circumstances, and the variation of the
operations of IMA or ITI from conditions projected, so as to result in the
failure of ITI to realize the anticipated value of the contribution of IMA's
operations through the Merger. For a more detailed discussion of these and other
factors, see "Risk Factors -- Certain Considerations Relating to the Merger" in
the enclosed Joint Proxy Statement/Prospectus.
Other important information regarding ITI, IMA, the Merger Agreement, the
proposed amendments to ITI's Certificate of Incorporation, the election of
directors and related matters, is also included in the enclosed Joint Proxy
Statement/Prospectus. You are urged to read carefully the Joint Proxy
Statement/Prospectus, as well as the Annexes thereto.
YOUR VOTE IS IMPORTANT. The affirmative vote of holders of a majority of
the outstanding shares of ITI Common Stock will be required to approve,
respectively, the Merger Agreement and the transactions contemplated thereby,
the proposed Capitalization Amendment and the proposed Board Vacancy Amendment.
Directors are elected by a plurality vote. Approval of the proposal to authorize
the Board of Directors to adjourn the ITI Meeting to permit the further
solicitation of proxies, if necessary, requires the affirmative vote of holders
of a majority of the outstanding shares of ITI Common Stock present in person or
represented by proxy and entitled to vote at the ITI Meeting. Whether or not you
plan to attend the ITI Meeting, it is important that your shares be represented.
If you are not certain that you will attend, please complete, sign and date your
proxy card and return it in the enclosed prepaid envelope as soon as possible.
If after voting your shares by proxy, you decide you would rather vote them in
person, you may do so at the ITI Meeting.
Sincerely,
JAMES D. KRUGMAN
Chairman of the Board
<PAGE> 6
INSITUFORM MID-AMERICA, INC.
17988 Edison Avenue
Chesterfield, Missouri 63005
Telephone (314) 532-6137
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS OF
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Class A
Common Stock, $.01 par value ("IMA Class A Common Stock"), and Class B Common
Stock, $.01 par value ("IMA Class B Common Stock"), of Insituform Mid-America,
Inc., a Delaware corporation ("IMA"), will be held at the Sheraton West Port
Plaza Hotel, 900 West Port Plaza, St. Louis, Missouri, on October 12, 1995 at
10:00 a.m., local time, for the following purposes:
(1) To consider and vote upon a proposal to approve an Agreement and
Plan of Merger dated as of May 23, 1995 (the "Merger Agreement") among IMA,
Insituform Technologies, Inc., a Delaware corporation ("ITI"), and ITI
Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of
ITI ("ITI Sub"), and the transactions contemplated thereby, providing for,
among other things, the merger (the "Merger") into IMA of ITI Sub, as a
result of which IMA would become a wholly-owned subsidiary of ITI, and the
consummation of the transactions contemplated by the Merger Agreement,
including the conversion of each share of IMA Class A Common Stock into the
right to receive 1.15 shares of Class A Common Stock, $.01 par value, of
ITI subsequent to conversion into IMA Class A Common Stock, in accordance
with its terms, of all outstanding shares of IMA Class B Common Stock.
(2) To authorize the Board of Directors to adjourn the meeting to
permit the further solicitation of proxies, if necessary.
(3) To transact such other business as may properly come before the
meeting, including any adjournments or postponements thereof.
The proposal to approve the Merger Agreement must be approved by an
affirmative vote of holders of a majority of the outstanding shares of IMA Class
A Common Stock and IMA Class B Common Stock voting together as one class. The
proposal to authorize the Board of Directors to adjourn the meeting to permit
the further solicitation of proxies, if necessary, must be approved by an
affirmative vote of holders of a majority of the outstanding shares of IMA Class
A Common Stock and IMA Class B Common Stock present in person or represented by
proxy and entitled to vote at the meeting voting together as one class.
The Board of Directors has fixed the close of business on September 1, 1995
as the record date for the determination of holders of IMA Class A Common Stock
and IMA Class B Common Stock entitled to notice of and to vote at the meeting,
including any adjournments or postponements thereof.
These items are more fully described in the enclosed Joint Proxy
Statement/Prospectus, which is hereby made a part of this Notice.
Whether you plan to attend the meeting or not, please sign and date the
enclosed proxy and return it promptly by mail in the enclosed envelope. No
postage is required if mailed in the United States. If you attend the meeting,
you may vote either in person or by your proxy.
By Order of the Board of Directors,
JOSEPH F. OLSON
Secretary
Chesterfield, Missouri
September 15, 1995
IMPORTANT
STOCKHOLDERS CAN HELP AVOID THE NECESSITY AND EXPENSE OF FOLLOW-UP LETTERS
TO ASSURE THAT A QUORUM IS PRESENT AT THE MEETING BY PROMPTLY RETURNING THE
ENCLOSED PROXY. THE ENCLOSED ENVELOPE REQUIRES NO POSTAGE IF MAILED IN THE
UNITED STATES.
<PAGE> 7
INSITUFORM TECHNOLOGIES, INC.
1770 Kirby Parkway, Suite 300
Memphis, Tennessee 38138
Telephone (901) 759-7473
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS OF
CLASS A COMMON STOCK
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Class A
Common Stock, $.01 par value ("ITI Common Stock"), of Insituform Technologies,
Inc., a Delaware corporation ("ITI"), will be held at The Hilton-Memphis East,
5069 Sanderlin Avenue, Memphis, Tennessee, on October 12, 1995 at 10:00 a.m.,
local time, for the following purposes:
(1) To consider and vote upon a proposal to approve an Agreement and
Plan of Merger dated as of May 23, 1995 (the "Merger Agreement") among ITI,
ITI Acquisition Corp., a Delaware corporation and wholly-owned subsidiary
of ITI ("ITI Sub"), and Insituform Mid-America, Inc., a Delaware
corporation ("IMA"), and the transactions contemplated thereby, providing
for, among other things, the merger (the "Merger") into IMA of ITI Sub, as
a result of which IMA would become a wholly-owned subsidiary of ITI, and
the consummation of the transactions contemplated by the Merger Agreement,
including the conversion of each share of Class A Common Stock, $.01 par
value ("IMA Class A Common Stock"), of IMA into the right to receive 1.15
shares of ITI Common Stock subsequent to conversion into IMA Class A Common
Stock, in accordance with its terms, of all outstanding shares of Class B
Common Stock, $.01 par value, of IMA.
(2) To consider and vote upon a proposal to approve an amendment (the
"Capitalization Amendment") of the Certificate of Incorporation of ITI,
effective contemporaneously with the consummation of the Merger, to
increase the number of authorized shares of ITI Common Stock from
25,000,000 shares to 40,000,000 shares.
(3) To consider and vote upon a proposal to approve an amendment (the
"Board Vacancy Amendment"), effective contemporaneously with the
consummation of the Merger, to provide for the filling of vacancies on
ITI's Board of Directors as contemplated by Section 7.3 of the Merger
Agreement.
(4) To elect four Class III Directors of ITI for the ensuing
three-year term and until their respective successors are elected and have
qualified.
(5) To authorize the Board of Directors to adjourn the meeting to
permit further solicitation of proxies, if necessary.
(6) To transact such other business as may properly come before the
meeting, including any adjournments or postponements thereof.
The consummation of the Merger is subject to approval of the proposed
Capitalization Amendment and the proposed Board Vacancy Amendment, neither of
which will become effective until consummation of the Merger.
The proposals to approve, respectively, the Merger Agreement, the
Capitalization Amendment and the Board Vacancy Amendment must be approved by an
affirmative vote of holders of a majority of the outstanding shares of ITI
Common Stock. Directors are elected by a plurality vote. The proposal to
authorize the Board of Directors to adjourn the meeting to permit the further
solicitation of proxies, if necessary, requires the affirmative vote of holders
of a majority of the shares of ITI Common Stock present in person or represented
by proxy and entitled to vote at the meeting.
The Board of Directors has fixed the close of business on August 30, 1995
as the record date for the determination of holders of ITI Common Stock entitled
to notice of and to vote at the meeting, including any adjournments or
postponements thereof.
These items are more fully described in the enclosed Joint Proxy
Statement/Prospectus, which is hereby made a part of this Notice.
Whether you plan to attend the meeting or not, please sign and date the
enclosed proxy and return it promptly by mail in the enclosed envelope. No
postage is required if mailed in the United States. If you attend the meeting,
you may vote either in person or by your proxy.
By Order of the Board of Directors,
HOWARD KAILES
Secretary
Memphis, Tennessee
September 15, 1995
IMPORTANT
STOCKHOLDERS CAN HELP AVOID THE NECESSITY AND EXPENSE OF FOLLOW-UP LETTERS
TO ASSURE THAT A QUORUM IS PRESENT AT THE MEETING BY PROMPTLY RETURNING THE
ENCLOSED PROXY. THE ENCLOSED ENVELOPE REQUIRES NO POSTAGE IF MAILED IN THE
UNITED STATES.
<PAGE> 8
JOINT PROXY STATEMENT/PROSPECTUS
------------------------------
PROSPECTUS RELATING TO UP TO 12,914,238 SHARES OF
CLASS A COMMON STOCK OF
INSITUFORM TECHNOLOGIES, INC.
------------------------------
PROXY STATEMENT RELATING TO
INSITUFORM TECHNOLOGIES, INC. INSITUFORM MID-AMERICA, INC.
ANNUAL MEETING OF HOLDERS OF SPECIAL MEETING OF HOLDERS OF
CLASS A COMMON STOCK CLASS A COMMON STOCK AND
TO BE HELD OCTOBER 12, 1995 CLASS B COMMON STOCK
TO BE HELD OCTOBER 12, 1995
This Joint Proxy Statement/Prospectus is being furnished to the
stockholders of Insituform Technologies, Inc., a Delaware corporation ("ITI"),
and the stockholders of Insituform Mid-America, Inc., a Delaware corporation
("IMA"), in connection with the solicitation of proxies by the respective Boards
of Directors of ITI and IMA for use at the annual meeting of stockholders of ITI
to be held on October 12, 1995 (including any adjournments or postponements
thereof, the "ITI Meeting") and the special meeting of stockholders of IMA to be
held on October 12, 1995 (including any adjournments or postponements thereof,
the "IMA Meeting").
At the ITI Meeting, holders (the "ITI Stockholders") of Class A Common
Stock, $.01 par value ("ITI Common Stock"), of ITI will be asked to consider and
vote upon (i) a proposal to approve an Agreement and Plan of Merger dated as of
May 23, 1995 (the "Merger Agreement"), among ITI, ITI Acquisition Corp., a
Delaware corporation and a wholly-owned subsidiary of ITI ("ITI Sub"), and IMA,
and the transactions contemplated thereby, providing for, among other things,
the merger (the "Merger") into IMA of ITI Sub,
Cover page continued on next page
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN MATTERS
WHICH SHOULD BE CONSIDERED BEFORE VOTING.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------
The date of this Joint Proxy Statement/Prospectus is September 15, 1995.
<PAGE> 9
as a result of which IMA would become a wholly-owned subsidiary of ITI, (ii) a
proposal to approve an amendment (the "Capitalization Amendment") of the
Certificate of Incorporation of ITI (the "ITI Charter"), effective
contemporaneously with the consummation of the Merger, to increase the number of
authorized shares of ITI Common Stock from 25,000,000 shares to 40,000,000
shares, and (iii) a proposal to approve an amendment (the "Board Vacancy
Amendment") of the ITI Charter, effective contemporaneously with the
consummation of the Merger, to provide for the filling of vacancies on ITI's
Board of Directors as contemplated by Section 7.3 of the Merger Agreement. The
consummation of the Merger is subject to approval of the proposed Capitalization
Amendment and the proposed Board Vacancy Amendment, neither of which will become
effective until consummation of the Merger. At the ITI Meeting, ITI Stockholders
will also be asked to consider and vote upon a proposal to elect four Class III
Directors of ITI for the ensuing three-year term and until their respective
successors are elected and have qualified, and a proposal to authorize ITI's
Board of Directors to adjourn the ITI Meeting to permit the further solicitation
of proxies, if necessary.
At the IMA Meeting, holders (the "IMA Stockholders") of Class A Common
Stock, $.01 par value (the "IMA Class A Common Stock"), of IMA and Class B
Common Stock, $.01 par value (the "IMA Class B Common Stock"), of IMA will be
asked to consider and vote upon a proposal to approve the Merger Agreement, and
the transactions contemplated thereby, and a proposal to authorize IMA's Board
of Directors to adjourn the IMA Meeting to permit the further solicitation of
proxies, if necessary.
This Joint Proxy Statement/Prospectus serves as the prospectus of ITI under
the Securities Act of 1933, as amended (the "Securities Act"), for the issuance
of up to 12,914,238 shares of ITI Common Stock which will be delivered to the
IMA Stockholders pursuant to the Merger Agreement.
Subject to the terms, conditions and procedures set forth in the Merger
Agreement, upon consummation of the Merger the business and operations of IMA
will be continued as a wholly-owned subsidiary of ITI and each share of IMA
Class A Common Stock will be converted into the right to receive 1.15 shares of
ITI Common Stock (the "Conversion Ratio") subsequent to the conversion into IMA
Class A Common Stock of all of the outstanding shares of IMA Class B Common
Stock in accordance with its terms. The fair market value of ITI Common Stock to
be received pursuant to the Merger may fluctuate and at the consummation of the
Merger may be more or less than the current fair market value of such shares.
See "The Merger -- Basic Terms of Merger Agreement." No fractional shares of ITI
Common Stock will be issued in the Merger, but cash will be paid in lieu of such
fractional shares. See "The Merger -- Basic Terms of Merger Agreement."
The information included herein with respect to ITI and its affiliates was
supplied by ITI, and the information included herein with respect to IMA and its
affiliates was supplied by IMA.
This Joint Proxy Statement/Prospectus and the accompanying forms of proxy
are first being mailed to the ITI Stockholders and the IMA Stockholders on or
about September 18, 1995.
The ITI Common Stock is quoted on The Nasdaq Stock Market under the symbol
"INSUA." The IMA Class A Common Stock is quoted on The Nasdaq Stock Market under
the symbol "INSMA." On September 14, 1995, the closing prices on The Nasdaq
Stock Market of ITI Common Stock and IMA Class A Common Stock were $14.94 and
$16.75, respectively.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, AND IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE
SECURITIES OFFERED BY THIS JOINT PROXY STATEMENT/PROSPECTUS, OR THE SOLICITATION
OF A PROXY, IN ANY JURISDICTION, TO OR FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER, SOLICITATION OF AN OFFER OR PROXY SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR
ANY DISTRIBUTION OF THE SECURITIES OFFERED PURSUANT TO THIS JOINT PROXY
STATEMENT/PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN SINCE THE DATE OF
THIS JOINT PROXY STATEMENT/PROSPECTUS.
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<PAGE> 10
AVAILABLE INFORMATION
ITI has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (together with all exhibits
thereto, the "Registration Statement") under the Securities Act with respect to
the ITI Common Stock to be issued in connection with the Merger. This Joint
Proxy Statement/Prospectus does not contain all of the information contained in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. The Registration Statement is
available for inspection and copying at the public reference facilities of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549-1004.
Each of ITI and IMA is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports and other information with the
Commission. Such reports and other information may be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549-1004 and at the following Regional Offices
of the Commission: Chicago Regional Office, Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and New York Regional
Office, 7 World Trade Center, New York, New York 10048. Copies of such material
can be obtained in person from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549-1004 at prescribed rates. Such
reports and other information may also be inspected at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006. The ITI Common Stock and the IMA Class A Common Stock
are traded in the over-the-counter market and quoted on The Nasdaq Stock Market.
COPIES OF ITI'S ANNUAL REPORT ON FORM 10-K, INCLUDING THE FINANCIAL
STATEMENTS, FOR THE YEAR ENDED DECEMBER 31, 1994, WHICH HAS BEEN FILED WITH THE
COMMISSION, WILL BE SENT WITHOUT CHARGE TO ITI STOCKHOLDERS TO WHOM THIS JOINT
PROXY STATEMENT/PROSPECTUS IS DELIVERED UPON WRITTEN REQUEST TO ITI'S SECRETARY
AT INSITUFORM TECHNOLOGIES, INC., 1770 KIRBY PARKWAY - SUITE 300, MEMPHIS,
TENNESSEE 38138.
------------------------------
The following trademarks mentioned in this Joint Proxy Statement/Prospectus
are registered trademarks which are owned by ITI and licensed to IMA:
Insituform(R), Insitucutter(R), Insitutube(R), Insitupipe(R) and NuPipe(R).
UltraPipe(R) is a registered trademark owned by ITI. The following additional
trademarks are owned by or licensed to IMA: PALTEM(R), PAL-Liner(TM),
SZ-Liner(TM), Sprayroq(TM) and Tite Liner(TM).
3
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................................................................. 3
Table of Contents..................................................................... 4
Joint Proxy Statement/Prospectus Summary.............................................. 6
The Parties......................................................................... 6
Risk Factors........................................................................ 6
Information Concerning the Meetings................................................. 6
The Merger.......................................................................... 7
The Capitalization Amendment........................................................ 10
The Board Vacancy Amendment......................................................... 10
Election of ITI Directors........................................................... 11
Adjournment of Meetings............................................................. 11
Summary Historical and Unaudited Pro Forma Combined Condensed Financial Data........ 11
Comparative Unaudited Per Share Data of ITI and IMA................................. 14
Risk Factors.......................................................................... 16
Certain Considerations Relating to Acquiring ITI Shares............................. 16
Certain Considerations Relating to the Merger....................................... 19
Information Concerning the Meetings................................................... 22
The ITI Meeting..................................................................... 22
The IMA Meeting..................................................................... 23
The Merger............................................................................ 26
Background.......................................................................... 26
Recommendations of the Boards of Directors; Reasons for Approving the Merger
Agreement........................................................................ 31
Opinion of ITI Financial Advisor.................................................... 33
Opinion of IMA Financial Advisor.................................................... 36
Interests of Certain Persons in the Merger and Related Transactions................. 39
Basic Terms of Merger Agreement..................................................... 41
Management of ITI Following Consummation of the Merger.............................. 46
Resales of ITI Common Stock......................................................... 47
Registration Rights Agreement....................................................... 47
Pooling Letters..................................................................... 48
Conversion Letters.................................................................. 48
Governmental and Regulatory Matters................................................. 49
Certain Federal Income Tax Consequences of the Merger............................... 49
Accounting Treatment................................................................ 50
Expenses............................................................................ 51
The Capitalization Amendment.......................................................... 51
The Board Vacancy Amendment........................................................... 52
Market Prices of and Dividends on ITI Common Stock and IMA Class A Common Stock....... 54
Unaudited Pro Forma Combined Condensed Financial Information.......................... 56
Selected Financial Data of ITI........................................................ 66
ITI -- Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 67
Selected Financial Data of IMA........................................................ 81
IMA -- Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 82
Election of ITI Directors............................................................. 88
Business of ITI....................................................................... 102
Security Ownership of Principal Stockholders and Management of ITI.................... 120
Business of IMA....................................................................... 123
Management of IMA..................................................................... 133
Security Ownership of Principal Stockholders and Management of IMA.................... 136
Description of ITI Capital Stock...................................................... 137
Comparative Rights of Stockholders of ITI and IMA..................................... 138
Adjournment of Meetings............................................................... 141
Legal Matters......................................................................... 141
Experts............................................................................... 141
Index to Financial Statements......................................................... 143
</TABLE>
4
<PAGE> 12
<TABLE>
<S> <C> <C>
Annex A -- Merger Agreement
Exhibit A -- Agreement of Merger
Exhibit B -- Form of Pooling Letter
Exhibit C -- Form of IMA Accountants' Comfort Letters
Exhibit D -- Form of ITI Accountants' Comfort Letter
Exhibit E -- Amendments to ITI Charter
Exhibit F -- Amendments to ITI By-laws
Exhibit G -- Form of Conversion Letter
Exhibit H -- Form of ITI Counsel's Opinion
Exhibit I -- Form of IMA Counsel's Opinion
Exhibit J -- Form of Rule 145 Letter
Exhibit K -- Form of Affholder Agreement
Exhibit L -- Form of Kalishman Agreements
Annex B -- Opinion of Merrill Lynch & Co.
Annex C -- Opinion of Schroder Wertheim & Co. Incorporated
Annex D -- The Capitalization Amendment
Annex E -- The Board Vacancy Amendment
</TABLE>
5
<PAGE> 13
JOINT PROXY STATEMENT/PROSPECTUS SUMMARY
The following is a summary of certain information contained in this Joint
Proxy Statement/Prospectus. This summary is not intended to be complete and is
qualified in its entirety by the more detailed information and financial
statements, including the notes thereto, contained elsewhere in this Joint Proxy
Statement/Prospectus and the attached Annexes, all of which are important and
should be reviewed carefully. Capitalized terms used herein without definition
shall have the meanings ascribed to them elsewhere in this Joint Proxy
Statement/Prospectus.
THE PARTIES
ITI. ITI is engaged in the provision, throughout the world, of trenchless
pipeline rehabilitation systems and technologies. ITI utilizes state-of-the-art
processes to repair sewers, tunnels and pipelines, usually without excavation
and with minimal interruption of traffic and commercial activity. ITI's primary
technology is the Insituform Process, a "cured-in place," non-disruptive
pipeline rehabilitation process that, during ITI's most recent fiscal year,
contributed to approximately 79% of ITI's revenues. In addition, ITI offers
certain other products in trenchless applications, such as its NuPipe Process,
which utilizes a "fold-and-formed" technology used primarily to repair smaller
or less damaged pipe or in situations where polyvinylchloride pipe is preferred,
and has acquired a variety of pipeline and ancillary technologies that, under
the UltraPipe name, employ a diameter reduction technique tailored to meet the
pressure pipe rehabilitation needs of the oil and gas transmission market. The
principal executive offices of ITI are located at 1770 Kirby Parkway, Suite 300,
Memphis, Tennessee 38138, and the telephone number is (901) 759-7473. See
"Business of ITI."
IMA. IMA applies various trenchless and other technologies to solve
problems requiring rehabilitation, new construction and improvement of pipeline
systems, including sewers, industrial waste lines, slurry lines and oil field
and industrial process pipelines. Rehabilitation process revenues, primarily
derived by IMA from the Insituform Process as a licensee of ITI, accounted for
approximately 68% of IMA's contract revenues during its most recent fiscal year.
IMA is also the exclusive North American licensee of Ashimori Industry Co. Ltd.
proprietary pipeline rehabilitation technologies and, as such, utilizes the
PALTEM-HL system of rehabilitating pressure pipes. In addition to its pipeline
system rehabilitation methods, IMA utilizes trenchless technologies to construct
tunnels ranging from four to ten feet in diameter through a variety of soils and
provides the Tite Liner Process, a method of inserting a corrosive and abrasive
resistant lining in oil field, mining and industrial process pipelines. The
principal executive offices of IMA are located at 17988 Edison Avenue,
Chesterfield, Missouri 63005, and the telephone number is (314) 532-6137. See
"Business of IMA."
RISK FACTORS
There are certain factors that should be considered by ITI Stockholders and
IMA Stockholders in determining whether to vote to approve the Merger Agreement
and the transactions contemplated thereby. See "Risk Factors."
INFORMATION CONCERNING THE MEETINGS
THE ITI MEETING
Date, Time and Place of Meeting. The ITI Meeting will be held at The
Hilton-Memphis East, 5069 Sanderlin Avenue, Memphis, Tennessee on October 12,
1995 at 10:00 a.m., local time.
Purpose of the Meeting. The purpose of the ITI Meeting is to consider and
vote upon (i) the proposal to approve the Merger Agreement and the transactions
contemplated thereby, (ii) the proposal to approve the Capitalization Amendment,
(iii) the proposal to approve the Board Vacancy Amendment, (iv) the election of
four Class III directors for the ensuing three-year term, (v) the proposal to
authorize ITI's Board of Directors to adjourn the ITI Meeting to permit the
further solicitation of proxies, if necessary, and (vi) such other business as
may properly come before the ITI Meeting. See "Information Concerning the
Meetings -- ITI Meeting."
Record Date. Only holders of record of shares of ITI Common Stock at the
close of business on August 30, 1995 are entitled to notice of and to vote at
the ITI Meeting. On August 30, 1995, 14,609,804 shares of ITI Common Stock were
outstanding and entitled to vote.
6
<PAGE> 14
Vote Required. The proposals to approve, respectively, the Merger
Agreement, the Capitalization Amendment and the Board Vacancy Amendment must be
approved by an affirmative vote of the holders of a majority of the outstanding
shares of ITI Common Stock. Directors are elected by a plurality vote. The
proposal to authorize ITI's Board of Directors to adjourn the ITI Meeting to
permit the further solicitation of proxies, if necessary, requires the
affirmative vote of holders of a majority of the shares of ITI Common Stock
present in person or represented by proxy and entitled to vote at the ITI
Meeting. If there are insufficient votes to constitute a quorum or to approve
the Merger Agreement, or to approve the Capitalization Amendment or to approve
the Board Vacancy Amendment, at the ITI Meeting, it is contemplated that such
meeting would be adjourned in order to permit further solicitation of proxies.
As of August 30, 1995, directors and executive officers of ITI and their
affiliates beneficially owned an aggregate of 3,879,047 shares of ITI Common
Stock (approximately 25.6% of the aggregate shares of ITI Common Stock then
outstanding) entitled to notice of and to vote at the ITI Meeting. See "Security
Ownership of Principal Stockholders and Management of ITI."
THE IMA MEETING
Date, Time and Place of Meeting. The IMA Meeting will be held at the
Sheraton West Port Plaza Hotel, 900 West Port Plaza, St. Louis, Missouri on
October 12, 1995 at 10:00 a.m., local time.
Purpose of the IMA Meeting. The purpose of the IMA Meeting is to consider
and vote upon (i) the proposal to approve the Merger Agreement and the
transactions contemplated thereby, (ii) the proposal to authorize IMA's Board of
Directors to adjourn the IMA Meeting to permit the further solicitation of
proxies, if necessary, and (iii) such other business as may properly come before
the IMA Meeting. See "Information Concerning the Meetings -- IMA Meeting."
Record Date. Only holders of record of shares of IMA Class A Common Stock
and IMA Class B Common Stock at the close of business on September 1, 1995 are
entitled to notice of and to vote at the IMA Meeting. On September 1, 1995,
8,330,303 shares of IMA Class A Common Stock and 2,472,985 shares of IMA Class B
Common Stock were outstanding and entitled to vote.
Vote Required. The proposal to approve the Merger Agreement must be
approved by an affirmative vote of the holders of a majority of the outstanding
shares of IMA Class A Common Stock and IMA Class B Common Stock voting together
as one class. The proposal to authorize IMA's Board of Directors to adjourn the
IMA Meeting to permit the further solicitation of proxies, if necessary,
requires the affirmative vote of holders of a majority of the shares of IMA
Class A Common Stock and IMA Class B Common Stock present in person or
represented by proxy and entitled to vote at the IMA Meeting voting together as
one class. If there are insufficient votes to constitute a quorum or to approve
the Merger Agreement at the IMA Meeting, it is contemplated that such meeting
would be adjourned in order to permit further solicitation of proxies. As of
September 1, 1995, directors and executive officers of IMA and their affiliates
beneficially owned an aggregate of 4,197,835 shares of IMA Class A Common Stock
and IMA Class B Common Stock (approximately 38.5% of the aggregate shares of IMA
Class A Common Stock and IMA Class B Common Stock then outstanding) entitled to
notice of and to vote at the IMA Meeting. See "Security Ownership of Principal
Stockholders and Management of IMA."
THE MERGER
General. The Merger Agreement provides for the merger into IMA of ITI Sub,
as a result of which IMA would become a wholly-owned subsidiary of ITI. Pursuant
to the terms of the Merger Agreement, each share of IMA Class A Common Stock
outstanding immediately prior to the Effective Time will, by virtue of the
Merger, be converted into the right to receive 1.15 shares of ITI Common Stock
subsequent to conversion into IMA Class A Common Stock, in accordance with its
terms, of all outstanding shares of IMA Class B Common Stock. The fair market
value of ITI Common Stock to be received pursuant to the Merger may fluctuate
and at the consummation of the Merger may be more or less than the current fair
market value of such shares. See "The Merger -- Basic Terms of Merger
Agreement."
Fractional Shares. No fractional shares will be issued pursuant to the
Merger. In lieu of any such fractional shares, the Exchange Agent shall, on
behalf of all holders of such fractional shares, aggregate all such fractional
shares and sell the resulting shares of ITI Common Stock for the accounts of
such holders who
7
<PAGE> 15
thereafter shall be entitled to receive on a pro rata basis the proceeds of the
sale of such shares of ITI Common Stock, without interest thereon.
Recommendations of the Boards of Directors; Reasons for Approving the
Merger Agreement. The Board of Directors of ITI believes that the approval of
the Merger Agreement, and the transactions contemplated thereby, the approval of
the proposed Capitalization Amendment and the approval of the proposed Board
Vacancy Amendment are in the best interests of ITI and its stockholders. The
consummation of the Merger is subject to approval of the proposed Capitalization
Amendment and the proposed Board Vacancy Amendment, neither of which will become
effective until consummation of the Merger, and failure of ITI Stockholders to
approve the proposed Capitalization Amendment and the proposed Board Vacancy
Amendment would enable ITI or IMA to terminate the Merger Agreement.
Accordingly, the Board of Directors of ITI recommends that ITI Stockholders vote
FOR the approval of the Merger Agreement, and the transactions contemplated
thereby, FOR approval of the proposed Capitalization Amendment, FOR approval of
the proposed Board Vacancy Amendment, FOR approval of the election of the four
Class III directors named in this Joint Proxy Statement/Prospectus and FOR
authorization of the Board of Directors of ITI to adjourn the ITI Meeting in
order to permit the further solicitation of proxies, if necessary. See "The
Merger -- Recommendations of the Boards of Directors; Reasons for Approving the
Merger Agreement -- Board of Directors of ITI," "The Capitalization Amendment,"
"The Board Vacancy Amendment," "Election of ITI Directors," and "Adjournment of
Meetings."
The Board of Directors of IMA believes that the approval of the Merger
Agreement, and the transactions contemplated thereby, is in the best interests
of the IMA Stockholders and recommends that IMA Stockholders vote FOR the
approval of the Merger Agreement, and the transactions contemplated thereby, and
FOR authorization of the Board of Directors of IMA to adjourn the IMA Meeting in
order to permit the further solicitation of proxies, if necessary. See "The
Merger -- Recommendations of the Boards of Directors; Reasons for Approving the
Merger Agreement -- Board of Directors of IMA" and "Adjournment of Meetings."
Opinions of Financial Advisors. Merrill Lynch & Co. rendered an oral
opinion on May 22, 1995, which was subsequently confirmed in a written opinion
dated the date of this Joint Proxy Statement/Prospectus, to the Board of
Directors of ITI to the effect that, as of such dates, based upon the
assumptions made, the matters considered, and the limitations on the review
undertaken, the consideration to be paid by ITI pursuant to the Merger is fair
to ITI from a financial point of view. Schroder Wertheim & Co. Incorporated
rendered its opinion to the Board of Directors of IMA to the effect that, as of
May 22, 1995, the Conversion Ratio is fair, from a financial point of view, to
the IMA Stockholders. Schroder Wertheim has delivered an updated written opinion
to the Board of Directors of IMA to the same effect dated as of the date of this
Joint Proxy Statement/Prospectus. Copies of the opinions of Merrill Lynch and
Schroder Wertheim, each dated as of the date of this Joint Proxy
Statement/Prospectus, setting forth the assumptions made, the matters considered
and the limitations on the review undertaken in rendering such opinions, are
attached to this Joint Proxy Statement/Prospectus as Annexes B and C,
respectively, and should be read carefully in their entirety. See "The
Merger -- Opinion of ITI Financial Advisor" and "-- Opinion of IMA Financial
Advisor."
Management of ITI Following Consummation of the Merger. The Merger
Agreement provides, in part, that the Board of Directors of ITI, which is
divided into three classes serving staggered three-year terms, will be expanded
so that, at the Effective Time, all of ITI's current directors will remain on
ITI's Board of Directors and three of IMA's current directors, Messrs.
Kalishman, Affholder and Siteman, will become ITI directors, serving terms
expiring, respectively, with the terms of the existing classes of directors of
ITI. ITI has agreed that, during the period from the Effective Time to December
9, 1998, ITI shall nominate and recommend such persons for re-election to the
ITI Board of Directors upon expiration of their terms. At the Effective Time,
ITI will enter into agreements with Mr. Kalishman, under which he will serve as
Vice Chairman of the Board of ITI through a term expiring on December 9, 1998
and as a consultant for two years, and will also enter into a three-year
employment agreement with Mr. Affholder, under which he will initially serve as
chief operating officer for ITI's North American contracting operations. See
"The Merger -- Management of ITI Following Consummation of the Merger."
Interests of Certain Persons in the Merger. As more fully described under
"The Merger -- Management of ITI Following Consummation of the Merger," all ten
of ITI's current directors will remain on ITI's Board
8
<PAGE> 16
of Directors following the Effective Time, and three of IMA's current directors,
Messrs. Kalishman, Affholder and Siteman, will become ITI directors as of the
Effective Time.
At the Effective Time, ITI will enter into agreements with Jerome
Kalishman, the Chairman of IMA, under which Mr. Kalishman will serve as Vice
Chairman of the Board of Directors of ITI for a term expiring on December 9,
1998, and will enter into a consulting agreement with Mr. Kalishman pursuant to
which ITI will engage Mr. Kalishman as a consultant in connection with the
business of ITI for a two-year term. Pursuant to the terms of the Merger
Agreement, ITI will also enter into a three-year employment agreement with
Robert W. Affholder, the President of IMA, under which Mr. Affholder will serve
initially as chief operating officer for ITI's North American contracting
operations and thereafter in such other executive staff position as may be
designated by ITI. Each of Messrs. Kalishman and Affholder will also enter into
non-competition agreements with ITI, extending from the Effective Time until the
later of five years thereafter or two years after all service to ITI has ended.
See "The Merger -- Interests of Certain Persons in the Merger and Related
Transactions -- Employment and Consulting Agreements."
At the Effective Time, all outstanding options to acquire IMA Class A
Common Stock under IMA's Stock Option Plan will be assumed by ITI upon the same
terms and conditions as contained under such plan, except that each such option
will be exercisable for that number of shares of ITI Common Stock into which the
number of shares of IMA Class A Common Stock subject to such option immediately
prior to the Effective Time would be convertible in the Merger if such shares
were outstanding at the Effective Time, and the exercise price per share will be
calculated as more fully described under "The Merger -- Basic Terms of Merger
Agreement -- IMA Stock Options" below.
From and after the Effective Time, ITI will, to the extent permitted by
Delaware law, honor all obligations of IMA pursuant to IMA's Certificate of
Incorporation, By-Laws and agreements with certain directors, which provide in
various respects for indemnification of officers and directors of IMA with
respect to events occurring prior to the Effective Time.
ITI has entered into a registration rights agreement with Robert W.
Affholder and Xanadu Investments, L.P., pursuant to which ITI is, under certain
circumstances, required to use its reasonable best efforts to effect a
registration under the Securities Act of shares of ITI Common Stock held by such
parties and their affiliates. See "The Merger -- Registration Rights Agreement."
The obligations of ITI and ITI Sub to effect the Merger are subject to the
modification, upon terms reasonably satisfactory to ITI, of the equipment lease
between IMA and A-Y-K-E Partnership, a partnership of which Messrs. Kalishman
and Affholder are partners. See "The Merger -- Interests of Certain Persons in
the Merger and Related Transactions -- A-Y-K-E Equipment Agreement."
In connection with the acceptance of employment as President and chief
executive officer of ITI by Jean-Paul Richard, in October 1993 ITI granted to
Mr. Richard a five-year option to purchase up to 300,000 shares of ITI Common
Stock, currently exercisable with respect to up to 50,000 of such shares. At the
Effective Time, however, in accordance with its terms, such option will become
exercisable with respect to all shares covered thereby upon the election of a
Board of Directors of ITI other than pursuant to the arrangements in effect upon
the date of grant. See "The Merger -- Interests of Certain Persons in the Merger
and Related Transactions -- Certain ITI Options."
On July 3, 1992, ITI restructured a loan previously made to Ringwood
Limited, a member of the Ringwood Group, which includes Douglas K. Chick and
Brian Chandler, both directors of ITI. The outstanding loan, evidenced by a
non-recourse promissory note in the principal amount of $3,624,842.40 executed
by Ringwood Limited to ITI, is secured by 255,801 shares of ITI Common Stock
beneficially owned by Ringwood Limited and Messrs. Chandler and Chick, and was
originally due July 3, 1995. Such loan has been extended by one year because
legal restrictions in connection with the Merger prevented members of the
Ringwood Group from selling sufficient shares of ITI Common Stock to be able to
repay the loan, and the value of such security was less than the amount of the
outstanding indebtedness.
Under IMA's existing credit facilities, the consent of certain banks will
be required in connection with the Merger. Mr. Siteman is the largest
stockholder and Chairman of the Board of the parent of one such bank, and Lee M.
Liberman, a director of IMA, is director of the parent of another.
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Effective Time of the Merger. The Merger will become effective at the time
a certificate of merger is duly filed with the Secretary of State of Delaware.
Such filing, together with all other filings or recordings required by Delaware
law in connection with the Merger, will be made within ten business days after
the approval by the stockholders of each of ITI and IMA of the Merger Agreement
and the satisfaction or, to the extent permitted under the Merger Agreement,
waiver of all conditions to the Merger contained in the Merger Agreement (except
that ITI may delay closing for up to 15 business days in order to effectuate the
restructurings described by "The Merger -- Basic Terms of Merger
Agreement -- Restructuring Transactions").
Governmental and Regulatory Matters. Under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, the Merger is subject to review by the Antitrust
Division of the Department of Justice and the Federal Trade Commission to
determine whether it complies with applicable antitrust laws. ITI and IMA filed
notification reports, together with requests for early termination of the
waiting period, with the Department of Justice and the FTC on June 16, 1995.
Effective June 26, 1995, the FTC confirmed early termination of the waiting
period.
Certain Federal Income Tax Consequences. Thompson & Mitchell, IMA's legal
counsel, has delivered its opinion to IMA to the effect that, assuming the
Merger occurs in accordance with the Merger Agreement and conditioned on the
accuracy of certain representations made by ITI, IMA and certain stockholders of
IMA, the Merger will constitute a "reorganization" for federal income tax
purposes and that, accordingly, no gain or loss will be recognized by IMA
Stockholders who exchange their shares of IMA Class A Common Stock solely for
shares of ITI Common Stock in the Merger. However, cash received in lieu of
fractional shares may give rise to taxable income. It is a condition to the
obligations of ITI, ITI Sub and IMA to consummate the Merger that the foregoing
opinion be confirmed in writing as of the Closing Date. Each IMA Stockholder is
urged to consult his own tax advisor to determine the specific tax consequences
of the Merger to him, including the applicability of various state, local and
foreign tax laws. See "The Merger -- Certain Federal Income Tax Consequences of
the Merger."
Conditions to the Merger. The consummation of the Merger is conditioned
upon the fulfillment or waiver, where permissible, of certain conditions set
forth in the Merger Agreement. See "The Merger -- Basic Terms of Merger
Agreement -- Conditions to Consummation of the Merger."
Accounting Treatment. It is expected that the Merger will be accounted for
as a pooling-of-interests under generally accepted accounting principles. See
"The Merger -- Accounting Treatment."
Effects of the Merger on Rights of Stockholders. As a result of the
Merger, holders of IMA Class A Common Stock who receive shares of ITI Common
Stock will become stockholders of ITI. For a comparison of the charter and
by-law provisions of ITI and IMA governing the rights of ITI Stockholders and
IMA Stockholders, respectively, see "Comparative Rights of Stockholders of ITI
and IMA."
Absence of Appraisal Rights. Under Delaware law, neither ITI Stockholders
nor IMA Stockholders will be entitled to demand appraisal rights as a result of
the consummation of the Merger. See "Information Concerning the
Meetings -- Dissenters' Rights."
THE CAPITALIZATION AMENDMENT
In connection with the approval of the Merger Agreement and the
transactions contemplated by the Merger Agreement, ITI Stockholders are also
being asked to approve an amendment to the ITI Charter that will become
effective at the Effective Time, and will increase the number of authorized
shares of ITI Common Stock from 25,000,000 shares to 40,000,000 shares. The
consummation of the Merger is subject to approval of the proposed Capitalization
Amendment, which will not become effective until consummation of the Merger. See
"The Capitalization Amendment."
THE BOARD VACANCY AMENDMENT
In connection with the approval of the Merger Agreement and the
transactions contemplated by the Merger Agreement, ITI Stockholders are also
being asked to approve an amendment to the ITI Charter that will become
effective at the Effective Time, and will provide for the filling of vacancies
on ITI's Board of Directors as contemplated by Section 7.3 of the Merger
Agreement. The consummation of the Merger is
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subject to approval of the proposed Board Vacancy Amendment, which will not
become effective until consummation of the Merger. See "The Board Vacancy
Amendment."
ELECTION OF ITI DIRECTORS
At the ITI Meeting, the ITI Stockholders will vote to elect four persons to
the ITI Board of Directors as described under "Election of ITI Directors," to
hold office from the conclusion of the ITI Meeting for a three-year term. See
"Election of ITI Directors."
ADJOURNMENT OF MEETINGS
At the ITI Meeting, the ITI Stockholders will vote upon a proposal to
authorize the Board of Directors of ITI to adjourn the ITI Meeting in order to
permit the further solicitation of proxies, if necessary. At the IMA Meeting,
the IMA Stockholders will vote upon a proposal to authorize the Board of
Directors of IMA to adjourn the IMA Meeting in order to permit the further
solicitation of proxies, if necessary. See "Adjournment of Meetings."
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following summary historical financial data of ITI and IMA and summary
unaudited pro forma combined condensed financial data have been derived from the
historical consolidated financial statements of ITI and IMA, respectively,
included herein and previously published historical financial statements of ITI
and IMA not appearing herein. In December 1992, ITI consummated the IGL
Acquisition, which ITI has accounted for as a pooling-of-interests and,
accordingly, the historical financial statements of the combining companies have
been retroactively combined (after adjustments to eliminate intercompany
balances and transactions, and to conform accounting methods) as if the
companies had operated as a single entity for the periods presented. Certain
historical financial data of IMA have been reclassified to conform to ITI's
accounting policies.
The unaudited pro forma combined condensed financial data give effect to
the Merger as if it had been effected on January 1, 1992 by combining the
financial statement data of ITI and IMA at and for each year in the three-year
period ended December 31, 1994 and at and for the six months ended June 30, 1995
and 1994 on a pooling-of-interests basis of accounting. In addition, the
unaudited pro forma combined condensed financial data for the six months ended
June 30, 1995 and 1994 and for the year ended December 31, 1994 illustrate
management's estimates of the financial statement effect of IMA's acquisition of
the pipeline rehabilitation business of Enviroq Corporation completed by IMA in
April 1995, which has been accounted for under the purchase method of
accounting. See "Business of IMA." Further, the unaudited pro forma combined
condensed financial data for the year ended December 31, 1994 and for the six
months ended June 30, 1994, illustrate the financial statement effect of ITI's
acquisition of Gelco and affiliates completed in October 1994, which has been
accounted for under the purchase method of accounting. See "Business of ITI."
The unaudited pro forma combined condensed financial data have been
included as required by the rules of the Commission and are provided for
comparative purposes only. The unaudited pro forma combined condensed financial
data do not purport to be indicative of the results which would have been
obtained if the transactions, in fact, had been effected on the date or dates
indicated or which may be obtained in the future.
Historical financial data at and for the six months ended June 30, 1995 and
1994 for ITI and at and for the nine months ended on such dates, respectively,
for IMA are unaudited, and, in the opinion of ITI's and IMA's respective
managements, include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the results of operations and
the financial position at and for each of the interim periods presented.
Operating results for the six months ended June 30, 1995 for ITI, and for the
nine months ended on such date for IMA, are not necessarily indicative of the
results that may be obtained for the entire fiscal years ending, respectively,
December 31, 1995 and September 30, 1995.
The summary historical and unaudited pro forma combined condensed financial
data set forth below should be read in conjunction with "Selected Financial Data
of ITI," "ITI -- Management's Discussion and
11
<PAGE> 19
Analysis of Financial Condition and Results of Operations," "Selected Financial
Data of IMA," "IMA -- Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Unaudited Pro Forma Combined Condensed
Financial Information" and ITI's and IMA's Consolidated Financial Statements,
including the notes thereto, contained elsewhere herein.
ITI HISTORICAL
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30, YEAR ENDED DECEMBER 31,
----------------------- ----------------------------------------------------------
1995(1) 1994 1994(2) 1993(3) 1992(4) 1991 1990
---------- -------- -------- -------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues..................... $ 83,446 $ 62,283 $148,247 $100,508 $95,559 $ 76,402 $60,683
Merger and restructuring costs..... -- -- -- (981) 14,572(5) 733 292
Gain on sale of investment in
IMA.............................. -- -- -- -- -- 17,280(6) --
Income (loss) from continuing
operations....................... 2,995(7) 3,643 9,794 7,260 (5,671)(5) 15,360(6) 1,408
Income (loss) from continuing
operations per common share...... .21 .25 .68 .51 (.41) 1.12 .11
BALANCE SHEET DATA (AT PERIOD END):
Total assets....................... 164,820 132,684 162,494 129,175 87,379 105,579 89,599
Long-term debt and redeemable
preferred stock.................. 53,131 34,307 47,347 36,454 7,421 8,059 9,030
</TABLE>
---------------
(1) In February 1995, ITI consummated the acquisition of 66% of Insituform
France S.A., which has been accounted for under the purchase method of
accounting.
(2) In October 1994, ITI consummated the acquisition of Gelco Services, Inc. and
affiliates, which has been accounted for under the purchase method of
accounting.
(3) In July 1993, ITI consummated the acquisitions of Naylor Industries, Inc.
and Insituform Midwest, Inc., which have been accounted for under the
purchase method of accounting.
(4) In December 1992, ITI consummated the acquisition of the minority interest
in IGL Canada Limited, and the acquisition of H.T. Schneider, Inc., which
have been accounted for under the purchase method of accounting.
(5) Reflects $9.667 million in costs associated with the IGL Acquisition, which
have been charged to operations primarily in the fourth quarter of 1992, and
a pre-tax charge in the amount of $4.905 million for restructuring costs,
primarily for asset-related write-offs, lease termination provisions and
personnel-related costs.
(6) In May 1991, ITI completed the sale of its equity interest in IMA as a
result of which ITI received payments aggregating $22.058 million, which,
after accounting for the aggregate carrying amount of the investment,
expense associated with the transaction and taxes (subsequent to utilization
of ITI's capital loss carryover reported as an extraordinary item), resulted
in a contribution of approximately $10.574 million to net income
(approximately $9.451 million to income before extraordinary item).
(7) On May 23, 1995, ITI entered into a memorandum of understanding, subject to
execution of an appropriate stipulation of settlement (which occurred on
September 11, 1995), court approval and other customary conditions, to
settle certain outstanding litigation for a cash payment of $3.2 million
(which ITI has deposited into escrow) and issuance of 30,000 shares of ITI
Common Stock, resulting in an after-tax charge against second quarter 1995
earnings of approximately $2.2 million.
12
<PAGE> 20
IMA HISTORICAL
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30, YEAR ENDED SEPTEMBER 30,
------------------- -------------------------------------------------------
1995(1) 1994 1994 1993(2) 1992(3) 1991 1990
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Total revenues........................... $77,611 $54,293 $75,279 $60,086 $66,690 $49,545 $36,272
Income from continuing operations........ 4,956 3,743 5,049 3,408 7,676 5,354 3,375
Income from continuing operations per
common share........................... .45 .34 .45 .31 .70 .52 .33
BALANCE SHEET DATA (AT PERIOD END):
Total assets............................. 91,920 54,488 63,879 52,936 45,116 34,414 22,690
Long-term debt........................... 14,024 (4) -- -- -- 341 360 425
</TABLE>
---------------
(1) In April 1995 IMA completed the Enviroq Acquisition, which has been
accounted for under the purchase method of accounting.
(2) In November 1992, IMA acquired substantially all of the assets of Pipeline
Rehabilitation Systems, Inc., which has been accounted for under the
purchase method of accounting.
(3) In October 1991, IMA acquired United Pipeline Systems Inc., which has been
accounted for under the purchase method of accounting. In connection with
such acquisition, IMA acquired all of the outstanding stock of United
Corrosion Corporation, the parent of UPSI.
(4) See "IMA -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" for information
regarding demands made for payment under IMA's $3.0 million subordinated
promissory note issued in the Enviroq Acquisition and IMA's reclassification
thereof as a current liability at June 30, 1995.
ITI AND IMA PRO FORMA COMBINED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED
JUNE 30, DECEMBER 31,
--------------------- ----------------------------------
1995 1994 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues............................................. $138,945 $113,538 $261,396 $151,829 $156,581
Income from continuing operations.......................... 4,819 6,983 16,978 9,734 2,288
Income from continuing operations per common share......... .18 .26 .63 .36 .09
BALANCE SHEET DATA (AT PERIOD END):
Total assets............................................... 254,136 186,070 227,537 177,010 133,682
Long-term debt and redeemable preferred stock.............. 67,177 34,307 47,347 36,454 7,759
</TABLE>
13
<PAGE> 21
COMPARATIVE UNAUDITED PER SHARE DATA OF ITI AND IMA
The following table summarizes certain unaudited comparative per share data
for ITI and IMA on an historical basis, and pro forma combined comparative per
share data and comparative per share data on a pro forma equivalent basis giving
effect to the Merger as a pooling-of-interests for accounting purposes. Such
information is derived from and should be read in conjunction with the Unaudited
Pro Forma Combined Condensed Financial Information and ITI's and IMA's
Consolidated Financial Statements, including the notes thereto, contained
elsewhere herein. The pro forma information presented is for comparative
purposes only and is not necessarily indicative of future combined earnings or
financial position or of combined earnings or financial position that would have
been reported had the Merger been completed at the beginning of the respective
periods or as of the dates for which such unaudited pro forma information is
presented. For a description of the pooling-of-interests accounting basis with
respect to the Merger and the related effects on the historical financial
statements of ITI, see "Unaudited Pro Forma Combined Condensed Financial
Information."
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS
ENDED AT OR FOR THE YEAR ENDED
JUNE 30, DECEMBER 31,
--------------- --------------------------
1995 1994 1994 1993 1992
----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C>
ITI:
Historical:
Income (loss) per share from continuing
operations................................. $0.21 $0.25 $0.68 $0.51 $(0.41)
Net tangible book value per share............. 1.51 1.90 1.28 1.52 2.52
Cash dividends declared per share............. -- -- -- -- --
Pro forma combined:
Income per share from continuing operations... 0.18 0.26 0.62 0.36 0.09
Net tangible book value per share............. 1.50 2.14 1.91 1.86 2.34
Cash dividends declared per share............. 0.03 0.03 0.06 0.06 0.05
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE
NINE MONTHS
ENDED AT OR FOR THE
JUNE 30, YEAR ENDED SEPTEMBER 30,
--------------- -------------------------
1995 1994 1994 1993 1992
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
IMA:
Historical:
Income per share from continuing operations.... $0.45 $0.34 $0.45 $0.31 $0.70
Net tangible book value per share.............. 2.64 2.79 2.93 2.54 2.45
Cash dividends declared per share.............. 0.14 0.14 0.14 0.14 0.10
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS
ENDED AT OR FOR THE YEAR ENDED
JUNE 30, DECEMBER 31,
--------------- -------------------------
1995 1994 1994 1993 1992
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Pro forma equivalent combined(a):
Income per share from continuing operations.... $0.21 $0.30 $0.71 $0.41 $0.10
Net tangible book value per share.............. 1.73 2.46 2.20 2.14 2.69
Cash dividends declared per share.............. 0.03 0.03 0.07 0.07 0.06
</TABLE>
---------------
(a) Pro forma equivalent combined amounts for IMA represent the pro forma
combined amounts for ITI above multiplied by the Conversion Ratio
(subsequent to conversion into IMA Class A Common Stock, in accordance with
its terms, of all outstanding shares of IMA Class B Common Stock).
14
<PAGE> 22
COMPARATIVE PER SHARE MARKET PRICES
ITI Common Stock is traded on The Nasdaq Stock Market under the symbol
"INSUA." IMA Class A Common Stock is also traded on The Nasdaq Stock Market
under the symbol "INSMA." The IMA Class B Common Stock has no established
trading market and IMA is not aware of any recent sales of such stock. The
following table sets forth, for the calendar periods indicated, the high and low
closing sales prices for ITI Common Stock and IMA Class A Common Stock,
respectively, as reported on The Nasdaq Stock Market.
<TABLE>
<CAPTION>
ITI IMA
----------------- -----------------
PERIOD: HIGH LOW HIGH LOW
---------------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
1992
Fourth Quarter........................ $26.50 $14.00 $20.50 $14.00
1993
First Quarter......................... $25.75 $17.63 $21.00 $13.25
Second Quarter........................ 20.25 12.25 14.00 10.00
Third Quarter......................... 14.50 11.25 14.75 10.00
Fourth Quarter........................ 16.50 12.25 16.25 12.25
1994
First Quarter......................... $15.25 $10.50 $15.00 $12.50
Second Quarter........................ 14.75 12.50 15.00 9.75
Third Quarter......................... 13.75 12.50 10.50 8.25
Fourth Quarter........................ 13.75 10.88 10.88 8.13
1995
First Quarter......................... $13.00 $11.13 $11.50 $ 8.63
Second Quarter........................ 14.00 11.88 15.00 10.38
Third Quarter
(through September 14, 1995)....... 16.63 12.88 18.63 14.50
</TABLE>
The information set forth in the table below presents the closing sales
price per share of ITI Common Stock and IMA Class A Common Stock, respectively,
as reported on The Nasdaq Stock Market, on May 23, 1995, the last full trading
day prior to the public announcement of the Merger Agreement, and on September
14, 1995, the last full trading day prior to the date of this Joint Proxy
Statement/Prospectus, and, applying such closing sales prices, the equivalent
value per share of IMA Class A Common Stock based upon the Conversion Ratio:
<TABLE>
<CAPTION>
EQUIVALENT VALUE
ITI IMA PER IMA SHARE
------ ------ ----------------
<S> <C> <C> <C>
At May 23, 1995.......................... $13.50 $12.00 $15.53
At September 14, 1995.................... 14.94 16.75 17.18
</TABLE>
Because the market price of ITI Common Stock is subject to fluctuation due
to numerous market forces, the market value of the shares of ITI Common Stock
that holders of IMA Class A Common Stock will receive in the Merger may increase
or decrease prior to the Effective Time. Stockholders of ITI and IMA are urged
to obtain current market quotations for their shares.
15
<PAGE> 23
RISK FACTORS
THE DETERMINATION OF WHETHER TO VOTE IN FAVOR OF APPROVAL OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY INVOLVES THE CONSIDERATION
BY IMA STOCKHOLDERS OF WHETHER TO ACQUIRE SHARES OF ITI COMMON STOCK AND BY ITI
STOCKHOLDERS OF WHETHER TO AUTHORIZE THE MERGER, AS A RESULT OF WHICH IMA WILL
BECOME A WHOLLY-OWNED SUBSIDIARY OF ITI. ACCORDINGLY, IN ANALYZING THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, IMA STOCKHOLDERS AND ITI
STOCKHOLDERS, RESPECTIVELY, SHOULD CAREFULLY CONSIDER, ALONG WITH THE OTHER
MATTERS REFERRED TO IN THIS JOINT PROXY STATEMENT/PROSPECTUS, THE RISK FACTORS
DESCRIBED BELOW.
CERTAIN CONSIDERATIONS RELATING TO ACQUIRING ITI SHARES
Reliance on the Insituform Process. ITI's business relies primarily upon
the Insituform Process (the "Insituform Process"), a "cured-in-place" technology
for the trenchless rehabilitation of sewers, tunnels and pipelines. During its
most recent fiscal year, ITI derived approximately 79% of its consolidated
revenues from royalties, sales and construction revenues related to the
Insituform Process. Although ITI believes that the Insituform Process is a
unique process which has competitive advantages over other methods of pipe
replacement and repair, the pipe replacement and repair business is highly
competitive. The Insituform Process has in recent years encountered increasing
competition from other trenchless rehabilitation methods in addition to its
historical principal competition from more traditional pipeline rehabilitation
approaches. ITI and its licensees who perform pipe replacement and repair may
not be successful in marketing the Insituform Process to state and municipal
authorities and potential industrial customers relative to competitive
technologies. Furthermore, to the extent that other processes for pipe
replacement and repair gain wide acceptance, ITI's business could be adversely
affected. See "Business of ITI -- Trenchless Rehabilitation Processes" and
"-- Competition" below.
Reliance on Licensee Network. Although ITI's strategy has been to expand
its business into direct installation operations in its principal markets, ITI
currently licenses to unaffiliated parties (including IMA) the rights to the
Insituform Process under agreements covering a substantial portion of the United
States and in numerous foreign countries. A significant portion of ITI's revenue
is dependent on the efforts of its existing licensee network to expand and
develop the market for the Insituform Process. See "Business of ITI -- Licensing
Operations" below.
International Operations. ITI's business includes the widespread
international operations of its licensees, subsidiaries and affiliates.
Accordingly, the political, economic and regulatory environment within the
countries in which such entities do business will significantly affect ITI's
operations. Actions taken by the governments in such countries in respect of
national, state and local regulation, including taxation, national and local
environmental protection regulations and exchange control and convertibility
regulations may cause delay and increased costs and may prevent ITI from
carrying on business in such countries and could therefore materially affect
ITI's operations.
Dependence on Governmental Customers. The trenchless rehabilitation
businesses of ITI and its licensees are substantially dependent upon revenues
generated from municipalities and governmental agencies, and there can be no
assurance that ITI's business will not be adversely affected by governmental
budgetary and appropriations policies at the federal, state and local levels.
Government contracts generally are obtained through competitive bidding and may
be amended or terminated at the convenience of the respective governmental
agencies. See "Business of ITI -- Marketing" below.
Patents. ITI holds certain patents with respect to its trenchless
rehabilitation processes. While ITI believes that its long experience with the
Insituform Process, its continued commitment of resources to support and develop
the Insituform Process, the strength of its trademarks and its degree of market
penetration should enable ITI to compete effectively in the pipeline
rehabilitation market, a judicial determination of invalidity or the expiration
of one or more of the patents covering ITI's processes could adversely affect
the business of ITI. Two important patents relating to the Insituform Process
already have expired in many countries, in particular in the United States,
Canada, Japan, the United Kingdom and Germany. See "Business of ITI -- Patents"
and "-- Legal Proceedings" below.
16
<PAGE> 24
Uncertainties and Costs of Litigation Between IMA and ITI. Various
disputes have arisen in the context of the existing licensing and supply
arrangements between ITI and IMA, as a result of, among other things: IMA's
commercialization of the PALTEM systems, IMA's consummation of its acquisition
(the "Enviroq Acquisition") of the pipeline rehabilitation business of Enviroq
Corporation (since renamed IMA Merger Sub, Inc.; "Enviroq") without the consent
of ITI, ITI's entry into installation activities in the United States and other
matters. Although IMA has advised ITI that it has fulfilled and will continue to
fulfill all of its obligations to ITI, ITI has communicated to IMA its concerns
regarding the ability of IMA to operate in compliance with its existing
Insituform licenses in view of IMA's commercialization of the PALTEM systems. In
April 1995, ITI declined to grant its consent, as requested by Enviroq under the
various Insituform and NuPipe license agreements with Enviroq's subsidiaries, in
connection with the Enviroq Acquisition, and initiated judicial proceedings in
which it seeks a declaratory judgment confirming its action. The Insituform and
NuPipe license agreements, respectively, contain certain provisions which
require the consent of the licensor in order to avoid termination in the event
of change in control of the licensee and/or assignment of the licenses. See "The
Merger -- Background" and "ITI -- Legal Proceedings" below. If the Merger
Agreement is not approved by stockholders of IMA and ITI, respectively, IMA and
ITI anticipate that they would engage in litigation arising out of disputes
between the parties (including the Enviroq Acquisition), if they are unable to
reach a mutually acceptable settlement. See "The Merger -- Recommendations of
the Boards of Directors -- Reasons for Approving the Merger Agreement -- Board
of Directors of ITI" and "-- Board of Directors of IMA" below.
Certain Other Litigation. A stockholder of ITI has filed an action in the
United States District Court for the Western District of Tennessee, which has
been certified as a class action on behalf of all purchasers of ITI Common Stock
during the relevant period, against ITI and one current and one former officer,
alleging various misstatements and omissions relating to, among other things,
acquisition and restructuring costs arising from ITI's acquisition of IGL in
December 1992, in public disclosures by ITI during a specified period in
violation of, among other things, Rule 10b-5 under the Exchange Act.
Notwithstanding ITI's belief that it has defenses to the plaintiff's claim that
are well grounded in fact and law, ITI has entered into a stipulation of
settlement to settle such litigation. Under the settlement, which remains
subject to court approval and other customary conditions, ITI would make a cash
payment in the amount $3.2 million (which it has deposited into escrow) and
issue 30,000 shares of ITI Common Stock. For additional information concerning
such suit and other litigation pending against ITI and its subsidiaries, see
"Business of ITI -- Legal Proceedings" below.
Effect of Environmental Regulation. Installation operations of ITI and its
licensees, as well as ITI's manufacturing facilities, are subject to various
laws and regulations governing environmental protection, and changes in such
laws and regulations may in the future adversely impact ITI's operations. For
example, while many of ITI's direct installation operations have established
monitoring programs relating to the use of solvents in the installation process,
there can be no assurance that further restrictions will not be imposed on the
use of solvents or the thermosetting resins used in the Insituform Process. See
"Business of ITI -- Government Regulation" below.
Fluctuations in Operating Results; Possible Volatility of Stock. ITI's net
income or loss has fluctuated during the last five years as follows: net income
of $116,000 in 1990 (when equity in earnings of associated companies, primarily
IMA, was $1.2 million), net income of $16.7 million in 1991 ($10.6 million of
which resulted from ITI's sale of its equity interest in IMA and the subsequent
utilization of a capital loss carryforward), a net loss of $6.2 million in 1992
(reflecting $9.7 million in costs associated with the acquisition by ITI of
Insituform Group Limited and a pre-tax charge of $4.9 million for restructuring
costs), net income of $5.0 million and $8.6 million in 1993 and 1994,
respectively, and net income of $3.0 million in the first half of 1995
(subsequent to an after-tax charge against second quarter 1995 earnings of
approximately $2.2 million resulting from a litigation loss). See
"ITI -- Management's Discussion and Analysis of Financial Condition and Results
of Operations" below. During such period, the market price of the ITI Common
Stock, as reported on The Nasdaq Stock Market, fluctuated from a high price of
$26.50 to a low price of $2.44. At September 14, 1995, the closing sales price
per share of ITI Common Stock reported on The Nasdaq Stock Market was $14.94.
The market price of the ITI Common Stock may be subject to fluctuations in
response to variations in ITI's operating results, market conditions and
economic factors.
17
<PAGE> 25
Seasonality; Effect of Inclement Weather. Historically, the work reported
by ITI's licensees (including affiliated licensees) in the first calendar
quarter of the year has been disproportionately low, averaging, for the past
five years, approximately 21% of the work they reported over the full year.
Seasonal variations arising from the budgetary and appropriations process of the
governmental customers of ITI and its licensees and the contraction of pipeline
rehabilitation activity in certain regions during severe weather conditions may
contribute to interim fluctuations in ITI's results of operations.
Dividend Policy. ITI has never paid cash dividends on the ITI Common
Stock. ITI's present policy is to retain earnings to provide funds for the
operation and expansion of its business. It is anticipated that after the
Merger, ITI's board will review ITI's earnings, financial condition, cash flows,
financing agreements and other relevant factors in making determinations
regarding future dividends, if any. ITI's and IMA's credit agreements currently
limit their ability to pay cash dividends. There can be no assurance that ITI
will pay any cash dividends in the future.
Control. If the Merger Agreement, and the transactions contemplated
thereby, are approved by the ITI Stockholders and the other conditions to the
parties' obligations under the Merger Agreement are satisfied or waived, ITI has
agreed that: (x) its Board of Directors will be expanded as of the Effective
Time of the Merger hereinafter defined to include 13 members, of whom Paul A.
Biddelman, Brian Chandler, Douglas K. Chick, James D. Krugman and Silas Spengler
will constitute the "INA Group," William Gorham, Steven Roth, Sheldon Weinig and
Russell B. Wight, Jr. will constitute the "IGL Group," Jerome Kalishman, Robert
W. Affholder and Alvin J. Siteman will constitute the "IMA Group," and the
remaining member will consist of Jean-Paul Richard, ITI's President and chief
executive officer, such members to be divided into classes with terms expiring
at staggered intervals, and (y) during the period from the Effective Time until
December 9, 1998 (the "Term"), ITI will nominate and recommend for re-election
to the ITI Board of Directors each such member or his successor designated by
the remaining members of that director's group. The INA Group and the IGL Group,
together with Mr. Richard, comprise the current Board of Directors of ITI, and
the IMA Group has been designated for appointment by IMA. Messrs. Roth and Wight
are general partners in Interstate Properties, which beneficially owns
approximately 11.3% of the outstanding ITI Common Stock, and Messrs. Chandler
and Chick are members of a group (the "Ringwood Group"), within the meaning of
Section 13(d)(3) under the Exchange Act, which beneficially owns approximately
10.1% of the outstanding ITI Common Stock. Messrs. Kalishman (together with his
wife, Nancy F. Kalishman) and Affholder beneficially own approximately 76.6% and
19.1%, respectively, of the outstanding IMA Class B Common Stock, which as a
class is entitled to elect 55% of the IMA Board of Directors (rounded up to the
nearest whole number), and 10.9% and 8.0%, respectively, of the outstanding IMA
Class A Common Stock (exclusive of shares issuable upon conversion of IMA Class
A Common Stock). Immediately following the consummation of the Merger, Mr.
Kalishman (and his wife), Interstate Properties, the Ringwood Group and Mr.
Affholder will own approximately 11.9%, 6.1%, 5.5% and 4.8%, respectively, of
the outstanding ITI Common Stock. See "The Merger -- Management of ITI Following
Consummation of the Merger" below.
Conflicts of Interest. ITI has entered into certain remuneration
arrangements with Messrs. Krugman and Richard and, pursuant to the Merger
Agreement, will enter into agreements with Messrs. Kalishman and Affholder. See
"Management of ITI -- Certain Agreements with Directors and Executive Officers"
and "The Merger -- Interests of Certain Persons in the Merger and Related
Transactions" below. ITI has provided loan arrangements for the benefit of
members of the Ringwood Group, has paid fees for professional services to Mr.
Krugman's firm and obtained financing from Mr. Biddelman's firm, and, after
consummation of the Merger, will use certain equipment currently owned by a
partnership in which Messrs. Kalishman and Affholder are partners. See "Election
of ITI Directors -- Compensation Committee Interlocks and Insider Participation"
and "-- Other Information Concerning Nominees for Directors, Directors, Officers
and Stockholders" and "The Merger -- Interests of Certain Persons in the Merger
and Related Transactions" below. Messrs. Chandler and Chick and their affiliates
have been engaged in the development of certain pipeline rehabilitation and
repair processes which relate to the business of ITI and could be competitive
with such business. See "Election of ITI Directors -- Other Information
Concerning Nominees for Director, Directors, Officers and Stockholders" below.
All current ITI directors will continue as directors of ITI after the Effective
Time. Pursuant to the Merger Agreement, ITI has entered into a registration
rights agreement
18
<PAGE> 26
with Mr. Affholder and Xanadu Investments, L.P.; and after the Effective Time
ITI will continue in effect certain indemnification arrangements covering
officers and directors of IMA (including Messrs. Kalishman, Affholder and
Siteman, who will become directors of ITI after the consummation of the Merger)
with respect to events occurring prior to the Effective Time. See "The
Merger -- Registration Rights Agreement" and "-- Interests of Certain Persons in
the Merger and Related Transactions" below. ITI also is a party to customary
indemnification arrangements with its incumbent directors.
Exchange Rate Fluctuations. Adverse fluctuations in the exchange rates
between the United States dollar and the currencies of other countries in which
ITI operates or has licensees may have a negative impact on ITI's consolidated
results during the reporting period affected by such fluctuations. While ITI
intends to manage any such foreign currency exposure in the context of discrete
commercial transactions, the failure of ITI to offset its exposure to currency
fluctuations could materially impact ITI's financial results.
Anti-Takeover Provisions. The ITI Charter and ITI's By-Laws contain
provisions that may have the effect of perpetuating existing management and
discouraging a takeover attempt that might be beneficial to stockholders who
wish to receive a premium from a potential bidder. These provisions include: (i)
the classification of the ITI Board of Directors, (ii) the restriction that
directors can only be removed for cause and only by a vote of the stockholders,
(iii) the elimination of the stockholders' ability to act by written consent,
and (iv) the ability of the ITI Board of Directors (without a stockholder vote)
to issue one or more series of preferred stock with such voting rights and other
provisions as the board may determine. See "Description of Capital Stock of
ITI -- Anti-Takeover Provisions."
Shares Eligible for Future Sale. As of September 1, 1995, approximately
7,720,077 shares of ITI Common Stock to be issued pursuant to the Merger will be
eligible for immediate sale in the public market and approximately 4,703,704
shares will be held by affiliates of ITI and IMA. Certain agreements entered
into by such affiliates prohibit them from disposing of any ITI Common Stock
until after the date of the first publication of the operating results of ITI
covering at least a 30-day period after the Merger has been consummated, after
which time such shares will be eligible for sale under Rule 144 or Rule 145 of
the Securities Act, as applicable. As of September 1, 1995, ITI has also
reserved up to 490,457 shares for issuance upon the exercise of outstanding
stock options granted by IMA, and additional options that IMA is permitted to
grant under the Merger Agreement, that will be assumed by ITI in the Merger,
which shares will be registered on a Form S-8 registration statement as soon as
is practicable following the consummation of the Merger. In addition,
registration rights have been granted to Mr. Affholder and Xanadu Investments,
L.P. with respect to approximately 4,530,696 shares of ITI Common Stock to be
held by them and their affiliates (all, except 1,000 shares, of which are
issuable pursuant to the Merger). Sales of substantial amounts of ITI Common
Stock after the consummation of the Merger could adversely affect the prevailing
market price of ITI Common Stock. See "Unaudited Pro Forma Combined Condensed
Financial Information," "The Merger -- Basic Terms of Merger
Agreement -- Treatment of IMA Stock Options," "-- Resales of ITI Common Stock,"
"-- Registration Rights Agreement" and "-- Pooling Letters" below.
CERTAIN CONSIDERATIONS RELATING TO THE MERGER
Non-Insituform Operations. Although rehabilitation activities, primarily
utilizing the Insituform Process, have traditionally been the principal activity
of IMA, at June 30, 1995 backlog from rehabilitation projects accounted for
$40.2 million of aggregate backlog of $65.2 million at such date, while backlog
from tunneling and corrosion and abrasion protection operations accounted for
$17.4 million and $7.6 million of such aggregate amount, respectively. During
the nine months ended June 30, 1995 and the fiscal year ended September 30,
1994, approximately 51% and 22%, respectively, of IMA's consolidated revenues
were derived from non-Insituform Process operations, principally consisting of
such tunneling and corrosion and abrasion protection activities. See "Business
of IMA" below.
Competition; Development of Additional Products. The pipeline
reconstruction, rehabilitation and repair business is highly competitive and IMA
has numerous competitors in that market. In recent years, additional trenchless
rehabilitation methods competing with the Insituform Process have been
introduced by other companies, which may provide an alternative to more
traditional pipeline rehabilitation approaches and
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to the Insituform Process. Although IMA is the exclusive North American licensee
of Ashimori Industry Co. Ltd. ("Ashimori") proprietary pipeline rehabilitation
technologies, and is actively pursuing development of its Ashimori products
business, the Ashimori products licensed to IMA are in various stages of
development and require significant financial support, and IMA may not be
successful in achieving the market acceptance which would generate a profit
contribution consistent with IMA's evaluation of the future potential of such
products.
Western Hemisphere Business; Exchange Rate Fluctuations. IMA's business,
in particular its activities utilizing corrosion and abrasion protection
methods, includes operations outside of the United States, such as those of its
subsidiaries in Canada and Chile. During the nine months ended June 30, 1995 and
the fiscal year ended September 30, 1994, operations outside of the United
States represented 27% and 15%, respectively, of IMA's consolidated revenues. As
such activities expand further, the political, economic and regulatory
environment in which such subsidiaries operate will increasingly affect IMA's
business, as will adverse fluctuations in the exchange rates between the United
States dollar and the currencies of other countries in which IMA operates.
Dependence on Governmental Customers. IMA's business is substantially
dependent upon revenues generated from customers which are municipalities and
state agencies. During fiscal 1994, these customers accounted for approximately
75% of IMA's revenues. There can be no assurance that IMA's business will not be
adversely affected by fiscal policies of state and local governments or by the
policy of the federal government in connection with various projects. Government
contracts generally are obtained through competitive bidding and may be amended
or terminated at the convenience of the respective governmental agencies. IMA's
four largest customers in fiscal 1994 were municipalities and state agencies
which accounted for approximately 39% of IMA's contract revenues. See "Business
of IMA -- Customers" below.
Reliance on Patents. Although IMA relies upon its own and licensed
know-how to exploit the Insituform Process and other trenchless technologies, it
also relies on a series of patents relating to the Insituform Process and such
other technologies. Certain important Insituform Process patents have already
expired in IMA's licensed territory. The invalidity or expiration of patents
covering technology licensed to IMA could have a material adverse effect on
IMA's business. See "Business of IMA -- License Agreements and Patents" below.
Outstanding Issues Between ITI and IMA. As a result of any termination of
the Merger Agreement prior to completion of the Merger, ITI and IMA would be
released from their respective obligations under a cooperation agreement entered
into in April 1995, as amended. While in effect, such agreement postpones
assertion by the parties of any rights in dispute as a result of IMA's
consummation of the Enviroq Acquisition without consent of ITI. See "The
Merger -- Background" and "Business of ITI -- Legal Proceedings" below for a
description of such agreement and litigation commenced by ITI against IMA and
Enviroq prior to the execution of such agreement, and other disputes between the
parties. ITI has also communicated to IMA its concerns regarding the ability of
IMA to operate in compliance with its existing Insituform licenses in view of
IMA's commercialization of the PALTEM systems. ITI and IMA would anticipate
prosecution or reinstatement of the foregoing litigation if the Merger Agreement
were terminated prior to completion of the Merger, or other litigation
addressing the same subject matter or other matters, or possibly other
approaches to resolving the outstanding issues between the parties, in the
absence of mutually agreeable alternative arrangements. See "The
Merger -- Recommendations of the Boards of Directors; Reasons for Approving the
Merger Agreement -- Board of Directors of ITI" and "-- Board of Directors of
IMA" below.
Effect of Environmental Regulation. IMA's operations facilities are
subject to state and federal environmental protection regulations and, in
compliance therewith, IMA has established a monitoring program relating to its
solvents. Although, IMA does not anticipate any material impediments to its
business arising from existing or anticipated future regulations or
requirements, changes in such laws and regulations may in the future adversely
impact IMA's operations. See "Business of IMA -- Regulations and Bonding."
Conflicts of Interest. Messrs. Kalishman (together with his wife, Nancy F.
Kalishman) and Affholder beneficially own approximately 76.6% and 19.1%,
respectively, of the outstanding IMA Class B Common Stock, which as a class is
entitled to elect 55% of the IMA Board of Directors (rounded up to the nearest
whole number), and 10.9% and 8.0%, respectively, of the outstanding IMA Class A
Common Stock
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(exclusive of shares issuable upon conversion of IMA Class B Common Stock). IMA
has designated three of its current directors, Messrs. Kalishman, Affholder and
Siteman, to become directors of ITI as of the Effective Time. Under the terms of
the Merger Agreement, ITI has entered into a registration rights arrangement
with Mr. Affholder and Xanadu Investments, L.P., and is obliged to undertake
certain obligations with respect to the indemnification of officers and
directors of IMA. In addition, upon the consummation of the Merger, ITI will
enter into agreements with Messrs. Kalishman and Affholder with respect to their
continuing positions in ITI and will use certain equipment currently owned by a
partnership agreement in which Messrs. Kalishman and Affholder are partners.
See. "The Merger -- Interests of Certain Persons in the Merger and Related
Transactions" below.
Seasonality; Potential Adverse Effects of Weather. IMA's business may be
affected by various climatic seasons through its operating territories, as well
as by the fiscal years and budgetary processes of IMA's governmental customers.
In July 1993, IMA's headquarters and operations facilities in St. Louis were
severely damaged by flooding and all activities that were performed at these
facilities temporarily were relocated. There can be no assurance that severe
weather conditions will not in the future adversely effect IMA's operations in a
material respect.
Significant Premium on IMA Class A Common Stock. On May 23, 1995, the last
full trading day prior to the public announcement of the Merger Agreement, the
closing sales price per share of ITI Common Stock reported on The Nasdaq Stock
Market was $13.50 and the closing sales price per share of IMA Class A Common
Stock was $12.00. Accordingly, the Conversion Ratio represents a significant
premium paid for the IMA Class A Common Stock, based on such market prices.
Although the ITI Board of Directors has determined, based on a number of factors
(including the opinion of Merrill Lynch & Co. that the consideration to be paid
by ITI in the Merger is fair, from a financial point of view, to ITI) that the
Merger is in the best interests of ITI and the ITI Stockholders, there can be no
assurance that the evaluations by, and the underlying assumptions of, the ITI
Board of Directors and its advisors will materialize, that unanticipated events
and circumstances will not occur, or that subsequent operations of IMA or ITI
will not vary, possibly in material respects, from conditions projected so as to
result in the failure of ITI to realize the anticipated value of its transaction
with IMA. See "The Merger -- Recommendations of the Boards of Directors; Reasons
for Approving the Merger -- Board of Directors of ITI" below.
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INFORMATION CONCERNING THE MEETINGS
THE ITI MEETING
Purpose of the Meeting. This Joint Proxy Statement/Prospectus is being
furnished by ITI to the ITI Stockholders in connection with the solicitation of
proxies by the Board of Directors of ITI for use at the ITI Meeting. At the ITI
Meeting, ITI Stockholders will consider and vote upon (i) the Merger Agreement
and the transactions contemplated thereby, (ii) the proposal to approve the
Capitalization Amendment, (iii) the proposal to approve the Board Vacancy
Amendment, (iv) the election of four Class III directors for the ensuing
three-year term, (v) the proposal to authorize ITI's Board of Directors to
adjourn the ITI Meeting to permit the further solicitation of proxies, if
necessary, and (vi) such other business as may properly come before the ITI
Meeting. The consummation of the Merger is subject to approval of the proposed
Capitalization Amendment and the proposed Board Vacancy Amendment, neither of
which will become effective until consummation of the Merger.
THE BOARD OF DIRECTORS OF ITI BELIEVES THAT THE APPROVAL OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, THE APPROVAL OF THE
PROPOSED CAPITALIZATION AMENDMENT AND THE APPROVAL OF THE PROPOSED BOARD VACANCY
AMENDMENT ARE IN THE BEST INTERESTS OF ITI AND THE ITI STOCKHOLDERS AND
RECOMMENDS THAT THE ITI STOCKHOLDERS VOTE FOR APPROVAL OF EACH SUCH PROPOSAL,
FOR THE ELECTION OF THE FOUR CLASS III DIRECTORS NAMED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS AND FOR AUTHORIZATION OF THE BOARD OF DIRECTORS OF ITI TO
ADJOURN THE ITI MEETING TO PERMIT THE FURTHER SOLICITATION OF PROXIES, IF
NECESSARY. See "The Merger -- Recommendations of the Boards of Directors;
Reasons for Approving the Merger Agreement -- Board of Directors of ITI," "The
Capitalization Amendment," "The Board Vacancy Amendment," "Election of ITI
Directors" and "Adjournment of Meetings" below.
Date, Time and Place of Meeting. The ITI Meeting will be held on October
12, 1995 at The Hilton-Memphis East, 5069 Sanderlin Avenue, Memphis, Tennessee
at 10:00 a.m., local time.
Record Date; Stockholders Entitled to Vote and Required Vote. Only holders
of record of ITI Common Stock at the close of business on August 30, 1995 are
entitled to notice of and to vote at the ITI Meeting. On August 30, 1995,
14,609,804 shares of ITI Common Stock were outstanding and entitled to vote. On
August 30, 1995, there were 1,842 holders of record of ITI Common Stock.
The presence in person or by proxy of holders of a majority of the
outstanding shares of ITI Common Stock is necessary to constitute a quorum at
the ITI Meeting. At the ITI Meeting, each holder of ITI Common Stock will be
entitled to one vote for each share held.
If there are insufficient votes to constitute a quorum or for approval of
the Merger Agreement, the Capitalization Amendment or the Board Vacancy
Amendment, the ITI Meeting would be adjourned in order to permit further
solicitation of proxies. The affirmative vote of holders of a majority of the
outstanding shares of ITI Common Stock is required to approve the proposals to
approve, respectively, the Merger Agreement, the Capitalization Amendment and
the Board Vacancy Amendment. Directors are elected by a plurality vote. The
proposal to authorize ITI's Board of Directors to adjourn the ITI Meeting in
order to permit the further solicitation of proxies, if necessary, requires the
affirmative vote of holders of a majority of the shares of ITI Common Stock
present in person or represented by proxy and entitled to vote at the ITI
Meeting.
As of August 30, 1995, directors and executive officers of ITI and their
affiliates beneficially owned an aggregate of 3,879,047 shares of ITI Common
Stock (approximately 25.6% of the aggregate shares of ITI Common Stock then
outstanding) entitled to notice of and to vote at the ITI Meeting.
Other Business. The management of ITI does not intend to present and does
not have any reason to believe that others will present, at the ITI Meeting, any
item of business other than those set forth herein. However, if any other
business is properly presented at the ITI Meeting and may properly be considered
and acted upon, proxies will be voted by those named on the proxy card in their
best judgment.
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Proposals by ITI Stockholders. Stockholder proposals intended to be
presented at the 1996 Annual Meeting of Stockholders of ITI must be received by
ITI by May 21, 1996 in order to be considered for inclusion in ITI's Proxy
Statement relating to its 1996 Annual Meeting.
THE IMA MEETING
Purpose of the Meeting. This Joint Proxy Statement/Prospectus is being
furnished by IMA to the IMA Stockholders in connection with the solicitation of
proxies by the Board of Directors of IMA for use at the IMA Meeting. At the IMA
Meeting, IMA Stockholders will consider and vote upon (i) a proposal to approve
the Merger Agreement and the transactions contemplated thereby, (ii) a proposal
to authorize IMA's Board of Directors to adjourn the IMA Meeting to permit the
further solicitation of proxies, if necessary, and (iii) such other business as
may properly come before the IMA Meeting.
THE BOARD OF DIRECTORS OF IMA BELIEVES THAT THE APPROVAL OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY IS IN THE BEST INTERESTS OF
IMA AND THE IMA STOCKHOLDERS AND RECOMMENDS THAT THE IMA STOCKHOLDERS VOTE FOR
THE APPROVAL OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY
AND FOR AUTHORIZATION OF THE BOARD OF DIRECTORS OF IMA TO ADJOURN THE IMA
MEETING TO PERMIT THE FURTHER SOLICITATION OF PROXIES, IF NECESSARY. See "The
Merger -- Recommendations of the Boards of Directors; Reasons for Approving the
Merger Agreement -- Board of Directors of IMA" and "Adjournment of Meetings"
below.
Date, Time and Place of Meeting. The IMA Meeting will be held on October
12, 1995 at the Sheraton West Port Plaza Hotel, 900 West Port Plaza, St. Louis,
Missouri at 10:00 a.m., local time.
Record Date; Stockholders Entitled to Vote and Required Vote. Only holders
of record of IMA Class A Common Stock and IMA Class B Common Stock at the close
of business on September 1, 1995 are entitled to notice of and to vote at the
IMA Meeting. On September 1, 1995, 8,330,303 shares of IMA Class A Common Stock
and 2,472,985 shares of IMA Class B Common Stock were outstanding and entitled
to vote. On September 1, 1995, there were 731 holders of record of IMA Class A
Common Stock and six holders of IMA Class B Common Stock.
The presence in person or by proxy of holders of a majority of the
outstanding shares of IMA Class A Common Stock and IMA Class B Common Stock as a
single class is necessary to constitute a quorum at the IMA Meeting. At the IMA
Meeting, each holder of IMA Class A Common Stock and each holder of IMA Class B
Common Stock will be entitled to one vote for each share held.
If there are insufficient votes to constitute a quorum or for approval of
the Merger Agreement, the IMA Meeting would be adjourned in order to permit
further solicitation of proxies. The affirmative vote of holders of a majority
of the outstanding shares of IMA Class A Common Stock and IMA Class B Common
Stock voting together as one class is required to approve the Merger Agreement
and the transactions contemplated thereby. The proposal to authorize IMA's Board
of Directors to adjourn the IMA Meeting to permit the further solicitation of
proxies, if necessary, requires the affirmative vote of holders of a majority of
the shares of IMA Class A Common Stock and IMA Class B Common Stock present in
person or represented by proxy and entitled to vote at the IMA Meeting voting
together as one class.
As of September 1, 1995, directors and executive officers of IMA and their
affiliates beneficially owned an aggregate of 4,197,835 shares of IMA Class A
Common Stock and IMA Class B Common Stock (approximately 38.5% of the aggregate
shares of IMA Class A Common Stock and IMA Class B Common Stock then
outstanding) entitled to notice of and to vote at the IMA Meeting.
Other Business. The management of IMA does not intend to present and does
not have any reason to believe that others will present, at the IMA Meeting, any
item of business other than those set forth herein. However, if any other
business is properly presented at the IMA Meeting and may properly be considered
and acted upon, proxies will be voted by those named on the proxy card in their
best judgment.
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Proposals by IMA Stockholders. If the Merger is approved, the other
conditions to the Merger are satisfied and the Merger is consummated,
stockholders of IMA will become stockholders of ITI at the Effective Time. In
order to be eligible for inclusion in ITI's proxy materials for the 1996 Annual
Meeting of Stockholders of ITI, any stockholder proposal to take action at such
meeting must be received at the principal executive offices of ITI, 1770 Kirby
Parkway-Suite 300, Memphis, Tennessee 38138 no later than May 21, 1996. If the
Merger is not consummated, IMA would plan to hold a 1996 Annual Meeting of
Stockholders. In the event the Merger is not consummated before such date, any
stockholder who wishes to present a proposal for inclusion in the proxy
materials for IMA's 1996 Annual Meeting of Stockholders must have submited such
proposal to IMA no later than September 12, 1995.
ABSTENTIONS AND BROKER NON-VOTES
At the ITI Meeting and the IMA Meeting, abstentions and broker non-votes
(as hereinafter defined) will be counted as present for the purpose of
determining the presence or absence of a quorum for the transaction of business.
For the purpose of determining the vote required for approval of matters to be
voted on at such meetings, shares held by stockholders who abstain from voting
will be treated as being "present" and "entitled to vote" on the matter and,
thus, an abstention has the same effect as a vote against the matter. In the
case of a broker non-vote, such shares will not be treated as "present" and
"entitled to vote" on the matter. Accordingly, a broker non-vote will also have
the same effect as a vote at the ITI Meeting against approval of the Merger
Agreement, the Capitalization Amendment and the Board Vacancy Amendment, or at
the IMA Meeting against approval of the Merger Agreement. In the election of
directors, and in the determination of whether to authorize ITI's Board of
Directors and IMA's Board of Directors to adjourn, respectively, the ITI Meeting
or the IMA Meeting to permit the further solicitation of proxies, if necessary,
a broker non-vote or the withholding of a proxy's authority will have no effect
on the outcome of the vote on the matter. A "broker non-vote" refers to shares
represented at such meetings in person or by proxy by a broker or nominee where
such broker or nominee (i) has not received voting instructions on a particular
matter from the beneficial owners or persons entitled to vote; and (ii) the
broker or nominee does not have the discretionary voting power on such matter.
SOLICITATION, REVOCATION AND USE OF PROXIES
All holders of ITI Common Stock represented at the ITI Meeting by properly
executed proxies received prior to or at the ITI Meeting, and all holders of IMA
Class A Common Stock and IMA Class B Common Stock represented at the IMA Meeting
by properly executed proxies received prior to or at the IMA Meeting, unless
such proxies previously have been revoked, will be voted at such meetings,
respectively, in accordance with the instructions on the proxies. If no contrary
instructions are indicated, such proxies will be voted at the ITI Meeting FOR
the approval of the Merger Agreement and the transactions contemplated thereby,
FOR the approval of the proposed Capitalization Amendment, FOR the approval of
the proposed Board Vacancy Amendment, FOR the election of the four Class III
directors named in this Joint Proxy Statement/ Prospectus, and FOR authorization
of ITI's Board of Directors to adjourn the ITI Meeting to permit the further
solicitation of proxies, if necessary. If no contrary instructions are
indicated, such proxies will be voted at the IMA Meeting FOR the approval of the
Merger Agreement and the transactions contemplated thereby and FOR authorization
of IMA's Board of Directors to adjourn the IMA Meeting to permit the further
solicitation of proxies, if necessary.
Any proxy given pursuant to this solicitation with respect to the ITI
Meeting may be revoked by the person giving it at any time before the beginning
of the ITI Meeting. Proxies may be revoked by filing with the Secretary of ITI
written notice of revocation bearing a later date than the proxy, by duly
executing a later-dated proxy relating to the same ITI Common Stock, or by
attending the ITI Meeting and voting in person (although attendance at the ITI
Meeting will not in and of itself constitute revocation of a proxy). Any written
notice revoking a proxy with respect to the ITI Meeting should be sent to
Secretary, Insituform Technologies, Inc., 1770 Kirby Parkway, Suite 300,
Memphis, Tennessee 38138.
Any proxy given pursuant to this solicitation with respect to the IMA
Meeting may be revoked by the person giving it at any time before the beginning
of the IMA Meeting. Proxies may be revoked by filing with
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the Secretary of IMA written notice of revocation bearing a later date than the
proxy, by duly executing a later-dated proxy relating to the same IMA Class A
Common Stock or IMA Class B Common Stock, or by attending the IMA Meeting and
voting in person (although attendance at the IMA Meeting will not in and of
itself constitute revocation of a proxy). Any written notice revoking a proxy
with respect to the IMA Meeting should be sent to Secretary, Insituform
Mid-America, Inc., 17988 Edison Avenue, Chesterfield, Missouri 63005.
Proxies will be solicited by use of the mails. Directors, officers and
employees of ITI and IMA and their respective subsidiaries also may solicit
proxies by telephone, telegram or personal contact and such persons will receive
no additional compensation for such services. Copies of solicitation materials
will be furnished to fiduciaries, custodians and brokerage houses for forwarding
to beneficial owners of ITI Common Stock and IMA Class A Common Stock held in
their names. ITI has also engaged Morrow & Co., Inc., 345 Hudson Street, New
York, New York 10011, to aid in the solicitation of proxies with respect to the
ITI Meeting for a fee estimated at $7,500 plus reimbursement for reasonable and
customary out-of-pocket expenses. ITI and IMA will bear the cost of mailing the
proxy material in connection with, respectively, the ITI Meeting and the IMA
Meeting. ITI and IMA will each bear one-half of the filing and printing costs in
connection with this Joint Proxy Statement/Prospectus.
DISSENTERS' RIGHTS
Neither holders of ITI Common Stock, nor holders of IMA Class A Common
Stock nor IMA Class B Common Stock, have any appraisal rights under Delaware law
with respect to any of the matters to be voted on at the ITI Meeting or the IMA
Meeting, respectively.
RELATIONSHIP WITH INDEPENDENT AUDITORS
The ITI Board of Directors has selected BDO Seidman, LLP, independent
certified public accountants, as the auditors of ITI for the year ending
December 31, 1995. Such firm has audited the consolidated financial statements
of ITI for the year ended December 31, 1994. One or more representatives of BDO
Seidman, LLP are expected to be present at the ITI Meeting, and will be given an
opportunity to make a statement if they desire to do so, and will be available
to respond to appropriate questions by ITI Stockholders.
KPMG Peat Marwick LLP reported on IMA's financial statements for fiscal
1994, and it is anticipated that such firm will be appointed to serve as IMA's
auditors for fiscal 1995. One or more representatives of KPMG Peat Marwick LLP
are expected to be present at the IMA Meeting with the opportunity to make a
statement if they desire to do so. Representatives of such firm also will be
available to respond to appropriate questions from stockholders.
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THE MERGER
The description of the Merger Agreement set forth below does not purport to
be complete and is qualified in its entirety by reference to the text of the
Merger Agreement which is attached as Annex A to this Joint Proxy
Statement/Prospectus and is incorporated herein by reference.
ALL ITI STOCKHOLDERS AND IMA STOCKHOLDERS ARE URGED TO READ THE MERGER
AGREEMENT, AS WELL AS THE OTHER ANNEXES, IN THEIR ENTIRETY.
BACKGROUND
IMA became a licensee of ITI for the Insituform Process in December 1982
and began to perform significant Insituform operations during 1984. Since 1982
and through the completion of its most recent fiscal year, IMA's licensed
Insituform territory was expanded on five separate occasions, so as to cover all
or a portion of 17 states, Puerto Rico and the U.S. Virgin Islands. In addition,
IMA historically has purchased substantially all its requirements of the
polyester-fiber felt tubing, known as the Insitutube, from ITI. In December
1990, IMA became a licensee of ITI for the NuPipe Process, and entered into
arrangements to purchase from ITI its thermoplastic folded pipe used for the
NuPipe Process. See "Business of ITI" and "Business of IMA" below.
ITI, as part of a policy of stimulating royalties and sales of its
products, initially invested in IMA in February 1984, successively acquiring
shares of IMA preferred stock, which subsequently were converted into common
equity. Also, in 1989, ITI acquired additional common equity in connection with
the transactions relating to IMA's acquisition of Insituform North, Inc. and
Insituform de Puerto Rico, Inc. In May 1991, pursuant to an underwritten public
offering registered under the Securities Act, ITI completed the sale of its
entire equity position in IMA (constituting approximately 26% of the outstanding
equity of IMA), which generated proceeds aggregating $22.1 million, net of
underwriting discounts.
As a consequence of the ongoing business relationships in the ordinary
course between ITI and IMA, a number of issues arose out of the operations of
the parties' respective businesses, including aspects of their licensor-licensee
and supplier-customer relationships. Although these issues did not arise in the
context of discussions relating to the Merger, they affected the companies'
respective determinations concerning the Merger and the transactions
contemplated thereby.
Commencing in 1991, ITI initiated activities in the United States as a
direct installer using trenchless methods through the acquisition of domestic
Insituform licensees, acquiring the controlling interest in Insituform Southwest
(in March 1991), H.T. Schneider, Inc., the parent of Insituform of New England,
Inc. (in December 1992), Naylor Industries, Inc., the parent of Insituform Gulf
South, Inc. (in July 1993), Insituform Midwest, Inc. (in July 1993), and Gelco
Services, Inc. and its affiliates (in October 1994). From time to time, IMA
communicated to ITI that, in view of such strategy, IMA believed that it was in
IMA's strategic interest to reduce its dependence on ITI as a provider of
technology and materials. In furtherance of its strategy, in 1991, IMA acquired
companies offering the Tite Liner Process in the United States and worldwide.
Also, pursuant to its strategy of expanding its technological support, in
mid-1992 IMA entered into negotiations with Ashimori with respect to its
acquisition of rights to current and future Ashimori pipeline rehabilitation
technologies in North America, known as the PALTEM systems. In September 1992,
IMA entered into arrangements with Ashimori providing for IMA's acquisition of
an exclusive license to offer the PALTEM systems in substantially all of North
America and the exclusive right in such territory to utilize and sell materials
manufactured by Ashimori for use in pipeline rehabilitation. By letter dated
October 2, 1992, ITI communicated to IMA, among other things, ITI's concerns
regarding the ability of IMA to operate in compliance with its Insituform
licenses in view thereof. See "Business of ITI -- Licensing Operations" below.
On October 26, 1992, IMA announced publicly an agreement-in-principle with
Ashimori, and disclosed ITI's concerns and indicated that IMA had advised ITI
that IMA had fulfilled and would continue to fulfill all of its commitments to
ITI and that IMA did not intend to engage in any actions violative of its
Insituform Process licenses as a result of offering PALTEM systems or otherwise.
IMA also indicated that IMA and ITI
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were engaged in discussions aimed at achieving an arrangement in which ITI and
its licensees would offer non-gas applications of the PALTEM systems.
Thereafter, through the remainder of 1993 and into 1994, the companies
exchanged various communications relating to matters in contention, such as:
IMA's potential obligations to ITI with regard to cross-over royalties arising
from work done by IMA in Insituform territories assigned to licensees acquired
by ITI; the ability of ITI's contracting subsidiaries to cross-over into
territory assigned to IMA under its Insituform licenses; and claims by IMA to
use of ITI's manufacturing know-how. By agreement dated April 15, 1994, ITI and
IMA agreed that, until further notice and without prejudice to either party's
position, ITI and its subsidiaries may operate in IMA's territories upon payment
of the cross-over payment provided for under the applicable Insituform license
agreements with IMA.
During early 1994, Jean-Paul Richard, President and Chief Executive Officer
of ITI, and E. Randolph Jayne II, former President of IMA, engaged in a number
of discussions relating to Mr. Richard's suggestion regarding the possibility of
forming a joint venture with respect to the companies' respective domestic
contracting operations. The discussions led to a meeting on February 14, 1994 at
which representatives of ITI and IMA discussed various means of resolving
outstanding issues. At a regular meeting of the ITI Board of Directors on March
7, 1994, the Board of ITI was apprised of the outstanding issues with IMA and
authorized management to continue discussions with IMA.
On May 1, 1994, Messrs. Richard and Jayne met in Memphis to continue the
discussion of various means of resolving outstanding issues. At such meeting,
they determined that a combination of the two companies appeared to offer an
approach for achieving the parties' strategic objectives, if the parties could
resolve the issues which would likely arise in the process of negotiating a
transaction. It was also understood that the parties would continue to pursue
their respective business plans without regard to a possible transaction. On May
11, 1994, James D. Krugman, Chairman of the Board of ITI, and Mr. Richard, met
with Jerome Kalishman, Chairman of the Board of IMA, and Robert M. Leopold, a
director of IMA, to discuss the possibility of a combination of the companies.
On May 17, 1994, the IMA Board considered and discussed at its regular quarterly
meeting various strategic business issues concerning the relationship of ITI and
IMA, including the possibility of a business combination.
On June 9, 1994, Messrs. Kalishman, Jayne, Leopold, and Robert W.
Affholder, Vice Chairman of IMA, on behalf of IMA, and Messrs. Krugman, Richard
and William A. Martin, Senior Vice President -- Chief Financial Officer of ITI,
on behalf of ITI, met in St. Louis to discuss the parties' respective views of
possible business strategies for a combined company. At such time, the parties
believed that a shared vision and common strategy was an essential precondition
to proceeding with a possible transaction. The IMA representatives also
expressed their belief that the United States contracting operations of the
combined company should be headquartered in St. Louis under the direction of Mr.
Affholder. In IMA's view, this approach would enable contracting operations of
the combined company to maintain and build upon IMA's long-standing,
customer-driven business strategy. ITI also indicated its belief that, as a
result of consummation of any transaction, Mr. Affholder should become chief
operating officer of North America contracting operations, with such focus.
At a regular meeting of the Board of Directors of ITI held on June 14,
1994, the board was apprised of proposals for ITI and IMA to review the
respective business plans of the companies, and the board authorized management
to proceed in such regard, together with the informal advice of Merrill Lynch &
Co. ("Merrill Lynch"), which had proposed the terms of a financial advisory
agreement with ITI.
On June 30, 1994, ITI and IMA entered into a confidentiality agreement and
commenced exchange of confidential non-public information, to better facilitate
investigation and evaluation of a possible transaction between the companies.
Beginning in July 1994, Messrs. Krugman, Richard, Martin and Anthony W. Hooper,
Senior Vice President -- Marketing of ITI, on behalf of ITI, and Messrs.
Kalishman, Affholder, Jayne, Joseph F. Olson, Vice President -- Finance and
Administration of IMA, and John Kalishman, Director of Marketing of IMA, on
behalf of IMA, subject to the confidentiality agreement discussed the companies'
respective business plans and financial forecasts with a view to determining
whether there was any basis for future discussions.
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<PAGE> 35
At IMA's regular quarterly board meeting held July 27, 1994, Mr. Kalishman
briefed the board on the background of the discussions and Mr. Jayne reported on
the current status. At its regular meeting held August 2, 1994, management of
ITI reported to the ITI Board the status of such discussions with IMA and the
board authorized continuation thereof.
On August 30, 1994, IMA entered into a financial advisory agreement with
Schroder Wertheim & Co. Incorporated ("Schroder Wertheim"). In early October
1994, Mr. Kalishman advised Mr. Krugman that, given the relative stock prices of
ITI and IMA, Mr. Kalishman believed it was unlikely that a transaction could be
achieved and suggested that negotiations be deferred indefinitely.
On October 18, 1994, Mr. Krugman met with Mr. Kalishman in Chicago and
discussed the timeliness of a transaction, given the respective needs of the two
companies from a management perspective, in particular following the departure
in September 1994 of Mr. Jayne from IMA. Mr. Krugman asked Mr. Kalishman to
authorize IMA's financial advisors to explore possible economic terms for a
combination and Mr. Kalishman agreed to do so. At a regular meeting of ITI's
Board of Directors held on October 24, 1994, management apprised the board of
continuing discussions with IMA, and the board endorsed the continuation
thereof.
On November 2, 1994, following a special IMA Board meeting at which the
status of the communications with ITI was reviewed, IMA entered into an
agreement dated such date (the "Enviroq Agreement") which provided for IMA's
proposed acquisition of the pipeline rehabilitation business of Enviroq.
Enviroq, through subsidiaries, was a licensee of ITI for the Insituform and
NuPipe Processes in five states and the holder of a 42.5% partnership interest
in Midsouth Partners, a licensee in all or a part of three additional states.
IMA subsequently indicated to ITI IMA's position that the completion of the
Enviroq Acquisition was not contingent upon Enviroq's obtaining ITI's consent
thereto.
On November 20, 1994, representatives of ITI and IMA met at the offices of
Schroder Wertheim in New York, with representatives of Schroder Wertheim present
on behalf of IMA and representatives of Merrill Lynch present on behalf of ITI,
at which the respective business plans of the companies were distributed for
consideration in an effort to present background information which could
facilitate the determination of the relative values of the two companies. Each
company presented a projection of its performance over the next three to five
years. During these discussions, the parties considered that any possible
transaction should be tax-free to IMA Stockholders and that the accounting
treatment for any transaction should be on a pooling-of-interests basis, as
allowed by generally accepted accounting principles. The parties further
proposed to attempt to determine the economics of any transaction prior to
resolving outstanding questions of corporate governance.
Subsequently, Mr. Kalishman advised Mr. Krugman that, based upon IMA's
evaluation of the information then available, it would not be interested in a
transaction involving a conversion ratio that would provide to IMA Stockholders
less equity in the surviving company than would be held by ITI Stockholders, and
Mr. Krugman responded that such an arrangement would not be acceptable to ITI.
On November 21, 1994, the IMA Board at a regular quarterly meeting, considered
and discussed the issues between ITI and IMA.
On December 5, 1994, Mr. Krugman met with Mr. Kalishman to ascertain IMA's
possible continuing interest in a transaction with ITI on a basis involving
another conversion ratio. Upon Mr. Kalishman's advising Mr. Krugman that IMA
would not reconsider with respect to the conversion ratio, they agreed to meet
to discuss possible resolutions of disputes and disagreements. Accordingly, on
December 19, 1994 Messrs. Krugman, Richard, Kalishman and Affholder met in
Memphis and discussed possible resolution of various issues between the
companies, such as those involving IMA's commercialization of the PALTEM
processes, cross-over activities regarding the Insituform Process and IMA's
planned manufacturing activities, but did not agree to any definitive
arrangements. At such meeting, the parties renewed discussions regarding a
possible combination, and Messrs. Kalishman and Affholder advised the ITI
representatives that IMA would reconsider IMA's requirement of a conversion
ratio based upon equal total equity values if they were furnished information
regarding ITI's research and development activities and future prospects which
would justify a different relative valuation. Thereupon, representatives of ITI
presented a status report on ITI's research and
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development initiatives and growth plans. Based upon such report, Messrs.
Kalishman and Affholder withdrew the equal value requirement to allow
negotiations to proceed.
By letter dated January 4, 1995, Enviroq requested that ITI grant its
consent under various Insituform and NuPipe licenses with Enviroq's subsidiaries
in connection with the proposed Enviroq Acquisition. See "Business of
ITI -- Licensing Operations -- Insituform License Agreements" below. Enviroq's
letter requested a response by January 13, 1995. By letter dated January 13,
1995, Enviroq advised ITI that Enviroq did not expect a response to its prior
letter by January 13, 1995 but that ITI be given every reasonable opportunity to
consider Enviroq's request and that ITI proceed with all due diligence.
At a regular meeting of the ITI Board of Directors held on January 24,
1995, the board was apprised of developments concerning the Enviroq Acquisition
and discussions with IMA, and management presented an analysis of combined
operations of ITI and IMA. The ITI Board authorized management to continue
discussions with IMA including a potential combination of the companies, and to
take appropriate steps to preserve ITI's rights in the context of the Enviroq
Acquisition.
On February 7, 1995, representatives of Merrill Lynch and Schroder Wertheim
met to discuss a possible conversion ratio relative to a transaction between ITI
and IMA. Based upon the conversion ratio suggested by Merrill Lynch at such
time, IMA terminated its negotiations with respect to a proposed transaction.
At IMA's annual board meeting on February 14, 1995, Mr. Kalishman reported
to the IMA Board that, in view of the perceived inadequacy of the conversion
ratio suggested by Merrill Lynch, he had terminated discussions with ITI
regarding a possible merger. He also advised the board that management of IMA
intended to proceed to explore a possible resolution of disputes and
disagreements between the parties.
Mr. Krugman and Mr. Kalishman met on February 21, 1995 in Naples, Florida
for the purpose of discussing a resolution of the pending disputes between the
parties. At such meeting, Mr. Krugman suggested that the parties continue
attempts to achieve an agreement regarding a conversion ratio. Mr. Kalishman
advised that reopening discussions regarding a conversion ratio should only be
accomplished through IMA's financial advisor and after there was an agreement
regarding corporate governance issues for a combined company. Messrs. Kalishman
and Krugman agreed to meet in St. Louis with Mr. Richard on February 24, 1995 to
discuss the issues between the companies. At such meeting, the possibility of a
merger was revisited, and Mr. Krugman agreed to pursue the matter with
representatives of Schroder Wertheim.
On February 28, 1995, Mr. Krugman met with a representative of Schroder
Wertheim to explore the principal terms of a transaction, including a possible
range for the conversion ratio, consideration of the formation of a regular
dividend policy with respect to the shares of ITI, the composition of the ITI
Board and the roles of Messrs. Kalishman and Affholder in the management of the
combined companies.
On March 15, 1995, Mr. Krugman followed up with Schroder Wertheim by
telephone and proposed the Conversion Ratio of 1.15 shares of ITI Common Stock
for each share of IMA Class A Common Stock, and a board comprised of ten
directors, six of whom would be named by ITI, three of whom would be designed by
IMA and one of whom would be ITI's chief executive officer. Mr. Krugman further
concurred, in view of previous discussions with IMA, that he not continue as
Chairman of the Board, in favor of Mr. Kalishman. The representative of Schroder
Wertheim indicated, on behalf of IMA, that he believed the terms would be
substantially acceptable to IMA.
On March 15 and 16, 1995, ITI's legal advisor communicated with IMA's legal
advisor in order to confirm the proposed terms of a transaction between the
companies, including the proposed Conversion Ratio, board composition and
composition of management. On March 16, 1995, IMA's legal advisor communicated
to ITI's legal advisor IMA's position that the board of directors after
consummation of a transaction should be comprised of four members designated by
ITI, the chief executive officer of the company and at least three and possibly
four directors designated by IMA. On March 29, 1995, ITI's legal advisor
submitted to IMA's legal advisor the working draft of an agreement and plan of
merger so as to identify outstanding issues between the companies.
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On April 4, 1995, ITI publicly announced that it had declined to grant its
consent, as requested by Enviroq under the various Insituform and NuPipe Process
license agreements with Enviroq's subsidiaries, in connection with the
transactions contemplated by the Enviroq Agreement. ITI also announced that it
had filed an action (the "Declaratory Action") in Tennessee Chancery Court
pursuant to which it sought a declaratory judgment confirming its action. See
"Business of ITI -- Legal Proceedings" below. On April 4, 1995, ITI, Enviroq and
IMA entered into and publicly announced an agreement (the "Cooperation
Agreement") providing that no further action would be taken through April 30,
1995 in that lawsuit or any other court action taken through such date, pending
attempts by the parties to resolve their differences.
On April 11, 1995, Messrs. Krugman and Richard, together with Russell B.
Wight, Jr., a director of ITI and partner of Interstate Properties, ITI's
largest stockholder, and Brian Chandler and Douglas K. Chick, also both
directors of ITI and members of the Ringwood Group, holding the next largest
position in ITI's stock, met with Mr. Kalishman at the offices of Interstate
Properties in Saddle Brook, New Jersey. During the meeting, the participants
discussed the terms of a possible transaction between ITI and IMA and failed to
resolve issues relating to board composition and Mr. Kalishman's future role in
ITI after the effectuation of a transaction. Such failure was attributable,
among other reasons, to the views of various ITI directors that certain
principal ITI Stockholders had relied upon Mr. Krugman's serving as Chairman of
the Board for the period determined in the context of ITI's acquisition of
Insituform Group Limited in 1992, and that the Conversion Ratio reflected a
substantial premium to market (while at the same time Messrs. Kalishman and
Affholder, collectively, would own a substantially greater position in ITI's
outstanding stock than any other single stockholder constituency), such that IMA
should accept ITI's proposals regarding board composition and board
chairmanship.
On April 18, 1995, IMA completed the Enviroq Acquisition. On such date, ITI
announced that it had entered into additional agreements with Enviroq and IMA to
postpone through April 30, 1995 assertion by ITI of any rights under the
Insituform and NuPipe Process license agreements with Enviroq's subsidiaries,
and any rights under the partnership agreement of Midsouth Partners (see
"Business of ITI -- Investments" below), arising as a result of the acquisition
of Enviroq by IMA without ITI's consent.
On April 21, 1995, Mr. Richard met with Mr. Kalishman to discuss
alternative corporate governance arrangements for the board of directors of the
combined companies, and proposed that the board be comprised of thirteen
directors, ten of whom would be the current ITI directors (including ITI's Chief
Executive Officer) and three of whom would be designated by IMA (the "April
Board Proposal"). Mr. Kalishman indicated that he would recommend such proposal
to the IMA Board and concurred that any future dividend policy would be a matter
for determination by ITI's Board of Directors.
At a regular meeting of the Board of Directors of ITI held on April 25,
1995, the terms of the proposed agreement and plan of merger and the
transactions contemplated thereby as of such date were presented to the board.
At the meeting, management presented an analysis of the proposed transaction,
Merrill Lynch reviewed for the board certain financial calculations for
consideration by the board in evaluating the transaction proposed and ITI's
legal counsel reviewed legal matters pertinent to such transactions. The board
authorized management to propose a transaction with IMA providing for the
Conversion Ratio and the April Board Proposal and to continue negotiation of Mr.
Kalishman's role in ITI after the effectuation of a transaction. On April 25,
1995 following the board meeting, Messrs. Krugman and Richard telephoned Mr.
Kalishman and proposed a transaction providing for the Conversion Ratio and the
April Board Proposal. They further advised Mr. Kalishman that, although ITI
would be prepared to accept his serving as co-chairman of the ITI Board, the ITI
Board's support for the transaction would be strengthened if Mr. Kalishman were
then to agree to serve in a newly-created position of Vice Chairman of the Board
of ITI and as a consultant of ITI for a period of two years.
On April 28, 1995, ITI publicly announced that it had agreed with IMA to
extend through May 31, 1995 the period during which ITI would postpone assertion
of any rights in dispute as a result of the consummation of the Enviroq
Acquisition by IMA without consent of ITI. During such period, the parties
agreed not to take further action in the Declaratory Action regarding such
matters, except for certain procedural actions to preserve the parties' rights.
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On May 8, 1995, Mr. Kalishman communicated to ITI IMA's willingness to
proceed to conclude a transaction providing for the Conversion Ratio, the April
Board Proposal, and the appointment of Mr. Kalishman as Vice Chairman of the
Board of ITI and his engagement as consultant.
At a regular quarterly meeting of the IMA Board held May 12, 1995, the
terms of the proposed merger and related transactions were presented to the
directors. At the meeting, the board considered presentations from IMA
management, representatives of Schroder Wertheim and IMA's legal counsel, which
described and analyzed in detail the proposed business combination. The Schroder
Wertheim representatives advised the IMA Board that, based upon their analysis
of the information then available, they believed that their firm would be in a
position to render an opinion that the Conversion Ratio was fair, from a
financial point of view, to the IMA Stockholders. The board authorized
management to continue negotiation of various terms of the Merger Agreement,
including clarification of provisions relative to the future roles of Messrs.
Kalishman and Affholder in the operations of the combined companies.
On May 22, 1995, ITI entered into definitive financial advisory
arrangements with Merrill Lynch.
On May 22, 1995, the terms of the Merger Agreement and the transactions
contemplated thereby were presented to the Board of Directors of IMA at a
special telephonic meeting of the board. At the meeting, Schroder Wertheim
presented an analysis of considerations attendant to the Merger and advised the
IMA Board orally that the Conversion Ratio is fair, from a financial point of
view, to the IMA Stockholders. The directors unanimously approved the terms of
the Merger Agreement and the transactions contemplated thereby and authorized
the execution of the Merger Agreement.
On May 22, 1995, the terms of the Merger Agreement and the transactions
contemplated thereby were presented to the Board of Directors of ITI at a
special meeting of the board. At the meeting, the board considered presentations
from ITI management, representatives of Merrill Lynch and ITI's legal counsel,
and asked questions of ITI's independent auditors, regarding the proposed
transactions. At the meeting, Merrill Lynch presented an analysis of the
financial terms of the proposed Merger and advised the Board orally to the
effect that, based upon the assumptions made, the matters considered, and the
limitations on the review undertaken, as of such date, the consideration to be
paid by ITI pursuant to the Merger is fair to ITI from a financial point of
view. At the meeting, the directors authorized management to formulate
arrangements with Interstate Properties, in order to confirm to Interstate that
the period during which Interstate and its partners would be held to
restrictions governing transactions in ITI and IMA stock, in order to support
the accounting treatment of the transaction as a pooling-of-interests, would not
be unduly extended. On May 23, 1995, the Board of Directors of ITI reconvened
telephonically, at which time the directors unanimously approved the terms of
the Merger Agreement and the transactions contemplated thereby and authorized
the execution of the Merger Agreement.
On May 23, 1995, ITI, ITI Sub and IMA executed the Merger Agreement.
RECOMMENDATIONS OF THE BOARD OF DIRECTORS; REASONS FOR APPROVING THE MERGER
AGREEMENT
Board of Directors of ITI. THE BOARD OF DIRECTORS OF ITI BELIEVES THAT THE
TERMS OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY,
INCLUDING THE PROPOSED CONVERSION RATIO OF 1.15 SHARES OF ITI COMMON STOCK FOR
EACH SHARE OF IMA CLASS A COMMON STOCK OUTSTANDING, ARE FAIR TO AND IN THE BEST
INTERESTS OF ITI AND THE ITI STOCKHOLDERS. ACCORDINGLY, THE BOARD HAS APPROVED
THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS
THAT HOLDERS OF ITI COMMON STOCK VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND
THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT.
At a special meeting of the Board of Directors of ITI held on May 23, 1995,
the Board of Directors of ITI approved the Merger Agreement and the transactions
contemplated thereby, including the issuance by ITI of 1.15 shares of ITI Common
Stock to the IMA Stockholders for each share of IMA Class A Common Stock held
subsequent to conversion into IMA Class A Common Stock, in accordance with its
terms, of all
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outstanding shares of IMA Class B Common Stock. This approval followed, and was
based upon discussions at, meetings of the Board of Directors of ITI at which
matters relating to ITI and IMA were considered, held on March 7, June 14,
August 2 and October 24, 1994 and January 24, April 25, May 22 and May 23, 1995.
In arriving at its conclusion, the Board of Directors of ITI received
presentations from, and reviewed carefully the terms and conditions of the
Merger Agreement with, its management, counsel and financial advisor.
Thereafter, the Board of Directors of ITI approved the Merger Agreement and the
transactions contemplated thereby.
Such determination by the Board of Directors of ITI was based on a number
of factors, including, without limitation, the following: (i) the anticipated
creation of a larger and stronger company with better economies of scale,
greater operations flexibility and the enhanced ability to fund key strategic
initiatives through the combination of complementary attributes of the two
companies; (ii) the enhanced ability of ITI to market the Insituform and NuPipe
Processes in territories licensed to IMA and its subsidiaries (including Enviroq
and its subsidiaries), and to provide a national network for new industrial
applications of such processes; (iii) the infusion by ITI through its domestic
contracting operations of the strong contracting capabilities and culture of
IMA; (iv) the opportunities presented by IMA's proprietary technologies such as
the PALTEM systems for trenchless pipeline rehabilitation, in particular insofar
as addressing pressure pipes used in the gas utility industry, and the Tite
Liner Process for corrosion and abrasion protection, insofar as addressing
mining and oil and gas transmission lines; (v) the uncertainties arising from
outstanding issues between ITI and IMA, including those arising from the Enviroq
Acquisition and operations under IMA's existing Insituform and NuPipe licenses
from ITI, and the uncertainties and costs of litigation such as the Declaratory
Action and other proceedings that may arise from such disputes; (vi) the
financial condition, results of operations and prospects resulting from the
combination of ITI and IMA, including potential costs savings that could be
achieved by the combined entity through elimination of duplicative costs in
contracting and manufacturing operations and administration, and the risks
involved in achieving these prospects; (vii) the relative historical market
values of ITI Common Stock and IMA Class A Common Stock; (viii) the structure of
the Merger allowing accounting for the transaction as a pooling-of-interests;
and (ix) the opinion of ITI's financial advisor, Merrill Lynch, to the effect
that, based upon the assumptions made, the matters considered, and the
limitations on the review undertaken, as of such date, the consideration to be
paid by ITI pursuant to the Merger is fair to ITI from a financial point of
view. Merrill Lynch has confirmed this opinion as of the date of this Joint
Proxy Statement/Prospectus in a written opinion delivered to the Board of
Directors of ITI. See "-- Opinion of ITI Financial Advisor" below. A copy of
this opinion, dated the date of this Joint Proxy Statement/Prospectus, is
attached hereto as Annex B, and the ITI Stockholders are urged to read such
opinion carefully in its entirety.
The directors of ITI evaluated the factors listed above in light of their
knowledge of the business and options of ITI and IMA and their business
judgment. The Board of Directors of ITI considered these factors in their
totality and did not quantify or otherwise attempt to assign relative weights to
the specific factors considered in making its determinations.
ITI expects that, if the Merger is not approved by the stockholders of ITI
or IMA, ITI would continue to operate as it has in the past. As a result of any
termination of the Merger Agreement without effectuation of the Merger, ITI and
IMA would be released from their respective obligations under the Cooperation
Agreement and ITI would anticipate prosecution or reinstitution of the
Declaratory Action or other litigation addressing the same subject matter or
other matters, or possibly other approaches to resolve the outstanding issues
with IMA in the absence of alternative agreements with IMA.
Board of Directors of IMA. THE BOARD OF DIRECTORS OF IMA BELIEVES THAT THE
TERMS OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY,
INCLUDING THE PROPOSED CONVERSION RATIO OF 1.15 SHARES OF ITI COMMON STOCK FOR
EACH SHARE OF IMA CLASS A COMMON STOCK OUTSTANDING, ARE FAIR TO, AND IN THE BEST
INTERESTS OF, IMA AND ITS STOCKHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS OF
IMA HAS APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY
AND RECOMMENDS THAT THE HOLDERS OF IMA CLASS A COMMON STOCK AND IMA CLASS B
COMMON STOCK VOTE
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FOR THE APPROVAL OF THE MERGER AGREEMENT AND THE OTHER TRANSACTIONS CONTEMPLATED
BY THE MERGER AGREEMENT.
Given the significance of the Insituform Process to IMA's business, IMA's
Board of Directors has regularly reviewed the status of IMA's relationships with
ITI, including the desirability of a strategic alliance between the two
companies. The IMA Board of Directors considered and evaluated the desirability
of the Merger Agreement at its regular quarterly meeting held May 12, 1995 and
at a special meeting held May 22, 1995. During these meetings, IMA's Board of
Directors received presentations from and consulted with its financial advisors
and legal counsel.
In reaching its conclusion, IMA's Board of Directors carefully reviewed the
terms and conditions of the Merger Agreement and considered a number of factors,
including: (i) the perceived complementary strengths of IMA (which include its
demonstrated ability to successfully operate and grow its Insituform Process
installation business in its licensed territories and to utilize tunneling and
Tite Liner and PALTEM products to offer a full line of pipeline construction and
rehabilitation products to municipal and industrial customers) and of ITI (which
include its technological base, international presence and manufacturing
capabilities), which the board believed would provide synergies and growth
opportunities unique to a combination of the two companies; (ii) the
uncertainties and costs of litigation which could result from IMA's continuing
to operate as an independent licensee, particularly in light of the lawsuit
initiated by ITI with respect to the Insituform Process licenses acquired in the
Enviroq Acquisition and possible litigation involving other disputes between the
parties; (iii) the enhanced ability of the combined companies to compete with
existing and emerging pipeline rehabilitation technologies, given developments
regarding other proprietary technologies and the expiration of certain principal
patents relating to the Insituform Process; (iv) the perceived effect of the
Merger on many of IMA's employees and customers resulting from the anticipated
organizational framework within which North American contracting operations are
planned to be conducted on a consolidated basis by the combined companies; (v)
the fact that the receipt by the IMA Stockholders of ITI Common Stock in the
Merger would be pursuant to a tax-free reorganization such that no taxable gain
or loss would be recognized for United States federal income tax purposes by IMA
Stockholders as a result of the Merger, except to the extent of cash received in
respect of fractional shares; (vi) information concerning the financial
performance, condition, business operations and prospects of each of IMA and ITI
and of the combined companies on a pro forma basis; (vii) the historical market
prices of IMA Class A Common Stock and ITI Common Stock for which IMA Class A
Common Stock would be exchanged; and (viii) the receipt by IMA's Board of
Directors of a fairness opinion from its financial advisor, Schroder Wertheim,
to the effect that the Conversion Ratio is fair to IMA Stockholders, from a
financial point of view. In particular, the board reviewed and analyzed the
relative contribution analysis, comparable company analysis, comparable merger
and acquisition transaction analysis and discounted cash flow analysis presented
by Schroder Wertheim. See "-- Opinion of IMA Financial Advisor" below.
The directors of IMA evaluated the foregoing factors in light of their
knowledge of the business and operations of IMA and ITI and their business
judgment. IMA's Board of Directors considered these factors in their totality
and did not quantify or otherwise attempt to assign relative weights to the
specific factors considered in making its determination.
If the Merger Agreement is not approved by stockholders of IMA and ITI,
respectively, IMA would expect to continue to operate in accordance with its
historical business. IMA anticipates that it and ITI would engage in the
litigation arising out of the Enviroq Acquisition and possibly other litigation
arising out of other disputes between the parties, if they were unable to reach
a mutually acceptable settlement.
OPINION OF ITI FINANCIAL ADVISOR
On May 22, 1995, Merrill Lynch delivered its oral opinion, which was
subsequently confirmed in a written opinion dated the date of this Joint Proxy
Statement/Prospectus, to the ITI Board of Directors to the effect that, as of
such dates, based upon the assumptions made, the matters considered and the
limitations on the review undertaken, the consideration to be paid by ITI
pursuant to the Merger is fair to ITI from a financial point of view.
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A COPY OF THE MERRILL LYNCH OPINION, DATED THE DATE HEREOF, WHICH INCLUDES
THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND CERTAIN LIMITATIONS ON THE SCOPE OF
REVIEW, IS ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS AS ANNEX B. HOLDERS OF
SHARES OF ITI COMMON STOCK ARE URGED TO READ THE MERRILL LYNCH OPINION IN ITS
ENTIRETY. THE SUMMARY OF THE MERRILL LYNCH OPINION SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF SUCH OPINION.
The opinion of Merrill Lynch is directed only to the fairness from a
financial point of view of the consideration to be paid by ITI pursuant to the
Merger Agreement and does not constitute a recommendation to any ITI Stockholder
as to how such stockholder should vote.
In arriving at the opinion of Merrill Lynch dated May 22, 1995 (the
"Merrill Lynch Opinion"), which Merrill Lynch discussed with the ITI Board of
Directors, Merrill Lynch, among other things, (i) reviewed IMA's Annual Reports,
Forms 10-K and related financial information for the five fiscal years ended
September 30, 1994 and IMA's Forms 10-Q and the related unaudited financial
information for the quarterly periods ended December 31, 1994 and March 31,
1995; (ii) reviewed ITI's Annual Reports, Forms 10-K and related financial
information for the five fiscal years ended December 31, 1994, and ITI's Form
10-Q and the related unaudited financial information for the quarterly period
ended March 31, 1995; (iii) reviewed certain information, including financial
forecasts, relating to the business, earnings, cash flow, assets and prospects
of IMA and ITI, furnished to Merrill Lynch by IMA and ITI, respectively; (iv)
conducted discussions with members of senior management of IMA and ITI
concerning their respective businesses and prospects; (v) reviewed certain
information furnished to Merrill Lynch by ITI and conducted discussions with
members of senior management of IMA and ITI concerning potential synergies to be
realized as a result of the Merger; (vi) reviewed the historical market prices
and trading activity for the IMA Class A Common Stock and ITI Common Stock;
(vii) considered the pro forma effect of the Merger on ITI's capitalization
ratios and earnings, cash flow and book value per share; (viii) reviewed the
Merger Agreement; and (ix) reviewed such other financial studies and analyses
and performed such other investigations and took into account such other matters
as Merrill Lynch deemed necessary including its assessment of general economic,
market and monetary conditions. The financial information referred to in clause
(iii) above furnished to Merrill Lynch included projected information with
respect to the anticipated future performance of ITI and IMA. These projections
were not prepared with a view to public disclosure or compliance with the
published guidelines of the Commission or the guidelines established by the
American Institute of Certified Public Accountants regarding projections.
Furthermore, Merrill Lynch did not ascribe any particular weight to such
projections.
In preparing the Merrill Lynch Opinion, Merrill Lynch relied upon the
accuracy and completeness of all information supplied or otherwise made
available to it by ITI and IMA and assumed that financial forecasts and
estimates of operating efficiencies and potential synergies expected to result
from the Merger furnished by ITI and IMA reflected the best currently available
estimates and judgments of the managements of ITI and IMA as to the expected
future financial performance of their respective companies. Merrill Lynch did
not independently verify such information or assumptions, conduct a physical
inspection of the properties or facilities of ITI or IMA or undertake an
independent appraisal or evaluation of the assets or liabilities of ITI or IMA.
The Merrill Lynch Opinion does not address the relative merits of the
Merger as compared to any other business plan or opportunity that might be
presented to ITI, or the effect of any other arrangement in which ITI might
engage.
In arriving at the Merrill Lynch Opinion, Merrill Lynch considered certain
financial analyses. In connection with its presentation to the ITI Board of
Directors, Merrill Lynch has provided the ITI Board of Directors with a summary
of valuation results obtained by using several different valuation methods as
well as other materials concerning the IMA Class A Common Stock (the "Merrill
Lynch Report"), the material portions of which are summarized below.
Discounted Cash Flow Analysis-IMA. Merrill Lynch calculated ranges of
equity value for IMA based upon the value, discounted to the present, of its
fiscal year end five-year stream of unlevered after-tax cash flow and its
projected fiscal year 2000 terminal value based upon a range of multiples of
5.5x to 9.5x of
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earnings before interest, taxes, depreciation and amortization ("EBITDA").
Merrill Lynch utilized discount rates reflecting a weighted average cost of
capital ranging from 21.0% to 25.0%.
Discounted Cash Flow Analysis-ITI. Merrill Lynch calculated ranges of
equity value for ITI based upon the value, discounted to the present, of its
fiscal year end five-year stream of unlevered after-tax free cash flow and its
projected fiscal year 2000 terminal value based upon a range of multiples of its
projected fiscal year 2000 EBITDA. In conducting its analysis, Merrill Lynch
utilized two sets of projections supplied by ITI management, referred to herein
as the ITI Base Case and the ITI Downside Case. For purposes of the Merrill
Lynch Report, the "ITI Base Case" is defined as ITI management's projections of
ITI assuming ITI maintains normal business relations with IMA, while the "ITI
Downside Case" is defined as ITI management's projections of ITI assuming the
Merger is not consummated and IMA and ITI assume adversarial postures with
respect to each other. In both cases, Merrill Lynch utilized discount rates
reflecting a weighted average cost of capital ranging from 21.0% to 25.0% and
terminal value multiples of fiscal year 2000 EBITDA ranging from 4.0x to 8.0x.
Relative Implied Exchange Ratio Analysis. Merrill Lynch utilized a
discounted cash flow methodology to compare implied exchange ratios based on
relative ranges of value for IMA and ITI. The comparison of IMA to the ITI Base
Case yielded an implied exchange ratio of (i) between 1.12 and 1.26 shares of
ITI Common Stock for each share of IMA Class A Common Stock, assuming Synergies
(as defined below) and (ii) between 1.06 and 1.16 shares of ITI Common Stock for
each share of IMA Class A Common Stock, assuming no Synergies. For purposes of
the Merrill Lynch Report, "Synergies" are defined as and based on ITI management
forecasts of projected annual savings arising from the Merger of $2.8 million in
1996 and $3.7 million in 1997-2000.
Contribution Analysis. Merrill Lynch also compared the relative ownership
of the stockholders of ITI and the stockholders of IMA to the combined company
of 55.3% and 44.7% on a fully-diluted basis, respectively, to the relative
contributions of each of ITI and IMA to the combined company for the years
ending December 31, 1995 through 2000, to revenues, earnings before interest and
taxes ("EBIT") (assuming Synergies and assuming no Synergies) and net income
(assuming Synergies and assuming no Synergies). This analysis indicated that,
for the years ending December 31, 1995 through 2000, IMA would have contributed
amounts ranging from 38.2% to 43.7% of revenues of the combined entity; amounts
ranging from 37.2% to 46.6% of EBIT of the combined entity, with Synergies
contributing amounts ranging from 0% to 5.3%; amounts ranging from 37.2% to
44.9% of EBIT of the combined entity, assuming no Synergies; amounts ranging
from 44.2% to 46.5% of net income of the combined entity, with Synergies
contributing amounts ranging from 0% to 5.7%; and amounts ranging from 41.0% to
44.3% of net income of the combined entity, assuming no Synergies.
Pro Forma Analysis. In addition, Merrill Lynch analyzed certain pro forma
effects resulting from the Merger, including the potential impact of the Merger
on the estimated earnings per share ("EPS") for the years ending December 31,
1995 through 2000, including Synergies. This analysis indicated that for a
holder of ITI Common Stock, (i) based on the ITI Base Case including Synergies,
the Merger would be dilutive on an estimated EPS basis for the years ending
December 31, 1995 through 1999 in amounts ranging from 14.1% to 1.7% and
accretive in the year ending December 31, 2000 by 0.4%, and (ii) based on the
ITI Downside Case with no Synergies, the Merger would be accretive for the years
ending December 31, 1996 through 2000 in amounts ranging from 2.1% to 54.5% and
dilutive in the year ending December 31, 1995 by 14.1%. The analysis indicated
that for a holder of IMA Class A Common Stock, the Merger would be accretive on
an estimated EPS basis for the years ending December 31, 1995 through 2000 in
amounts ranging from 5.7% to 19.9%.
Historical Stock Price Analysis. Merrill Lynch reviewed the per share
weekly stock price and trading volume of IMA Class A Common Stock and ITI Common
Stock over the period from May 15, 1992 to May 17, 1995 compared with the
performance of the Standard & Poor's 500 Index. Merrill Lynch also reviewed the
performance of the per share weekly closing price of IMA Class A Common Stock
and ITI Common Stock over the period from May 15, 1992 to May 17, 1995 compared
with the movement of the Standard & Poor's 400 Index and a composite index of
certain other publicly-traded companies which Merrill Lynch deemed to be
reasonably comparable to IMA and ITI.
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Merrill Lynch also performed analyses of selected publicly-traded companies
and of selected acquisition transactions. However, Merrill Lynch did not rely on
the results of either of these analyses as the group of companies deemed by
Merrill Lynch to be comparable to ITI or IMA was too limited in number to be
meaningful.
The summary set forth above does not purport to be a complete description
of the analyses performed by Merrill Lynch. Arriving at a fairness opinion is a
complex process not necessarily susceptible to partial or summary description.
Merrill Lynch believes that its analysis must be considered as a whole and that
selecting portions of its analyses and of the factors considered by it, without
considering all such factors and analyses, could create a misleading view of the
process underlying its analyses set forth in the Merrill Lynch Opinion and the
Merrill Lynch Report. The matters considered by Merrill Lynch in its analyses
are based on numerous macroeconomic, operating and financial assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond ITI's or IMA's control. Any estimates
incorporated in the analyses performed by Merrill Lynch are not necessarily
indicative of actual past or future results or values, which may be
significantly more or less favorable than such estimates. Estimated values do
not purport to be appraisals and do not necessarily reflect the prices at which
businesses or companies may be sold in the future, and such estimates are
inherently subject to uncertainty.
The ITI Board of Directors selected Merrill Lynch to act as its financial
advisor on the basis of Merrill Lynch's reputation as an internationally
recognized investment banking firm with substantial expertise in transactions
similar to the Merger and because it is familiar with ITI and its business. As
part of its investment banking business, Merrill Lynch is continually engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions. Merrill Lynch has rendered from time to time various investment
banking and financial advisory services to a predecessor of ITI for which it has
received customary compensation.
Merrill Lynch Fees. With respect to Merrill Lynch's services as financial
advisor in connection with the Merger, ITI has agreed to pay Merrill Lynch (i) a
retainer of $100,000, (ii) a fee of $150,000 which became payable upon execution
of the Merger Agreement and (iii) a transaction fee of 0.825% of the aggregate
purchase price upon the consummation of the Merger, against which the fees
earned from (i) and (ii) will be credited. In addition, ITI also has agreed to
reimburse Merrill Lynch for its reasonable out-of-pocket expenses (including
reasonable fees and expenses of its legal counsel) and to indemnify Merrill
Lynch and certain related persons against certain liabilities, including
liabilities under the federal securities laws, arising out of its engagement.
OPINION OF IMA FINANCIAL ADVISOR
Schroder Wertheim has delivered a written opinion and made an oral
presentation to the Board of Directors of IMA that, as of May 22, 1995, the
Conversion Ratio is fair, from a financial point of view, to the IMA
Stockholders. Schroder Wertheim has delivered an updated written opinion, dated
as of the date of this Joint Proxy Statement/Prospectus, to the Board of
Directors of IMA that, as of such date, the Conversion Ratio is fair, from a
financial point of view, to the IMA Stockholders. Schroder Wertheim, as part of
its investment banking business, is continually engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. The Board of Directors of IMA selected Schroder Wertheim on the basis
of such experience. In requesting the Schroder Wertheim opinion, neither IMA nor
the Board of Directors of IMA gave any special instructions to Schroder Wertheim
or imposed any limitations upon the scope of the investigations that Schroder
Wertheim deemed necessary to enable it to deliver its opinion.
THE FULL TEXT OF THE OPINION OF SCHRODER WERTHEIM DATED AS OF THE DATE OF
THIS JOINT PROXY STATEMENT/PROSPECTUS, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN BY SCHRODER WERTHEIM, IS
ATTACHED AS ANNEX C TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND INCORPORATED BY
REFERENCE HEREIN. IMA STOCKHOLDERS ARE URGED TO READ THIS OPINION IN ITS
ENTIRETY.
The May 22, 1995 opinion (the "Schroder Wertheim Opinion") is substantially
similar to the opinion attached hereto as Annex C. Schroder Wertheim's opinions
are directed only to the fairness, from a financial
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point of view, to IMA Stockholders of the Conversion Ratio and do not address
IMA's underlying business decision to enter into the Merger Agreement and effect
the transactions contemplated therein. Schroder Wertheim's opinions were
directed to the Board of Directors of IMA and were not rendered with a view
toward serving as or constituting a recommendation to any IMA Stockholders as to
how such stockholders should vote with respect to approval of the Merger
Agreement and the transactions contemplated therein.
In connection with rendering the Schroder Wertheim Opinion, Schroder
Wertheim, among other things: (i) reviewed the Merger Agreement; (ii) reviewed
the audited financial statements of (a) IMA for the fiscal years ended September
30, 1990 through 1994 and (b) ITI for the fiscal years ended December 31, 1990
through 1994; (iii) reviewed the Form 10-Qs for IMA for the quarters ended
December 31, 1994 and March 31, 1995; (iv) reviewed the Form 10-Q for ITI for
the quarter ended March 31, 1995; (v) reviewed the Form 8-Ks for IMA and ITI
filed during the period January 1, 1994 to May 21, 1995; (vi) had discussions
with IMA management regarding the business and operations of IMA and
management's financial projections for the fiscal years ending September 30,
1995 through 1999; (vii) had discussions with ITI management regarding the
business and operations of ITI and management's financial projections for the
years ending December 31, 1995 through 1999; (viii) performed a relative
contribution analysis; (ix) compared the results of IMA's operations with those
of certain publicly traded companies that were deemed to be reasonably similar;
(x) reviewed the financial terms, to the extent publicly available, of certain
acquisition transactions that were deemed to be reasonably comparable; (xi)
performed a discounted cash flow analysis of IMA's and ITI's projections; (xii)
reviewed the stock price and trading volume history for IMA and ITI; (xiii)
reviewed research reports and news articles on IMA and ITI; and (xiv) performed
such other financial studies, analyses, inquiries and investigations as Schroder
Wertheim deemed appropriate. The financial information referred to in clauses
(vi) and (vii) above furnished to Schroder Wertheim included projected
information with respect to the anticipated future performance of IMA and ITI.
These projections were not prepared with a view to public disclosure or
compliance with the published guidelines of the Commission or the guidelines
established by the American Institute of Certified Public Accountants regarding
projections. Furthermore, Schroder Wertheim did not ascribe any particular
weight to such projections.
In rendering its opinions, Schroder Wertheim relied upon the accuracy and
completeness of all information supplied or otherwise made available to it by
IMA and ITI or obtained by it from other sources, and Schroder Wertheim did not
assume any responsibility for independently verifying such information, or
undertake an independent appraisal of the assets or liabilities (contingent or
otherwise) of IMA or ITI and was not furnished with such appraisals. With
respect to financial forecasts for IMA and ITI, Schroder Wertheim was advised by
the managements of IMA and ITI, respectively, and it assumed without independent
investigation, that the forecasts were reasonably prepared and reflected the
best currently available estimates and judgment as to the expected future
financial performance of each company.
General. The preparation of a fairness opinion is a complex project and is
not necessarily susceptible to partial or summary description. The nature of
available information may further affect the value of any particular methodology
or technique. Schroder Wertheim's conclusion was based upon all the analyses and
factors that it considered taken as a whole and also on the application of
Schroder Wertheim's experience and judgment. Its conclusion involved significant
elements of subjective judgment and qualitative analysis. No value, merit or
weight of any single technique or factor was assigned by Schroder Wertheim.
Accordingly, Schroder Wertheim believes that its analyses must be considered as
a whole and that to focus upon specific portions of such analyses and factors
would create an incomplete and misleading view of the process underlying the
preparation of the opinion. Schroder Wertheim's analyses and opinions were
based, in part, upon forecasts and projections of future results which are not
necessarily indicative of actual future results. Actual results may be
significantly more or less favorable than the projected results. In performing
its analyses, Schroder Wertheim made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond IMA's or ITI's control, and therefore are
inherently imprecise.
In arriving at its opinions, Schroder Wertheim performed various analyses
of IMA. Schroder Wertheim performed a relative contribution analysis based upon
the historical and projected results for IMA and ITI. Schroder Wertheim also
reviewed the historical trading prices for IMA Class A Common Stock and ITI
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Common Stock. In addition, Schroder Wertheim analyzed IMA's ongoing operations
based upon three valuation methodologies: (i) analysis of comparable publicly
traded companies; (ii) analysis of mergers and acquisitions of comparable
companies; and (iii) discounted cash flow analysis. The following is only a
summary of each of the financial analyses utilized by Schroder Wertheim and does
not purport to be a complete description of each such analysis.
Relative Contribution Analysis. Schroder Wertheim performed a relative
contribution analysis based upon the terms of the Merger and the historical and
projected results of IMA and ITI. Schroder Wertheim reviewed IMA's and ITI's
historical and projected revenues, operating cash flow, operating income and net
income. Schroder Wertheim also analyzed certain pro forma effects resulting from
the Merger. Compared to the 44.6% fully-diluted ownership that the IMA
Stockholders would receive in the Merger, IMA would contribute 41.3%, 40.6% and
42.0% to combined revenue, 36.0%, 33.0% and 39.9% to combined EBITDA, 34.9%,
35.3% and 44.5% to combined EBIT, and 36.5%, 39.2% and 47.1% to combined net
income, based on the latest twelve months ended March 31, 1995, projected 1995
results and projected 1996 results, respectively. In addition, the projections,
including IMA and ITI assumptions for cost savings, indicate the Merger is
projected to result in greater pro forma earnings per share for IMA Stockholders
than the projected earnings per share for IMA Stockholders assuming no Merger.
Stock Trading History. Schroder Wertheim reviewed and analyzed the history
of the trading prices and volume for both IMA Class A Common Stock and ITI
Common Stock, both separately and in relation to each other. In addition,
Schroder Wertheim reviewed and analyzed the relationship between movements of
the prices of IMA Class A Common Stock and ITI Common Stock and movement of the
composite index based on the prices of companies considered by Schroder Wertheim
to be comparable (see "-- Comparable Publicly Traded Company Analysis" below) to
IMA and ITI, respectively. During the period January 1, 1994 to May 16, 1995,
IMA Class A Common Stock underperformed both ITI Common Stock and the composite
index.
Based upon a Conversion Ratio of 1.15 shares of ITI Common Stock for each
share of IMA Class A Common Stock and a per share price of ITI Common Stock of
$13.50 (the closing per share price of ITI Common Stock on May 16, 1995), the
consideration to be received by the IMA Stockholders represented a premium of
28.0% over the per share price of IMA Class A Common Stock as of May 16, 1995
($12.13 per share) and a premium of 37.0% over the previous 30 trading days'
average per share price of IMA Class A Common Stock as of May 16, 1995 ($11.33
per share).
Comparable Publicly Traded Company Analysis. Schroder Wertheim used a
comparable publicly traded company analysis to prepare a valuation for IMA. For
the valuation of IMA, Schroder Wertheim considered ITI, Michael Baker
Corporation, Banister Foundation, Inc., Granite Construction, Inc., The L.F.
Myers Co. Group and J. Ray McDermott, S.A., as comparable publicly traded
companies. Such companies had trading multiples which ranged from 0.1x to 1.5x
last twelve months ("LTM") revenues, 6.3x x 14.4x LTM operating income, 3.6x to
8.6x LTM operating cash flow, 11.3x to 21.8x LTM net income, and 10.6x to 15.9x
projected 1995 net income. Applying these multiples to IMA results, the IMA per
share equity value ranged from $11.73 to $16.73.
Comparable Merger and Acquisition Transactions. Schroder Wertheim reviewed
merger and acquisition transactions specifically involving construction
companies and in general involving industrial manufacturing companies. While
there have been more than 40 transactions in the construction industry since
January 1992, most of these transactions have been small or have involved
private companies or the subsidiaries of public companies. As a result, limited
information was available for review and Schroder Wertheim did not view these
transactions as being helpful for determining a valuation of IMA. Schroder
Wertheim reviewed the prices and multiples paid in twelve recent acquisitions of
industrial manufacturing companies. Such transactions had implied multiples
which ranged from 0.6x to 1.6x LTM revenues, 6.7x to 17.3x LTM operating income,
and 5.1x to 11.7x LTM operating cash flow. Applying these multiples to IMA's LTM
result, the IMA per share equity value ranged from $9.51 to $14.49.
Discounted Cash Flow Analysis. Schroder Wertheim used a discounted cash
flow analysis to estimate the present value of IMA's future cash flows based
upon five-year financial forecasts prepared by IMA
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management. Schroder Wertheim calculated the estimated present value of the cash
flows of IMA as the sum of (i) the aggregate discounted cash flow (using various
discount rates based on a weighted average cost of capital) for each of the
fiscal years 1995 through 1999, plus (ii) the discounted value (using various
discount rates based on a weighted average cost of capital) of the estimated
"terminal value" (or value of the cash flow in fiscal years after 1999),
determined by applying multiples to IMA's operating cash flow. Applying terminal
multiples ranging from 5.0x to 7.0x and using discount rates ranging from 14.0%
to 16.0%, the IMA per share equity value ranged from $11.79 to $18.24.
The terms of the engagement of Schroder Wertheim by the Board of Directors
of IMA are set forth in a letter agreement, dated August 30, 1994, between
Schroder Wertheim and IMA (the "IMA Engagement Letter"). Pursuant to the terms
of the IMA Engagement Letter, IMA agreed to pay Schroder Wertheim, in
consideration of certain advisory services with respect to a business
combination involving IMA, a fee equal to the sum of 0.875% of the Aggregate
Consideration (as defined in the IMA Engagement Letter). IMA also agreed to
reimburse Schroder Wertheim for its reasonable out-of-pocket expenses. In
connection with the IMA Engagement Letter IMA agreed to indemnify Schroder
Wertheim against certain liabilities relating to or arising out of its
engagement, including liabilities under federal securities laws.
INTERESTS OF CERTAIN PERSONS IN THE MERGER AND RELATED TRANSACTIONS
In considering the recommendations of the Board of Directors of ITI and the
Board of Directors of IMA with respect to the Merger Agreement and related
matters, ITI Stockholders and IMA Stockholders should be aware that certain
members of ITI's and IMA's respective managements or their respective Boards of
Directors have certain interests that are described below that may present them
with actual or potential conflicts of interest in connection with the Merger
Agreement and the transactions contemplated thereby.
New Directors of ITI. As more fully described under "-- Management of ITI
Following Consummation of the Merger" below, all ten of ITI's current directors,
Messrs. Biddelman, Chick, Chandler, Gorham, Krugman, Richard, Roth, Spengler,
Weinig and Wight, will remain on ITI's Board of Directors following the
Effective Time and three of IMA's current directors, Messrs. Kalishman,
Affholder and Siteman, will become ITI directors as of the Effective Time. ITI
has agreed that during the period from the Effective Time to December 9, 1998,
ITI shall nominate and recommend such persons for re-election to the ITI Board
of Directors upon expiration of their respective terms.
Employment and Consulting Agreements. Pursuant to the terms of the Merger
Agreement, at the Effective Time ITI will enter into agreements with Messrs.
Kalishman and Affholder, the Chairman and President of IMA, respectively,
containing the terms of their continuing relationship with ITI. ITI and Mr.
Kalishman will enter into an agreement under which Mr. Kalishman will serve as
Vice Chairman of the Board of Directors of ITI, for a term commencing at the
Effective Time and expiring on December 9, 1998, at an annual salary of
$100,000. In addition, at the Effective Time ITI will enter into a consulting
agreement with Mr. Kalishman pursuant to which ITI will engage Mr. Kalishman as
a consultant in connection with the business of ITI, for a two-year term at an
annual fee of $150,000. Such agreements are terminable by Mr. Kalishman at any
time upon at least 60 days' written notice. Pursuant to the terms of the Merger
Agreement, ITI will also enter into an employment agreement with Mr. Affholder
under which Mr. Affholder will serve initially as chief operating officer for
ITI's North American contracting operations and thereafter in such other
executive staff position as may be designated by ITI, for a three-year term at
an annual salary of $250,000. Each of Messrs. Kalishman and Affholder will also
enter into non-competition agreements with ITI, extending from the Effective
Time until the later of five years thereafter or two years after all service to
ITI has ended.
IMA Stock Options. At the Effective Time, all outstanding options to
acquire IMA Class A Common Stock under IMA's Stock Option Plan will be assumed
by ITI upon the same terms and conditions as contained under such plan, except
that each such option will be exercisable for that number of shares of ITI
Common Stock into which the number of shares of IMA Class A Common Stock subject
to such option immediately prior to the Effective Time would be convertible in
the Merger if such shares were outstanding at
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the Effective Time, and the exercise price per share will be calculated as more
fully described under "-- Basic Terms of Merger Agreement -- IMA Stock Options"
below.
Indemnification of Officers and Directors of IMA. Pursuant to the Merger
Agreement, from and after the Effective Time ITI will, to the extent permitted
by the Delaware law, honor all obligations of IMA pursuant to IMA's certificate
of incorporation, by-laws and agreements with certain directors, which provide
in various respects for indemnification of officers and directors of IMA with
respect to events occurring prior to the Effective Time.
Registration Rights. Pursuant to the Merger Agreement, ITI has entered
into a registration rights agreement with Mr. Affholder and Xanadu Investments,
L.P., pursuant to which ITI is, under certain circumstances, required to use its
reasonable best efforts to effect a registration under the Securities Act of
shares of ITI Common Stock held by such parties and their affiliates. See
"-- Registration Rights Agreement" below.
A-Y-K-E Equipment Agreement. The obligations of ITI and ITI Sub to
consummate the transactions contemplated by the Merger Agreement and to effect
the Merger are subject, among other conditions, to the modification, upon terms
reasonably satisfactory to ITI, of the tunneling equipment lease between IMA and
A-Y-K-E Partnership, a partnership of which Messrs. Kalishman and Affholder are
partners. Such arrangements cover equipment held by such partnership for lease
both to IMA and other parties, as available, and are currently terminable upon
30 days' notice by either such partnership or IMA. The modification of such
arrangements may entail (i) the purchase, at fair market value determined by an
independent appraiser qualified in such matters and reasonably satisfactory to
ITI, of such equipment, (ii) the long-term lease of such equipment, at fair
market rental rates determined by such an appraiser, which at the option of ITI
may be on a non-exclusive basis and from time to time, and terminable by IMA on
the same or substantially similar basis as is contained in the arrangements
currently in effect or (iii) certain other modifications of the arrangements
currently in effect.
Acceleration of Certain ITI Options. In connection with the acceptance of
employment as President and Chief Executive Officer of ITI by Mr. Richard, in
1993 ITI granted to Mr. Richard a five-year option to purchase up to 300,000
shares of ITI Common Stock, exercisable with respect to up to 50,000 shares upon
commencement of employment and with respect to the remainder of such shares on
the third anniversary thereof. At the Effective Time, however, in accordance
with its terms, such option will become exercisable with respect to all shares
covered thereby upon the election of a Board of Directors of ITI other than
pursuant to the arrangements entered into by ITI upon its acquisition in
December 1992 of Insituform Group Limited.
Ringwood Loan. On July 3, 1992, ITI restructured a loan previously made to
Ringwood Limited ("Ringwood"), a member of the Ringwood Group, comprised of
Ringwood, Parkwood Limited, as trustee of the Anthony Basmadjian "P" Settlement,
Barford Limited, as trustee of the Anthony Basmadjian Settlement, and Douglas K.
Chick and Brian Chandler, both directors of ITI. The outstanding loan, evidenced
by Ringwood's non-recourse promissory note in the principal amount of
$3,624,842.40 executed to ITI, is secured by 255,801 shares of ITI Common Stock
beneficially owned by Ringwood and Messrs. Chandler and Chick, and was
originally due July 3, 1995. On May 21, 1995, such loan was extended by one year
because legal restrictions prevented members of the Ringwood Group from selling
sufficient shares of ITI stock to be able to repay the loan, and the value of
such security was less than the amount of the outstanding indebtedness.
Consent of IMA's Bank Lenders. Under IMA's existing credit facilities, the
consent of The Boatmen's National Bank of St. Louis ("Boatmen's") and Mark Twain
Bank ("Mark Twain") will be required in connection with the Merger. Alvin J.
Siteman, an IMA director who has been designated to become a director of ITI at
the Effective Time, is the largest shareholder and Chairman of the Board of the
parent of Mark Twain. Lee M. Liberman, an IMA director, serves as a director of
the parent of Boatmen's. See "IMA -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" below for a description of IMA's current credit facilities and
"ITI -- Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources" below for a description of
additional facilities under discussion by ITI which would refinance IMA's
long-term indebtedness to such banks, in which such banks may participate.
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BASIC TERMS OF MERGER AGREEMENT
The Merger; Conversion Ratio. Pursuant to the terms of the Merger
Agreement, each share of IMA Class A Common Stock outstanding immediately prior
to the Effective Time will, by virtue of the Merger, be converted into the right
to receive 1.15 fully paid and non-assessable shares of ITI Common Stock;
provided that IMA Stockholders will receive cash in lieu of fractional shares of
ITI Common Stock as described in "-- Exchange Procedure; Treatment of Fractional
Shares" below. The market value of the shares of ITI Common Stock to be received
by IMA Stockholders is subject to fluctuation and, at the consummation of the
Merger, may be more or less than the current fair market value of such shares.
At the Effective Time, ITI Sub will be merged into and with IMA, the separate
corporate existence of ITI Sub will cease and IMA will continue as the surviving
corporation, as a wholly-owned subsidiary of ITI. From and after the Effective
Time, IMA, as the surviving corporation, will possess all the assets, rights,
privileges, immunities and franchises and be subject to all of the liabilities,
obligations and penalties of IMA and ITI Sub, as provided under Delaware law.
IMA Stock Options. At the Effective Time, all options to acquire IMA Class
A Common Stock which are outstanding at the Effective Time under IMA's Stock
Option Plan will be assumed by ITI upon the same terms and conditions as
contained under such plan, except that: (i) each such option will be exercisable
for that number of shares of ITI Common Stock (rounded to the nearest whole
share) into which the number of shares of IMA Class A Common Stock subject to
such option immediately prior to the Effective Time would be convertible in the
Merger if such shares were outstanding at the Effective Time, and (ii) the
option price per share of ITI Common Stock will be an amount obtained by
dividing (x) the exercise price per share in effect on such date times the
number of shares of IMA Class A Common Stock previously covered by such option,
by (y) the number of shares of ITI Common Stock covered by the option as so
assumed.
Effective Time of the Merger. The Merger Agreement provides that the
Merger will become effective at the time a certificate of merger is duly filed
with the Secretary of State of Delaware. The time at which the Merger will
become effective is referred to herein as the "Effective Time." Such filing,
together with all other filings or recordings required by Delaware law in
connection with the Merger, will be made within ten business days after the
approval by the stockholders of each of ITI and IMA of the Merger Agreement and
the satisfaction or, to the extent permitted under the Merger Agreement, waiver
of all conditions to the Merger contained in the Merger Agreement (except that
ITI may delay closing for up to 15 business days in order to effectuate the
restructurings referenced under "-- Restructuring Transactions" below).
Exchange Procedure; Treatment of Fractional Shares. Prior to the Effective
Time, ITI Sub will designate American Stock Transfer and Trust Company, or, at
its election a bank or trust company or similar entity, reasonably satisfactory
to IMA, which is authorized to act as the exchange agent in the Merger (the
"Exchange Agent"). As soon as possible after the Effective Time but no later
than 15 days after the Effective Time, the Exchange Agent will send a notice and
letter of transmittal to each record holder of IMA Class A Common Stock
outstanding immediately prior to the Effective Time, advising such record holder
of the terms of the exchange effected by the Merger and the procedure for
surrendering to the Exchange Agent such record holder's certificate(s)
evidencing IMA Class A Common Stock for exchange for shares of ITI Common Stock.
Upon surrender to the Exchange Agent of all of a record holder's certificate(s)
formerly representing IMA Class A Common Stock, together with a duly executed
letter of transmittal, the certificate(s) will be cancelled and such holder will
be entitled to receive in exchange therefor a certificate evidencing the number
of full shares of ITI Common Stock for which the IMA Class A Common Stock
theretofore represented by the certificate(s) so surrendered shall have been
exchanged.
No fractional shares of ITI Common Stock will be issued in the Merger. In
lieu of issuing certificates for fractional shares of ITI Common Stock, the
Exchange Agent will, on behalf of all holders of such fractional shares, on or
before the tenth day following the Effective Time, aggregate all such fractional
shares and sell the resulting shares of ITI Common Stock for the accounts of
such holders, and such holders will thereafter be entitled to receive, on a pro
rata basis, the net proceeds of the sale of such shares of ITI Common Stock,
without interest thereon, upon surrender of all such holders' certificates for
exchange.
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No dividend or other distribution payable to holders of record of ITI
Common Stock as of any date subsequent to the Effective Time will be paid to the
holders of outstanding certificates formerly representing IMA Class A Common
Stock until such certificates are so surrendered. All such dividends and
distributions will be accrued and paid, without interest, to the record holder
of the ITI Common Stock for which certificates are delivered, upon such
surrender.
Any holder of IMA Class A Common Stock, other than an officer or director
of IMA or holder of more than 5% of the IMA Class A Common Stock, may request
that certificates evidencing shares of ITI Common Stock to be issued or any cash
payment to be made upon surrender of IMA Class A Common Stock be issued or paid
in a name other than that in which the certificate is registered. If any
certificate evidencing shares of ITI Common Stock is to be issued in a name
other than that in which the certificate surrendered in exchange therefor is
registered or if any payment of cash is to be made to a person other than the
person in whose name such certificate is registered, the certificate so
surrendered must be properly endorsed and otherwise in proper form for transfer
and the person requesting the exchange must either (i) pay to the Exchange Agent
any transfer or other taxes required by reason of such issuance or (ii)
establish to the satisfaction of the Exchange Agent that such transfer or other
taxes have been paid or are not applicable.
Certain Covenants. IMA has agreed that, during the period prior to the
Effective Time (except to the extent that ITI shall otherwise agree in writing),
IMA will and will cause each of its subsidiaries to: (a) make no purchase, sale,
or lease in respect of, nor introduce any method of management or operation in
respect of, its business or its assets and properties, except in a manner
consistent with prior practice and as set forth in IMA's capital expenditure
budget provided to ITI, except as expressly permitted by the Merger Agreement;
(b) maintain, preserve, and in no way further encumber its assets and properties
other than in the ordinary course of business consistent with past practice, and
not enter into any agreement to effectuate the foregoing after the Effective
Time; (c) use its best efforts: (i) to preserve its present business
organization intact, (ii) to keep available the services of the present
employees assigned to it, and (iii) to preserve its present relationships with
entities or persons having business dealings with IMA or any of its
subsidiaries, in each case except as set forth in the Merger Agreement; (d)
maintain its books and records in accordance with good business practices, on a
basis consistent with prior practice; (e) comply in all material respects with
all laws, rules, regulations, writs, statutes, ordinance, judgments,
injunctions, decrees, determinations, awards, and other orders of every court,
government and governmental agency and instrumentality, domestic or foreign,
applicable to it and to the conduct of its business and perform in all material
respects all its obligations without default; (f) not incur, or agree to incur,
any indebtedness for money borrowed, except in the ordinary course of business
and, to the extent set forth in the Merger Agreement, under its existing line of
credit with Boatmen's and Mark Twain, or issue any bond, debenture, note, or
similar obligation, or any guarantee any obligation of any person or entity,
except for guarantees of construction performance bonds in the ordinary course
of business; (g) not mortgage, pledge, or subject to lien any of its assets and
properties, other than existing encumbrances; (h) not make any loans, advances
or contributions to, or investments in, or guarantees of, any other person
(other than as permitted by the Merger Agreement), and not acquire any shares of
ITI Common Stock; (i) maintain and pay all premiums with respect to all policies
of insurance relating to its business, and its assets and properties, as are
presently held in its name and timely renew all such policies or substitute
substantially similar coverage therefor; (j) except as permitted by the Merger
Agreement, not make any change adverse to it in any material respect in the
terms of any principal agreement (nor approve, amend or modify any agreement to
which an insider is a party); (k) not make any capital expenditure (including,
without limitation, expenditures for property, plant and equipment) or
appropriations or commitments with respect thereto, except to the extent of the
total dollar amount and, to the extent indicated therein, at the times set forth
in IMA's capital expenditure budget; (l) not acquire or agree to acquire by
merging or consolidating with, or by purchasing a substantial equity interest in
or substantial portion of the assets of, or by any other manner, any business or
any corporation, partnership, joint venture, association or other business
organization or division thereof or otherwise acquire or agree to acquire any
assets outside the ordinary course of business consistent with past practice,
except as permitted by the Merger Agreement; (m) not amend, modify, supplement,
or in any way change in any material respect any plan or arrangement established
for the benefit of its employees; (n) not enter into any license or sublicense
agreement or other arrangement conferring any rights to utilize any intellectual
property the rights to which are held by IMA or any subsidiary; (o) not settle
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or compromise any litigation involving the payment of, or an agreement to pay
over time an amount in cash, notes, or other property, except as permitted by
the Merger Agreement; (p) not pay, discharge or satisfy claims, liabilities or
obligations (absolute, accrued, contingent or otherwise and whether due or to
become due) which involve payments or commitments to make payments exceeding
$100,000 in the aggregate, other than (i) liabilities or obligations incurred in
the ordinary course of business and consistent with past practice, and (ii)
scheduled repayments of current portions of and interest on long term
indebtedness or repayments under existing revolving credit agreements; (q) not
take any action in furtherance of the utilization for commercial purposes of the
additional facilities planned for construction in Chesterfield, Missouri, nor
acquire nor install any equipment or machinery on any such property, nor take
any action in furtherance of any loan arrangements heretofore contemplated in
connection with such facilities, without the prior consent of ITI in each case,
it being understood that, without the consent of ITI, IMA will be permitted to
complete construction of such facility in accordance with the plans contemplated
by IMA's capital expenditure budget (without the contemplated tower and
manufacturing equipment) and IMA will be permitted to acquire (but not install)
manufacturing equipment which it has ordered; and (r) not take any action or
fail to take any action which would result in any breach of any of its
representations, warranties or covenants contained under the Merger Agreement.
In addition, IMA has agreed that, during the period prior to the Effective
Time (except to the extent that ITI shall otherwise agree in writing), it will
not and will cause each of its subsidiaries not to: (a) except as permitted
under the Merger Agreement, make or propose any change to their respective
certificates of incorporation or by-laws (or similar documents); or (b) except
as permitted under the Merger Agreement, issue, grant, sell or encumber any
shares of their capital stock, or any security, option, warrant, put, call,
subscription or other right of any kind, fixed or contingent, that directly or
indirectly calls for the acquisition, issuance, sale, pledge or other
disposition of any shares of capital stock or other equity interest, enter into
any agreement, commitment or understanding calling for any such transaction or
make any other changes in their equity capital structure; (c) split, combine or
reclassify any of its capital stock; (d) except for any payment of regular
semi-annual cash dividends at a rate not to exceed its present dividend rate,
declare, set aside or pay any dividend on or make any other distribution
(whether in cash, stock, securities, indebtedness, rights or property or any
combination thereof) in respect of any shares if its capital stock or other
equity interests, or redeem or otherwise acquire any shares of the capital stock
of IMA.
IMA has also agreed that none of IMA or any of its subsidiaries or their
respective officers, directors, employees, agents or representatives will,
directly or indirectly, initiate, solicit or encourage discussions, inquiries or
proposals or, participate in any negotiation or discussion, for the purpose of
or with the intention of leading to any proposal concerning any merger,
consolidation or other business combination involving IMA or any subsidiary of
IMA or any acquisition of any equity interest in or a material portion of the
assets of IMA or any subsidiary of IMA, taken as a whole, except for the Merger
Arrangement, unless the Board of Directors of IMA, based on the written opinion
of counsel, determines that the exercise of its fiduciary responsibilities
requires that such information be furnished or such negotiations be commenced.
ITI has agreed that during the period prior to the Effective Time (except
to the extent that IMA shall otherwise agree in writing), ITI will and will
cause each of its subsidiaries to: (a) make no purchase, sale, or lease in
respect of, nor introduce any method of management or operation in respect of,
its business or its assets and properties, except in a manner in all material
respects consistent with prior practice; (b) use its best efforts: (i) to
preserve its present business organization intact, and (ii) to preserve its
present relationships with entities or persons having business dealings with ITI
or any of its subsidiaries, in each case except insofar as permitted by the
Merger Agreement; (c) maintain its books and records in accordance with good
business practices, on a basis consistent with prior practice; and (d) maintain
in all material respects the current character of the business of ITI and its
subsidiaries, taken as a whole, except as expressly permitted under the Merger
Agreement and not enter into any agreement to effectuate the foregoing after the
Effective Time.
In addition, ITI has agreed that, prior to the Effective Time, except as
permitted by the Merger Agreement or to the extent IMA shall otherwise consent
in writing, it will not (i) issue, grant, sell or encumber any shares of its
capital stock, or any security, option, warrant, put, call, subscription or
other right of any kind, fixed or contingent, that directly or indirectly calls
for the acquisition, issuance, sale, pledge or
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other disposition of any shares of capital stock of ITI, enter into any
agreement, commitment or understanding calling for any such transaction or make
any other changes in its equity capital structure, except, in all such cases for
(A) issuances or grants of options to purchase shares of ITI Common Stock
pursuant to any option plan of ITI in effect or pursuant to any options or
warrants outstanding and (B) any transaction or transactions relating directly
or indirectly (through issuance, grant or sale of rights, warrants, options or
otherwise) to the issuance of up to an aggregate number of shares of ITI Common
Stock which would not, without reference to any transaction or transactions, or
issuance, prior to the date of the Merger Agreement, or any of the foregoing
permitted transactions, require the filing of a Report on Form 10-C under the
rules of the Commission, or (ii) split, combine or reclassify any shares of its
capital stock, declare, set aside or pay any dividend or other distribution
(whether in case, stock, securities, indebtedness, rights or property or any
combination thereof) in respect of any shares of its capital stock or other
equity interests, or redeem or otherwise acquire any shares of its capital stock
or other equity interests.
Restructuring Transactions. IMA has agreed that, following the receipt of
approvals by the ITI Stockholders and the IMA Stockholders of the Merger
Agreement and the transactions contemplated thereby, IMA will effect such
restructurings of IMA's subsidiaries and transfers of the assets and liabilities
of IMA and its subsidiaries that are requested by ITI. ITI has agreed to
indemnify IMA and its subsidiaries against any out-of-pocket costs and tax
liabilities arising out of any such restructurings and transfers in the event
that the Merger and the other transactions contemplated by the Merger Agreement
are not consummated.
Representations and Warranties. ITI and IMA have made a number of
representations and warranties to one another. IMA has made representations and
warranties to ITI concerning, among other things, organization, good standing
and qualification to do business, corporate power and authority, conflicts,
capitalization, subsidiaries, securities filings, financial statements, absence
of undisclosed liabilities, absence of material adverse effects,
pooling-of-interests accounting treatment, taxes, title, property, contracts,
employee compensation and benefits, labor relations, insurance, intellectual
property and technology, disputes and litigation, environmental matters,
interest of insiders, supplies and inventory, licenses and franchises. ITI has
made representations and warranties to IMA concerning, among other things,
organization, good standing and qualification to do business, conflicts,
capitalization, corporate power and authority, financial statements, securities
filings, absence of undisclosed liabilities, absence of material adverse
effects, disputes and litigation, interests of insiders and pooling-of-interests
accounting treatment.
Conditions to Consummation of the Merger. The respective obligations of
each of ITI, ITI Sub and IMA to consummate the transactions contemplated by the
Merger Agreement and to effect the Merger are subject to the satisfaction or
waiver, if permissible by law, at or prior to the Effective Time of the
following conditions: (a) the waiting period applicable to the consummation of
the transactions contemplated by the Merger Agreement required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 shall have expired or been
terminated (see "-- Government and Regulatory Matters" below for information
concerning early termination of such period on June 26, 1995); (b) the Merger
Agreement, the Merger and the transactions contemplated therein shall have been
duly approved and adopted by the requisite vote of the respective stockholders
of ITI and IMA in accordance with applicable law and the rules promulgated by
the National Association of Securities Dealers, Inc.; (c) the proposed
Capitalization Amendment and the proposed Board Vacancy Amendment, which are
contemplated by the Merger Agreement, shall have been approved by the requisite
vote of ITI Stockholders entitled to vote thereon and duly filed in accordance
with the requirements of Delaware law; (d) the amendments to ITI's By-Laws as
contemplated in the Merger Agreement shall have been adopted by the Board of
Directors of ITI; (e) the registration statement filed with the Commission with
respect to shares of ITI Common Stock to be issued in the Merger shall be
effective as of the date (the "Closing Date") of the closing (the "Closing") of
the transactions contemplated by the Merger Agreement and as of the Effective
Time, and no stop order suspending the effectiveness of the registration
statement or similar restraining order shall have been threatened or initiated
by the Commission or any state or foreign securities administrator; (f) ITI
shall have received an opinion from BDO Seidman, LLP, dated the Closing Date, in
form and substance reasonably satisfactory to ITI and to IMA, to the effect that
the transactions contemplated by the Merger Agreement and the Merger will
qualify for pooling-of-interests
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accounting treatment under generally accepted accounting principles; (g) at or
prior to the Effective Time, all of the shares of IMA Class B Common Stock
issued and outstanding immediately prior to the Effective Time shall have been
converted into shares of IMA Class A Common Stock on a share-for-share basis in
accordance with IMA's Certificate of Incorporation, as currently in effect; (h)
no order, stay, judgment, injunction or decree shall have been issued and be in
effect by any court restraining or prohibiting the consummation of the
transactions contemplated in the Merger Agreement and no statute, rule or
regulation shall have been promulgated or enacted by any foreign or United
States federal or state government, governmental authority or governmental
agency, which would prevent or make illegal the consummation of the transactions
contemplated in the Merger Agreement including the Merger; (i) IMA shall have
received from counsel to IMA, an opinion, dated the Closing Date, in form and
substance reasonably satisfactory to IMA and to ITI and its counsel, to the
effect that the Merger will be treated for federal income tax purposes as a
reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of
the Internal Revenue Code of 1986, as amended (the "Code"), and that ITI, ITI
Sub and IMA will each be a party to that reorganization within the meaning of
Section 368(b) of the Code; and (j) ITI's Board of Directors and its offices
shall have been expanded and filled, respectively, as set forth under the Merger
Agreement.
The obligations of ITI and ITI Sub to consummate the transaction
contemplated by the Merger Agreement and to effectuate the Merger are also
subject to the satisfaction or waiver, if permissible by law, of certain
conditions, including the following: (a) the representations and warranties of
IMA contained in the Merger Agreement shall be true and correct in all material
respects at and as of the Closing Date with the same effect as through all such
representations and warranties were made at and as of the Closing Date, and IMA
shall have complied with all of its covenants contained in the Merger Agreement
in all material respects; (b) ITI shall have received assurances, reasonably
satisfactory to it, that at and after the Effective Time, and except as
permitted by the Merger Agreement, there shall not exist any security, option,
warrant, right, put, call, subscription, agreement, commitment, understanding or
claim of any kind, fixed or contingent, that directly or indirectly calls for
IMA or any of its subsidiaries to acquire, issue, deliver or sell, or to cause
to be acquired, issued, delivered or sold, any shares of the capital stock of or
equity interest in IMA or any subsidiary or obligating IMA or any subsidiary to
grant, extend or enter into any of the foregoing; (c) the holders of not more
than 5% of the outstanding shares of IMA Class A Common Stock shall, at the
Closing Date, be entitled to demand payment of the fair value of their shares as
dissenting shareholders (see "Information Concerning the Meetings -- Dissenters'
Rights" above for a discussion of the absence of such rights in the Merger under
applicable Delaware law); (d) all notices to, and declarations, filings and
registrations with, and consents, authorizations, approvals and waivers from,
governmental and regulatory bodies required to consummate the transactions
contemplated by the Merger Agreement shall have been made or obtained, and all
other notices, consents or waivers with respect to the transactions contemplated
by the Merger Agreement shall have been made or obtained; (e) ITI shall have
received the resignations of all such officers and directors of IMA and each
subsidiary of IMA requested by it; and (f) no action, suit or proceeding against
any party hereto relating to the consummation of any of the transactions
contemplated in the Merger Agreement or any governmental action seeking to delay
or enjoin any such transactions shall be pending or threatened and no
investigation by any governmental or regulatory body shall have been commenced
(and be pending), seeking to restrain or prohibit (or questioning the validity
or legality of) the consummation of the transactions contemplated by the Merger
Agreement, including the Merger, or seeking material damages in connection
therewith which ITI, in good faith and with the advice of ITI's counsel,
reasonably believes makes it undesirable to proceed with the consummation of the
transactions contemplated by the Merger Agreement. See also "-- Interests of
Certain Persons in the Merger and Related Transactions" above for a discussion
of the agreements intended with, respectively, Messrs. Kalishman and Affholder
and the treatment of certain equipment owned by a partnership of such persons.
The obligations of IMA to consummate the transactions contemplated by the
Merger Agreement and to effectuate the Merger are also subject to the
satisfaction or waiver, if permissible by law, of certain conditions, including
the following: (a) the representations and warranties of ITI and ITI Sub
contained in the Merger Agreement shall be true and correct in all material
respects at and as of the Closing Date with the same effect as though all such
representations and warranties were made at and as of the Closing Date, and ITI
and ITI Sub shall have complied with their respective covenants contained under
the Merger Agreement in all
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material respects; and (b) no action, suit or proceeding against any current
director of IMA relating to the consummation of any of the transactions
contemplated in the Merger Agreement, and seeking material damages in connection
therewith, shall be pending or threatened which IMA, in good faith and with the
advice of IMA's counsel, reasonably believes makes it undesirable to proceed
with the consummation of the transactions contemplated by the Merger Agreement.
See "-- Interests of Certain Persons in the Merger and Related Transactions"
above for a discussion of the agreements intended with, respectively, Messrs.
Kalishman and Affholder and certain director indemnification arrangements.
Amendments. At any time prior to the Effective Time, the parties may, by
written agreement, make any modification or amendment of the Merger Agreement
approved by their respective boards of directors; provided, that, the Conversion
Ratio may not be amended or modified without the approval of holders of the IMA
Class A Common Stock at any time after such holders have approved the Merger
Agreement, and any such amendments will conform to the requirements of Delaware
law.
Termination. The Merger Agreement may be terminated and the Merger
abandoned at any time prior to the Effective Time, whether prior to or after
approval by the stockholders of either IMA or ITI, by the consent of the parties
thereto, or by either IMA or ITI if: (i) the other party shall have breached in
any material respect any of its representations or warranties contained in the
Merger Agreement; (ii) any such representation or warranty shall not be correct
or accurate in all material respects at and as of the Closing Date with the same
effect as if made at such time; (iii) the other party shall have failed to
comply in all material respects with any of its covenants or agreements
contained in the Merger Agreement to be complied with or performed by it at or
prior to the Closing Date; (iv) at the stockholders meeting (including any
adjournment or postponement thereof) of the other party, or any successor
meeting called for the same purpose, the requisite affirmative approval of the
stockholders of the other party shall not have been obtained; (v) if a permanent
injunction is entered, enforced or deemed applicable to the Merger Agreement
which prohibits the consummation of the transactions contemplated thereby and
all appeals of such injunction shall have been taken and shall have been
unsuccessful; (vi) if any governmental entity, the consent of which is a
condition to the obligation of such party to consummate the transactions
contemplated thereby, shall have determined not to grant its consent and all
appeal of such determination shall have been taken and shall have been
unsuccessful; or (vii) the Closing shall not have occurred on or prior to
January 31, 1996.
Cooperation Agreement. The Merger Agreement, as supplemented by a letter
agreement dated May 23, 1995 (the "Litigation Agreement") between ITI and IMA,
continues the moratorium on further assertion of any rights in dispute as a
result of the consummation of the Enviroq Acquisition by IMA without consent of
ITI, except for certain procedural steps to preserve the respective rights of
the parties. See "-- Background" above. Under the Litigation Agreement, the
parties to the Declaratory Action submitted a joint motion seeking to stay all
proceedings until January 31, 1996 or the earlier termination of the Merger
Agreement. The motion was granted by order dated July 5, 1995.
MANAGEMENT OF ITI FOLLOWING CONSUMMATION OF THE MERGER
If the Merger Agreement, and the transactions contemplated thereby, are
approved by the ITI Stockholders and the conditions to the parties' obligations
under the Merger Agreement are satisfied or waived, ITI has agreed that its
Board of Directors will be expanded as of the Effective Time to include the
following persons: William Gorham, Alvin J. Siteman, Silas Spengler and Sheldon
Weinig, for a term expiring at the 1996 Annual Meeting of Stockholders of ITI
("Merger Class I Directors"); Robert W. Affholder, Paul A. Biddelman, Douglas K.
Chick and Steven Roth, for a term expiring at the 1997 Annual Meeting of
Stockholders of ITI ("Merger Class II Directors"); and Brian Chandler, Jerome
Kalishman, James D. Krugman, Jean-Paul Richard and Russell B. Wight, Jr., for a
term expiring at the 1998 Annual Meeting of Stockholders of ITI ("Merger Class
III Directors"). Other than Mr. Richard, the directors are grouped as follows:
(i) Messrs. Biddelman, Chandler, Chick, Krugman and Spengler constitute the "INA
Group;" (ii) Messrs. Gorham, Roth, Weinig and Wight constitute the "IGL Group;"
and (iii) Messrs. Affholder, Kalishman and Siteman constitute the "IMA Group."
The INA Group and the IGL Group, together with Mr. Richard, comprise the current
Board of Directors of ITI, and the IMA Group has been designated for appointment
by IMA. ITI has further agreed that, during the Term, ITI will nominate and
recommend for re-election to the ITI Board of Directors, upon expiration of
their terms, the Merger Class I Directors, the
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Merger Class II Directors and the Merger Class III Directors. If, during the
Term, any director resigns or is unable to serve for any reason, such vacancy
will be filled with a designee chosen by the remaining members of that
director's group and thereafter ITI will nominate and recommend such designee
for election to the Board of Directors of ITI.
At the Effective Time, ITI will enter into an agreement with Mr. Kalishman,
under which he will serve as Vice Chairman of ITI during the Term, and will also
enter into a three-year employment agreement with Mr. Affholder, under which he
will initially serve as chief operating officer for ITI's North American
contracting operations. See "-- Interests of Certain Persons in the Merger"
above.
RESALES OF ITI COMMON STOCK
The shares of ITI Common Stock to be issued to IMA Stockholders in
connection with the Merger may be traded freely and without restriction by those
IMA Stockholders who are not deemed to be "affiliates" of either IMA or ITI
within the meaning of Rule 145 promulgated under the Securities Act ("Rule
145"). Persons who may be deemed to be affiliates of IMA generally include
individuals or entities that control or are controlled by, or are under common
control with IMA and may include certain officers and directors of IMA, as well
as principal IMA Stockholders. Affiliates may resell shares of ITI Common Stock
only in transactions permitted by Rule 145, pursuant to an effective
registration statement under the Securities Act or in transactions otherwise
exempt from registration. This Joint Proxy Statement/Prospectus does not cover
resales of ITI Common Stock received by any person who may be deemed an
affiliate of IMA. IMA has caused to be delivered to ITI a written agreement in
the form included as Exhibit J to the Merger Agreement attached hereto as Annex
A (a "Rule 145 Letter") from each person who may be deemed to be an affiliate to
the effect that no disposition of ITI Common Stock received pursuant to the
Merger Agreement will be made except in accordance with applicable provisions of
the Securities Act and the rules and regulation promulgated thereunder. The
certificates evidencing the shares of ITI Common Stock received by such persons
who may be deemed affiliates of IMA pursuant to the Merger Agreement will bear a
legend setting forth such restrictions.
REGISTRATION RIGHTS AGREEMENT
ITI has entered into a Registration Rights Agreement dated as of September
1, 1995 (the "Registration Rights Agreement"), with Robert W. Affholder and
Xanadu Investments, L.P. (the "Registration Rights Stockholders"). Mr. Affholder
and Xanadu Investments, L.P. represent all parties known to ITI and IMA who may
be deemed affiliates and who would be unable to dispose of all of their shares
of ITI Common Stock issued in connection with the Merger within the volume
limitations of Rule 144 promulgated under the Securities Act. The Registration
Rights Agreement will become effective on the date of the first publication of
operating results of ITI covering at least a 30-day period after the Effective
Time and all registration rights granted pursuant to the Registration Rights
Agreement will terminate on December 9, 1998.
The Registration Rights Agreement provides that any Registration Rights
Stockholder may make a written request for registration under the Securities Act
(a "Demand Registration") of all or part, but no less than 500,000, of the
shares of ITI Common Stock owned beneficially by it or by its affiliates (the
"Registrable Securities"). However, ITI shall not be obligated (i) to effect
more than one Demand Registration for each Registration Rights Stockholder and
its affiliates unless ITI qualifies and is entitled to use a registration
statement on Form S-3, in which case each Registration Rights Stockholder shall
be entitled to a total of three Demand Registrations, (ii) to effect a Demand
Registration for fewer than 500,000 shares of ITI Common Stock, (iii) to effect
a Demand Registration if such written request is given after December 9, 1998,
(iv) to effect a Demand Registration for any Registrable Securities if, in the
written opinion of counsel to ITI, such Registrable Securities could, within
three months of the date of a Registration Rights Stockholder's request, be
publicly offered and sold without registration under the Securities Act, (v) to
effect a Demand Registration if a Demand Registration has been effectuated
within the prior six months, (vi) to effect a Demand Registration during the
period commencing on the date of delivery of the Incidental Registration Notice
(as defined in the Registration Rights Agreement) and ending on the earlier of
the 20th day after the effectiveness of the registration statement with respect
to which such Incidental Registration Notice relates or the date ITI abandons
plans to pursue the registration contemplated by such registration statement or
(vii) to effect a
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<PAGE> 55
Demand Registration during a period in which ITI would be required to undertake
an audit in order to have available for inclusion in the registration statement
current financial statements as required in accordance with the Securities Act,
unless the Registration Rights Stockholder undertakes to bear the costs of such
audit.
In addition, if ITI proposes to file a registration statement relating to
an underwritten public offering of shares of ITI Common Stock to be offered for
its own account or for the account of others and if the managing underwriter for
such proposed offering advises ITI that the inclusion of some or all of the
Registrable Securities in such registration statement would not interfere with
the successful marketing of ITI Common Stock for the account of ITI in such
offering, ITI shall provide written notice of the proposed offering to the
Registration Rights Stockholders, setting forth a description of the intended
method of distribution and use its reasonable best efforts (subject to any
limits as may have been set by ITI's Board of Directors or the managing
underwriters on the number of Registrable Securities which may be included in
the offering) to register pursuant to such registration statement (an
"Incidental Registration") such number of Registrable Securities requested by
such Registration Rights Stockholder. ITI shall not be obligated to effect an
Incidental Registration for any Registrable Securities if, in the written
opinion of counsel to ITI, such Registrable Securities could, within three
months of the date of a Registration Rights Stockholder's request, be publicly
offered and sold without registration under the Securities Act.
In connection with the registration of any Registrable Securities, ITI will
pay all out-of-pocket expenses of ITI incurred as a result of such registration,
including Commission filing fees, fees and expenses incurred complying with the
securities or Blue Sky laws, printing expenses, fees and expenses of counsel and
independent certified public accountants for ITI and any reasonable fees and
expenses of any additional experts retained by ITI in connection with such
registration, as well as internal ITI expenses. Each participating Registration
Rights Stockholder will pay any underwriting fees, discounts or commissions
attributable to the sale of such Registration Rights Stockholder's Registrable
Securities, and any out-of-pocket expenses of such Registration Rights
Stockholder, including its counsel's fees and expenses. ITI has also agreed to
indemnify each Registration Rights Stockholder and certain other persons for
certain liabilities arising under the Securities Act, or to contribute to
payments such persons may be required to make in respect thereof in connection
with any such registration statement.
POOLING LETTERS
In connection with the Merger Agreement, ITI and IMA have entered into
additional agreements, each dated May 23, 1995, a form of which is included as
Exhibit B to the Merger Agreement attached hereto as Annex A (the "Pooling
Letter Agreements"), with (i) Interstate Properties and its partners, Steven
Roth, Russell B. Wight, Jr. and David Mandelbaum, and Douglas K. Chick, Brian
Chandler, Ringwood Limited, Barford Limited and Parkwood Limited, constituting
the largest stockholders of ITI; (ii) each other director and executive officer
of ITI; (iii) Jerome and Nancy F. Kalishman, individually and as trustees and/or
tenants by the entirety, Xanadu Investments, L.P. and Robert W. Affholder,
constituting the largest stockholders of IMA; and (iv) each other director and
executive officer of IMA. Pursuant to the Pooling Letter Agreements, and subject
to specified exceptions, such persons have agreed, among other things, not to
transfer or dispose of any shares of ITI Common Stock, IMA Class A Common Stock
or IMA Class B Common Stock owned by them, respectively, until the earlier of:
(x) the termination of the Merger Agreement or (y) the date of the first
publication of the operating results of ITI covering at least a 30-day period
after the Merger has been consummated.
In connection with execution of Pooling Letter Agreements by Interstate and
its partners, ITI and IMA confirmed that such agreements would not remain in
effect if the Merger did not occur on or prior to January 31, 1996, and ITI
committed that, at the request of Interstate, it will use its best efforts to
publish at the earliest practicable date following the Effective Time the
operating results of ITI covering the first full calendar month after the Merger
is consummated, consistent with the release by ITI of year-end results.
CONVERSION LETTERS
In connection with the Merger Agreement, ITI and IMA have entered into
agreements, each dated May 23, 1995, a form of which is included as Exhibit G to
the Merger Agreement attached hereto as Annex A (the "Conversion Letter
Agreements"), with each of Robert W. Affholder, James Kalishman, John
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<PAGE> 56
Kalishman, Susan Kalishman, Thomas Kalishman and Xanadu Investments, L.P.,
constituting the holders of all of the outstanding shares of IMA Class B Common
Stock. Pursuant to the Conversion Letter Agreements, such persons have agreed to
convert, immediately prior to the consummation of the transactions contemplated
by the Merger Agreement, each outstanding share of IMA Class B Common Stock
beneficially owned by them, respectively, into one share of IMA Class A Common
Stock in accordance with the terms of the IMA Class B Common Stock.
GOVERNMENTAL AND REGULATORY MATTERS
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), requires parties to proposed business combinations exceeding a
certain size to file Notification and Report Forms with respect to such business
combinations. Accordingly, on June 16, 1995, both ITI and IMA filed Notification
and Report Forms with respect to the Merger with the Antitrust Division of the
Department of Justice (the "Antitrust Division") and the Federal Trade
Commission (the "FTC") for review pursuant to the HSR Act. Effective June 26,
1995, the FTC confirmed early termination of the waiting period applicable to
the Merger under the HSR Act. Neither ITI nor IMA believes that the Merger will
violate in any respect the antitrust laws of the United States; however, at any
time before or after the consummation of the Merger, the Antitrust Division or
the FTC or another person could seek to enjoin or restrain the Merger on
antitrust or other grounds. There can be no assurance that such challenge, or
any additional challenge, if made, will not be successful.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion has been prepared by Thompson & Mitchell, counsel
to IMA ("IMA Counsel"), and, except as otherwise indicated, summarizes IMA
Counsel's opinion. The discussion is a general summary of the material federal
income tax consequences of the Merger to certain IMA Stockholders and does not
purport to be a complete analysis or listing of all potential tax considerations
or consequences relevant to a decision whether to vote for the approval of the
Merger Agreement and the transactions contemplated thereby. The discussion does
not address all aspects of federal income taxation that may be applicable to IMA
Stockholders subject to special federal income tax treatment including (without
limitation) foreign persons, insurance companies, tax-exempt entities,
retirement plans, dealers in securities and persons who acquired their IMA Class
A Common Stock pursuant to the exercise of employee stock options or otherwise
as compensation. The discussion addresses neither the effect of any applicable
state, local or foreign tax laws, nor the effect of any federal tax laws other
than those pertaining to the federal income tax. IN VIEW OF THE INDIVIDUAL
NATURE OF FEDERAL INCOME TAX CONSEQUENCES, IMA STOCKHOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE MERGER
TO THEM.
The discussion is based on the Internal Revenue Code of 1986, as amended,
regulations proposed or promulgated thereunder, and administrative
interpretations and judicial precedents relating thereto, all of which are
subject to change. Any such change, which may or may not be retroactive, could
alter the tax consequences discussed herein. The discussion is also based on
certain assumptions regarding the factual circumstances that will exist at the
Effective Time of the Merger, including certain representations of ITI, IMA, and
certain stockholders of IMA. If any of these factual assumptions is inaccurate,
the tax consequences of the Merger could differ from those described herein. The
discussion assumes that the shares of IMA Class A Common Stock are held as
capital assets (within the meaning of Section 1221 of the Code) at the Effective
Time.
Assuming the Merger occurs in accordance with the Merger Agreement, the
Merger will constitute a "reorganization" for federal income tax purposes under
Section 368(a)(1)(A) of the Code, by reason of the application of Section
368(a)(2)(E) of the Code, with the following federal income tax consequences:
(1) IMA Stockholders will recognize no gain or loss as a result of the
exchange of their IMA Class A Common Stock solely for shares of ITI Common
Stock pursuant to the Merger, except with respect to cash received in lieu
of fractional shares, if any, as described in paragraph (4) below.
(2) The aggregate adjusted tax basis of the shares of ITI Common Stock
received by each IMA Stockholder in the Merger (including any fractional
share of ITI Common Stock deemed to be received,
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<PAGE> 57
as described in paragraph 4 below) will be equal to the aggregate adjusted
tax basis of the shares of IMA Class A Common Stock surrendered.
(3) The holding period of the shares of ITI Common Stock received by
each IMA Stockholder in the Merger (including any fractional share of ITI
Common Stock deemed to be received, as described in paragraph 4 below) will
include the holding period of the shares of IMA Class A Common Stock
exchanged therefor.
(4) An IMA Stockholder who receives cash in the Merger in lieu of a
fractional share of ITI Common Stock will be treated as if the fractional
share had been received by such stockholder in the Merger and then redeemed
by ITI in return for the cash. The receipt of such cash will cause the
recipient to recognize capital gain or loss equal to the difference between
the amount of cash received and the portion of such holder's adjusted tax
basis in the shares of ITI Common Stock allocable to the fractional share.
IMA has received from IMA Counsel an opinion to the effect that the Merger
will be a "reorganization" for federal income tax purposes under Section
368(a)(1)(A) of the Code, by reason of Section 368(a)(2)(E) of the Code, and
that the other federal income tax consequences of the Merger are in all material
respects as described in this section. Such opinion is subject to the conditions
and assumptions stated therein and also relies on various representations made
by ITI, IMA, and certain stockholders of IMA. Copies of the opinion are
available, without charge, to IMA Stockholders upon written request to Joseph F.
Olson, Vice President -- Finance and Administration, Insituform Mid-America,
Inc., 17988 Edison Avenue, Chesterfield, Missouri 63005. An opinion of counsel,
unlike a private letter ruling from the Internal Revenue Service (the
"Service"), has no binding effect on the Service. The Service could take a
position contrary to IMA Counsel's opinion and, if the matter were litigated, a
court may reach a decision contrary to the opinion. The Service is not expected
to issue a ruling on the tax consequences of the Merger, and no such ruling is
being requested.
It is a condition to the obligations of ITI, ITI Sub and IMA to consummate
the Merger that the foregoing opinion be confirmed in writing to IMA as of the
Closing Date. See "-- Basic Terms of Merger Agreement -- Conditions to
Consummation of the Merger" above.
THE FOREGOING IS A GENERAL DISCUSSION OF THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER TO CERTAIN IMA STOCKHOLDERS AND IS INCLUDED FOR
GENERAL INFORMATION ONLY. THE FOREGOING DISCUSSION DOES NOT TAKE INTO ACCOUNT
THE PARTICULAR FACTS AND CIRCUMSTANCES OF EACH IMA STOCKHOLDER'S TAX STATUS AND
ATTRIBUTES. AS A RESULT, THE FEDERAL INCOME TAX CONSEQUENCES ADDRESSED IN THE
FOREGOING DISCUSSION MAY NOT APPLY TO EACH IMA STOCKHOLDER. IN VIEW OF THE
INDIVIDUAL NATURE OF INCOME TAX CONSEQUENCES, EACH IMA STOCKHOLDER SHOULD
CONSULT HIS OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE
MERGER TO SUCH STOCKHOLDER, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL,
STATE, LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
AND OTHER TAX LAWS.
ACCOUNTING TREATMENT
It is a condition to the obligations of ITI, ITI Sub and IMA to effect the
Merger that ITI has received an opinion from BDO Seidman, LLP, in form and
substance reasonably satisfactory to ITI and IMA, stating that the transactions
contemplated by the Merger Agreement will qualify for pooling-of-interests
accounting treatment under generally accepted accounting principles. See
"-- Basic Terms of Merger Agreement -- Conditions to Consummation of the Merger"
above. BDO Seidman, LLP has advised ITI and IMA that the Merger would not
qualify for pooling-of-interests treatment in accordance with generally accepted
accounting principles if, among other things (i) IMA Class B Common Stock is not
converted into IMA Class A Common Stock on a share for share basis prior to the
Effective Time without the payment of a premium and (ii) ITI Common Stock is
exchanged for less than 90% of the outstanding IMA Class A Common Stock.
Although certain transactions could have the effect of shares of IMA Class A
Common Stock being deemed
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not to be exchanged for ITI Common Stock or could violate requirements for the
use of pooling-of-interests accounting treatment (e.g., sales of shares by
directors or executive officers of ITI or IMA, see "-- Pooling Letters" above),
ITI and IMA are not aware of any such transaction. The Merger Agreement provides
as a condition to ITI's obligations to consummate the Merger that the holders of
not more than 5% of the outstanding shares of IMA Class A Common Stock shall be
entitled to demand payment of the fair value of their shares. See "Information
Concerning Meetings -- Dissenters' Rights" for a discussion of the absence of
such rights in the Merger under applicable Delaware law.
The pooling-of-interests method of accounting is intended to present as a
single interest two or more common stockholder interests which were previously
independent. The pooling-of-interests method of accounting assumes that the
combining companies have been combined from their inception. Consequently, the
historic financial statements for periods prior to the consummation of the
combination are restated as though the companies had been combined. The restated
financial statements are adjusted to conform the accounting policies of IMA with
those of ITI. See "Unaudited Pro Forma Combined Condensed Financial Information"
below.
EXPENSES
IMA, ITI and ITI Sub have agreed that, whether or not the Merger is
effected, all costs and expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby will be paid by the party
incurring such costs and expenses, except that ITI has agreed to reimburse IMA
for certain expenses incurred by IMA in connection with certain corporate
restructurings requested by ITI if the Merger is not consummated. See "-- Terms
of Merger Agreement -- Restructuring Transactions" above.
THE CAPITALIZATION AMENDMENT
In connection with its approval of the Merger Agreement, and the
transactions contemplated by the Merger Agreement, the Board of Directors of ITI
also has approved an amendment to Article FOURTH of the ITI Charter to provide
for an increase in the number of authorized shares of ITI Common Stock from
25,000,000 shares to 40,000,000 shares. Approval of the proposed Capitalization
Amendment, which will become effective upon consummation of the Merger, is a
condition to the obligations of ITI, ITI Sub and IMA to consummate the Merger.
The following summary description of the proposed Capitalization Amendment
is not intended to be complete and is qualified in its entirety by reference to
the complete text of the proposed Capitalization Amendment attached to this
Joint Proxy Statement/Prospectus as Annex D.
ITI is presently authorized to issue 27,000,000 shares of capital stock, of
which 25,000,000 shares are ITI Common Stock and 2,000,000 shares are preferred
stock, $.10 par value ("ITI Preferred Stock"). At the close of business on
August 30, 1995, there were outstanding 14,609,804 shares of ITI Common Stock.
No shares of Preferred Stock were outstanding on such date. An additional
2,314,443 shares of ITI Common Stock were reserved for possible future issuance
upon exercise of outstanding stock options and warrants and options that may be
granted under ITI's existing stock option plans. Further, it is anticipated
that, based on the number of shares of IMA Class A Common Stock and IMA Class B
Common Stock outstanding on September 1, 1995, 12,423,781 shares of ITI Common
Stock will be issued to IMA Stockholders in connection with the Merger and,
based on the number of shares covered by stock options granted by IMA and
outstanding on such date, and options that IMA is permitted to grant under the
Merger Agreement, up to an additional 490,457 shares of ITI Common Stock will be
reserved for issuance upon exercise of stock options granted by IMA and assumed
by ITI in connection with the Merger. Holders of capital stock of ITI do not
have any preemptive rights to subscribe for or purchase any shares of capital
stock of ITI.
The proposed amendment to Article FOURTH of the ITI Charter will increase
the number of authorized shares of capital stock to 42,000,000, of which
40,000,000 shares will be ITI Common Stock and 2,000,000 shares will be ITI
Preferred Stock. Thus, the proposed Capitalization Amendment will increase the
authorized number of shares of ITI Common Stock from 25,000,000 shares to
40,000,000 shares. The authorized number of shares of ITI Preferred Stock will
remain unchanged. The proposed Capitalization Amendment will not
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change any other aspect of Article FOURTH of the ITI Charter. Approval of the
proposed Capitalization Amendment will not of itself cause any change in the
capital stock account or surplus account of ITI.
The primary purpose of the proposed Capitalization Amendment is to
authorize the additional shares of ITI Common Stock necessary to effectuate the
Merger and the exercise following the consummation of the Merger of options and
warrants with respect to ITI Common Stock. If the proposed amendment is
approved, any or all of the remaining part of the authorized but unissued shares
of ITI Common Stock may thereafter be issued for such purposes and on such
conditions as the Board of Directors of ITI may determine, without further
approval by the ITI Stockholders, unless the issuance is in connection with a
transaction for which stockholder approval is otherwise required under
applicable law or the rules of The Nasdaq Stock Market.
Although, except for the Merger, the transactions contemplated by the
Merger Agreement and ITI's existing option and warrant arrangements, no
commitments have been made, and no particular transactions are pending or
intended, with respect to the issuance of any of the additional shares which
will be authorized by the amendment to Article FOURTH of the ITI Charter, ITI
continuously evaluates, explores and has discussions with respect to future
potential acquisitions which may involve the issuance of the additional shares.
The additional shares may also be used for any issuance in connection with
future financings, employee benefit plans or other corporate purposes. See
"ITI -- Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources" below for information
concerning financing alternatives that may be considered by ITI in connection
with plans for the expansion of its business following completion of the Merger
and for general corporate purposes.
The overall effect of an issuance of additional shares of ITI Common Stock
may be to render more difficult the accomplishment of any attempted takeover or
other change in control affecting ITI and/or the removal of ITI's Board of
Directors and management. ITI has not proposed the Capitalization Amendment as
an anti-takeover measure, nor is the proposal to amend the ITI Charter to
increase the number of authorized shares of ITI Common Stock being made in
response to any specific efforts known to management of ITI to obtain control or
accumulate the securities of ITI. ITI's management has no knowledge of any such
specific efforts.
The affirmative vote of holders of a majority of the outstanding shares of
ITI Common Stock is required to approve the proposed Capitalization Amendment.
The Board of Directors of ITI believes that the proposed Capitalization
Amendment is in the best interests of ITI and the ITI Stockholders and
recommends that the ITI Stockholders vote FOR approval of the proposed
Capitalization Amendment. Because consummation of the Merger is subject to
approval of the proposed Capitalization Amendment, if the Capitalization
Amendment is not approved by the requisite vote of the ITI Stockholders, the
Merger, notwithstanding approval of the Merger Agreement by the ITI
Stockholders, will not be effected. In addition, if the Merger is not
consummated for any reason, the Capitalization Amendment will be null and void.
THE BOARD VACANCY AMENDMENT
In connection with approval of the Merger Agreement, and the transactions
contemplated by the Merger Agreement, the Board of Directors of ITI has also
approved an amendment to Article SIXTH of the ITI Charter to provide for the
filling of vacancies on the Board of Directors of ITI as contemplated by Section
7.3 of the Merger Agreement, to become effective at the Effective Time. Approval
of the Board Vacancy Amendment is a condition to the obligations of ITI, ITI Sub
and IMA to consummate the Merger.
Pursuant to the Merger Agreement, ITI has agreed that, during the period
from the Effective Time until December 9, 1998, if any director resigns or is
unable to serve for any reason such vacancy will be filled with a designee
chosen by the remaining members of that director's group, and thereafter ITI
will nominate and recommend such designee for election to the ITI Board of
Directors until the end of the Term. The proposed Board Vacancy Amendment
implements these provisions of the Merger Agreement. The foregoing summary
description of the proposed Board Vacancy Amendment is not intended to be
complete and is qualified in its
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entirety by reference to the complete text of the proposed Board Vacancy
Amendment attached to this Joint Proxy Statement/Prospectus as Annex E.
The affirmative vote of holders of a majority of the outstanding ITI Common
Stock is required to approve the proposed Board Vacancy Amendment.
The Board of Directors of ITI believes that the proposed Board Vacancy
Amendment is in the best interests of ITI and the ITI Stockholders and
recommends that the ITI Stockholders vote FOR approval of the proposed Board
Vacancy Amendment. Because consummation of the Merger is subject to approval of
the proposed Board Vacancy Amendment, if the Board Vacancy Amendment is not
approved by the requisite vote of the ITI Stockholders, the Merger,
notwithstanding approval of the Merger Agreement by the ITI Stockholders, will
not be effected. In addition, if the Merger is not consummated for any reason,
the Board Vacancy Amendment will be null and void.
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MARKET PRICES OF AND DIVIDENDS ON
ITI COMMON STOCK AND IMA CLASS A COMMON STOCK
ITI Common Stock is traded on The Nasdaq Stock Market under the symbol
"INSUA." IMA Class A Common Stock is also traded on The Nasdaq Stock Market
under the symbol "INSMA." The IMA Class B Common Stock has no established
trading market and IMA is not aware of any recent sales of such stock. The
following table sets forth, for the calendar periods indicated, the high and low
closing sales prices for ITI Common Stock and IMA Class A Common Stock,
respectively, as reported on The Nasdaq Stock Market. Quotations represent
prices between dealers and do not include retail mark-ups, mark-downs or
commissions.
<TABLE>
<CAPTION>
ITI IMA
----------------- -----------------
PERIOD: HIGH LOW HIGH LOW
-------------------------------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
1992
Fourth Quarter........................................ $26.50 $14.00 $20.50 $14.00
1993
First Quarter......................................... $25.75 $17.63 $21.00 $13.25
Second Quarter........................................ 20.25 12.25 14.00 10.00
Third Quarter......................................... 14.50 11.25 14.75 10.00
Fourth Quarter........................................ 16.50 12.25 16.25 12.25
1994
First Quarter......................................... $15.25 $10.50 $15.00 $12.50
Second Quarter........................................ 14.75 12.50 15.00 9.75
Third Quarter......................................... 13.75 12.50 10.50 8.25
Fourth Quarter........................................ 13.75 10.88 10.88 8.13
1995
First Quarter......................................... $13.00 $11.13 $11.50 $ 8.63
Second Quarter........................................ 14.00 11.88 15.00 10.38
Third Quarter
(through September 14, 1995)....................... 16.63 12.88 18.63 14.50
</TABLE>
On May 23, 1995, the last full trading day prior to the public announcement
of the Merger Agreement, the closing sales price per share of ITI Common Stock
reported on The Nasdaq Stock Market was $13.50 and the closing sales price per
share of IMA Class A Common Stock reported on The Nasdaq Stock Market was
$12.00. On September 14, 1995, the last full trading day prior to the date of
this Joint Proxy Statement/Prospectus, the closing sales price per share of the
ITI Common Stock reported on The Nasdaq Stock Market was $14.94 and the closing
sales price per share of IMA Class A Common Stock reported on The Nasdaq Stock
Market was $16.75. Because the market price of ITI Common Stock is subject to
fluctuation due to numerous market forces, the market value of the shares of ITI
Common Stock that holders of IMA Class A Common Stock will receive in the Merger
may increase or decrease prior to the Effective Time. STOCKHOLDERS OF ITI AND OF
IMA ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THEIR SHARES.
As of August 30, 1995, the number of record holders of ITI Common Stock was
1,842.
As of September 1, 1995, the number of record holders of IMA Class A Common
Stock was 731 and the number of record holders of IMA Class B Common Stock was
six.
Holders of ITI Common Stock are entitled to receive dividends as and when
they may be declared by ITI's Board of Directors. ITI has never paid a cash
dividend on the ITI Common Stock. ITI's present policy is to retain earnings to
provide funds for the operation and expansion of its business. However, pursuant
to discussions between representatives of ITI and IMA in connection with the
Merger Agreement, the parties anticipate that after the Merger, ITI's Board will
review ITI's dividend policy from time to time and will consider ITI's earnings,
financial condition, cash flows, financing agreements and other relevant factors
in making determinations regarding future dividends, if any. Under the terms of
certain credit arrangements to which ITI is a party, ITI is subject to certain
limitations in paying dividends. See Note 9 of the Notes to ITI's
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Consolidated Financial Statements, including the notes thereto, contained
elsewhere herein and "ITI -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
IMA has a policy of paying regular cash dividends at current annual rates
of $.14 per share of IMA Class A Common Stock and $.1272 per share of IMA Class
B Common Stock. IMA has paid dividends at such rates semi-annually in January
and July of each year since the beginning of fiscal 1993. Holders of IMA Class A
Common Stock and IMA Class B Common Stock are entitled to receive dividends if,
as and when they may be declared by IMA's Board of Directors. Under IMA's
Certificate of Incorporation, no cash dividends may be declared or paid on
shares of IMA Class B Common Stock unless there is or has been declared or paid
a cash dividend on each share of IMA Class A Common Stock of at least 110% of
the per share dividend on IMA Class B Common Stock. Under the provisions of its
outstanding term loan agreement, IMA is subject to certain limitations in paying
dividends. See "IMA -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
55
<PAGE> 63
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following Unaudited Pro Forma Combined Condensed Financial Statements
are presented to illustrate the financial statement effect of the Merger. The
pro forma financial statements have been prepared assuming that the Merger will
be 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 reporting periods and
accounting methods) as if the companies had operated as a single entity for the
periods presented. Certain historical financial data of IMA have been
reclassified to conform to ITI's accounting policies.
The accompanying Unaudited Pro Forma Combined Condensed Balance Sheet
combines the balance sheets of ITI and IMA as of June 30, 1995. The Unaudited
Pro Forma Combined Condensed Statements of Operations combine the statements of
operations of ITI and the statements of operations of IMA for the years ended
December 31, 1994, 1993, and 1992 and the six months ended June 30, 1995 and
1994.
The Unaudited Pro Forma Combined Condensed Financial Statements are based
upon the historical financial statements of ITI and the historical financial
statements of IMA. The primary historical financial statements of IMA are
prepared on the basis of a fiscal year ending September 30. Following the
consummation of the Merger, IMA's assets, liabilities and results of operations
will be consolidated with ITI's on the basis of a calendar year ending December
31. The Unaudited Pro Forma Combined Condensed Financial Statements should be
read in conjunction with the respective historical financial statements of ITI
and IMA which are contained elsewhere in this Joint Proxy Statement/Prospectus,
the related notes thereto and the Notes to the Unaudited Pro Forma Combined
Condensed Financial Statements.
In addition to the Merger, the accompanying Unaudited Pro Forma Combined
Condensed Statements of Operations for the year ended December 31, 1994 and the
six months ended June 30, 1995 and 1994 also illustrate management's current
estimate of the financial statement effect of the Enviroq Acquisition completed
by IMA in April 1995, which has been accounted for under the purchase method of
accounting. The accompanying Unaudited Pro Forma Combined Condensed Statement of
Operations for the year ended December 31, 1994 and for the six months ended
June 30, 1995 and 1994 adjust the historical consolidated statements of
operations of IMA as if the Enviroq Acquisition had become effective at the
beginning of each such period. Further, the accompanying Unaudited Pro Forma
Combined Condensed Statement of Operations for the year ended December 31, 1994
and for the six months ended June 30, 1994 adjust the historical Consolidated
Statement of Operations of ITI as if its acquisition of Gelco Services, Inc.
("Gelco") and affiliates (which was completed in October 1994) had become
effective at the beginning of such period.
The following Unaudited Pro Forma Combined Condensed Financial Statements
have been included as required by the rules of the Commission and are provided
for comparative purposes only. The pro forma financial statements do not purport
to be indicative of the results of which would have been obtained if the
transactions, in fact, had been effected on the date or dates indicated or which
may be obtained in the future.
56
<PAGE> 64
INSITUFORM TECHNOLOGIES, INC.
AND
INSITUFORM MID-AMERICA, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AT JUNE 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ITI IMA PRO FORMA MIDSOUTH PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS(1) HISTORICAL(2) ADJUSTMENTS(3) COMBINED
---------- ---------- -------------- ------------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current:
Cash and cash equivalents............. $ 10,553 $ 2,925 $ $ 241 $ $ 13,719
Marketable securities................. 1 0 1
Receivables -- net.................... 42,740 31,571 (1,757)(A) 2,277 (153)(A) 74,678
Income tax refundable................. 1,678 419 2,097
Inventories........................... 8,197 5,376 (25)(C) 432 13,980
Deferred income taxes................. 2,256 0 2,800(C) 5,056
Prepaid expenses and miscellaneous.... 5,477 4,486 (1,070)(C) 116 9,009
---------- ---------- ------- ------ ------- ---------
Total current assets................ 70,902 44,777 (52) 3,066 (153) 118,540
Property and equipment, net............. 30,646 29,136 (3,331)(C) 1,319 57,770
Other assets:
Intangibles........................... 56,106 15,102 (855)(C) 42 69,931
(464)(D)
Investments in licensees and
affiliated companies................ 1,940 1,519 (2,038)(B) 1,421
Deferred income taxes................. 1,586 0 1,586
Other................................. 3,640 1,386 (138)(C) 4,888
---------- ---------- ------- ------ ------- ---------
Total other assets.................. 63,272 18,007 (1,457) 42 (2,038) 77,826
---------- ---------- ------- ------ ------- ---------
Total assets........................ $ 164,820 $ 91,920 $ (4,840) $ 4,427 $ (2,191) $254,136
======== ======== ============ ========== ============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accruals......... $ 20,636 $ 13,675 $ (1,757)(A) $ 811 $ (153)(A) $ 41,293
8,081(C)
Income taxes payable.................. 1,945 133 2,078
Deferred income taxes................. 536 0 536
Notes payable and current maturities
of long-term debt................... 7,285 17,256 49 24,590
---------- ---------- ------- ------ ------- ---------
Total current liabilities........... 30,402 31,064 6,324 860 (153) 68,497
Long-term debt, less current
maturities............................ 53,131 14,024 22 67,177
Deferred income taxes................... 1,073 1,018 2,091
Other................................... 0 891 891
---------- ---------- ------- ------ ------- ---------
Total liabilities................... 84,606 46,997 6,324 882 (153) 138,656
---------- ---------- ------- ------ ------- ---------
Minority interests...................... 2,345 1,391 1,507(B) 5,243
---------- ---------- ------- ------ ------- ---------
Stockholders' equity:
Common stock.......................... 144 108 16(B) 268
Additional paid-in capital............ 45,867 18,565 (16)(B) 64,416
Retained earnings..................... 36,295 25,245 (10,700)(C) 3,545 (3,545)(B) 50,376
(464)(D)
---------- ---------- ------- ------ ------- ---------
82,306 43,918 (11,164) 3,545 (3,545) 115,060
Treasury stock........................ 0 0 0
Cumulative foreign currency
translation adjustments............. (813) (386) (1,199 )
Note receivable from affiliates....... (3,624) 0 (3,624 )
Unrealized gain on investments
available for sale.................. 0 0 0
---------- ---------- ------- ------ ------- ---------
Total stockholders' equity.......... 77,869 43,532 (11,164) 3,545 (3,545) 110,237
---------- ---------- ------- ------ ------- ---------
Total liabilities and stockholders'
equity............................ $ 164,820 $ 91,920 $ (4,840) $ 4,427 $ (2,191) $254,136
======== ======== ============ ========== ============ =========
</TABLE>
57
<PAGE> 65
INSITUFORM TECHNOLOGIES, INC.
AND
INSITUFORM MID-AMERICA, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
BASIS OF PRESENTATION
Reference is made to the material following the caption "Unaudited Pro
Forma Combined Condensed Financial Information."
(1) Pro forma adjustments and eliminations to effect the Merger are as follows:
(A) To eliminate intercompany balances.
(B) To reflect the issuance of ITI Common Stock for the IMA Class A Common
Stock.
(C) To record estimated restructuring provisions, net of income tax
benefit, and the estimated expense of the Merger as if the transaction
had occurred at the balance sheet date.
(D) To reflect the recharacterization of the net of tax gain recognized by
ITI upon the sale of its holdings in Enviroq as a reduction of the
purchase consideration paid by IMA, resulting in a reduction of
goodwill.
(2) At June 30, 1995, a 15% general partnership interest in Midsouth Partners, a
domestic Insituform licensee, was held by a subsidiary of ITI, and a 42.5%
interest therein was held by a subsidiary of Enviroq. As a result of the
Enviroq Acquisition, the pro forma statements reflect a majority ownership
(57.5%) in Midsouth Partners as held by the combined ITI/IMA. See "Business
of ITI-Investments" below for a description of arbitration proceedings
brought by the remaining partner of Midsouth Partners alleging an event of
default by Enviroq under the partnership agreement of Midsouth Partners as a
result of entering into the Enviroq Agreement, and the purported exercise by
such partner of its alleged rights as a non-defaulting partner to name a
majority of the members of the management committee of Midsouth Partners, an
action to which both ITI and Enviroq have objected.
(3) Eliminations to effect the consolidation of Midsouth Partners are as
follows:
(A) To eliminate intercompany balances.
(B) To reflect minority interests and the elimination of ITI's and
Enviroq's equity-method investments in Midsouth.
58
<PAGE> 66
INSITUFORM TECHNOLOGIES, INC.
AND
INSITUFORM MID-AMERICA, INC.
UNAUDITED PRO FORMA COMBINED
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1995
-------------------------------------------------------------------
ITI IMA ENVIROQ PRO FORMA PRO FORMA
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS(2) IMA
---------- ---------- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Revenues............................................ $ 83,446 $ 51,493 $6,843 $58,336
Operating costs and expenses:
Cost of revenues.................................. 53,243 38,230 6,070 44,300
Selling, general and
administrative.................................. 17,254 7,563 1,165 362(A) 9,090
Research and development.......................... 3,315 702 24 726
Merger and restructuring costs.................... 0 0 0 0
---------- ---------- ---------- ------- ---------
Total operating costs and expenses.............. 73,812 46,495 7,259 362 54,116
---------- ---------- ---------- ------- ---------
Operating income.................................... 9,634 4,998 (416) (362) 4,220
Other income (expense).............................. (4,783) (333) (85) (389)(B) (807)
---------- ---------- ---------- ------- ---------
Income before taxes on income..................... 4,851 4,665 (501) (751) 3,413
Taxes on income..................................... 1,911 1,710 (104) (265)(C) 1,341
---------- ---------- ---------- ------- ---------
Income before minority interests and equity in
earnings of associated companies................ 2,940 2,955 (397) (486) 2,072
Minority interests.................................. (260) (299) 0 (299)
Equity in earnings of associated companies.......... 315 365 140 505
---------- ---------- ---------- ------- ---------
Income from continuing operations................... $ 2,995 $ 3,021 $ (257) $ (486) $ 2,278
======== ======== ======== ============ ========
Income from continuing operations per common
share............................................. $ 0.21 $ 0.27 $ 0.21
======== ======== ========
Number of shares used to compute net income per
share............................................. 14,442 11,110 11,110
======== ======== ========
<CAPTION>
PRO FORMA MIDSOUTH PRO FORMA PRO FORMA
ADJUSTMENTS(3) HISTORICAL(4) ADJUSTMENTS(5) COMBINED
-------------- ------------- -------------- ---------
<S> <C> <C> <C> <C>
Revenues............................................ $ (4,119)(A) $ 4,512 $ (543)(A) $138,945
(2,414)(A) (273)(A)
Operating costs and expenses:
Cost of revenues.................................. (4,119)(A) 3,253 (543)(A) 93,447
(2,414)(A) (273)(A)
Selling, general and
administrative.................................. (10)(D) 517 26,851
Research and development.......................... 0 4,041
Merger and restructuring costs.................... 0(B) 0 0
------- ------ ------ ---------
Total operating costs and expenses.............. (6,543) 3,770 (816) 124,339
------- ------ ------ ---------
Operating income.................................... 10 742 0 14,606
Other income (expense).............................. (755)(D) 24 (6,321)
------- ------ ------ ---------
Income before taxes on income..................... (745) 766 0 8,285
Taxes on income..................................... (291)(D) 0 2,961
------- ------ ------ ---------
Income before minority interests and equity in
earnings of associated companies................ (454) 766 0 5,324
Minority interests.................................. 0 (326)(B) (885)
Equity in earnings of associated companies.......... 0 (440)(B) 380
------- ------ ------ ---------
Income from continuing operations................... $ (454) $ 766 $ (766) $ 4,819
============ ========== ============ ========
Income from continuing operations per common
share............................................. $ 0.18
========
Number of shares used to compute net income per
share............................................. (C) 27,218
========
</TABLE>
59
<PAGE> 67
INSITUFORM TECHNOLOGIES, INC.
AND
INSITUFORM MID-AMERICA, INC.
UNAUDITED PRO FORMA COMBINED
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
----------------------------------------------------------------------------
PRO
ITI GELCO PRO FORMA FORMA IMA ENVIROQ
HISTORICAL HISTORICAL(1) ADJUSTMENTS(1) ITI HISTORICAL HISTORICAL
---------- ------------- ------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $148,247 $17,685 $(1,854)(A) $164,078 $ 84,023 $ 21,156
Operating costs and expenses:
Cost of revenues....................... 94,629 10,045 (1,854)(A) 102,820 60,718 16,516
Selling, general and administrative.... 33,560 3,761 730(B) 38,051 11,969 2,622
Research and development............... 1,509 1,509 652 66
Merger and restructuring costs......... 0 0 0
-------- ------- ------- -------- ------- -------
Total operating costs and expenses... 129,698 13,806 (1,124) 142,380 73,339 19,204
-------- ------- ------- -------- ------- -------
Operating income........................ 18,549 3,879 (730) 21,698 10,684 1,952
Other income (expense).................. (2,440) (2) (1,364)(C) (3,806) 42 250
-------- ------- ------- -------- ------- -------
Income before taxes on income.......... 16,109 3,877 (2,094) 17,892 10,726 2,202
Taxes on income......................... 6,140 620(D) 6,760 4,317 1,137
-------- ------- ------- -------- ------- -------
Income before minority interests and
equity in earnings of associated
companies............................ 9,969 3,877 (2,714) 11,132 6,409 1,065
Minority interests...................... (584) (584) (696) 0
Equity in earnings of associated
companies.............................. 409 409 160 419
-------- ------- ------- -------- ------- -------
Income from continuing operations....... $ 9,794 $ 3,877 $(2,714) $ 10,957 $ 5,873 $ 1,484
======== ======= ======= ======== ======= =======
Income from continuing operations per
common share........................... $ 0.68 $ 0.76 $ 0.53
======== ======== =======
Number of shares used to compute net
income per share....................... 14,414 14,414 11,085
======== ======== =======
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA MIDSOUTH PRO FORMA PRO FORMA
ADJUSTMENTS(2) IMA ADJUSTMENTS(3) HISTORICAL(4) ADJUSTMENTS(5) COMBINED
-------------- --------- -------------- ------------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $ $105,179 $ (9,283)(A) $ 7,048 $ (1,089)(A) $261,396
(4,121)(A) (416)(A)
Operating costs and expenses:
Cost of revenues....................... 77,234 (9,283)(A) 5,103 (1,089)(A) 170,248
(4,121)(A) (416)(A)
Selling, general and administrative.... 971(A) 15,562 (19)(D) 951 54,545
Research and development............... 718 0 2,227
Merger and restructuring costs......... 0 0(B) 0 0
------- -------- ------- ------ ------- --------
Total operating costs and expenses... 971 93,514 (13,423) 6,054 (1,505) 227,020
------- -------- ------- ------ ------- --------
Operating income........................ (971) 11,665 19 994 0 34,376
Other income (expense).................. (1,125)(B) (833 ) (12) (4,651)
------- -------- ------- ------ ------- --------
Income before taxes on income.......... (2,096) 10,832 19 982 0 29,725
Taxes on income......................... (741)(C) 4,713 0 11,473
------- -------- ------- ------ ------- --------
Income before minority interests and
equity in earnings of associated
companies............................ (1,355) 6,119 19 982 0 18,252
Minority interests...................... (696 ) 0 (417)(B) (1,697)
Equity in earnings of associated
companies.............................. 579 0 (565)(B) 423
------- -------- ------- ------ ------- --------
Income from continuing operations....... $ (1,355) $ 6,002 $ 19 $ 982 $ (982) $ 16,978
======= ======== ======= ====== ======= ========
Income from continuing operations per
common share........................... $ 0.54 $ 0.63
======== ========
Number of shares used to compute net
income per share....................... 11,085 (C) 27,162
======== ========
</TABLE>
60
<PAGE> 68
INSITUFORM TECHNOLOGIES, INC.
AND
INSITUFORM MID-AMERICA, INC.
UNAUDITED PRO FORMA COMBINED
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1994
----------------------------------------------------------------------------------------------
ITI GELCO PRO FORMA PRO FORMA IMA ENVIROQ PRO FORMA
HISTORICAL HISTORICAL(1) ADJUSTMENTS(1) ITI HISTORICAL HISTORICAL ADJUSTMENTS(2)
---------- ------------- -------------- --------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $ 62,283 $ 9,576 $ (1,290)(A) $70,569 $ 36,918 $ 10,722
Operating costs and
expenses:
Cost of revenues......... 39,396 5,468 (1,290)(A) 43,574 26,388 8,160
Selling, general and
administrative......... 13,448 2,080 200(B) 15,728 6,221 1,411 486(A)
Research and
development............ 2,964 2,964 54 19
Merger and restructuring
costs.................. 0 0 0
---------- ------ ------- --------- ---------- ---------- ------
Total operating
costs and
expenses......... 55,808 7,548 (1,090) 62,266 32,663 9,590 486
---------- ------ ------- --------- ---------- ---------- ------
Operating income........... 6,475 2,028 (200) 8,303 4,255 1,132 (486)
Other income (expense)..... (853) 35 (710)(C) (1,528) (14) 155 (511)(B)
---------- ------ ------- --------- ---------- ---------- ------
Income before taxes on
income................. 5,622 2,063 (910) 6,775 4,241 1,287 (997)
Taxes on income............ 2,035 541(D) 2,576 1,657 560 (351)(C)
---------- ------ ------- --------- ---------- ---------- ------
Income before minority
interests and equity in
earnings of associated
companies.............. 3,587 2,063 (1,451) 4,199 2,584 727 (646)
Minority interests......... (216) (216) (71) 0
Equity in earnings of
associated companies..... 272 272 120 4
---------- ------ ------- --------- ---------- ---------- ------
Income from continuing
operations............... $ 3,643 $ 2,063 $ (1,451) $ 4,255 $ 2,633 $ 731 $ (646)
======== ========== ============ ======== ======== ======== ============
Income from continuing
operations per common
share.................... $ 0.25 $ 0.30 $ 0.24
======== ======== ========
Number of shares used to
compute net income per
share.................... 14,412 14,412 11,125
======== ======== ========
<CAPTION>
PRO FORMA PRO FORMA MIDSOUTH PRO FORMA PRO FORMA
IMA ADJUSTMENTS(3) HISTORICAL(4) ADJUSTMENTS(5) COMBINED
--------- -------------- ------------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Revenues................... $47,640 $ (4,603)(A) $ 2,665 $ (377)(A) $113,538
(2,196)(A) (160)(A)
Operating costs and
expenses:
Cost of revenues......... 34,548 (4,603)(A) 2,194 (377)(A) 72,980
(2,196)(A) (160)(A)
Selling, general and
administrative......... 8,118 (10)(D) 465 24,301
Research and
development............ 73 0 3,037
Merger and restructuring
costs.................. 0 (B) 0 0
--------- ------- ------------- ------ ---------
Total operating
costs and
expenses......... 42,739 (6,809) 2,659 (537) 100,318
--------- ------- ------------- ------ ---------
Operating income........... 4,901 10 6 0 13,220
Other income (expense)..... (370) 3 (1,895)
--------- ------- ------------- ------ ---------
Income before taxes on
income................. 4,531 10 9 0 11,325
Taxes on income............ 1,866 0 4,442
--------- ------- ------------- ------ ---------
Income before minority
interests and equity in
earnings of associated
companies.............. 2,665 10 9 0 6,883
Minority interests......... (71) 0 (4)(B) (291)
Equity in earnings of
associated companies..... 124 0 (5)(B) 391
--------- ------- ------------- ------ ---------
Income from continuing
operations............... $ 2,718 $ 10 $ 9 $ (9) $ 6,983
======== ============ ========== ============ ========
Income from continuing
operations per common
share.................... $ 0.24 $ 0.26
======== ========
Number of shares used to
compute net income per
share.................... 11,125 (C) 27,206
======== ========
</TABLE>
61
<PAGE> 69
INSITUFORM TECHNOLOGIES, INC.
AND
INSITUFORM MID-AMERICA, INC.
UNAUDITED PRO FORMA COMBINED
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
------------------------------------------------------------
ITI IMA PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS(3) COMBINED
---------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
Revenues................................... $ 100,508 $ 60,495 $ (6,485)(A) $ 151,829
(2,689)(A)
Operating costs and expenses:
Cost of revenues......................... 60,066 45,044 (6,485)(A) 95,936
(2,689)(A)
Selling, general and administrative...... 27,672 11,292 38,964
Research and development................. 2,718 61 2,779
Merger and restructuring costs........... (981) (B) (981)
---------- ---------- -------------- ---------
Total operating costs and
expenses....................... 89,475 56,397 (9,174) 136,698
---------- ---------- -------------- ---------
Operating income........................... 11,033 4,098 0 15,131
Other income (expense)..................... (511) 43 (468)
---------- ---------- -------------- ---------
Income before taxes on income............ 10,522 4,141 0 14,663
Taxes on income............................ 3,314 1,845 5,159
---------- ---------- -------------- ---------
Income before minority interests and
equity in earnings of associated
companies............................. 7,208 2,296 0 9,504
Minority interests......................... (408) 0 (408)
Equity in earnings of associated
companies................................ 460 178 638
---------- ---------- -------------- ---------
Income from continuing operations.......... $ 7,260 $ 2,474 $ 0 $ 9,734
======== ======= =========== ========
Income from continuing operations per
common share............................. $ 0.51 $ 0.22 $ 0.36
======== ======= ========
Number of shares used to compute net income
per share................................ 14,330 11,053 (C) 27,040
======== ======= ========
</TABLE>
62
<PAGE> 70
INSITUFORM TECHNOLOGIES, INC.
AND
INSITUFORM MID-AMERICA, INC.
UNAUDITED PRO FORMA COMBINED
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1992
-----------------------------------------------------------
ITI IMA PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS(3) COMBINED
---------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
Revenues.................................... $ 95,559 $ 69,709 $ (5,864)(A) $ 156,581
$ (2,823)(A)
Operating costs and expenses:
Cost of revenues.......................... 59,721 47,497 (5,864)(A) 98,531
(2,823)(A)
Selling, general and administrative....... 21,982 9,559 31,541
Research and development.................. 4,349 286 4,635
Merger and restructuring costs............ 14,572 0 (B) 14,572
---------- ---------- -------------- ---------
Total operating costs and
expenses........................ 100,624 57,342 (8,687) 149,279
---------- ---------- -------------- ---------
Operating income............................ (5,065) 12,367 0 7,302
Other income (expense)...................... 2,868 (9) 2,859
---------- ---------- -------------- ---------
Income before taxes on income............. (2,197) 12,358 0 10,161
Taxes on income............................. 4,223 4,684 8,907
---------- ---------- -------------- ---------
Income before minority interests and
equity in earnings of associated
companies.............................. (6,420) 7,674 0 1,254
Minority interests.......................... (248) 0 (248)
Equity in earnings of associated
companies................................. 997 285 1,282
---------- ---------- -------------- ---------
Income from continuing operations........... $ (5,671) $ 7,959 $ 0 $ 2,288
======== ======= =========== ========
Income from continuing operations per common
share..................................... $ (0.41) $ 0.89 $ 0.09
======== ======= ========
Number of shares used to compute net income
per share................................. 13,884 8,915 (C) 24,136
======== ======= ========
</TABLE>
63
<PAGE> 71
INSITUFORM TECHNOLOGIES, INC.
AND
INSITUFORM MID-AMERICA, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED STATEMENTS OF OPERATIONS
BASIS OF PRESENTATION
Reference is made to the material following the caption "Unaudited Pro
Forma Combined Condensed Financial Information."
(1) Pro forma adjustments and eliminations to effect the Gelco acquisition are
as follows:
(A) To eliminate intercompany transactions.
(B) To reflect (i) amortization of goodwill, (ii) depreciation on the
step-up of property and equipment to fair value and (iii) reduction of
management fees, executive compensation and rent expense.
(C) To record interest expense associated with acquisition indebtedness.
(D) Pro forma taxes on income have been provided as if Gelco and its
affiliates had not been "S" Corporations prior to their acquisition.
(2) Pro forma adjustments and eliminations to effect the Enviroq Acquisition are
as follows:
(A) Reflects the payment of a $.2 million annual consulting fee,
amortization of the non-compete agreement over five years and
amortization of goodwill over 25 years. The consulting fee is based on
a five-year consulting agreement.
(B) Reflects the interest expense associated with (i) $15.25 million in
long-term debt to fund the purchase of Enviroq based on a 60-day LIBOR
rate plus 1.75% and (ii) $3 million non-compete note payable at 6%. See
"IMA -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" below for
information regarding demands made for payment of such note.
(C) Reflects the tax benefit associated with the pro forma adjustments,
excluding goodwill amortization which will not receive an income tax
benefit.
(3) Pro forma adjustments and eliminations to effect the Merger are as follows:
(A) Intercompany transactions, primarily ITI royalty income of $2.414
million, $4.121 million, $2.196 million, $2.689 million and $2.823
million and product sales of $4.119 million, $9.283 million, $4.603
million, $6.485 million and $5.864 million, have been eliminated for
the periods ended June 30, 1995, December 31, 1994, June 30, 1994,
December 31, 1993 and December 31, 1992, respectively.
(B) The Pro Forma Combined Condensed Consolidated Statements of Operations
do not reflect estimated restructuring provisions or costs associated
with the Merger of $7.0 million and $6.5 million, respectively. Such
costs associated with the Merger will be charged to operations in the
quarter in which the Merger is effected. Such estimated restructuring
provisions are expected to be charged to operations primarily in the
quarter in which the Merger is effected and in the months following
consummation of the Merger.
(C) The number of shares used to compute net income per share from
continuing operations has been calculated using the Conversion Ratio of
1.15 shares of ITI Common Stock for each share of IMA Class A Common
Stock.
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<PAGE> 72
(D) To recharacterize the net of tax gain recognized by ITI upon the sale
of its holdings in Enviroq as a reduction of the purchase consideration
paid by IMA and adjust the related goodwill amortization.
(4) At June 30, 1995 and through the periods reported, a 15% general partnership
interest in Midsouth Partners was held by a subsidiary of ITI, and a 42.5%
interest therein was held by a subsidiary of Enviroq. As a result of the
Enviroq Acquisition, the pro forma statements reflect a majority ownership
(57.5%) in Midsouth Partners as held by the combined ITI/IMA. See "Business
of ITI -- Investments" below for a description of arbitration proceedings
brought by the remaining partner of Midsouth Partners alleging an event of
default by Enviroq under the partnership agreement of Midsouth Partners as a
result of entering into the Enviroq Agreement, and the purported exercise by
such partner of its alleged rights as a non-defaulting partner to name a
majority of the members of the management committee of Midsouth Partners, an
action to which both ITI and Enviroq have objected.
(5) Eliminations to effect the consolidation of Midsouth Partners are as
follows:
(A) To eliminate intercompany transactions.
(B) To reflect income attributable to minority interests and to eliminate
ITI's and Enviroq's historical share of earnings under the equity
method.
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SELECTED FINANCIAL DATA OF ITI
The selected financial data of ITI set forth below have been derived from
ITI's consolidated financial statements included herein and previously published
historical financial statements of ITI not appearing herein. In December 1992,
ITI consummated the acquisition (the "IGL Acquisition") of Insituform Group
Limited ("IGL"), which ITI has accounted for as a pooling-of-interests and,
accordingly, the historical financial statements of the combining companies have
been retroactively combined (after adjustments to eliminate intercompany
balances and transactions, and to conform accounting methods) as if the
companies had operated as a single entity for the periods presented. The
selected financial data as at and for the six months ended June 30, 1995 and
1994 is unaudited; however, in the opinion of the management of ITI, include all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the results of operations and the financial position at and
for each of the interim periods presented. Operating results for the six months
ended June 30, 1995 are not necessarily indicative of the results that may be
obtained for the entire year ending December 31, 1995. The selected financial
data of ITI set forth below and should be read in conjunction with
"ITI -- Management's Discussion and Analysis of Financial Condition and Results
of Operations" and ITI's Consolidated Financial Statements, including the notes
thereto, contained elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------- -------------------------------------------------------
1995(1) 1994 1994(2) 1993(3) 1992(4) 1991 1990
---------- -------- -------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues................. $ 83,446 $ 62,283 $148,247 $100,508 $95,559 $76,402 $60,683
Merger and restructuring
costs........................ -- -- -- (981) 14,572(5) 733 292
Other income (expense):
Gain on sale of investment in
IMA........................ -- -- -- -- -- 17,280(6) --
Income (loss) from continuing
operations................... 2,995(7) 3,643 9,794(8) 7,260(8) (5,671)(5) 15,360(6) 1,408
Income (loss) from continuing
operations per common
share........................ .21 .25 .68 .51 (.41) 1.12 .11
BALANCE SHEET DATA (AT PERIOD
END):
Total assets................... 164,820 132,684 162,494 129,175 87,379 105,579 89,599
Long-term debt and redeemable
preferred stock.............. 53,131 34,307 47,347 36,454 7,421 8,059 9,030
</TABLE>
---------------
(1) In February 1995, ITI consummated the acquisition of 66% of Insituform
France S.A., which has been accounted for under the purchase method of
accounting.
(2) In October 1994, ITI consummated the acquisition of Gelco Services, Inc. and
affiliates, which has been accounted for under the purchase method of
accounting.
(3) In July 1993, ITI consummated the acquisitions of Naylor Industries, Inc.
and Insituform Midwest, Inc., which have been accounted for under the
purchase method of accounting.
(4) In December 1992, ITI consummated the acquisition of the minority interest
in IGL Canada Limited, and the acquisition of H.T. Schneider, Inc., which
have been accounted for under the purchase method of accounting.
(5) Reflects $9.667 million in costs associated with the IGL Acquisition, which
have been charged to operations primarily in the fourth quarter of 1992, and
a pre-tax charge in the amount of $4.905 million for restructuring costs,
primarily for asset-related write-offs, lease termination provisions and
personnel related costs.
(6) In May 1991, ITI completed the sale of its equity interest in IMA as a
result of which ITI received payments aggregating $22.058 million, which,
after accounting for the aggregate carrying amount of the investment,
expense associated with the transaction and taxes (subsequent to utilization
of ITI's capital loss carryover reported as an extraordinary item), resulted
in a contribution of approximately $10.574 million to net income
(approximately $9.451 million to income before extraordinary item).
(7) On May 23, 1995, ITI entered into a memorandum of understanding, subject to
execution of an appropriate stipulation of settlement (which occurred on
September 11, 1995), court approval and other customary conditions, to
settle certain outstanding litigation for a cash payment of $3.2 million
(which ITI has deposited into escrow) and issuance of 30,000 shares of ITI
Common Stock, resulting in an after-tax charge against second quarter 1995
earnings of approximately $2.2 million.
(8) In December 1993, ITI determined to discontinue the operations of its
division engaged in the offsite rehabilitation of downhole tubulars for the
oil and gas industry. As a result, ITI recorded a fourth quarter 1993 charge
to write down the division's assets to their estimated net realizable values
and to accrue for operating losses during the anticipated phase-out period.
The statements of operations and balance sheets have been restated to
reflect continuing operations. ITI also recorded a fourth quarter 1994
charge resulting from the abandonment of efforts to find a purchaser for,
and shut-down of, such division.
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ITI -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
ITI's revenues include product sales of materials and equipment to
licensees, construction revenues from trenchless installation and non-trenchless
contracting activities and royalty income and initial license fees received from
licensees for the use of ITI's trenchless rehabilitation processes. Product
sales consist primarily of sales of Insitutubes and NuPipe to licensees.
Construction contract revenue is generated by ITI's wholly-owned subsidiaries,
principally Insituform Southwest, Insituform of New England, Inc. ("Insituform
New England"), Insituform Gulf South, Inc. ("Gulf South"), Insituform Midwest,
Inc. ("Insituform Midwest"), Gelco Services, Inc., IGL Canada Limited ("IGL
Canada"), Insituform Permaline Limited ("Insituform Permaline"), Insituform
Overseas Limited ("IOL"), NuPipe Limited and Insituform France S.A. ("Insituform
France"). Royalties and license fees are paid by ITI's 33 unaffiliated
Insituform licensees and sub-licensees and its ten unaffiliated NuPipe
licensees. During the three years ended December 31, 1994, 1993 and 1992
approximately 78.7%, 77.7% and 70.5%, respectively, of ITI's consolidated
revenues were derived from sales, construction and royalty revenues related to
the Insituform Process.
Product sales and royalties are primarily a function of the contracts
performed by ITI'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 ITI of minimum royalties in excess of royalties otherwise due on work
performed. Construction revenues generated by ITI's consolidated subsidiaries
include revenues from the non-trenchless operations of IGL Canada. ITI's
consolidated subsidiaries obtain supplies of Insitutubes and related materials
from ITI.
ITI was incorporated in Delaware in 1980 in order to act as IGL's exclusive
licensee of the Insituform Process in most of the United States. In December
1992, ITI consummated the IGL Acquisition, 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 always operated as a
single entity.
ITI's acquisition in 1991 of the controlling interest in Insituform
Southwest, its acquisitions in December 1992 of the minority interest in IGL
Canada, at that time a majority-owned subsidiary of IGL, and of H.T. Schneider,
Inc., the parent of Insituform New England, its acquisitions in July 1993 of
Naylor Industries, Inc. ("Naylor"), the parent of Gulf South, and of Insituform
Midwest, its acquisition in October 1994 of Gelco and its February 1995
acquisition of two-thirds of the interest in Insituform France have been
accounted for under the purchase method of accounting, so that the results of
the acquired companies are included in ITI's historical results of operations
from the consummation of such transactions, respectively. In addition, product
sales and purchases and royalty revenues and expenses related to intercompany
transactions occurring subsequent to the acquisition dates of Insituform
Southwest, Insituform New England, Gulf South, Insituform Midwest, Gelco and
Insituform France have been eliminated.
See "-- Liquidity and Capital Resources" below for information concerning
the proposed disposition of IGL Canada's non-trenchless business. During the six
months ended June 30, 1995, such operations generated revenues of $3.3 million,
resulting in an operating loss of $.3 million, compared to revenues of $4.0
million, resulting in an operating loss of $.2 million, during the six months
ended June 30, 1994. During the years ended December 31, 1994, 1993 and 1992,
such operations generated revenues of $14.0 million, $14.1 million and $23.5
million, respectively, resulting in operating income of, respectively, $.8
million, $1.1 million and $2.5 million.
Fluctuations in the exchange rates between the United States dollar and the
currencies of other countries in which ITI operates or has licensees may have an
impact on ITI's consolidated results during the relevant reporting period. ITI
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. ITI does not
anticipate that the circumstances in which such hedging activity would be
appropriate will have a material effect on ITI's liquidity.
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Six Months Ended June 30, 1995 and 1994
Revenues. Revenues for the first half of 1995 increased 34.0% to $83.4
million from $62.3 million in the prior year, primarily as a result of an
increase in construction revenues and, to a lesser extent, royalties and license
fees, offset by a decrease in product sales. The significant increase in
construction revenues was due in part to the October 1994 acquisition of Gelco
and its affiliates and the February 1995 acquisition of a two-thirds interest in
Insituform France. Subsequent to their respective acquisitions, however, product
sales to and royalty revenues from these entities have been eliminated from
ITI's consolidated revenues. Fluctuations in currency exchange rates of the
Japanese yen and British pound sterling to the United States dollar favorably
impacted total revenues by approximately $.8 million in the first half of 1995.
Construction revenues during the first half of 1995 increased by 51.3% to
$64.5 million from $42.6 million in the comparable period of the prior year,
primarily due to the acquisitions of Gelco and Insituform France. During the
six-month period, $10.0 million of construction revenues were attributable to
the recently-acquired Gelco operations and $2.6 million of construction revenues
were attributable to Insituform France. Increases in construction revenues also
reflect increases in revenues for the six-month period by Insituform New
England, of $4.9 million (primarily attributable to continuing project work on
its contracts with the Massachusetts Water Authority), by Insituform Midwest, of
$3.9 million, and by Gulf South, of $3.1 million, offset by decreases in
revenues for the six-month period by Insituform Permaline, of $.8 million, and
by Insituform Southwest, of $1.9 million. During the first six months of 1995,
50.0% of the revenues of IGL Canada (or 3.9% of ITI's consolidated revenues) was
derived from non-Insituform operations in Canada, compared to 64.5% of the
revenues of IGL Canada during the first half of the prior year (6.4% of ITI's
consolidated revenues). Fluctuations in the currency exchange rates of the
British pound sterling and the Canadian dollar to the United States dollar
favorably impacted construction revenues by approximately $.1 million in the
first half of 1995.
Product sales for the first half of 1995 decreased 8.0% to $13.2 million
from $14.3 million for the first half of 1994. For the first half of 1994,
product sales included $.8 million in sales to ITI's recently-acquired
subsidiaries, Gelco and Insituform France. Decreased construction activity in
Japan, due to delays in projects caused in part by the January earthquake,
resulted in decreased sales of $.5 million for the six-month period. The
decrease in product sales was partially offset by improved sales to European
licensees of $.4 million for the six-month period. Fluctuations in the currency
exchange rates of the Japanese yen and British pound sterling to the United
States dollar, collectively, positively impacted product sales by approximately
$.7 million in the first half of 1995.
Royalties and license fees for the first half of 1995 increased by 7.9% to
$5.8 million from $5.3 million for the same period in 1994. While gross
royalties for the six-month period increased by $1.8 million, the elimination of
an additional $1.4 million in intercompany royalties from wholly-owned licensees
($.5 million of which were attributable to newly-acquired entities) resulted in
a net increase of $.4 million. During the first half of 1995 and 1994,
respectively, license fee revenue of $.2 million and $.2 million was recorded.
Operating Costs and Expenses. In the first half of 1995, cost of
construction contracts increased 45.7% to $44.7 million from $30.7 million in
1994, primarily attributable to newly-acquired licensees which added,
collectively, $9.1 million to costs for the six-month period in 1995. During the
first half of 1995, construction costs as a percentage of construction revenues
decreased to 69.2% from 71.9% in 1994, primarily due to higher margins achieved
by certain of the newer subsidiaries, partially offset by lower margins in some
regions of the United States which resulted from competitive bidding conditions.
For the first half of 1995, cost of product sales decreased by 2.0% to $8.5
million from $8.6 million in the first half of 1994. For the first half of 1995,
cost of product sales as a percentage of product sales increased to 64.3% in
1995 compared to 60.3% for the same period in 1994, due primarily to changes in
the mix of products sold and an increase in European product sales at
historically lower margins.
For the first half of 1995, selling, general and administrative expenses as
a percentage of revenues was 20.7% compared to 21.6% in the first half of 1994,
due to the increase in revenues in the 1995 period over 1994. In the first half
of 1995, selling, general and administrative expenses increased 28.3% to $17.3
million compared to $13.4 million in 1994, primarily attributable to the costs
of operations for Gelco and Insituform
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France (aggregating $2.5 million for the six months in the current year),
including amortization of additional goodwill of $.6 million for the six-month
period in 1995. In addition, in 1995 costs have increased at Insituform New
England due to management transition and additional crew management personnel to
handle increased volume.
For the first half of 1995, strategic marketing and product development
costs increased 11.8% to $3.3 million compared to $3.0 million in the prior
year, due primarily to industrial marketing efforts in the chemical and pulp and
paper industries.
Litigation Settlement. As more fully described under "Business of
ITI -- Legal Proceedings" below, during the second quarter of 1995 ITI entered
into a memorandum of understanding to settle a pending shareholder class action
lawsuit. Under the settlement, which has been evidenced by a stipulation of
settlement and remains subject to court approval and other customary conditions,
ITI would make a cash payment to class members in the amount of $3.2 million
(which has been deposited in escrow) and issue 30,000 shares of ITI Common Stock
(valued at $.4 million at June 30, 1995). Accordingly, ITI charged earnings for
$3.6 million (after-tax effect of approximately $2.2 million) during the second
quarter of 1995.
Realized Gain on Disposal of Investment. In April 1995, ITI realized a
gain on the disposal of its investment in Enviroq of approximately $.8 million,
as a result of the consummation of the Enviroq Acquisition by IMA.
Other Expense. For the first half of 1995, other expense increased 127.4%
to $1.9 million from $.9 million, attributable to $1.3 million of additional
interest incurred on debt issued to fund the acquisitions of Gelco and
Insituform France, coupled with an increase in interest rates from early 1994.
Partially offsetting this decrease was an increase in investment income of
$212,000, resulting from improved market interest rates and implementation of a
domestic cash management program which maximizes funds available for short-term
investment.
Taxes on Income. In the first half of 1995, taxes on income decreased 6.1%
to $1.9 million from $2.0 million in the prior year, primarily as a result of an
$.8 million decrease in income before taxes on income, which was offset
partially by an increase in the effective tax rate to 39.4% from 36.2% during
the first half of 1994. The effective rate increased in 1995, primarily as a
result of foreign earnings being taxed at higher rates, and tax benefits on
losses in certain foreign jurisdictions being reserved while full future
utilization is uncertain.
Net Income. For the first half of 1995, total revenues increased $21.2
million, or 34.0%, over the first half of 1994, which was coupled with an
increase in gross profit of $7.3 million, or 32.0%, partially offset by
increased operating costs of $4.2 million, or 25.3%. These factors resulted in
an increased operating profit of $3.2 million, or 48.8%, compared to the prior
period. An increase in other expense of $1.1 million, coupled with the
litigation loss of $3.6 million, offset slightly by the gain on the sale of an
investment of $.7 million and lower taxes on income of $.1 million, resulted in
a decrease in income before minority interests and equity in earnings of
affiliated companies of $.6 million, or 18.0%. As a result of the foregoing, net
income for the first half of 1995 was $3.0 million, a decrease of $.6 million
from net income of $3.6 million in the first half of 1994.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Revenues. Revenues increased 47.5% to $148.2 million in 1994 from $100.5
million in the prior year, primarily as a result of an increase in construction
revenues, and to a lesser extent, product sales. As discussed above, during 1994
and 1993 ITI consolidated the construction revenues of four newly-acquired
former licensees, resulting in the elimination of the related product sales and
royalty revenues.
Construction contract revenues increased 74.3% to $109.7 million from $63.0
million in 1993, primarily as a result of the acquisitions of Gelco (in October
1994) and Insituform Midwest and Gulf South (both in July 1993), which
collectively added $51.3 million to 1994 construction revenues, compared to
$20.7 from Insituform Midwest and Gulf South in the prior year. Construction
revenues also reflected an increase in 1994 of $12.6 million by Insituform New
England, due primarily to the project work on its contracts with the
Massachusetts Water Resources Authority. Fluctuations in the currency exchange
rates of Canadian dollars to United States dollars negatively impacted 1994
construction revenues by approximately $1.2 million. In 1994,
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71.7% of the revenues of IGL Canada (or 9.5% of ITI's consolidated revenues) was
derived from non-Insituform operations in Canada.
Product sales increased 4.4% to $28.3 million in 1994 from $27.1 million in
1993. The increase in 1994 was primarily due to increased licensee activity in
the United States, activity in Japan relating to the Narita Airport project, and
recovering economic conditions in Europe. These increases were offset by
eliminations of intercompany sales to ITI's recently-acquired subsidiaries.
Post-acquisition intercompany sales to Gelco of $.7 million were excluded from
1994 consolidated product sales. In addition, 1993 sales included $2.9 million
of pre-acquisition sales to Insituform Midwest and Gulf South.
Royalty and license fee revenue decreased 1.9% in 1994 to $10.3 million
compared to $10.5 million in 1993. The decrease was primarily attributable to
the elimination of $.2 million in post-acquisition intercompany royalties from
Gelco in 1994. Royalties in 1993 included $.6 million of pre-acquisition
royalties from Insituform Midwest and Gulf South. In 1994, ITI added licenses
for South Korea and, on a non-exclusive basis, for Japan and Poland, recognizing
license fee revenue of $.3 million. In 1993, ITI signed licenses in Australia,
Belgium, Hawaii, Switzerland and, on a non-exclusive basis, various territories
in the former Soviet Union, recognizing $.6 million in license fee revenue.
Operating Costs and Expenses. In 1994, cost of construction contracts
(which include both trenchless installations and open-cut excavation) increased
72.6% to $77.2 million from $44.7 million in 1993. The increase was primarily
attributable to newly-acquired licensees, which added, collectively, $40.0
million to 1994 construction costs, compared to $14.0 million in 1993. During
1994, construction costs as a percentage of construction revenues decreased to
70.4% from 71.1% in 1993, due primarily to the 1994 acquisition of Gelco and
1993 acquisition of Insituform Midwest, which achieved comparatively higher
gross margins, offset by poorer performance at Insituform New England and
increased price competition in certain markets.
Cost of product sales as a percentage of product sales increased to 60.8%
in 1994 compared to 55.5% in 1993 with the gross profit decreasing to $11.1
million in 1994 from $12.0 million in 1993. Those results primarily reflected an
increase of $2.9 million in product sales in 1994 by Japan and the United
Kingdom, where margins are lower. In addition, ITI recorded a provision of $.6
million for certain obsolete inventories of NuPipe in 1994. Also, in 1993, ITI
recorded reductions in certain European warranty reserves no longer required in
the amount of $.5 million, which favorably impacted cost of product sales,
whereas, in 1994, no such reductions were recorded.
As a percentage of revenues, selling, administrative and general expenses
were 22.6% compared to 27.5% in 1993. The decreases in 1994 as a percent of
revenues was attributable primarily to economies of scale realized by the
allocation of fixed costs over a larger revenue base. Further, ITI incurred
approximately $.7 million in costs late in 1993 in connection with reorganizing
management. Selling, administrative and general expenses increased 21.3% to
$33.6 million compared to $27.7 million in 1993 due, in part, to the incremental
costs of operations for recently acquired entities of $2.3 million (of which $.7
million related to incremental goodwill and noncompete amortization). Also
contributing to the increase were the additional ongoing costs of expanded
administrative and marketing efforts in 1994, including salaries and related
benefits of $2.8 million for additional personnel, travel and other costs.
Research and development costs decreased 44.5% to $1.5 million in 1994
compared to $2.7 million in 1993, primarily due to the elimination of
duplicative United Kingdom research and development costs, including personnel
and facilities, as a result of the acquisition of IGL in December 1992, and the
concentration of such efforts in the United States. In addition, certain
employees in the United Kingdom were reassigned from research and development to
technical support and selling and marketing in 1994. In 1995, ITI anticipates an
increase in research and development costs as a result of new and expanded
projects.
In 1993, ITI recognized merger and restructuring credits of approximately
$1.0 million, which primarily reflected the effect of an early termination of a
sub-lease under ITI's Langley, United Kingdom, lease (which resulted in the
receipt of $.8 million). ITI continues to seek to negotiate a termination of the
underlying lease in Langley.
Other Income (Expense). Other income (expense) increased to $2.4 million
from $.5 million in 1993, primarily attributable to additional interest incurred
on debt issued to fund ITI's corporate acquisitions (an
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increase of $1.8 million compared to 1993). In the prior year, other expenses
also included $.3 million incurred in connection with a postponed public equity
offering.
Taxes on Income. Taxes on income applicable to continuing operations
increased to $6.1 million from $3.3 million in 1993 as a result of an increase
in the effective tax rate to 38.1%, as compared to 31.5% in 1993, combined with
a $5.6 million increase in income before taxes on income. As indicated in Note
17 of the Notes to ITI's Consolidated Financial Statements included elsewhere
herein, the 1993 effective tax rate was lower than the United States federal
statutory rate, primarily due to the favorable foreign tax treatments of certain
foreign earnings generated in the period. The additional amortization of
goodwill of $1.0 million associated with the Gulf South and Insituform Midwest
acquisitions, which was not deductible for tax purposes, contributed to the
increase in the 1994 rate over the statutory rate, as did ITI's inability to
utilize current year losses in certain tax jurisdictions to offset current year
profits in other jurisdictions.
In its financial statements, ITI has reported net deferred income tax
assets of $2.8 million as of December 31, 1994. ITI has net operating loss and
foreign tax credit carryforwards which, if fully realized, would produce future
tax benefits of $6.3 million. The realization of these benefits is dependent on
the generation of future taxable income in the applicable jurisdictions, and ITI
has recorded a valuation allowance of $3.4 million to reduce the related net
deferred tax assets to $2.8 million. Such amounts represent the level of future
income tax benefits the realization of which, in management's opinion, meets the
"more likely than not" threshold required under Statement of Financing
Accounting Standards No. 109, Accounting for Income Taxes ("FAS 109"). The net
operating loss carryforwards ("NOLs") of ITI's subsidiaries are summarized in
Note 17 of the Notes to Consolidated Financial Statements included elsewhere
herein.
Approximately $1.2 million of the United States NOLs, expiring in 2007, are
further subject to limitations imposed by Section 382 of the Code and may only
be utilized to the extent of approximately $.4 million per year as a result of
the ownership change which occurred upon ITI's acquisition of Insituform New
England. However, this limitation is such that the full amount of NOLs may be
utilized before the expiration of the carryforward period.
Management of ITI has prepared projections of the respective subsidiaries'
taxable income for future years that indicate that the NOLs that are subject to
a Section 382 limitation would be absorbed within four to seven years, that the
remaining United States and Canadian NOLs would be absorbed within three years
and a substantial portion of the United Kingdom NOLs would be absorbed within
seven years. However, ITI does not believe that the future realization of all of
these future tax benefits indicated by its projections is sufficiently assured
to allow their full recognition in the consolidated financial statements. In
particular, projections of operating results over an extended period, such as
seven years, are inherently imprecise. Accordingly, a valuation allowance of
$3.4 million has been recorded as of December 31, 1994.
The realization of the net deferred tax asset of $2.8 million would require
that certain of ITI's subsidiaries, including Insituform California, Insituform
Southwest, Insituform New England, IGL Canada, Insituform Permaline, and
Insituform Technical Services generate various levels of annual taxable income
over the respective carryforward periods. Management of ITI believes that it is
more likely than not that the applicable levels of taxable income can be
generated. In reaching this conclusion, management noted a number of factors,
including the following related to its domestic operations: (i) the operations
of Insituform New England were historically profitable, it has substantial
contract backlog and the NOL carryforward was generated by a non-recurring
charge immediately prior to its acquisition by ITI; and (ii) historically
profitable partnership investments held by Insituform California are expected to
continue to result in annual taxable income. With regard to its foreign
operations, management noted a number of factors including that, with the
exception of NuPipe Limited, ITI's United Kingdom operations have had a history
of profitability until the United Kingdom recession and ITI has eliminated
duplicative administrative and research and development facilities in the United
Kingdom and has also reduced managerial and other staffing levels in the United
Kingdom.
Discontinued Operations. In December 1993, ITI adopted a formal plan to
discontinue the operations of its division engaged in the off-site
rehabilitation of downhole tubulars for the oil and gas industry. ITI offered
the business and the related assets, including a facility located in Dallas,
Texas, for sale during 1994, but was unable to obtain a commitment from
prospective buyers, and management determined to shutdown the
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division. ITI recorded a charge of $2.0 million ($1.3 million net of applicable
income tax benefit) in the fourth quarter of 1993 to write-down the division's
assets to their estimated net realizable value and to accrue for estimated
operating losses during the phase-out period. Upon the determination to
liquidate the division's assets, ITI recorded, in the fourth quarter of 1994, a
charge of $1.8 million ($1.2 net of applicable income tax benefit) to writedown
the division's assets to their estimated liquidation values and to accrue for
estimated costs to shut-down the operation.
The downhole tubular division's revenues for the years ended December 31,
1994 and 1993 were $1.1 million and $1.9 million, respectively. The results of
operations of the downhole tubular division have been reclassified to separately
identify them as discontinued operations.
Net Income. Total revenues increased by $47.7 million, or 47.5%, in 1994
over 1993, which was coupled with an increase in gross profit of $13.2 million,
or 32.6%, partially offset by increased operating costs of $5.7 million, or
19.2%. These factors contributed to an increase in operating income of $7.5
million, or 68.1%. Excluding merger and restructuring credits in 1993, operating
income would have increased by $8.5 million. An increase in other expense of
$1.9 million, coupled with an increase in taxes on income of $2.8 million,
resulted in an increase in income from continuing operations of $2.5 million, or
34.9%. Losses in 1994 from discontinued operations were $1.2 million (net of
applicable income tax benefits of $.6 million). In 1993, ITI recognized $218,000
from the cumulative effect of an accounting change to FAS 109. As a result of
the foregoing, net income for 1994 was $8.6 million, an increase of $3.6
million, or 72.2%, from 1993.
Year Ended December 31, 1993 Compared to Year Ended December 31, 1992
Revenues. Revenues increased 5.1% to $100.5 million in 1993 from $95.6
million in the prior year, reflecting an increase in construction revenues,
partially offset by declines in product sales and royalties. As discussed above,
in 1993 ITI began to consolidate the construction revenues of three
newly-acquired former licensees and to eliminate the related product sales and
royalty revenues.
Construction contract revenues increased 18.4% to $63.0 million from $53.2
million in 1992, primarily as a result of the acquisitions of such licensees,
which collectively added $27.1 million to 1993 construction revenues. This
incremental revenue was partially offset by decreases in revenues of $7.3
million and $9.6 million experienced by IGL Canada and Insituform Permaline,
respectively, which were attributable to the effects of a Canadian economic
recession and to a change in the traditional spending patterns in the United
Kingdom, where the privatized water authorities have deferred rehabilitation
projects in favor of pollution control projects. In 1993, 75.4% of the revenues
of IGL Canada (or 12.6% of ITI's consolidated revenues) was derived from
non-Insituform operations in Canada. In addition, fluctuations in currency
exchange rates of the British pound sterling and Canadian dollar to United
States dollars negatively impacted 1993 construction revenues by approximately
$2.5 million.
Product sales decreased 9.4% to $27.1 million in 1993 from $29.9 million in
the prior year. Post-acquisition intercompany sales to Insituform New England,
Gulf South and Insituform Midwest, totalling $3.8 million, were excluded from
1993 consolidated product sales. Royalties and license fees decreased 15.3% in
1993 to $10.5 million compared to $12.4 million in 1992, primarily as a result
of the exclusion of $1.7 million in post-acquisition royalties as well as the
decrease in licensee installation activity during the first half of 1993
primarily due to weather conditions in the United States and economic recessions
in Europe and Canada. The decrease in royalties was partially offset by a 1993
increase of $.6 million in license fees, reflecting the grant of new Insituform
licenses for Hawaii, Australia, Belgium, Switzerland, and, on a non-exclusive
basis, various territories in the former Soviet Union.
Operating Costs and Expenses. Cost of construction contracts increased
9.6% to $44.7 million in 1993 from $40.8 million in the prior year, primarily
attributable to the newly-acquired licensees which, collectively, added $19.0
million to 1993 construction costs. Construction costs as a percentage of
construction revenues improved to 71.0% in 1993 from 76.6% in 1992, principally
due to margins achieved by new subsidiaries (Gulf South and Insituform Midwest),
partially offset by lower margins in the United Kingdom which resulted from
volume decreases and competitive bidding conditions. During 1993, management
reduced the size of its United Kingdom installation work force in response to
this decrease in work load.
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Costs of product sales as a percentage of product sales decreased to 55.5%
in 1993 compared to 62.2% in 1992 with gross profit increasing to $12.0 million
in 1993 from $11.3 million in 1992. The change was due primarily to higher
production volume and productivity improvements in the United Kingdom and Japan
combined with NuPipe margin improvements in the United States.
As a percentage of revenues, selling, administrative and general expenses
were 27.5% compared to 23.0% in 1992. Selling, administrative and general
expenses increased 25.9% to $27.7 million compared to $22.0 million in 1992,
primarily due to expanded selling and marketing efforts, the realignment of
employee responsibilities in 1993 from research and development to technical
support and selling and marketing departments, and certain 1993 fourth quarter
costs associated with reorganizing management. In addition, costs of operations
for Insituform New England, Insituform Midwest and Gulf South of approximately
$5.5 million were included in 1993 consolidated operations, including
amortization of additional goodwill and noncompete obligations of $1.1 million.
This increase was offset partially by savings realized upon the elimination of
duplicative facilities and employees in the United Kingdom in 1993, following
the acquisition of IGL in December 1992.
Research and development costs decreased 37.2% to $2.7 million in 1993
compared to $4.3 million in 1992, primarily due to the realignment of employee
responsibilities from research and development to technical support and
marketing, as well as the cost savings experienced in the United Kingdom due to
the combination of research and development efforts of ITI with those previously
conducted by IGL through the elimination of redundancies.
Merger and restructuring costs in 1992 were incurred in conjunction with
the acquisition of IGL and, in 1993, restructuring credits primarily from the
early termination of a sub-lease under the Langley lease resulted in the receipt
of $845,000. At December 31, 1993, ITI was seeking to negotiate a termination of
the underlying lease in Langley. As discussed above, ITI realized certain cost
savings in 1993 as a result of the elimination of duplicative facilities and
employees.
Other Income (Expense). Other income (expense) decreased 117.2% to
($511,000) from $2.9 million in 1992. The decrease was primarily attributable to
$1.2 million of additional interest incurred on debt issued to fund the
acquisitions of Insituform New England, Insituform Midwest and Gulf South. In
addition, investment income decreased $1.1 million, resulting from lower
investment portfolio balances, as well as lower market interest rates. ITI also
incurred costs of $276,000 associated with a postponed public equity offering.
Taxes on Income. Taxes on income applicable to continuing operations
decreased 21.4% to $3.3 million in 1993 from $4.2 million in 1992 as a result of
a decrease in the effective tax rate to 31.5% from 192.2%, partially offset by a
$12.7 million increase in income before taxes on income. In 1992, a significant
portion of ITI's IGL merger costs of $9.7 million was not deductible for federal
income tax purposes. In addition, in accordance with the provisions of
Accounting Principles Board Opinion No. 11, Accounting for Income Taxes, ITI did
not recognize the expected amount of income tax benefits associated with its
$4.9 million restructuring provision in 1992 due to existing net operating loss
situations in certain of the applicable jurisdictions.
As permitted by FAS 109, ITI elected to include the cumulative effect of
this accounting change in its statement of income in the period of initial
application. The application of this standard resulted in the $2.1 million
reduction of previously recorded net deferred income tax liabilities, of which
$1.8 million related to future income tax benefits of pre-acquisition NOLs of
certain subsidiaries and which has been recorded as a reduction to the costs in
excess of assets of the businesses acquired. Except for the inclusion of the
cumulative effect of $218,000, or $.02 per share, in the first quarter 1993 net
income, the application of this statement had no material impact on the results
of operations. In its financial statements, ITI reported net deferred income tax
assets of $2.4 million as of December 31, 1993.
Discontinued Operations. In connection with ITI's determination to
discontinue the operations of its division engaged in the off-site
rehabilitation of downhole tubulars for the oil and gas industry, ITI put the
business and the related assets, including a facility located in Dallas, Texas,
up for sale or liquidation during 1994. As a result, ITI recorded a charge of
$2.0 million ($1.3 million net of applicable income tax benefit) in the fourth
quarter to write down the division's assets to their estimated net realizable
value and to accrue for operating losses estimated at $585,000 during the
anticipated phase-out period.
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The downhole tubular division's revenues for the years ended December 31,
1993 and 1992 were $1.9 million and $.2 million, respectively. The downhole
tubular division did not commence operations until the third quarter of 1992.
The results of operations for the downhole tubular division have been
reclassified to separately identify them as discontinued operations. For the
years ended December 31, 1993 and 1992, operating losses, net of applicable
income tax benefits were $1.1 million and $.5 million, respectively.
Net Income. Total revenues increased by $4.9 million or 5.2% in 1993 over
the prior year, which was coupled with an increase in gross profit of $4.6
million or 12.9%. Operating costs decreased $11.5 million, resulting in an
increase in operating income of $16.1 million. Excluding merger and
restructuring provisions in each year, operating income would have been $10.1
million in 1993, or $545,000 greater than the corresponding amount of $9.5
million in 1992. The decrease of $3.4 million in other income in 1993, was
partially offset by a decrease of $.9 million in taxes on income. As a result of
the foregoing, 1993 income from continuing operations was $7.3 million, compared
to $5.7 million loss in 1992 ($14.0 million of which was attributable to merger
and restructuring costs). Losses from discontinued operations were $2.5 million
and $540,000 in 1993 and 1992, respectively (net of applicable income tax
benefits, of $1.3 million and $278,000, respectively). ITI also recognized
$218,000 from the cumulative effect of an accounting change to FAS 109 in 1993.
As a result of the foregoing, net income was $5.0 million in 1993, an increase
of $11.2 million from the net loss of $6.2 million in 1992.
Pro Forma Combined Operations (ITI/IMA). Giving pro forma effect (i) to
the consummation of the Merger, and assuming that the Merger will be accounted
for as a pooling-of-interests (so that the historical financial statements of
ITI and IMA are retroactively combined, as if the companies had been operating
as a single entity), (ii) to ITI's acquisition of Gelco and affiliates, and
assuming that such transaction (which has been accounted for under the purchase
method of accounting) had occurred on January 1, 1994, and (iii) to the Enviroq
Acquisition, and assuming that such transaction (which has been accounted for
under the purchase method of accounting) had occurred on January 1, 1994, for
the years ended December 31, 1994, 1993 and 1992 the combined companies would
have recorded revenues of $261.4 million, $151.8 million and $156.6 million. At
June 30, 1995, a 15% general partnership interest in Midsouth Partners was held
by a subsidiary of ITI and a 42.5% interest therein was held by a subsidiary of
Enviroq; and, as a consequence of the Enviroq Acquisition, Midsouth Partners has
been consolidated in the Pro Forma Combined Condensed Statements. See "Business
of ITI -- Investments" below for a description of arbitration proceedings
brought by the remaining partner of Midsouth Partners alleging an event of
default by Enviroq under the governing partnership agreement as a result of
entering into the Enviroq Agreement, and the purported exercise by such partner
of its alleged rights as a non-defaulting partner to name a majority of the
members of the management committee of Midsouth Partners, an action to which
both ITI and Enviroq have objected.
The increased aggregate revenues for the most recently completed fiscal
year reflect: (i) the operations of Gelco and its affiliates, and Enviroq, (ii)
the operations for the entire year of Gulf South and Insituform Midwest
(acquired by ITI in July 1993), (iii) greater market penetration through
increasing acceptance of the Insituform Process, and the normalization of IMA's
rehabilitation operations which had been adversely impacted by floods and rains
in the prior year, and (iv) the expansion of IMA's abrasion and corrosion
protection operations and improved market conditions for its tunneling
operations. In the prior period, the decrease in revenues reflected the weak
market for IMA's tunneling operations, the impact of excessive rains and floods
in IMA's area of operations, and decreased revenues in IGL Canada and Insituform
Permaline, attributable, respectively, to Canadian recessionary conditions and
to the changed priorities of privatized water authorities in the United Kingdom.
ITI and IMA believe that the trenchless rehabilitation processes offered by
them, including additional product introductions (in particular, involving the
PALTEM processes in pressure pipe applications in the gas utility industry),
will continue to find increased market acceptance, although there can be no
assurance that such processes will be able to effectively meet competitive
pressures, that any new products will be successfully introduced, or that recent
historical results will be indicative of future results. Given the geographical
limitations of the existing Insituform licenses, the markets in which ITI's and
IMA's Insituform contracting operations are conducted have historically not
overlapped.
The historical results of the combined companies for each of the three
years in the period ended December 31, 1994 confirm ITI's increasing
concentration of revenues derived from direct installation
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activities (85.3%, 75.3% and 73.0%, respectively, of total revenues for the
combined companies, as compared to 74.0%, 62.6% and 55.7%, respectively, for ITI
alone, but including Gelco in the most recent year), resulting from the
acquisition of domestic licensees. For the six months ended June 30, 1995, 86.4%
of total revenues for the combined companies were derived from direct
installation operations (as compared to 77.3% for ITI alone).
ITI's corresponding pro forma combined gross profit would have increased to
$91.1 million, $55.9 million and $58.1 million for the years ended December 31,
1994, 1993 and 1992, respectively (compared to $61.3 million, $40.4 million and
$35.8 million, respectively, for ITI alone, but including Gelco in the most
recent year), as a result of additional construction contract revenue in IMA
(including Enviroq). Such amounts represent 34.9%, 36.8% and 37.1%,
respectively, of total revenues (compared to 37.3%, 40.2% and 37.5%,
respectively, for ITI alone, but including Gelco in the most recent year),
reflecting the change in revenue mix. For the six months ended June 30, 1995 and
1994, pro forma combined gross profit would have been $45.5 million and $40.1
million, respectively (compared to $30.2 million and $27.0 million,
respectively, for ITI alone, but including Gelco in the earlier period),
representing 32.7% and 35.3% of total revenues, respectively (or 36.2% and
38.3%, respectively, for ITI alone, but including Gelco in the earlier period).
Selling, general and administrative costs in the combined companies, as a
percentage of total revenues, would have been 19.3%, 20.9%, 25.7% and 20.1% for
the six months ended June 30, 1995 and the years ended December 31, 1994, 1993
and 1992, respectively (compared to 20.7%, 23.2%, 27.5% and 23.0%, respectively,
for ITI alone, but including Gelco in the most recent year). ITI believes that
savings may be achieved by the combined companies, including without limitation,
potential savings through elimination of duplicative costs in contracting and
manufacturing operations and administration.
In accordance with generally accepted accounting principles applicable to a
pooling-of-interests, all costs associated with the Merger, estimated in the
amount of $6.5 million, will be charged to operations in the quarter in which
the Merger is effected. In accordance with such principles as so applied, all
restructuring provisions, estimated in the amount of $7.0 million, will be
expensed primarily in the quarter in which the transaction is completed and in
the months following the consummation of the Merger. Of the costs associated
with the Merger, ITI anticipates aggregate expenses in connection with the
transaction of approximately $3.8 million, and IMA anticipates aggregate
expenses in connection with the transaction of approximately $2.7 million. The
restructuring provisions are anticipated to derive primarily from (i)
elimination of duplicative manufacturing operations, including the
rationalization of IMA's planned facility in Chesterfield, Missouri with ITI's
existing capacity, (ii) consolidation of operations conducted by ITI under the
UltraPipe name and related facilities maintained by ITI in Everman, Texas with
IMA's larger corrosion and abrasion protection activities, (iii) reorganization
of Insituform Process field crews and related facilities once territories
serviced by IMA's installation activities are combined with territories serviced
by ITI installation activities, and (iv) personnel-related costs.
On a pro forma basis, the effective tax rate of the combined companies was
38.1% and 40.4% for the six months ended June 30, 1995, and the year ended
December 31, 1994, respectively, compared to 39.0% and 38.2% for ITI alone (but
including Gelco in the most recent year). Both ITI and IMA operate in foreign
countries which have different tax rates than the United States. Accordingly,
the combined companies will also be subject to some fluctuation in effective tax
rates depending on the jurisdictions in which profits are generated, and in
which current operating losses may remain unutilized. Additionally, the
combining companies anticipate that, in the period in which the combination is
effected, the effective tax rate of the combined companies will be higher than
the pro forma combined effective tax rate presented as a result of the
non-deductibility of merger costs.
Income from continuing operations for the combined companies, on a pro
forma basis, would have been, $17.0 million, $9.7 million and $2.3 million for
each of the three years in the period ended December 31, 1994, respectively
($11.0 million, $7.3 million and ($5.7 million), respectively, of which would
have been derived from ITI alone, but including Gelco in the most recent year),
and $4.8 million and $7.0 million for the six months ended June 30, 1995 and
1994, respectively ($3.0 million and $4.3 million, respectively, of which would
have been derived from ITI alone, but including Gelco in the earlier period).
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LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1995, ITI reported $10.6 million in cash, U.S. treasury bills,
and short-term investments, as compared to $16.6 million at December 31, 1994
and $15.7 million at December 31, 1993. Cash and cash equivalents decreased $6.0
million during the six months ended June 30, 1995 as a result of $3.0 million of
cash used by operations and capital expenditures of $2.7 million. Cash and cash
equivalents increased $.9 million in the year ended December 31, 1994 as a
result of $14.7 million provided by operations, offset by capital expenditures
of $9.0 million and repayments of long-term debt of $5.8 million. ITI received
proceeds of $9.8 million from long-term debt during 1994 which it used primarily
to fund $9.4 million in expenditures for business acquisitions. The foregoing
contributed to a working capital ratio (current ratio) of 2.3-to-1 at June 30,
1995, constituting an increase from the 1.8-to-1 ratio at December 31, 1994,
which constituted a decrease from the 2.0-to-1 ratio at December 31, 1993.
Continuing operations used cash of $2.9 million during the six months ended
June 30, 1995, compared to cash provided by operations of $6.2 million during
the same period in the prior year. This change was primarily attributable to a
litigation loss (see "Business of ITI -- Legal Proceedings" below), reductions
in accounts payable and income taxes payable, and increases in prepaid expenses
and miscellaneous assets from the respective December 31, 1994 balances,
partially offset by increased depreciation and amortization and a slightly
smaller increase in receivables as compared with the six months ended June 30,
1994. Additional federal and state income tax payments were made by ITI in March
and June 1995 as a result of greater 1994 United States taxable income as
compared with that generated for the 1993 tax year. Further, in the first
quarter of 1995, ITI made its 1994 profit-sharing plan contribution and bonus
payments. Prepaid expenses and miscellaneous assets increased at June 30, 1995,
primarily due to the deferral of expenses of approximately $.8 million related
to the pending transaction with IMA. In addition, in April 1995 ITI realized a
gain on the disposal of its investment in Enviroq of approximately $.8 million;
ITI has recorded the proceeds from such disposition in the amount of
approximately $1.2 million in prepaid expenses and miscellaneous assets since
such proceeds were not received until August 1995.
Continuing operations provided $14.8 million in cash in 1994 as compared to
$5.3 million in 1993. This increase was due primarily to an increase in income
from continuing operations of $2.5 million, additional depreciation and
amortization of $1.2 million associated with continuing capital expenditures and
to incremental amortization of $.7 million relating to goodwill and
non-competition agreements arising from the acquisitions of the Gelco companies,
Gulf South and Insituform Midwest, and an increase of $4.3 million in income
taxes payable. Discontinued operations used cash of $.1 million in 1994 compared
to $.9 million in 1993.
During 1994, increases in accounts payable and accruals provided $2.3
million in cash as compared to 1993, in which $7.3 million was used, primarily
to retire approximately $10.0 million of non-recurring merger and restructuring
liabilities which arose during 1992.
Receivables, which include amounts unbilled and retainage receivables under
construction contracts, increased $2.5 million during the six months ended June
30, 1995 and $9.9 million during 1994 and decreased $.2 million in 1993. During
the first half of 1995, trade receivables decreased $.8 million from product
sales in the United States, Japan and, to a lesser extent, in the United
Kingdom, while retainage receivables decreased by $1.1 million. Primarily due to
the Gelco acquisition and the significantly increased activity of United States
contracting operations in 1994, receivables, including costs and estimated
earnings in excess of billings, increased 51.1% to $41.6 million from $27.5
million at December 31, 1993, reflecting a $1.9 million increase in retainage
receivables and an increase of $2.9 million in costs and estimated earnings in
excess of billings on construction contracts over 1993. The collection cycle for
construction receivables is generally longer than for ITI'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 collected
within 60 to 90 days after completion of a contract.
In October 1994, ITI acquired all of the outstanding common stock of Gelco
and affiliates, ITI's licensees of the Insituform Process in Oregon, Washington,
Idaho, Alaska, Hawaii, Guam, northern California and northern Nevada, portions
of Montana and British Columbia, and related assets. The purchase price of $18.0
million was paid with $9.0 million in cash at closing and $9.0 million in
promissory notes due on the first
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and second anniversaries of closing. In addition, ITI issued promissory notes,
aggregating approximately $2.85 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, subject to the rights
of Third National Bank in Nashville under its loan arrangements with ITI. See
Note 1 of the Notes to ITI's Consolidated Financial Statements included
elsewhere herein.
In February 1995, ITI acquired two-thirds of the stock of Insituform France
for the sum of approximately $1.4 million, which was funded with proceeds from
ITI's existing credit facility with Third National Bank in Nashville.
In view of the start-up nature of operations conducted by ITI under the
UltraPipe name, management of ITI is considering alternatives to continued
maintenance of facilities maintained in Everman, Texas, including, in the event
of consummation of the transaction with IMA, consolidation with IMA's larger
corrosion and abrasion protection activities. ITI has also been engaged in
discussions with respect to a potential sale by IGL Canada of the assets
utilized in its multi-service, open-cut sewer and water pipeline construction
and rehabilitation operations to certain members of management of IGL Canada,
for a purchase price equal to the book value at closing of the assets sold
(approximately $1.5 million at June 30, 1995, exclusive of inventory, which
would be included in the sale at cost calculated at closing). Such discussions
have included payment by IGL Canada to the purchasers of (i) $375,000, to
provide working capital for such business, and (ii) an amount to be determined
to assume warranty work to be performed after closing. Such transaction remains
subject to completion of such discussions and formulation of definitive
arrangements among the parties, and there can be no assurance that any such
transaction will be consummated.
Capital expenditures increased in 1994 to $9.0 million from $5.3 million in
1993, primarily as a result of additional equipment needed for expanding
construction contract volume. During 1994, ITI also received $1.2 million in
proceeds upon disposal of older equipment.
Financing activities provided $.4 million in cash during the first half of
1995, primarily reflecting borrowings to finance the acquisition of ITI's
interest in Insituform France and proceeds from issuance of ITI Common Stock
upon option exercises, offset by amortization of long-term debt. Financing
activities provided $3.6 million in cash during 1994 as compared with $35.0
million in 1993. During 1994, ITI received $9.8 million in proceeds from
long-term obligations, primarily utilized to fund the Gelco acquisition. In
1993, ITI borrowed in excess of $35.4 million in connection with the Gulf South
and Insituform Midwest acquisitions. Principal payments increased to $5.8
million in 1994 from $2.6 million in 1993, primarily as a result of ITI's 1993
borrowings under its Third National Bank of Nashville facility. At June 30,
1995, an additional installment of $1.05 million remained outstanding on ITI's
promissory note delivered upon completion of the acquisition of Insituform New
England in 1992, which has been deposited into escrow pending resolution of
outstanding matters with the seller.
ITI has outstanding borrowings of $35.2 million under its credit agreement
with Third National Bank in Nashville entered into in July 1993, which initially
provided for advances of up to $30 million and was subsequently amended in
August 1994 to provide for an additional $12 million so as to aggregate $42
million. Until June 1995, borrowings under this facility accrued interest,
payable quarterly on the original $30 million (and monthly through August 1995,
and then quarterly, on the additional facility), at the lesser of (i) the bank's
prime rate or (ii) 2.75% above a 30-day adjusted LIBOR rate, as defined in the
facility (or, if ITI maintained certain financial ratios, 2.25% above such
adjusted LIBOR rate). Quarterly principal payments of $1.1 million were due
until the facility was further amended in June 1995, with the entire remaining
principal due on December 31, 1997. The facility obligates ITI to comply with
certain financial ratios and restrictive covenants that, among other things,
limit the ability of ITI and its subsidiaries to incur further indebtedness, pay
dividends, make loans and encumber their properties, and requires guarantees of
certain domestic subsidiaries.
In June 1995, the facility was further amended to provide for additional
credit available for two years on a revolving basis, in the amount, together
with the then existing facility, aggregating up to $50 million, the additional
amounts to be utilized for working capital and expansion of ITI's business. The
amended facility provides that all new advances, together with all existing
indebtedness, are due in June 2000, subject to earlier
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installments after June 1997 based on a five-year amortization schedule for the
existing and additional indebtedness. Under the revised arrangements, interest
on all existing and additional indebtedness would be payable quarterly at a rate
selected monthly by ITI as either the bank's prime rate, plus a margin up to
.25% in the event certain financial ratios are not maintained, or a 30-day
adjusted LIBOR rate, plus a margin ranging from 1.75% to 2.25%, depending on
maintenance of certain financial ratios. Other covenants and guaranties
contained in the facility prior to amendment remain in effect.
ITI's senior subordinated note in the principal amount of $5 million,
acquired by Hanseatic Corporation in July 1993 for discretionary customer
accounts, 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 facility with Third National Bank
in Nashville), and purchase money debt incurred in completion with acquisitions
of businesses. The note is pre-payable at the option of ITI, at premiums until
the fifth anniversary of closing ranging from 3% to 1% of the amount prepaid,
and is subject to defeasance thereafter in the event ITI deposits cash or
government securities sufficient to service payments under the note. 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 ITI Common Stock of $14.25 and holders of such shares are
entitled to demand and incidental registration rights.
On May 21, 1995, ITI agreed to extend by one year, through July 1996, the
maturity of the note held by ITI issued by Ringwood Limited in the principal
amount of $3.624 million (see "Election of ITI Directors -- Other Information
Concerning Nominees for Director, Directors, Officers and Stockholders").
See Note 9 of the Notes to ITI's Consolidated Financial Statements included
elsewhere herein, for information describing credit lines obtained by ITI's
subsidiaries in Canada, the United Kingdom and Japan. At June 30, 1995, an
aggregate amount of $.9 million was outstanding, including bank overdrafts,
under such facilities. As more fully described under Note 11 of the Notes to
ITI's Consolidated Financial Statements included elsewhere herein, ITI also
remains obligated on industrial revenue and development bonds in the outstanding
aggregate principal amount of $4.9 million at June 30, 1995.
In October 1992, Naylor sold (the "NISI Sale") all of the common stock of
Naylor Industrial Services, Inc. ("NISI"), which was engaged primarily in the
provision of industrial cleaning services to refineries and chemical and
petrochemical manufacturing plants. As part of the NISI Sale, Naylor agreed to
indemnify the purchaser, with certain exceptions and subject to specified
limitations, against certain claims that may arise out of the breach by Naylor
of its representations, warranties and covenants to the purchaser or from
actions or omissions of Naylor prior to the NISI Sale, and further to indemnify
the purchaser for certain pending or threatened litigation claims that were
known to Naylor as of the date of purchase. At the time of ITI's acquisition of
Naylor, Naylor maintained general liability, worker's compensation and
automobile insurance policies with an annual aggregate coverage limit of $6
million, subject to per occurrence deductibles of up to $250,000 for worker's
compensation claims and up to $100,000 for general liability and automobile
claims. Although such coverage was obtained by Naylor so as to be generally
consistent with industry practice, there can be no assurance that any such
claims that arise, 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. ITI's financial statements reflect its
management's estimate of the likely amounts of such remaining premiums. At June
30, 1995, Naylor had outstanding letters of credit securing future premium
payments which were collateralized by cash and cash equivalents of approximately
$1.0 million.
As more fully described in Note 20 of the Notes to ITI's Consolidated
Financial Statements included elsewhere herein, ITI has also provided in its
financial statements for the estimated amounts of liabilities that are likely to
be incurred from pending litigation and claims involving Naylor. In addition, as
discussed in such note, ITI is a defendant in a lawsuit alleging various
misstatements and omissions relating to, among other things, costs arising from
its 1992 acquisition of IGL in public disclosures by ITI. Notwithstanding ITI's
belief that it has defenses to the plaintiff's claim that are well grounded in
fact and law, on May 23, 1995 ITI entered into a memorandum of understanding to
settle such litigation. Under the settlement, which has been
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evidenced by a stipulation of settlement and remains subject to court approval
and other customary conditions, ITI would make a cash payment to class members
in the amount of $3.2 million (which ITI has deposited into escrow) and issue to
class members 30,000 shares of ITI Common Stock which resulted in an after-tax
charge against second quarter 1995 net income in the order of approximately $2.2
million.
ITI is also reviewing settlement proposals received in connection with
certain litigation continuing before the Maine Superior Court, alleging labor
regulations violations by Insituform New England which pre-date the 1992
acquisition of such company by ITI. Such settlement would not become effective
unless Insituform New England is unsuccessful in its appeal of a prior judgment
rendered by the Maine court, and would liquidate the amount of Insituform New
England's liability to plaintiffs in the amount of $1.25 million, plus
attorneys' fees and costs. Under the arrangements pursuant to which ITI acquired
Insituform New England, ITI is indemnified by the seller against any damages and
expenses in connection with this litigation, and, without limiting ITI's
recourse, approximately $1.05 million is held in an escrow account jointly
maintained by counsel to the seller and counsel to ITI in order to secure such
obligation.
ITI has declined to grant its consent, as requested by Enviroq, a domestic
licensee, under various Insituform and NuPipe license agreements with Enviroq's
affiliates in connection with the agreement pursuant to which, on April 18,
1995, the pipeline rehabilitation business of Enviroq was acquired by IMA. See
"Business of ITI -- Legal Proceedings" below, for a description of the suit
filed by ITI in Tennessee Chancery Court (subsequently removed by defendants to
federal district court) seeking a declaratory judgment confirming such action.
ITI has agreed with IMA that, unless the Merger Agreement is terminated, neither
party will take any further action in such suit, or to assert any rights in
dispute as a result of consummation of the Enviroq Acquisition without ITI's
consent, except for certain procedural steps to preserve the respective rights
of the parties. See "The Merger -- Basic Terms of Merger Agreement
-- Cooperation Agreement" above. ITI has also communicated to IMA its
concerns regarding the ability of IMA to operate in compliance with its existing
Insituform licenses in view of IMA's commercialization of the PALTEM systems.
See "Business of ITI -- Licensing Operations" below. ITI and IMA would
anticipate prosecution or reinstatement of the foregoing litigation if the
Merger Agreement were terminated prior to completion of the Merger, or other
litigation addressing the same subject matter or other matters, or possibly
other approaches to resolving the outstanding issues between the parties in the
absence of mutually agreeable alternative arrangements.
Management believes its working capital and its existing credit
availability will be adequate to meet its capital requirements for the
foreseeable future.
On May 23, 1995, ITI, ITI Sub and IMA executed the Merger Agreement. See
"The Merger -- Basic Terms of Merger Agreement." ITI presently plans to
consummate the Merger after the occurrence (or waiver) of all conditions
precedent. ITI has deferred approximately $.8 million of expenses incurred
through June 30, 1995 related to the Merger, which will be expensed in the
quarter in which the transaction is completed. ITI anticipates that the total
amount of expenses, exclusive of reorganization provisions, related to the
transaction (including amounts deferred through June 30, 1995) will be
approximately $6.5 million, $3.8 million of which ITI estimates will be incurred
by it and $2.7 million of which IMA estimates will be incurred by it. See
"-- Results of Operations -- Pro Forma Combined Operations (ITI/IMA)" above for
information concerning reorganization provisions anticipated in the event the
Merger is consummated.
In the event the Merger is consummated, and assuming that the Merger is
accounted for on a pooling-of-interests basis, at June 30, 1995 the combined
companies would have had $13.7 million in cash and cash equivalents ($2.9
million of which derive from IMA), and a working capital ratio (current ratio)
of 1.7-to-1. Long-term debt of the combined companies, on a pro forma basis,
would have been $67.2 million ($14.0 million of which is attributable to IMA
indebtedness incurred in connection with the Enviroq Acquisition). See
"IMA -- Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources" for information regarding
demands made for repayment of a $3 million subordinated note, which IMA has
reclassified as a current liability. In the event the Merger is consummated,
management of ITI believes working capital, credit availability (including IMA's
credit lines; see "IMA -- Management's Discussion and Analysis of Financial
Condition and Results of Operations") and liquid assets will continue to be
adequate to meet requirements for the foreseeable future.
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In anticipation of any plans for the expansion of ITI's business and for
general corporate purposes following the completion of the Merger, and in order
to consolidate the long-term debt of ITI and IMA, ITI has obtained the
commitment of Third National Bank in Nashville with respect to an expansion of
ITI's current facility, subject to closing with IMA under the Merger Agreement.
The expanded facility would provide for advances by participating lenders, on a
revolving basis over a two-year period following closing, of up to $100 million,
$35.5 million of which would represent ITI's indebtedness under the current
facility and $15.6 million of which would be utilized to refinance IMA's
long-term indebtedness. Such indebtedness would mature five years after closing,
subject to prior installments after the second year based on a five-year
amortization schedule. Interest on all indebtedness under the expanded facility
would be payable at a rate selected by ITI as either the bank's prime rate, plus
a margin of 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 maintenance of certain financial ratios. Any such
arrangements remain subject to definitive documentation, which would include any
modification of other covenants and guarantees contained in the existing
facility, and completion of the group of participating lenders.
Following completion of the Merger, and in connection with any plans for
the expansion of ITI business and for general corporate purposes, ITI may
consider an offering of shares of ITI Common Stock or convertible or other debt.
ITI 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 STANDARD
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for the Long-Lived Assets to be Disposed Of ("FAS 121").
FAS No. 121 requires that long-lived assets, certain identifiable intangibles
and goodwill to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
FAS No. 121 is effective for ITI beginning with the year ending December
31, 1996. Management of ITI is currently evaluating the impact of the adoption
of this accounting standard on ITI's operating results and financial condition,
and management does not anticipate a material effect.
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SELECTED FINANCIAL DATA OF IMA
The selected financial data of IMA set forth below has been derived from
IMA's consolidated financial statements included herein and previously published
historical financial statements of IMA not appearing herein. The selected
financial data at and for the nine months ended June 30, 1995 and 1994 is
unaudited; however, in the opinion of the management of IMA, include all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the results of operations and the financial position for
and as at the end of each of the interim periods presented. Operating results
for the nine months ended June 30, 1995 are not necessarily indicative of the
results that may be obtained for the entire fiscal year ending September 30,
1995. The selected data of IMA set forth below and should be read in conjunction
with "IMA -- Management's Discussion and Analysis of Financial Condition and
Results of Operations" and IMA's Consolidated Financial Statements, including
the notes thereto, contained elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30, YEAR ENDED SEPTEMBER 30,
------------------ -------------------------------------------
1995(1) 1994 1994 1993(2) 1992(3) 1991 1990
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues....................... $77,611 $54,293 $75,279 $60,086 $66,690 $49,545 $36,272
Income from continuing operations.... 4,956 3,743 5,049 3,408 7,676 5,354 3,375
Income from continuing operations per
common share....................... .45 .34 .45 .31 .70 .52 .33
Dividends per share of IMA Class A
Common Stock....................... .14 .14 .14 .14 .10 .07 .06
BALANCE SHEET DATA (AT PERIOD END):
Total assets......................... 91,920 54,488 63,879 52,936 45,116 34,414 22,690
Long-term debt....................... 14,024(4) -- -- -- 341 360 425
</TABLE>
---------------
(1) In April 1995, IMA completed the Enviroq Acquisition, which has been
accounted for under the purchase method of accounting.
(2) In November 1992, IMA acquired substantially all of the assets of Pipeline
Rehabilitation Systems, Inc., which has been accounted for under the
purchase method of accounting.
(3) In October 1991, IMA acquired United Pipeline Systems Inc. ("UPSI"), which
has been accounted for under the purchase method of accounting. In
connection with such acquisition, IMA acquired all of the outstanding stock
of United Corrosion Corporation, the parent of UPSI.
(4) See "IMA Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" below for
information regarding demands made for payment under IMA's $3.0 million
subordinated promissory note issued in the Enviroq Acquisition and IMA's
reclassification thereof as a current liability at June 30, 1995.
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IMA -- MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
IMA's results of operations are affected by the nature and level of
activity of its three principal product lines: pipeline system rehabilitation
(including the Insituform Process); corrosion and abrasion protection; and
tunneling. Revenues and profit contribution from these product lines tend to be
affected by various factors unique to each, including market demand and
competitive conditions, weather conditions, product mix within each line and
whether IMA is furnishing proprietary technology or acting as general contractor
on particular projects.
Over the past three fiscal years, IMA's contract revenues increased from
$66.7 million to $75.3 million. This growth resulted principally from increases
in Insituform Process volume derived from IMA's licensed territories, as well as
growth in IMA's corrosion and abrasion protection business, especially in Canada
and Chile. These factors were offset in part by a decrease in tunneling revenues
due to weakness in the construction markets in the areas served by IMA. Contract
revenues were adversely affected in fiscal 1993 by the flooding and rains which
occurred in IMA's Midwest operating area, and the increase from $60.1 million in
fiscal 1993 to $75.3 million in fiscal 1994 reflects, in large measure, the
return to more normal weather conditions in the most recently completed fiscal
year.
Income from operations and net income during the past three fiscal years
generally reflected trends similar to changes in contract revenues for the
above-stated reasons. Additionally, margins in the corrosion and abrasion
operation decreased in fiscal 1994 due to operations of IMA's Latin American
subsidiary as general contractor, which carry lower margins than those achieved
from IMA's proprietary technologies. Over the past two years, tunneling margins
were significantly constrained by competitive pressures. Also during such
period, IMA incurred significant costs associated with the development of IMA's
PALTEM product line which was acquired early in fiscal 1993.
During the nine months ended June 30, 1995, contract revenues increased
significantly compared to the corresponding period of the prior year due
primarily to the growth in Latin American operations and recovery of the
tunneling market. Despite these increases, margins were adversely affected by
general contracting activities of the corrosion and abrasion protection
operations and by the effect of competitive conditions on tunneling
profitability. PALTEM development costs also continued to negatively affect
IMA's operating margin.
On April 18, 1995, IMA completed the Enviroq Acquisition. IMA expects that
such acquisition will add significant incremental Insituform revenues in future
periods. For its fiscal year ended March 1995, Enviroq reported Insituform and
NuPipe revenues of $20.3 million. See "The Merger -- Basic Terms of Merger
Agreement -- Cooperation Agreement" above for a description of the moratorium on
assertion of rights in dispute, including with respect to the Insituform
licenses of Enviroq's subsidiaries, as a result of the consummation of the
Enviroq Acquisition without ITI's consent. IMA incurred $15.25 million of
long-term senior bank debt to finance the cash portion of the purchase price of
the acquisition. In connection with the acquisition IMA also issued a five-year
$3 million subordinated note in consideration for a covenant not to compete and
agreed to pay $1 million for consulting services over five years. See
"-- Liquidity and Capital Resources" below for information regarding demands
made for payment under the foregoing subordinated note, which IMA has
re-classified as a current liability.
Nine Months Ended June 30, 1995 and 1994
Contract revenues for the nine months ended June 30, 1995 were $77.6
million, an increase of 43% from the corresponding period in fiscal 1994.
Corrosion and abrasion protection revenues increased 173% as a result of the
Latin American general contracting and Tite Liner operations. Tunneling revenues
increased 98% due to the continuation of more normalized market conditions.
Rehabilitation revenues, generated primarily by the Insituform Process,
increased 6% due principally to the consummation of the Enviroq Acquisition on
April 18, 1995. See "The Merger -- Basic Terms of Merger
Agreement -- Cooperation Agreement" above for a
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description of the moratorium rights in dispute, including with respect to the
Insituform licenses of Enviroq's subsidiaries, as a result of the consummation
of the Enviroq Acquisition without the consent of ITI.
Gross profit for the nine months ended June 30, 1995 was $20.3 million, a
35% increase compared to the amount reported in the prior-year period. The
increase resulted from the contract revenue increases. Gross profit as a
percentage of contract revenues was 26.2% for the recent year-to-date period,
compared to 27.8% in the corresponding period of the prior year. The reduction
in gross profit percentage for the current year period was primarily
attributable to IMA's operating as a general contractor in its corrosion and
abrasion business in Latin America, which yields lower profit margins than
revenues generated by IMA's proprietary technologies.
The 28% increase in operating expenses for the year-to-date period resulted
primarily from the research and development costs associated with development of
high pressure PALTEM products, operating expenses attributable to the Enviroq
Acquisition and administrative expenses for the corrosion and abrasion
protection operations in Latin America which commenced in January 1994. For the
year-to-date period, operating expenses represented 14.4% for contract revenues
compared to 16.1% in the prior year period, as contract revenue growth continued
to outpace operating expense increases.
Income from operations for the nine-month period June 30, 1995 represented
11.8% of contract revenues. For the current fiscal year, income from operations
increased 44% over the comparable period in the prior year, primarily as a
result of improved leveraging of operating expense, partially offset by the
reduction in gross profit margin.
Net income for the nine month period ended June 30, 1995 increased 32% over
the prior year period and represented 6.4% of contract revenues compared to 6.9%
for the comparable period of the prior year. The reduction in net income as a
percentage of contract revenues was attributable to the allocation of income to
the owner of the minority interest in IMA's Latin American subsidiary which is
reported on a consolidated basis.
Year Ended September 30, 1994 compared to Year Ended September 30, 1993
In 1994, contract revenues increased 25% over the prior year, due to
normalization of rehabilitation operations which had been adversely impacted by
floods and rains in the prior year, the start-up of abrasion and corrosion and
pipeline construction operations in Latin America, an improved Tite Liner market
in Canada, and improved market conditions for IMA's tunneling operations.
The growth in contract revenues resulted in a 26% increase in gross profit
over the prior year. As a percentage of contract revenues, gross profit improved
from 27.5% to 27.6%, even though IMA's tunneling business continued to
experience lower than historic margins due to a weak construction market. Also,
the pipeline construction work undertaken in Latin America adversely impacted
margins, because of IMA's acting as general contractor, which activity generally
carries lower margins than IMA achieves on work performed utilizing the
Company's proprietary methods. These reductions were offset by improvements in
rehabilitation revenue margins attributable primarily to improved installation
efficiencies.
Operating expenses increased 10% primarily as a result of costs associated
with the start-up of the Latin American operation and increased research and
development expenses for the PALTEM product line. As a percentage of contract
revenues, operating expenses were 15.4% for 1994 compared to 17.5% in 1993, as
contract revenues grew faster than operating expenses.
Income from operations as a percentage of contract revenues increased from
10.0% to 12.2%, resulting primarily from improvement in expense leveraging as
contract revenues increased.
Net income increased 48% as a result of contract revenue growth and
improved operating margins. As a percentage of contract revenues, net income
increased from 5.7% to 6.7% due to increased operating margins. Offsetting the
improvement somewhat was the income allocated to the owner of the minority
interest in a consolidated subsidiary and an increase in the effective tax rate
from 40.4% to 41.7% due to a change in mix of profit contributions among
non-U.S. operations.
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Year Ended September 30, 1993 Compared to Year Ended September 30, 1992
Contract revenues decreased 10%, principally due to the weak market for
tunneling. Strong demand for IMA's rehabilitation processes, particularly the
Insituform Process, enabled IMA to increase rehabilitation process revenues by
5%, despite the adverse effects of excessive rains and floods experienced
throughout most of IMA's Insituform licensed territories. Corrosion and abrasion
protection revenues increased 7%, despite weak economic conditions in Canada and
a weakening of the Canadian dollar by approximately 7%. This increase resulted
from the continuing development of the U.S. marketplace, primarily in the mining
sector.
A 22% reduction in gross profit resulted from the reduction in contract
revenues. The decrease from 31.9% to 27.5% in gross profit as a percentage of
contract revenues was due primarily to the underutilization of equipment in
rehabilitation and tunneling operations.
Operating expenses, associated with the PALTEM product line acquired in
November 1992 were the primary cause for the 17% increase in operating expenses.
The increase in operating expenses as a percentage of contract revenues
from 13.5% to 17.5% resulted from the aforementioned decrease in contract
revenues and PALTEM-related expenses.
The reduction in operating income and operating income margin was
attributable to the reduction in gross profit and the expenses associated with
the PALTEM operation.
Net income decreased 56% from the prior year amount and represented 5.7% of
contract revenues compared to 11.5% in the prior year. These reductions were the
result of the above-described factors which negatively impacted gross and
operating profit margins. In addition, IMA's current year results were affected
by an increase in its effective tax rate from 36.7% to 40.4%, which increase was
attributable primarily to a change in the mix of profit contributions among
non-U.S. operations.
Pro Forma Combined Operations (IMA/Enviroq). Giving pro forma effect to
the consummation of the Enviroq Acquisition, which has been accounted for by IMA
on the purchase method, as if such transaction had occurred on the first day of
the respective fiscal periods, IMA would have reported contract revenues of
$58.3 million and $105.2 million, respectively, for the six months ended June
30, 1995 and the twelve months ended December 31, 1994. The IMA/Enviroq pro
forma consolidated income statement (see "Unaudited Pro Forma Combined Condensed
Financial Information" above) illustrates the significant incremental Insituform
Process revenues which the Enviroq Acquisition would have added to IMA's
rehabilitation contract revenues. As a result, it is anticipated that one future
effect of the Enviroq Acquisition will be to increase the proportion of pipeline
system rehabilitation revenues compared to revenues from IMA's other product
lines. See "The Merger -- Basic Terms of Merger Agreement -- Cooperation
Agreement" above for a description of the moratorium on assertion of rights in
dispute, including with respect to the Insituform licenses of Enviroq
subsidiaries, as a result of the consummation of the Enviroq Acquisition without
ITI's consent.
The pro forma consolidated income statements also illustrate the effect of
Enviroq's historical cost structure on IMA's historical performance. IMA
reported gross profit margins of 27.7% and 25.8% for the twelve months ended
December 31, 1994 and the six months ended June 30, 1995, respectively, compared
to gross margins of 26.6% and 24.1% on a pro forma basis including Enviroq for
such periods. IMA will seek to improve the cost structure of Enviroq's
operations over time by introducing contracting efficiencies utilized by IMA,
however, there can be no assurance that such improvements will be realized.
Operating income as a percentage of contract revenues also illustrates the
effects of the differences in historical cost structures of the two companies.
IMA reported income from operations as a percentage of contract revenues of
12.7% and 9.5%, respectively, for the twelve months ended December 31, 1994 and
six months ended June 30, 1995. On a pro forma basis, such ratios were 11.1% and
7.2%, respectively, for the corresponding periods. This reflects differences in
the cost structures of the two companies, particularly, IMA's historical ability
to leverage overhead costs over a larger revenue base and achieve economies of
scale. In addition, the pro forma financial statements give effect to
amortization of goodwill under the purchase method of accounting, amortization
of non-compete costs of $.6 million per year and reflect a $.2 million annual
consulting fee payable in connection with the Enviroq Acquisition.
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The pro forma consolidated income statements also illustrate the effect of
additional interest expense of $.4 million for the six-month period and $1.1
million for the twelve-month period resulting from the $15.25 million term loan
used to fund the Enviroq Acquisition and the $3.0 million subordinated
promissory note issued in respect of a non-compete agreement. Interest on the
term loan will vary based upon, at IMA's option, LIBOR or prime rate. Interest
on the subordinated promissory note is fixed at 6% per annum. See "-- Liquidity
and Capital Resources" below for information regarding demands made for payment
under the foregoing subordinated note.
As a result of the Enviroq Acquisition, the effective tax rate of the
combined company increases significantly due to the inability to deduct the
goodwill created by the transaction for tax purposes. For the twelve months
ended December 31, 1994 and the six months ended June 30, 1995, IMA reported
effective tax rates of 40.2% and 36.7%, respectively. On a pro forma basis, the
effective tax rates increase to 43.5% and 39.3% for such periods.
LIQUIDITY AND CAPITAL RESOURCES
IMA's current ratio decreased to 1.4-to-1 as of June 30, 1995 from 1.5-to-1
at fiscal year end. The decrease in the current ratio at June 30, 1995 was
primarily attributable to the reclassification of IMA's subordinated promissory
note, as described below. For the nine months ended June 30, 1995, IMA expended
approximately $.3 million in cash for operating activities, the major uses of
which were an increase in costs and estimated earnings in excess of billings on
uncompleted contracts of approximately $4.5 million, resulting from timing
differences between the recognition of costs incurred for two tunneling projects
and one corrosion and abrasion project compared to the contractual terms as to
when the customer may be invoiced for work completed. IMA anticipates that a
major portion of this increase associated with these three projects will be
invoiced by the end of IMA's fourth fiscal quarter. Inventory increased for the
nine months ended June 30, 1995 by approximately $1.6 million, due primarily to
purchases pursuant to IMA's license agreement for its PALTEM systems products
and inventory stocks associated with the commencement of limited manufacturing
operations for rehabilitation and corrosion and abrasion protection products.
Prepaid expenses and other current assets increased for the nine months ended
June 30, 1995 by approximately $900,000, with the majority of the increases
representing an insurance claim receivable. Accrued expenses decreased for the
nine months ended June 30, 1995 by $3.3 million, of which a major portion
related to the completion of a large construction project in Latin America.
As of June 30, 1995, approximately $1.1 million of cash represented cash of
foreign subsidiaries. Unremitted earnings from foreign subsidiaries as of such
date approximated $3.3 million. IMA does not provide for federal income taxes on
such unremitted earnings because earnings are reinvested and, in the opinion of
management of IMA, will continue to be reinvested indefinitely. Upon
distribution of these earnings in the form of dividends or otherwise, IMA would
be subject to both United States income taxes and withholding taxes in the
various international jurisdictions. Withholding taxes would be payable if all
previously unremitted earnings were remitted to the United States company. A
portion or all of such withholdings taxes may be offset as credits against the
United States income taxes payable.
For the nine months ended June 30, 1995, IMA recorded capital expenditures
of approximately $5.3 million of which approximately $2.1 million related to the
construction of a new manufacturing facility and $3.2 million was for equipment
purchases.
IMA's current ratio decreased from 1.7-to-1 as of September 30, 1993 to
1.5-to-1 as of September 30, 1994. The decrease in the current ratio was
primarily attributable to the start-up of IMA's Latin American operation, which
expended approximately $3.9 million for capital expenditures, offset by
approximately $1.2 million of deferred income taxes which were reclassified to a
long-term liability status as a result of IMA's adoption of Statement of FAS
109.
IMA's operations generated approximately $10.7 million of cash in 1994
compared to $7.2 million in the prior year. Cash provided by operating
activities was primarily used for capital expenditures of $9.9 million
(consisting mainly of buildings and equipment purchases) and payment of cash
dividends aggregating
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$1.5 million. The cash balance of $3.1 million as of September 30, 1994
primarily represented cash and cash equivalents of foreign subsidiaries invested
in United States dollar denominated short-term investments.
As of fiscal year-end, IMA reported an increase in costs and estimated
earnings in excess of billings on uncompleted contracts of approximately $4.3
million over the amount reported at the end of fiscal 1993. The increase
primarily represented timing differences between billing of work completed and
the cutoff date for financial statement purposes for two large tunneling
projects.
At September 30, 1993, IMA reported an insurance claim receivable of $3.0
million. Such receivable had been eliminated by year-end 1994, as during fiscal
1994 IMA received proceeds from claims filed under various insurance policies,
which were used for the repair and replacement of flood-damaged buildings and
equipment.
During 1994, IMA maintained a short-term $10 million unsecured line of
credit for working capital purposes. Subsequent to September 30, 1994, IMA
increased the unsecured line of credit to $13 million. During fiscal 1994, the
average balance drawn under the line of credit was approximately $4.2 million
and the largest outstanding balance was $6.8 million. During the second fiscal
quarter, IMA entered into a new bank credit agreement pursuant to which its
short-term unsecured working capital line of credit was increased to $20
million. The line of credit was further increased to $23 million in September
1995. Interest on the line of credit is payable, at IMA's option, at the bank's
prime rate or a rate tied to LIBOR. The applicable interest rate was 8.5% per
annum at June 30, 1995. IMA believes that the existing line of credit and funds
generated internally from operations are adequate for IMA's current capital
needs.
On April 18, 1995, IMA completed the Enviroq Acquisition. Pursuant to the
transaction, IMA paid $15.25 million cash funded by a seven-year term loan from
IMA's banks. Principal payments of such loan amortize at the rate of $1.5
million per year during the term thereof. Under the term loan arrangement, IMA
granted first mortgages on various real estate it owns and pledged all the
shares of its U.S. subsidiaries and a portion of the shares of its Canadian
subsidiaries. The term loan agreement contains customary representations and
warranties and affirmative and negative covenants, including the maintenance of
certain financial ratios and a prohibition on the payment of cash dividends in
excess of the regular dividend rate currently in effect, which dividend payments
require the lenders' consent as a result of the execution of the Merger
Agreement. In addition, IMA issued a $3 million five-year subordinated
promissory note (the "Subordinated Enviroq Note") in consideration for a
covenant not to compete and entered into an agreement for consulting services
providing for IMA's payment of $1 million over five years.
By letter dated July 14, 1995, counsel for Enviroq Corporation (formerly
known as New Enviroq Corporation; "New Enviroq") alleged that an event of
default had occurred with respect to the payment of the interest due to New
Enviroq on June 30, 1995 under the Subordinated Enviroq Note. New Enviroq
demanded payment of such interest installment and purported to declare the
entire principal, in the amount of $3 million, due and payable. IMA advised New
Enviroq that such purported acceleration was improper and directed New Enviroq
to withdraw it. On August 1, 1995, New Enviroq filed a lawsuit against IMA in
the Circuit Court of Jefferson County, Alabama, seeking a judgment in respect of
IMA's alleged default under the Subordinated Note.
IMA denies liability to New Enviroq and intends to vigorously defend the
lawsuit and pursue claims against New Enviroq arising out of the Enviroq
Acquisition, including Enviroq's obligations under the Enviroq Agreement. IMA's
senior lenders have waived the event of default under IMA's principal financing
agreements which otherwise would have occurred as a result of New Enviroq's
actions in respect of the Subordinated Enviroq Note. IMA is seeking to negotiate
a mutually acceptable resolution regarding the status of the Subordinated
Enviroq Note. Pending such resolution, IMA has classified the obligation as a
current liability. In IMA's opinion, the ultimate resolution thereof will not
have a material adverse effect upon IMA's financial condition or results of
operations.
See "The Merger -- Basic Terms of Merger Agreement -- Cooperation
Agreement" above for a description of the moratorium on assertion of rights in
dispute, including with respect to the Insituform licenses of Enviroq's
subsidiaries, as a result of the consummation of the Enviroq Acquisition without
ITI's consent, and "IMA -- Legal Proceedings" below for information concerning
arbitration proceedings initiated
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<PAGE> 94
by one of the partners of Midsouth Partners (in which a subsidiary of IMA
acquired in the Enviroq Acquisition owns a 42.5% general partnership interest)
alleging an event of default by such subsidiary. If the Merger Agreement is not
approved by stockholders of IMA and ITI, respectively, IMA and ITI anticipate
that they would engage in litigation arising out of the disputes between the
parties (including the Enviroq Acquisition), if they are unable to reach a
mutually acceptable settlement.
On May 23, 1995, IMA entered into the Merger Agreement. IMA has deferred
approximately $.3 million of expenses incurred through June 30, 1995 related to
the transaction, which will be expensed in the quarter in which the transaction
is complete. IMA anticipates that the total amount of expenses exclusive of
reorganization costs related to the transaction (including amounts deferred
through June 30, 1995) will be approximately $2.7 million.
During April 1995, IMA commenced construction of a manufacturing facility
to produce materials used for proprietary rehabilitation technologies, including
those licensed under its agreement with Ashimori. IMA acquired land adjacent to
its headquarters building in fiscal 1994 for the construction of the facility.
Prior to the execution of the Merger Agreement, construction activities had
progressed to site excavation, completion of the foundation and erection of a
portion of the structural steel. To date IMA has funded the land acquisition and
construction expenditures utilizing borrowings under its line of credit. As a
result of the Merger Agreement, IMA and ITI have discussed the possible
relocation of the planned manufacturing processes to ITI's present facility. As
of the date hereof, IMA has not determined whether, in view of the covenants
contained in and consents required under the Merger Agreement, to complete
construction of the building for use as a manufacturing facility or an office
and operations facility or whether to seek to dispose of the property. It is
anticipated that such determination will be made in consultation with ITI based
upon the perceived needs of the proposed North American contracting operations
and the business plans of the combined companies after the Merger. If IMA
determines to utilize such property in connection with its future operations, it
would expect to obtain long-term financing therefor; however, it has abandoned
its previous plans to utilize industrial revenue bond financing for the project.
See "The Merger -- Basic Terms of Merger Agreement" for a description of the
covenants governing construction while the Merger Agreement is in effect.
IMA has entered into certain license agreements to offer pipeline
rehabilitation technologies. IMA anticipates that it will have no difficulty
exceeding its minimum royalty requirements under its Insituform licenses and its
Ashimori license. Based upon the favorable preliminary market reception of
PALTEM and IMA's evaluation of the long-term potential for this technology, IMA
is pursuing product development and manufacturing in the United States. IMA does
not believe that its commitments under its technology license agreements will
have a material adverse effect on its income from operations in future periods.
RECENTLY ISSUED ACCOUNTING STANDARD
In March 1995, the Financial Accounting Standards Board issued FAS No. 121.
FAS No. 121 requires that long-lived assets, certain identifiable intangibles
and goodwill to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
FAS No. 121 is effective for IMA fiscal year 1997. Management of IMA
believes that the adoption of this accounting standard will not have a material
impact on its operating results and financial condition.
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<PAGE> 95
ELECTION OF ITI DIRECTORS
At the ITI Meeting, stockholders will elect four directors denominated as
Class III directors. This is in accord with the ITI Charter which provides for
the division of its Board of Directors into three classes with the term of
office of the Class III directors expiring at the ITI Meeting. The remaining two
classes of directors will be elected at the Annual Meeting of Stockholders of
ITI to be held in 1996 and 1997, respectively, at which, in the event the Merger
is consummated, nominations will be made pursuant to the Merger Agreement. After
the expiration of the term of each class, the stockholders will elect directors
in each class to serve for a term of three years.
Accordingly, four Class III directors will be elected at the ITI Meeting,
each to serve for three years and until a successor has been elected and has
qualified. It is the intention of each of the persons named in the accompanying
form of proxy to vote the shares represented thereby in favor of the four Class
III nominees listed in the following table, unless otherwise instructed in such
proxy. Each such nominee is presently serving as a director of ITI. ITI's Board
of Directors has no reason to believe that any of the nominees listed in the
following table will be unable or will decline to serve. In case any of the
nominees is unable or declines to serve the persons named in the accompanying
form of proxy will vote the shares represented by such proxy for another person
duly nominated by ITI's Board of Directors in such nominee's stead or, if no
other person is so nominated, to vote such shares only for the remaining
nominees.
CERTAIN INFORMATION CONCERNING NOMINEES AND DIRECTORS
Certain information concerning: (i) the four nominees for election as Class
III directors of ITI, (ii) the other current directors of ITI of whose term of
office will continue after the ITI Meeting, and (iii) those individuals
designated by IMA for appointment to the ITI Board upon consummation of the
Merger, is set forth below. Such information was furnished by them to ITI:
<TABLE>
<CAPTION>
NAME OF DIRECTOR AGE BIOGRAPHICAL INFORMATION
-------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Nominees for Election:
CLASS III DIRECTORS
Brian Chandler............ 69 Private investor since prior to 1990; consultant to ITI
from prior to 1990 to 1994; Director of ITI since 1987.
James D. Krugman.......... 47 Partner, Krugman, Chapnick & Grimshaw (attorneys) since
prior to 1990; Chairman of the Board of ITI since 1988 and
Chief Executive Officer of ITI from April to October 1990
and from April to June 1989; Director: Hayward Industries,
Inc. and Meadox Medicals, Inc.; Director of ITI since 1987.
Jean-Paul Richard......... 52 President and Chief Executive Officer of ITI since 1993;
Chief Executive of Massey-Ferguson Group of Varity
Corporation from 1992 to 1993, and Senior Vice
President-Corporate Development of Varity from 1991 to
1992; Executive Vice President of Asea Brown Boveri, Inc.,
a subsidiary of Asea Brown Boveri, from 1990 to 1991;
Director: AGCO Corporation; Director of ITI since 1994.
Russell B. Wight, Jr...... 56 General Partner, Interstate Properties (real estate
development and construction) since prior to 1990;
Director: Vornado Realty Trust; Director of ITI since 1992.
</TABLE>
88
<PAGE> 96
<TABLE>
<CAPTION>
NAME OF DIRECTOR AGE BIOGRAPHICAL INFORMATION
-------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Other Directors Whose Term of Office
Will Continue After the ITI Meeting:
CLASS I DIRECTORS
Paul A. Biddelman......... 49 Treasurer, Hanseatic Corporation (private investment
company) since 1992; Managing Director, Clements Taee
Biddelman Incorporated (financial advisors) from 1991 to
1992; Managing Director, Corporate Finance Department,
Drexel Burnham Lambert Incorporated from 1982 to 1990;
Director: Celadon Group, Inc., Electronic Retailing Systems
International, Inc., Premier Parks Inc., Petroleum Heat &
Power Company, Inc., TLC Beatrice International Holdings,
Inc., Oppenheimer Group, Inc.; Director of ITI since 1988.
Douglas K. Chick.......... 71 Private investor since prior to 1990; consultant to ITI
from 1991 to 1994; Director of ITI since 1990.
Steven Roth............... 53 General Partner, Interstate Properties (real estate
development and construction) since prior to 1990; Chairman
and Chief Executive Officer, Vornado Realty Trust (real
estate operating company) since 1990; Chief Executive
Officer of Alexander's Inc. since March 1995; Director:
Vornado Realty Trust, Alexander's Inc.; Director of ITI
since 1992.
CLASS II DIRECTORS
William Gorham............ 64 President, The Urban Institute (government policy research)
since prior to 1990; Director of ITI since 1992.
Silas Spengler............ 64 Principal, Sullivan Associates, Inc. (board of directors
search firm) since 1994; Partner, Reid & Priest (attorneys)
from 1992 to 1994; Partner, Spengler Carlson Gubar Brodsky
& Frischling (attorneys) from prior to 1990 to 1992;
Director of ITI since 1987.
Sheldon Weinig............ 67 Consultant, Sony Engineering and Manufacturing of America
since 1994, and Vice Chairman from 1990 to 1994; Director:
Aseco Corporation, Unique Mobility, Inc., Intermagnetics
General Corporation; Director of ITI since 1992.
Designated by IMA for Appointment
at Effective Time:*
MERGER CLASS I DIRECTOR
Alvin J. Siteman.......... 66 Chairman of the Board and a director of Mark Twain
Bancshares, Inc. since prior to 1990; President of Flash
Oil Corporation, Site Oil Corporation, Site Oil Company of
Missouri and The Siteman Organization (oil and real estate)
since prior to 1990.
MERGER CLASS II DIRECTOR
Robert W. Affholder....... 59 President of IMA since 1994 and from prior to 1990 to 1993;
Vice Chairman of IMA from 1993 to 1995.
MERGER CLASS III DIRECTOR
Jerome Kalishman.......... 67 Chairman and chief executive officer of IMA since prior to
1990.
</TABLE>
---------------
* At the Effective Time, the Class I, Class II and Class III directors are
referred to, respectively, as the Merger Class I, Merger Class II and Merger
Class III directors.
Messrs. Kalishman, Affholder and Siteman are all directors of IMA, and none
currently serve on the Board of Directors of ITI.
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<PAGE> 97
In December 1992, in connection with the IGL Acquisition, the ITI Charter
was amended: (x) to divide the Board of Directors of ITI into three classes, as
equal in size as possible, having staggered three-year terms, with the term of
one class expiring each year; (y) to fix the number of directors of ITI at not
less than six nor more than 15, the exact number to be specified in the By-Laws
of ITI; and (z) to provide for the appointment of directors and the filling of
vacancies as contemplated by the agreement dated July 3, 1992, as amended
September 1, 1992 (the "IGL Acquisition Agreement"), among ITI, INA Acquisition
Corp. (ITI's wholly-owned subsidiary), and IGL. Upon consummation of the IGL
Acquisition, the Board of Directors of ITI was reconstituted to include: Messrs.
Spengler, Gorham and Weinig, for a term initially expiring at the 1993 annual
meeting of stockholders of ITI ("Class I Directors"); Messrs. Chick, Biddelman
and Roth, for a term initially expiring at the 1994 annual meeting of
stockholders of ITI ("Class II Directors"); and Messrs. Chandler, Krugman and
Wight, for a term initially expiring at the 1995 annual meeting of stockholders
of ITI ("Class III Directors"). Messrs. Spengler, Chick, Biddelman, Chandler and
Krugman were designated by ITI, and Messrs. Gorham, Weinig, Roth and Wight were
designated by IGL. ITI has further agreed that during the period from the
consummation of the IGL Acquisition to the sixth anniversary thereof (the
"Current Term"), ITI will nominate and recommend for re-election to its Board of
Directors, upon expiration of their terms, the Class I Directors, the Class II
Directors and the Class III Directors; and that, if during the Current Term any
director resigns or is unable to serve for any reason, such vacancy will be
filled with a designee chosen by the remaining members of that director's group
and thereafter ITI will nominate and recommend such designee for election to the
Board of Directors of ITI.
In March 1994, in connection with the commencement of Mr. Richard's
employment as President and Chief Executive Officer of ITI, ITI's Board of
Directors completed action to amend the By-Laws of ITI to increase the size of
the board from nine to ten, and to appoint Mr. Richard as a Class III Director,
to fill the vacancy created by the increase in the size of the board.
For a description of arrangements with respect to the composition of the
Board of Directors of ITI that will become effective upon consummation of the
Merger, see "The Merger -- Management of ITI Following Consummation of the
Merger" above.
No family relationship exists between any of the directors or executive
officers of the Company.
EXECUTIVE OFFICERS OF ITI
The executive officers of ITI, and their respective ages and positions with
ITI, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH ITI
---------------------------- --- -----------------------------------------------
<S> <C> <C>
James D. Krugman............ 47 Chairman of the Board
Jean-Paul Richard........... 52 President and Chief Executive Officer
William A. Martin........... 53 Senior Vice President -- Chief Financial
Officer
Anthony W. Hooper........... 47 Senior Vice President -- Marketing
Raymond P. Toth............. 47 Vice President -- Human Resources
</TABLE>
For information concerning Messrs. Krugman and Richard, see "-- Certain
Information Concerning Nominees and Directors" above.
William A. Martin has been Chief Financial Officer of ITI since 1988, a
Vice President from 1989 to January 1993 and a Senior Vice President since
January 1993.
Anthony W. Hooper has been Senior Vice President-Marketing of ITI since
November 1993. Mr. Hooper was previously, since 1992, President of Huyck
Formex/Weavexx Corporation, a North Carolina industrial textile and process
equipment manufacturer and subsidiary of BTR, Inc. From prior to 1990 to 1991,
Mr. Hooper was employed by Sprout Bauer, Inc., an industrial machinery and
systems manufacturer owned by Combustion Engineering, Inc., where he was Vice
President -- Marketing before becoming President of the Pulp and Paper Division.
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<PAGE> 98
Raymond P. Toth has been ITI's Vice President -- Human Resources since
February 1994. Since prior to 1990 and until joining the Company, Mr. Toth was
employed as Director of Human Resources for Sprout Bauer, Inc.
Effective upon consummation of the Merger, Mr. Kalishman would become Vice
Chairman of the Board of ITI and Mr. Affholder would become chief operating
officer of ITI's North American contracting operations. See "-- Certain
Information Concerning Nominees and Directors" above.
BOARD MEETINGS AND COMMITTEES
During the year ended December 31, 1994, the Board of Directors of ITI held
six meetings, and took action by unanimous written consent on six occasions. No
current director of ITI attended fewer than 75% of the aggregate number of
meetings of the Board of Directors of ITI and meetings of committees of the
board on which such person served which were held during the period that he
served.
The members of the Audit Committee of the Board of Directors of ITI are
Silas Spengler and Sheldon Weinig. The Audit Committee is responsible for
overseeing that management fulfills its responsibilities in connection with the
preparation of the consolidated financial statements of ITI and its
subsidiaries. The committee's functions include making recommendations to the
board regarding the engaging and discharging of ITI's independent auditors,
reviewing with the independent auditors the plan and the results of the auditing
engagement, reviewing the scope and results of ITI's procedures for internal
auditing, approving the professional services provided by the independent
auditors, reviewing the independence of the independent auditors, and reviewing
the adequacy of ITI's system of internal accounting controls. During the year
ended December 31, 1994, the Audit Committee held two meetings.
The members of the Compensation Committee of the Board of Directors of ITI
are Paul A. Biddelman, William Gorham, James D. Krugman and Steven Roth. The
functions of the Compensation Committee including making recommendations to the
Board of Directors of ITI regarding the salaries, bonuses, fringe benefits or
compensation of any kind for the officers and directors of ITI. The Compensation
Committee is also responsible for the administration of ITI's 1983 Stock Option
Plan (under which no further options may be granted), and its 1992 Employee
Stock Option Plan, and determines the eligible persons who are to receive
options under the latter such plan, the number of shares to be subject to each
option and the other terms and conditions upon which options under such plan are
granted and made exercisable. During the year ended December 31, 1994, the
Compensation Committee held two meetings and took action by unanimous written
consent on two occasions.
The members of the Director Stock Option Committee of the Board of
Directors of ITI are Brian Chandler and Douglas K. Chick. The Director Stock
Option Committee administers the 1992 Director Stock Option Plan and determines
the eligible persons who are to receive options, the number of shares to be
subject to each option and the other terms and conditions upon which options
under such plan are granted and made exercisable. During the year ended December
31, 1994, the Director Stock Option Committee did not meet.
ITI has not appointed a nominating committee of its Board of Directors.
DIRECTOR COMPENSATION
Each director of ITI who is not an operating officer of ITI is entitled to
receive compensation in the amount of $12,000 per annum and $1,000 per meeting
of the Board of Directors attended by such director, plus reimbursement of his
expenses.
James D. Krugman, Chairman of the Board of ITI, holds an option granted
under ITI's 1992 Director Stock Option Plan (the "Director Plan") on December
13, 1993 covering 95,000 shares of ITI Common Stock, exercisable at a per share
price of $14.50, the closing price of the ITI Common Stock on The Nasdaq Stock
Market on such date. As a consequence of the exchange of options previously
granted by IGL for options granted by ITI (see "-- Stock Plans" below), on
December 9, 1992 William Gorham, Sheldon Weinig and Russell B. Wight, Jr., who
became directors of ITI upon consummation of the IGL Acquisition, were granted
options covering 57,720 shares, 22,200 shares and 16,650 shares of ITI Common
Stock,
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<PAGE> 99
respectively, at exercise prices ranging from $6.53 to $13.74 per share,
calculated in accordance with the provisions of the IGL Acquisition Agreement.
In January 1995, Mr. Weinig exercised options covering 5,550 shares at an
exercise price of $6.53 per share, at which time options covering 11,100 shares
held by Mr. Wight expired. In July 1993, options covering 23,310 shares of ITI
Common Stock were granted by ITI to William Gorham in replacement of options
then expiring covering the same number of shares, at the exercise price per
share under the prior options of $9.68, which were exercised by Mr. Gorham in
June and July 1995 with respect to all such shares.
Except as aforesaid, no current director of ITI holds any options granted
by ITI under any stock option plan. Mr. Richard holds additional options granted
in connection with his acceptance of employment with ITI. For information with
respect to such options and other agreements entered into by ITI and certain
directors, see "-- Certain Agreements with Directors and Executive Officers"
below.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain
information with respect to compensation for each of the last three completed
years of ITI's Chief Executive Officer and each of the four other most highly
compensated executive officers whose salary and bonus exceeded $100,000 during
the most recent year:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION -------------
-------------------------------------------- SECURITIES
NAME AND OTHER UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS(#) COMPENSATION
---------------------------- ---- -------- -------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Jean-Paul Richard 1994 $400,000 $264,000 -- -- $ 83,405(3)
President and Chief 1993 35,386 236,250(4) -- 300,000 5,613
Executive Officer(2) 1992 -- -- -- -- --
William A. Martin 1994 165,334 51,709 -- 8,000 15,623(5)
Senior Vice President -- 1993 155,807 15,800 -- 15,000 14,759
Chief Financial Officer 1992 126,627 40,000 -- -- 12,227
R. William Pittman 1994 230,000 -- -- 12,000 24,217(7)
Senior Vice President -- 1993 49,539 50,000(4) -- 75,000 5,039
Operations(6) 1992 -- -- -- -- --
Anthony W. Hooper 1994 220,000 100,100 53,968 12,000 80,730(9)
Senior Vice President -- 1993 17,770 -- -- 75,000 2,315
Marketing(8) 1992 -- -- -- -- --
Raymond P. Toth 1994 110,000 40,040 16,353 8,000 53,286(11)
Vice President -- Human 1993 -- -- -- -- --
Resources(10) 1992 -- -- -- -- --
</TABLE>
---------------
(1) Excludes perquisites and other personal benefits unless the aggregate
amount of such compensation exceeds the lesser of either $50,000 or 10% of
the total of annual salary and bonus reported for the named executive
officer. Includes 1994 reimbursement for taxes for Messrs. Hooper and Toth
in the respective amounts of $43,509 and $16,353.
(2) Mr. Richard joined ITI in November 1993.
(3) Represents $79,006 in relocation expense and $4,399 in term life insurance
premiums.
(4) Represents amounts in lieu of bonus from former employer.
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<PAGE> 100
(5) Represents $12,465 in profit-sharing contributions under ITI's 401(k)
Profit-Sharing Plan (the "Restated Plan"), $400 in 401(k) contributions
under such plan and $2,758 in term life insurance premiums.
(6) Mr. Pittman joined ITI in October 1993 and resigned in June 1995.
(7) Represents $20,497 in relocation expense, $400 in 401(k) contributions
under the Restated Plan and $3,320 in term life insurance premiums.
(8) Mr. Hooper joined ITI in November 1993.
(9) Represents $78,779 in relocation expense, $400 in 401(k) contributions
under the Restated Plan and $1,551 in term life insurance premiums.
(10) Mr. Toth joined ITI in February 1994.
(11) Represents $51,778 in relocation expense and $1,508 in term life insurance
premiums.
Messrs. Richard, Pittman, Hooper and Toth joined ITI following the IGL
Acquisition, as ITI recruited management in order to support the consolidation
of its multinational and domestic operations.
For information with respect to compensation to James D. Krugman, Chairman
of the Board of ITI, see "-- Director Compensation" above and "-- Certain
Agreements with Directors and Executive Officers" below.
Option Grant Table. The following table sets forth certain information
regarding options granted by ITI during the year ended December 31, 1994 to the
individuals named in the above compensation table:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE OF ASSUMED
---------------------------------------------------------- ANNUAL RATES OF
NUMBER OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM(1)
OPTIONS TO EMPLOYEES PRICE EXPIRATION -------------------
NAME GRANTED(#) IN FISCAL YEAR ($/SH) DATE 5% 10%
------------------------ ---------- --------------- -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Jean-Paul Richard....... -- -- -- -- -- --
William A. Martin....... 8,000 4.3% $13.31 04/01/99 $12,214 $43,297
R. William Pittman...... 12,000 6.4 13.31 04/01/99 18,321 64,496
Anthony W. Hooper....... 12,000 6.4 13.31 04/01/99 18,321 64,496
Raymond P. Toth......... 8,000 4.3 13.31 04/01/99 12,214 43,297
</TABLE>
---------------
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on arbitrarily assumed rates of stock price appreciation of 5% and
10% compounded annually from the date the respective options are granted to
their expiration date.
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<PAGE> 101
Aggregate Option Exercises and Year-End Option Table. The following table
sets forth certain information regarding exercises of stock options, and stock
options held as of December 31, 1994, by the individuals named in the above
compensation table:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED ON FISCAL YEAR-END (#) AT YEAR-END(1)
EXERCISE VALUE --------------------------- ---------------------------
NAME (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------------------------- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jean-Paul Richard......... -- $ -- 50,000 250,000 $ -- $ --
William A. Martin......... 1,750 15,531 19,500 13,500 -- --
R. William Pittman........ -- -- 53,000 34,000 -- --
Anthony W. Hooper......... -- -- 28,000 59,000 -- --
Raymond P. Toth........... -- -- 2,000 6,000 -- --
</TABLE>
---------------
(1) Calculated on the basis of the fair market value of the underlying
securities at the exercise date or at year-end, as the case may be, minus
the exercise price.
STOCK PLANS
Under ITI's 1983 Stock Option Plan (the "Prior Plan"), there were
outstanding options for 37,653 shares of ITI Common Stock as of June 1, 1995. No
further options may be granted under the Prior Plan.
In June 1992, the stockholders of ITI approved ITI's 1992 Employee Stock
Option Plan (the "Employee Plan"), under which options to purchase an aggregate
of 500,000 shares of ITI Common Stock (as subsequently increased) were subject
to grants to key employees who are not directors (including executive officers),
and the Director Plan, under which options to purchase an aggregate of 500,000
shares of ITI Common Stock may be granted to directors of ITI (including
executive officers), as previously adopted by the Board of Directors. In June
1994, the stockholders of ITI approved an increase in the number of authorized
shares of ITI Common Stock available for issuance under the Employee Plan to
1,000,000 shares.
The Employee Plan is administered by the Compensation Committee of the
Board of Directors of ITI, and the Director Plan is administered by the Director
Stock Option Committee of the Board of Directors of ITI. Each such committee,
with respect to the plan that it administers, is empowered to determine the
persons who are to receive options, the number of shares to be subject to each
option and whether such options will be incentive stock options or non-qualified
stock options. Pursuant to amendments to the Employee Plan adopted in April
1994, the Compensation Committee may authorize another committee of the Board of
Directors of ITI constituted for such purpose to allocate options approved in
the aggregate by the Compensation Committee among employees who are not
officers. The exercise price of an option under either the Employee Plan or the
Director Plan may not be less than the lesser of the fair market value of the
ITI Common Stock on the date of grant of the option, or the tangible book value
per share of ITI Common Stock as of the end of the fiscal quarter of ITI
immediately preceding the grant, provided that no incentive stock option may be
granted at an option price which is less than the market value per share of the
ITI Common Stock on the date of grant.
In December 1992, the stockholders of ITI approved the INA Acquisition
Corp. Share Option Plan previously adopted by the Board of Directors and sole
stockholder of INA Acquisition Corp. In connection with the consummation of the
IGL Acquisition, options (the "Substitute IGL Options") covering an aggregate of
562,938 shares of ITI Common Stock (303,712 shares of which were covered by
options outstanding at June 1, 1995), granted pursuant to such plan in
substitution for options (the "IGL Options") outstanding prior to the IGL
Acquisition to acquire Ordinary Shares of IGL, became exercisable. Each
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<PAGE> 102
Substitute IGL Option covers the number of shares of ITI Common Stock that would
have been received in the IGL Acquisition had the underlying IGL Option been
exercised for Ordinary Shares in accordance with the terms of such option
immediately prior to the IGL Acquisition (subsequent to vesting thereof pursuant
to the IGL Acquisition Agreement), at a price per share equal to: (x) the
exercise price per share in effect on such date times the number of Ordinary
Shares previously covered by such IGL Option, divided by (y) the number of
shares of ITI Common Stock covered by such Substitute IGL Option. ITI caused the
adoption of such plan solely in order to implement the provisions of the IGL
Acquisition Agreement, and INA Acquisition Corp. will not grant any additional
options under such plan.
See "-- Certain Agreements with Directors and Executive Officers" below for
a description of additional options granted to Mr. Richard in connection with
his acceptance of employment with ITI, and "The Merger -- Basic Terms of Merger
Agreement -- IMA Stock Options" above for a description of options granted by
IMA that will be assumed by ITI at the Effective Time.
CERTAIN AGREEMENTS WITH DIRECTORS AND EXECUTIVE OFFICERS
ITI and James D. Krugman, Chairman of the Board of ITI are parties to an
employment agreement which became effective on December 9, 1992 upon the closing
of the IGL Acquisition. Such agreement provides that Mr. Krugman will serve as
Chairman of the Board of ITI until the later of (i) the sixth anniversary of
such closing or (ii) the date of the sixth annual meeting of stockholders of ITI
following July 3, 1992 or until such other date as Mr. Krugman's employment
terminates pursuant to such agreement, at an annual salary of $100,000. In the
event of Mr. Krugman's death, the agreement terminates automatically. Mr.
Krugman may cancel the agreement at any time upon 60 days' written notice
delivered to ITI, and ITI may terminate the agreement upon the failure of Mr.
Krugman to perform his duties thereunder owing to illness or other incapacity,
if such failure continues for a period of more than six months, or if Mr.
Krugman commits any act in bad faith and to the material detriment of ITI or is
convicted of a felony.
ITI's arrangements with Jean-Paul Richard, under which Mr. Richard became
President and Chief Executive Officer of ITI in November 1993, in addition to
base salary provide for bonus payments in an amount per annum up to 75% of base
salary, conditioned on fulfilling performance criteria. As an inducement to his
accepting employment with ITI, the Board of Directors authorized the grant to
Mr. Richard of a five-year option covering 300,000 shares of ITI Common Stock,
which ITI will register under the Securities Act, issuable upon exercise of such
option at a per share price of $16.25 (equal to the closing price of the ITI
Common Stock as quoted on The Nasdaq Stock Market on the date of grant). Such
option vested and became exercisable through the option term with respect to
50,000 shares upon commencement of employment and will vest and become
exercisable through the option term with respect to the remainder of such shares
on the third anniversary thereof, except that in the event of: (i) the
termination of Mr. Richard's employment without cause, the option will vest with
respect to a share of the portion not then vested calculated pro-rated on the
basis of the proportion that the period of service bears to three years, and
(ii) the election of a Board of Directors of ITI other than pursuant to the IGL
Acquisition Agreement while Mr. Richard remains employed, the option will become
fully-vested. Accordingly, in the event of consummation of the Merger, such
option would become fully-vested.
ITI also agreed to reimburse Mr. Richard for specified reasonable
relocation costs, and to provide a $700 per month car allowance, reimbursement
for country club membership fees and health insurance benefits. ITI's
arrangements with Mr. Richard provide that in the event Mr. Richard's employment
with ITI is terminated other than for cause, ITI will be obligated to pay
severance to Mr. Richard in an amount equal to two years' base salary.
In connection with the commencement of his employment as chief financial
officer of ITI, ITI extended a severance arrangement to William A. Martin
pursuant to which, in the event of termination of employment by ITI without
cause, ITI will deliver six months' prior notice thereof plus payments equal in
amount to six months' base salary.
ITI's arrangements with R. William Pittman, under which Mr. Pittman became
Senior Vice President -- Operations in October 1993, until Mr. Pittman's
resignation in June 1995 in addition to base salary provided
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for bonus payments in an amount up to $100,000 per annum, based upon performance
criteria. ITI's arrangements with Mr. Pittman provided for ITI to reimburse Mr.
Pittman for reasonable relocation costs, and to provide a $750 per month car
allowance, reimbursement for one country club membership and medical and life
insurance benefits. Under ITI's severance arrangements with Mr. Pittman, ITI is
obligated to pay to him amounts equal to twelve months' base salary in
installments during the period ending June 1996, and to defend and indemnify Mr.
Pittman in certain outstanding litigation.
ITI's arrangements with Anthony W. Hooper, under which Mr. Hooper became
Senior Vice President -- Marketing in November 1993, in addition to base salary
provide for bonus payments in an amount up to $110,000 per annum based on
performance criteria. ITI's arrangements with Mr. Hooper provided for ITI to
reimburse Mr. Hooper for reasonable relocation costs, and to provide a $700 per
month car allowance, reimbursement for one country club membership and medical
and life insurance benefits. In connection with his relocation to Memphis, ITI
extended an interest-free bridge loan in the amount of $230,000 to Mr. Hooper,
which was repaid in August 1994. In the event Mr. Hooper's employment is
terminated by ITI other than for cause, ITI would be obligated to pay to him
amounts equal to twelve months' base salary.
ITI's arrangements with Raymond P. Toth, under which Mr. Toth became Vice
President -- Human Resources in February 1994, in addition to base salary
provide for bonus payments in an amount up to 40% of base salary per annum,
based upon performance criteria. ITI's arrangements with Mr. Toth also provided
for ITI to reimburse Mr. Toth for reasonable relocation costs, and to provide
medical and life insurance benefits. In connection with his relocation to
Memphis, ITI extended an interest-free bridge loan in the amount of $110,000 to
Mr. Toth, which was repaid in October 1994.
ITI had consulting arrangements with Brian Chandler and Douglas K. Chick
through December 1994, pursuant to which ITI remunerated each in the amount of
$5,000 per month, in exchange for consultation in connection with development of
the European market for the NuPipe Process. Each of Messrs. Chandler and Chick
is a director of ITI and a member of the Ringwood Group. ITI's arrangements with
Messrs. Chandler and Chick, respectively, were terminable at will by either ITI
or the consultant, and provided for devotion by Messrs. Chandler and Chick,
respectively, of such business time as would be required by ITI and
reimbursement by ITI of out-of-pocket expenses incurred in connection with
provision of such consulting services. Such arrangements were terminated by ITI
in December 1994. See "Other Information Concerning Nominees for Director,
Directors, Officers and Stockholders" for information concerning additional
arrangements proposed with Messrs. Chandler and Chick arising from their
development activities regarding pipeline rehabilitation and repair processes,
and discussions regarding the application, if any, of certain commitments
previously alleged by IGL (which was acquired by ITI in 1992) to have been made
by Mr. Chandler in 1983 requiring him, through November 1993, to offer new
technology to IGL free of cost.
Effective upon consummation of the Merger, Mr. Kalishman would become Vice
Chairman of the Board of ITI and would also be retained by ITI as a consultant,
and Mr. Affholder would enter into an employment agreement with ITI under which
he would initially become chief operating officer of ITI's North American
contracting operations. See "The Merger -- Interest of Certain Persons in the
Merger and Related Transactions -- Employment and Consulting Agreements" for a
description of such arrangements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1994, the members of ITI's Compensation
Committee were James D. Krugman, Paul A. Biddelman, William Gorham and Steven
Roth.
In order to finance a portion of the purchase price for its acquisition of
Insituform Midwest, in July 1993 ITI sold its 8.5% senior subordinated note in
the principal amount of $5 million (the "Subordinated Hanseatic Note"), and
related warrants exercisable with respect to 350,877 unregistered shares of ITI
Common Stock, to Hanseatic Corporation ("Hanseatic"), which Hanseatic holds for
discretionary customer accounts. Paul A. Biddelman, who will continue as a
director of ITI after the Effective Time, is Treasurer of Hanseatic and, during
the year ended December 31, 1993, Hanseatic received fees of $100,000 from ITI
in connection with the arrangement. For a description of the terms of the
Subordinated Hanseatic Note and such warrants, see "ITI -- Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" above. During the years ended
December 31, 1994 and 1993, ITI paid to Hanseatic,
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for the benefit of its discretionary customer accounts, respectively, $425,000
and $75,556 in interest on the Subordinated Hanseatic Note.
James D. Krugman, who will continue as Chairman of the Board of ITI after
the Effective Time, and Howard Kailes, who will continue as Secretary of ITI
after the Effective Time, are members of the law firm of Krugman, Chapnick &
Grimshaw. During the years ended December 31, 1994, 1993 and 1992, Krugman,
Chapnick & Grimshaw received fees for legal services rendered to ITI,
respectively, of $755,000, $1,069,000 and $945,000, together with reimbursement
of out-of-pocket expenses of $161,745, $254,579 and $144,790. It is expected
that Krugman, Chapnick & Grimshaw will continue to render legal services to ITI
in the future.
Mr. Roth is a member of a partnership which holds certain registration
rights extended by ITI. See "-- Other Information Concerning Nominees for
Director, Directors, Officers and Stockholders" below.
PERFORMANCE GRAPH
The following performance graph compares the total stockholder return on
the ITI Common Stock to the S&P 500 Index and to a Composite Peer Group Index
for the past five years. The companies in the peer group are Enviroq, Insituform
East, Incorporated, IMA, Roto Rooter, Inc., and UTILX Corporation, which are
weighted by market capitalization. The graph assumes that $100 was invested in
the ITI Common Stock and each such Index on December 31, 1989 and that all
dividends were reinvested.
COMPARISON OF FIVE-YEAR CUMULATIVE RETURN
<TABLE>
<CAPTION>
INSITUFORM COMPOSITE
MEASUREMENT PERIOD TECHNOLOGIES S&P 500 PEER GROUP
(FISCAL YEAR COVERED) INC. INDEX INDEX
<S> <C> <C> <C>
1989 100.00 100.00 100.00
1990 44.60 93.40 72.80
1991 244.60 118.00 108.00
1992 313.80 123.30 150.00
1993 150.80 132.00 121.60
1994 143.10 130.00 88.60
</TABLE>
Notwithstanding anything set forth in any of ITI's previous filings under
the Securities Act or the Exchange Act which might incorporate future filings,
including this Joint Proxy Statement/Prospectus, in whole or in part, the
preceding performance graph and the report that follows shall not be deemed
incorporated by reference into any such filings.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee is composed of the Chairman of the Board of ITI
and three additional directors who are not executive officers of ITI. The
Compensation Committee of the Board of Directors of ITI makes recommendations to
the Board of Directors of ITI regarding the compensation arrangements for
executive officers of ITI, including ITI's Chief Executive Officer, and
administers ITI's stock-based employee
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compensation plans. Since ITI's Employee Plan, under which stock-based
compensation is granted to employees, does not permit participation of employees
who are directors of ITI, in future years stock option grants to ITI's Chief
Executive Officer, who was appointed to the board during the most recently-ended
year, will be determined by ITI's Director Stock Option Committee.
The Compensation Committee's objectives in formulating ITI's executive
compensation program are: (i) to offer levels of compensation which are
competitive with those offered by other companies in similar businesses; (ii) to
compensate executives based on each executive's level of responsibility and
contribution to ITI's business goals; (iii) to link compensation with ITI's
financial performance; and (iv) to align the interests of ITI's executives with
the interests of ITI's stockholders.
During the fiscal year ended December 31, 1994, the achievement of the
foregoing objectives was directed to support ITI's consolidation, following the
consummation of the IGL Acquisition in December 1992, of multinational and
domestic operations, involved in both technology development and contract
management. During the year ended December 31, 1994, ITI completed its new
management team with the addition of Raymond Toth, as Vice President-Human
Resources, following the hiring in the year ended December 31, 1993 of Jean-Paul
Richard, as new President and Chief Executive Officer, R. William Pittman, as
Senior Vice President -- Operations and Anthony W. Hooper, as Senior Vice
President -- Marketing.
The compensation program for ITI's executives, including its Chief
Executive Officer, consists of: (i) base salary; (ii) bonuses; and (iii) stock
options. Since the majority of ITI's executive management has been engaged
during the two most recent fiscal years, compensation has in large part resulted
from arrangements negotiated in connection with the initial engagement of such
managers, respectively.
(i) Base Salary. The Compensation Committee determines executive base
salaries by level of responsibility, individual performances and ITI
performance, as well as by the need to provide a competitive package that allows
ITI to retain key executives. At the commencement of each year, the Chief
Executive Officer in consultation with key executives, establishes individual
performance objectives for the ensuing year. After reviewing individual and ITI
performance for the year and available information on salaries at other
companies of similar size (with particular focus on other construction-based
operations) and other Insituform installers, the Chief Executive Officer makes
recommendations to the Compensation Committee concerning the base salaries of
other executive officers. The Compensation Committee reviews and, with any
changes it deems appropriate, approves these recommendations for submission to
the Board of Directors. Using the same review process, the Compensation
Committee makes decisions pertaining to the Chief Executive Officer. During the
year ended December 31, 1994, Mr. Richard was remunerated as Chief Executive
Officer pursuant to arrangements reached in connection with the commencement of
his employment in November 1993, as endorsed by the Board of Directors. Such
arrangements provided for an initial base salary of $400,000 per annum.
(ii) Cash Bonuses. Under historical guidelines designed to motivate and
reward key management personnel through the award of cash bonuses, key employees
who report to the Chief Executive Officer are eligible for bonuses of up to
approximately 50% of base salary. Direct reports to the senior executive staff
are eligible for bonuses of up to approximately 35% of base salary. Such
guidelines provide for an award of cash bonuses based on the achievement of
corporate goals recommended by senior executive management and approved by the
Board of Directors (which in the most recently completed year were weighted to
account for 70% of overall quantitative criteria), individual objectives
established for executive management by the Compensation Committee in
discussions with the chief executive officer (which in the most recently
completed year were weighted to account for 30% of overall quantitative
criteria), and an evaluation of executive management by the Compensation
Committee. During the most recently completed year, the Board of Directors in
recognition of the efforts of executive management, endorsed evaluation of the
achievement of initially established corporate goals without reference to the
effects on consolidated operations of the losses in ITI's discontinued
operations. See "ITI -- Management's Discussion and Analysis of Financial
Condition and Results of Operations" above. In connection with its hiring
commitments, ITI also extended bonus arrangements to executives retained during
and prior to its most recent fiscal year, entitling such executives to bonuses
ranging up to 75% of base salary in the case of Mr. Richard.
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(iii) Stock Options. The primary purpose of ITI's stock option program is
to align the interests of ITI's executive officers more closely with the
interests of ITI's stockholders by offering the executives an opportunity to
benefit from increases in the market price of the ITI Common Stock. ITI's stock
option program provides long-term incentives that have enabled ITI to attract
and retain key employees by encouraging their ownership of ITI Common Stock. In
connection with attracting new executive management, the Compensation Committee
has typically authorized the grant of options effective upon commencement of
employment.
ITI's current executive officers, collectively, hold options under the
Prior Plan (which, except for options then outstanding, terminated after ITI's
1992 Annual Meeting of Stockholders) and the Employee Plan, both of which are
administered by the Compensation Committee. In addition, Mr. Richard, in
connection with his acceptance of employment in 1993 was granted additional
options covering 300,000 shares of ITI Common Stock. During the year ended
December 31, 1994, the Compensation Committee, pursuant to amendments to the
continuing Employee Plan, authorized Mr. Richard, acting as a committee of the
board, to grant options to employees who were not officers, within limits
defined by the Committee, while retaining authority to effectuate option grants
to eligible officers. In defining the limits of option grants and in selecting
individual officers for options under the Employee Plan, and determining the
terms thereof, the Compensation Committee may take into consideration any
factors it deems relevant, including present and potential contributions to the
success of ITI.
During the year ended December 31, 1994, the Compensation Committee
authorized option grants to officers (not including the Chief Executive Officer,
who was not granted additional options during such year) covering 40,000 shares
of ITI Common Stock, representing options with respect to approximately 21% of
the ITI Common Stock covered by options granted that year. In future years,
stock option grants to Mr. Richard, who was appointed to the ITI Board during
the most recently-ended year, will be evaluated by the Director Stock Option
Committee pursuant to its authority under ITI's Director Plan.
* * *
The Compensation Committee believes that the compensation program for
executives of ITI is competitive with the compensation programs provided by
other companies with which ITI competes for executive talent and by other
companies of similar size in similar industries. The Compensation Committee
believes that amounts paid under ITI's cash bonus program are appropriately
related to ITI and individual performance. The Compensation Committee also
believes that its stock option program provides opportunities to executives that
are consistent with the returns that are generated on behalf of ITI's
stockholders.
Section 162(m) ("Section 162") of the Code generally limits federal income
tax deductions for compensation paid after 1993 to the chief executive officer
and the four other most highly compensated officers of ITI to $1 million per
year, but contains an exception for performance-based compensation that
satisfies certain conditions. In the absence of final regulations under Section
162, the Committee has not adopted an absolute policy regarding Section 162 and
is currently studying the implications of Section 162(m) on its compensation
programs. In making compensation decisions, the Committee will consider the net
cost of compensation to ITI and whether it is practicable and consistent with
other compensation objectives to qualify ITI's incentive compensation under the
applicable exemption of Section 162. The Committee anticipates that
deductibility of compensation payments will be one among a number of factors
used by the Committee in ascertaining appropriate levels or modes of
compensation, and that the Committee will make its compensation decision based
upon an overall determination of what it believes to be in the best interests of
ITI and its stockholders.
Compensation Committee
James D. Krugman
Paul A. Biddelman
William Gorham
Steven Roth
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COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Based solely upon a review of copies of reports received by it pursuant to
Section 16(a) of the Exchange Act, and the written representations of its
incumbent directors and officers, and holders of more than 10% of any registered
class of ITI's equity securities, ITI believes that during 1994 all filing
requirements applicable to its directors, officers and ten percent holders under
said section were satisfied, except that Interstate Properties, a New Jersey
general partnership ("Interstate"), and each of its three general partners,
Steven Roth, Russell B. Wight, Jr. and David Mandelbaum, filed a report on Form
4 subsequent to the due date thereof, disclosing one transaction consisting of
the open market purchase by Interstate of 4,000 shares of ITI Common Stock.
OTHER INFORMATION CONCERNING NOMINEES FOR DIRECTOR, DIRECTORS, OFFICERS AND
STOCKHOLDERS
Prior to the consummation of the IGL Acquisition, during the year ended
December 31, 1992 ITI incurred royalty expense of $4.9 million to Insituform
Licensees, B.V., an indirect wholly-owned subsidiary of IGL, under the licensing
arrangements pursuant to which ITI commercially exploited the Insituform
Process. Such amounts are eliminated from the consolidated results of operations
of ITI for such period as a result of accounting for the IGL Acquisition as a
pooling-of-interests. Prior to the consummation of the IGL Acquisition, the
members of the Ringwood Group beneficially owned approximately 16.9% of the
outstanding Ordinary Shares of IGL (with Parkwood Limited, as trustee of the
Anthony Basmadjian "P" Settlement ("Parkwood"), beneficially owning 12.9% of the
Ordinary Shares, Mr. Chandler, 4%, and Mr. Chick, 12.9%).
In connection with the IGL Acquisition, and so as to enable the IGL
Acquisition to qualify as a pooling-of-interests under generally accepted
accounting principles, ITI, Parkwood, Ringwood, and Messrs. Chandler and Chick
entered into an agreement dated July 3, 1992 pursuant to which a prior pledge
agreement extended by Messrs. Chandler and Chick and Parkwood, covering Ordinary
Shares of IGL and securing a promissory note in the principal amount of $3.5
million due August 30, 1992 (the "Prior Note"), accruing interest at a rate per
annum of 10.5%, from Mr. Chandler and Parkwood to ITI were, together with Mr.
Chick's guaranty of such note, cancelled, and in exchange Messrs. Chick and
Chandler and Ringwood executed and delivered to ITI a substitute stock pledge
agreement (the "New Pledge Agreement"), and Ringwood executed and delivered to
ITI a secured non-recourse promissory note in the principal amount of
$3,623,842.40 (the "Non-Recourse Note"), which included outstanding principal
and accrued interest on the Prior Note. Parkwood and Messrs. Chandler and Chick,
together with Ringwood and Barford Limited, as trustee of the Anthony Basmadjian
Settlement ("Barford"), are members of the Ringwood Group, and Messrs. Chandler
and Chick will continue as directors of ITI after the Effective Time. The
Non-Recourse Note bears interest at a rate per annum equal to 2 1/2% above the
prime rate from time to time in effect at Citibank, N.A. and was originally due
July 3, 1995. See "The Merger -- Interests of Certain Persons in the
Merger -- Ringwood Loan" for a description of the extension of such maturity
date by one year. Pursuant to the New Pledge Agreement, and as security for the
Non-Recourse Note, Ringwood and Messrs. Chick and Chandler pledged to ITI
255,801 shares of class B common stock, $.01 par value, of ITI beneficially
owned by them (which, in connection with the IGL Acquisition and in accordance
with their terms, were converted into shares of ITI Common Stock on a
share-for-share basis). During the years ended December 31, 1994 and 1993,
Ringwood paid to ITI, respectively, $352,892 and $462,040 in interest on the
Non-Recourse Note.
ITI has been engaged in discussions with Messrs. Chandler and Chick and
their affiliates with respect to a proposed license by ITI of certain pipe
rehabilitation technologies from or other arrangement with such parties, which
have involved an amount equal to $.7 million, which would be payable at closing,
an additional $.5 million upon commercialization of certain systems, an
additional $.5 million upon commercialization of alternate systems and
thereafter royalties payable over a term so that the aggregate of such royalties
would not exceed $5 million for the two technologies. Such discussions have also
included the extension to ITI of a right-of-first offer on additional
technologies. No definitive arrangements have been formulated with respect to
any such proposals, and there can be no assurance that ITI would have access to
any technology developed by Messrs. Chandler and Chick and their affiliates on
favorable terms or at all, or would be in a position to prevent the conduct of
potentially competing activities utilizing such developments.
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ITI and Messrs. Chandler and Chick and their affiliates have addressed the
application, if any, of certain commitments alleged by IGL (which was acquired
by ITI in 1992) to have been made by Mr. Chandler in 1983 requiring him, through
November 1993, to offer free of cost to IGL any new ideas, inventions and
technology for which Mr. Chandler was responsible. Mr. Chandler had previously,
in a Statement on Schedule 13D filed in 1989 by the Ringwood Group with respect
to its shareholdings in IGL, taken the position that such commitments are not
enforceable. ITI has acknowledged Mr. Chandler's position, but has not formally
agreed or disagreed with it. ITI will submit any definitive arrangements
regarding a transaction with Messrs. Chandler and Chick and their affiliates for
review and approval by a majority of the disinterested members of ITI's Board of
Directors. Such review will include consideration of any legal issues concerning
such technologies and the applicability and enforceability of the 1983
commitments made by Mr. Chandler.
As principal stockholders of IGL, the members of the Ringwood Group and
Interstate (each, a "Current Registration Rights Stockholder"), in connection
with the IGL Acquisition, received certain registration rights covering the
shares of ITI Common Stock issued in exchange for their Ordinary Shares, and all
other shares of ITI Common Stock held by them. Such agreement terminates in May
1999. Under such agreement, a Current Registration Rights Stockholder may demand
registration under the Securities Act on one occasion (unless ITI is entitled to
use a registration statement on Form S-3, in which case each Current
Registration Rights Stockholder is entitled to three demand registrations) of no
less than 500,000 shares of ITI Common Stock. In addition, the Current
Registration Rights Stockholders are entitled to incidental registration rights,
during the term of such agreement, with respect to the shares of ITI Common
Stock beneficially owned by them.
See "-- Compensation Committee Interlocks and Insider Participation" above
for information concerning legal services rendered to ITI by a firm in which
James D. Krugman, who will continue as Chairman of the Board of ITI after the
Effective Time, and Howard Kailes, who will continue as Secretary of ITI after
the Effective Time, are members, and concerning a company in which Paul A.
Biddelman, who will continue as a director of ITI after the Effective Time, is
Treasurer, which holds ITI's 8.5% senior subordinated note in the principal
amount of $5 million.
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BUSINESS OF ITI
GENERAL
ITI is engaged in the provision, throughout the world, of trenchless
pipeline rehabilitation systems and technologies. ITI utilizes state-of-the-art
processes to repair sewers, tunnels and pipelines, usually without excavation
and with minimal disruption of traffic and commercial activity. ITI's primary
technology is the Insituform Process, a "cured-in-place," non-disruptive
pipeline rehabilitation process that, during ITI's most recent fiscal year,
contributed to approximately 79% of ITI's revenues. The Insituform Process is
based on a custom manufactured polyester-fiber tubing, known as the Insitutube,
which forms a seamless, jointless and leakproof "pipe within a pipe." ITI
believes the repaired pipe, the Insitupipe, is stronger and has equal or greater
flow capacity than the original pipe.
The Insituform Process has been used successfully for approximately 23
years in the repair of sewers, tunnels and pipelines throughout the world. ITI
believes that the Insituform Process offers many advantages over traditional
"dig and replace" methods of pipeline replacement. Such advantages include
installation without excavation, design and application versatility, extension
of the pipeline's useful life and speed of installation. ITI believes that,
under normal conditions, sewer pipe repaired with the Insituform Process will
generally have a useful life in excess of 50 years.
In addition to the Insituform Process, ITI offers certain other products in
trenchless applications. ITI's NuPipe Process, which utilizes a "fold and
formed" technology, is used primarily to repair smaller or less damaged pipe and
in situations where polyvinylchloride pipe is preferred. ITI has also acquired a
variety of pipeline and ancillary technologies that employ a diameter-reduction
technique tailored to meet the pressure pipe rehabilitation needs of the oil and
gas transmission market.
ITI's products are marketed to governmental and industrial customers
primarily in North America and Western Europe, and have also been introduced in
South America, Eastern Europe, the Middle East, Australia and the Pacific Rim.
In the industrial market, ITI focuses its marketing efforts on companies in the
pulp and paper, chemical, petrochemical, food and drug, and nuclear and utility
industries.
As a result of the IGL Acquisition, ITI also conducts multi-service,
open-cut sewer and water pipeline construction and rehabilitation operations in
Canada. See "ITI -- Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" above for
information concerning the proposed disposition of such operations.
Historically, ITI's primary business has been to license other companies to
market and provide Insituform installation services using ITI's proprietary
technology in return for royalties and product sales revenue from materials
manufactured by ITI. As a result of its acquisitions, ITI has further integrated
its business to perform the entire process of manufacture and installation using
its trenchless processes. ITI intends to continue pursuing this integration
strategy in its principal markets. In other areas, ITI will continue to
emphasize marketing its products through license or joint venture arrangements.
ITI provides design assistance, marketing, research and technical support to all
its licensees in an effort to stimulate demand for its products and to ensure a
high standard of quality control throughout the process.
ITI was incorporated in Delaware in 1980 under the name Insituform of North
America, Inc., in order to act as the exclusive licensee of the Insituform
Process in most of the United States of IGL, the owner of the worldwide rights
to the Insituform Process. Contemporaneously with the consummation of the IGL
Acquisition, the name of ITI was changed to Insituform Technologies, Inc.
The IGL Acquisition has been accounted for as a pooling-of-interests and,
accordingly, ITI's consolidated financial statements included elsewhere herein
for the period prior to the acquisition, and (unless the context otherwise
requires) all other financial information of ITI included herein for such
period, include the combined historical results of ITI and IGL. ITI's
acquisition in 1991 of the controlling interest in Insituform Southwest, its
acquisitions in December 1992 of the minority interest in IGL Canada , at that
time a majority-owned subsidiary of IGL, and of H.T. Schneider, Inc., the parent
of Insituform New England, its acquisitions in July 1993 of Naylor Industries,
Inc., the parent of Gulf South, and Insituform Midwest, its acquisition in
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October 1994 of Gelco and various affiliated entities and its February 1995
acquisition of two-thirds of the interest in Insituform France have been
accounted for under the purchase method of accounting, so that the results of
the acquired companies are included in ITI's historical results of operations
from the consummation of such transactions, respectively.
As used herein, the term "ITI" refers to ITI and, unless the context
otherwise requires, its direct and indirect subsidiaries. For certain
information concerning each of ITI's industry segments, and domestic and foreign
operations, see Note 19 of the Notes to ITI's Consolidated Financial Statements
included elsewhere in this Joint Proxy Statement/Prospectus.
TRENCHLESS REHABILITATION PROCESSES
The Insituform Process. The Insituform Process for the rehabilitation of
sewers, pipelines and other conduits utilizes a tubing made of a polyester-fiber
felt, the Insitutube, which is constructed with a strong, smooth, watertight
polyurethane coating on the outside. The Insitutube is custom manufactured to
the diameter, length and other characteristics of the pipe, sewer or conduit to
be repaired.
A pipe to be repaired is first cleaned by removing tree roots and other
debris and a remote-controlled video camera is inserted into the pipe to inspect
it and in order to make a recording of the location of the lateral connections
for use in subsequent re-opening of the connections. If necessary, the section
of pipe to be rehabilitated is bypassed from the balance of the pipeline system.
Services to users in the affected section are usually not disconnected but usage
may be curtailed to prevent excess back-up in the lateral connections.
In the case of a typical pipe to be repaired by the Insituform Process,
access is gained through an existing manhole. Prior to the installation, the
Insitutube is saturated throughout its length with a thermosetting liquid resin.
In most cases, the Insitutube is installed using pressure from a column of water
maintained inside an inversion tube, and the Insitutube is turned inside out and
advanced through the pipe to be repaired with the resin-saturated surface held
against the surface of the existing pipe. The smooth-coated side of the
Insitutube forms the new interior surface of the pipe. After the Insitutube is
fully extended through the pipe to be repaired, the water inside the Insitutube
is heated to a prescribed temperature in order to cause the thermosetting liquid
resin to harden, or cure. Essentially, the Insituform Process creates a "pipe
within a pipe," the Insitupipe. Each end of the Insitupipe is cut off at the
manhole walls and the flow is re-established.
During the installation of the Insitutube, smaller lateral lines feeding
into the existing pipe are temporarily blocked. Lateral lines are side
connecting pipes, typically between four and six inches in diameter, which
discharge flow from homes and businesses into the main pipe undergoing repair.
To complete the installation, the Insitupipe must be cut, or routed out, at the
lateral junctions to re-establish the flow from these laterals. A
remote-controlled cutter, the Insitucutter, and a video camera are inserted into
the pipe and used to open the lateral lines into the pipe. ITI's lateral
rehabilitation service includes the cleaning, inspection, evaluation and
rehabilitation of laterals, utilizing the Insituform Process.
The NuPipe Process. The NuPipe Process entails the manufacture for ITI of
a flattened and folded replacement pipe from a thermoplastic material which is
stored on a reel in a reduced shape. The pipe is heated at the installation site
in order to make it flexible enough to be inserted into an existing expanded
conduit, pulled into place and then sequentially expanded to match the existing
conduit by internal heat and pressure creating a tight fit against the conduit
being repaired. In this position, the now expanded conduit is subjected to
internal pressure, and cooled to create a new pipe for permanent installation,
with lateral connections then cut from within.
The NuPipe Process requires little or no excavation for installation and
produces a pipe approximating the physical properties of a manufactured
thermoplastic pipe of the same thickness and diameter. In addition, the NuPipe
Process does not materially reduce the diameter of the existing pipe, eliminates
most of the annular space between the new rounded pipe and the original pipe,
and eliminates the need for grouting the main pipe. Because the pipe is
tight-fitting and jointless, flow capacity in most cases is at least equal to
that of the existing pipe, or is improved. The NuPipe Process involves
manufacture of pipe in continuous lengths of standard pipe diameters, rather
than custom manufacture for specific applications, as is the case with the
Insituform Process, making it suited for small-diameter pipes.
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PRI Technologies. The pipe lining and ancillary technologies acquired in
November 1991 and further developed by ITI (the "PRI Technologies") are
intended, under the UltraPipe name, to rehabilitate pipe used in the oil and gas
industry using a diameter reduction technology in a variety of applications.
Diameter reduction involves temporarily reducing the diameter of a polyethylene
pipe by inserting it in certain down-sizing equipment. In its down-sized
condition, the polyethylene pipe is inserted into the pipe to be rehabilitated
and is then allowed to revert back to its original size resulting in a tight fit
through the length of the lined pipe.
A specific application introduced in the first quarter of 1993 allows the
use of the diameter reduction process to line collection and transmission
pipelines, known as in-field pipe, by fusing lengths of polyethylene pipe to
form a pipe of a length equal to the section being lined, up to 3,000 feet at
one time. After installation, the ends of the polyethylene pipe are then
finished by formation of a flange. ITI believes that its in-field lining system
provides corrosion and erosion protection to the lined pipe and allows the
pressure rating of the lined system to remain equal to that of the unlined
system as a result of reversion of the compressed polyethylene to its original
condition after the lining is completed. See "ITI -- Management's Discussion and
Analysis of Financial Condition and Results of Operations" above for information
concerning ITI's determination to divest other operations utilizing certain of
the PRI Technologies for offsite application in lining downhole tubulars.
MANUFACTURING AND PRODUCT SALES
ITI's manufacturing and product sales operations accounted for
approximately 19% of ITI's consolidated revenues in 1994 (approximately 16%
during the six months ended June 30, 1995). Although ITI's Insituform license
agreements typically contain no requirement that licensees purchase equipment or
materials from ITI, ITI sells Insitutubes and related products utilized in the
Insituform Process pursuant to supply contracts with all of its domestic
Insituform licensees. Based on past experience and the nature of the work
generated in the individual licensed areas, ITI believes that gross revenues
from the sale of Insitutubes to its licensees will exceed gross revenues derived
from license royalties.
Under the current term of ITI's domestic supply arrangements, the licensee
purchases from ITI a specified percentage (60% or 90%) of its Insitutube
requirements, unless excused in certain circumstances, subject to minimum annual
purchases by the buyer and maximum required sales by ITI. Prices under such
contracts are fixed, subject to limited annual increases by ITI. Such contracts
are renewable on an annual basis.
In Europe, Insituform Linings Plc ("Linings"), a joint venture between ITI
and five licensees, manufactures and sells Insitutube linings. ITI owns 51% of
the equity of Linings, but does not control a majority of its board. In 1992,
ITI inaugurated its Insitutube manufacturing facility in Matsubuse, Japan.
The Insitutube is manufactured by ITI in varying lengths, diameters and
thicknesses to accommodate the requirements of each specific installation. The
average lead time necessary to produce the custom manufactured Insitutube varies
from one to two weeks depending principally on the length, thickness and
diameter required. ITI maintains an inventory of the plain and coated materials
used in the manufacture of Insitutubes and a small inventory of the most common
diameters and thicknesses of Insitutubes.
While raw materials used in ITI's Insituform products are typically
available from multiple sources, ITI's historical practice has been to purchase
the Insitutube materials from a limited number of suppliers. ITI maintains its
own felt manufacturing facility contiguous to its Insitutube manufacturing
facility in Batesville, Mississippi. ITI does not presently intend to
manufacture, blend or distribute resins, which are readily available from a
number of major corporations and, as described under "-- Investments" below, has
terminated its joint venture arrangements with respect to resins. ITI believes
that the sources of supply in connection with its Insituform operations are
adequate for its needs and that it is not substantially dependent upon any one
supplier.
ITI has discontinued its previously reported discussions with Nordifa S.A.,
of Liege-Sclessin, Belgium, for the marketing by ITI of Nordifa's Tubetex(R)
pipeline renovation products in North America.
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In connection with the introduction of the NuPipe Process, each domestic
licensee has entered into supply agreements pursuant to which the licensee is
required to purchase from ITI all of its requirements for the thermoplastic pipe
utilized in the application of the NuPipe Process. Prices under each supply
agreement are subject to limited increases by ITI. Each supply agreement is
automatically renewed for successive periods of two years each, unless the
licensee exercises a non-renewal option, which is available if ITI's quality and
prices are not competitive with commercially practicable alternative sources.
ITI has not received notice of exercise of any such non-renewal option.
ITI's supply agreement with an unaffiliated party, under which ITI was
entitled to purchase pipe to satisfy its licensees' NuPipe requirements, expired
in June 1995, and ITI has been engaged in discussions with such supplier with
respect to the extension of the arrangement through the end of 1999, subject to
automatic renewal unless one party terminates upon at least twelve months' prior
notice and to minimum purchases by ITI. ITI believes that alternative sources of
supply for its pipe requirements in connection with the NuPipe Process are
available. If ITI were unable to obtain its NuPipe requirements under its
existing third party arrangements, as extended, ITI might be adversely affected
until arrangements with alternative sources are formulated.
During 1994, ITI's wholly-owned subsidiary, Pipe Rehab International, Inc.
("PRI"), in connection with its acquisition of certain territories initially
reserved by the seller of the PRI Technologies, assumed the seller's obligations
under an equipment manufacturing agreement with a licensee for territories
comprising much of the Middle East, and has an agreement-in-principle for a
similar arrangement to a new licensee for territories in Africa south of the
equator. See "-- Licensing" below. In December 1993, ITI determined to
discontinue the operations of a division of PRI which engaged in the off-site
rehabilitation of downhole tubulars from its plant in Dallas, Texas. ITI
subsequently determined to abandon its efforts to find a purchaser for such
division and to shut down the Dallas facility. See Note 8 of the Notes to ITI's
Consolidated Financial Statements included elsewhere herein.
DIRECT INSTALLATION AND OTHER CONSTRUCTION OPERATIONS
ITI's direct installation operations utilizing the Insituform Process and
its other construction operations accounted for approximately 74% of ITI's
consolidated revenues in 1994 (approximately 77% during the six months ended
June 30, 1995). Such operations are principally conducted through the following
subsidiaries:
<TABLE>
<CAPTION>
COMPANY* HEADQUARTERS TERRITORY
-------------------------------- ---------------------- ------------------------------
<S> <C> <C>
Insituform Southwest Santa Fe Springs, Arizona, New Mexico,
California southern California,
southern Nevada, two
counties in Texas
Insituform of New England, Charlton, Maine, New Hampshire,
Inc. Massachusetts Vermont, Massachusetts,
Connecticut, Rhode Island
NuPipe New England, Inc. Charlton, Maine, New Hampshire,
Massachusetts Vermont, Massachusetts,
Connecticut, Rhode Island
Insituform Gulf South, Inc. Houston, Texas Texas Gulf coast area,
Louisiana and central
and south Mississippi
Insituform Midwest, Lemont, Illinois Indiana and portions of
Inc. Illinois, Iowa and
Wisconsin
</TABLE>
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<TABLE>
<CAPTION>
COMPANY* HEADQUARTERS TERRITORY
-------------------------------- ---------------------- ------------------------------
<S> <C> <C>
Gelco Services, Inc. Salem, Oregon Northern California,
northern Nevada,
Oregon, Washington,
Idaho, Alaska, Hawaii,
Guam and portions of
Montana
Gelco NuPipe, Inc. Salem, Oregon Northern California,
northern Nevada,
Oregon, Washington,
Idaho, Alaska, Hawaii,
Guam and portions of
Montana
IGL Canada Limited West Edmonton, Canada**
Alberta
Mar-Tech Insituform Ltd. Surrey, British British Columbia
Columbia
Insituform Permaline Ossett, England United Kingdom
Limited
NuPipe Limited Ossett, England United Kingdom
Insituform France S.A. LaCourneuve, France France
Insituform Overseas Northampton, spot repair services
Limited England
</TABLE>
---------------
* All such subsidiaries are wholly-owned, directly or indirectly, by ITI,
except for Insituform France S.A., two-thirds of which is so owned.
** IGL Canada Limited has granted a sub-license under its rights to the
Insituform and NuPipe Processes in British Columbia to Mar-Tech Insituform
Ltd., which was acquired as part of the acquisition of Gelco Services, Inc.
Gelco Services, Inc., Gelco NuPipe, Inc. and Mar-Tech Insituform Ltd.,
together with certain related assets, were acquired by ITI in October 1994, for
an aggregate purchase price of $18 million, one-half of which was paid at
closing and the remainder in guaranteed secured promissory notes issued
contemporaneously with notes to affiliates of the sellers aggregating
approximately $2.85 million (as adjusted), in evidence of payables and current
indebtedness and working capital. See Note 1 of the Notes to ITI's Consolidated
Financial Statements included elsewhere herein. In February 1995, ITI acquired
two-thirds of the stock of Insituform France from Entrepose Montalev S.A., a
subsidiary of Lyonnaise des Eaux S.A. and ITI's prior French licensee of the
Insituform Process ("Entrepose"), for the sum of approximately $1.5 million. The
remaining one-third of the stock in Insituform France will continue to be held
by Entrepose and be entitled to certain co-sale rights.
In 1994, ITI commenced spot contracting services through its newly-formed
subsidiary, Insituform Overseas Limited. ITI intends to provide such services in
unlicensed territories through the use of sub-contracted crews provided by its
subsidiaries as well as unaffiliated licensees.
Insituform and NuPipe installation operations are organized into field
installation and construction crews. Each field unit is typically composed of
crews responsible for cleaning and preparation, installation, and video/cutter
operations, respectively, and is typically equipped with a high-pressure water
cleaning truck, a boiler truck, a refrigeration truck, a television van with
cutting apparatus, other support trucks and vans, and pumping and safety
equipment.
In addition to its Insituform and NuPipe business, Gulf South evaluates the
overall condition of a sewerage collection system by inspection of the
individual components of the system, creating an automated
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database system that, among other things, inventories the customer's entire
sewerage system by individual pipe segments and results in recommendations for
rehabilitation. During the year ended December 31, 1994, Gulf South's revenues
from such activities aggregated $2.1 million.
In the first quarter of 1993, ITI introduced its technology for lining
in-field pipe utilizing the PRI Technologies, the rights of ITI to which exclude
agricultural irrigation applications worldwide, all of which were licensed,
royalty-free, to the seller upon acquisition of the PRI Technologies. During
1994, ITI acquired certain territories initially reserved under such license by
the seller for non-agricultural applications. Under ITI's acquisition
arrangements, in addition to amounts paid at closing and installments due
through 1995, the seller is entitled, subject to an initial grace period, to
contingent payments calculated on the basis of the length of pipe lined and
other criteria. In view of the start-up nature of operations utilizing the PRI
Technologies, management of ITI will consider alternatives to continued
maintenance of PRI's facilities in Everman, Texas, including, in the event of
consummation of the Merger, consolidation with IMA's larger corrosion and
abrasion protection activities.
During the year ended December 31, 1994 and six months ended June 30, 1995,
approximately 71.7% and 50.0%, respectively, of the revenues of IGL Canada (9.5%
and 3.9%, respectively, of ITI's consolidated revenues) were derived from
non-trenchless construction contracting, primarily new open-cut water and sewer
work, as a prime contractor or as a subcontractor to others for private
developers and municipalities. IGL Canada also conducts tunnelling operations
utilizing horizontal boring, pipe jacking, pipe extraction and microtunnelling
techniques, which entail digging work shafts, and then tunnels, and installing
pipe in the newly-dug tunnel, in connection with the construction of new sewer
and water systems and water and oil and gas pipelines. See "ITI -- Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" above for information concerning
the proposed disposition of the open-cut sewer and water pipeline construction
and rehabilitation operations of IGL Canada.
The direct installation business of ITI (including the non-trenchless
business of IGL Canada) is project-oriented, and contracts may be obtained
through competitive bidding, often requiring performance at a fixed price. The
profitability of these operations to ITI depends upon the ability to estimate
costs accurately, and such estimates may prove to be inaccurate as a result of
unforeseen conditions or events. A substantial proportion of the work on any
given project may be subcontracted out to third parties by ITI.
Proper trenchless installation requires certain expertise that is acquired
on the job and through training, and, if an installation is improperly
performed, ITI may be required to repair the defect, which may involve
excavation. ITI, accordingly, has incurred significant costs in establishing new
field installation crews, in training new operations personnel and in equipping
its direct installation staff. ITI generally invoices installation revenues on a
percentage-of-completion basis. Typically, collection from governmental agencies
is made within 60 to 90 days of billing.
ITI is required to carry insurance and bonding in connection with certain
direct installation projects, and, accordingly, maintains comprehensive
insurance policies, including workers' compensation, general and automobile
liability, and property coverage. ITI believes that it presently maintains
adequate insurance coverage for all direct installation activities. See
"ITI -- Management's Discussion and Analysis of Financial Condition and Results
of Operations" for information concerning contingencies related to insurance
maintained in connection with operations of Naylor that were divested before the
acquisition of Naylor by ITI. ITI has also arranged bonding capacity for bid,
performance and payment bonds. Typically, the cost of a performance bond is
approximately 1% of the contract value. ITI is required to indemnify surety
companies for any payments the sureties are required to make under the bonds.
LICENSING OPERATIONS
ITI grants licenses for the Insituform Process, covering exclusive and
non-exclusive territories, to licensees who provide sewer and pipeline repair
and rehabilitation services to governmental, industrial and commercial users
throughout their respective licensed territories. The licenses generally grant
to the licensee the right to utilize the know-how and practice the invention of
the patent rights (where they exist) relating to the Insituform Process, to use
ITI's copyrights and to use the trademark "Insituform." During 1994 and the
first half of 1995, ITI entered into new Insituform license agreements covering,
on an exclusive basis, New
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Zealand, South Korea and, on a non-exclusive basis Poland and (supplementing its
other eleven non-exclusive licenses in such territory), Japan. At present, the
Insituform Process is commercialized under license by an aggregate of 33
unaffiliated licensees and sublicensees. From time to time, in those territories
which do not justify the granting of a license, ITI also appoints agents which
promote the Insituform Process and secure contracts to be performed by ITI or
its licensees. During the year ended December 31, 1994, license fees and royalty
income from ITI's Insituform licensees represented $10.0 million, or 6.7% of
consolidated revenues.
Effective in December 1990, NuPipe, Inc., a wholly-owned subsidiary of ITI,
entered into licenses granting the exclusive right to commercialize the NuPipe
Process in assigned territories covering the United States, Puerto Rico and the
United States Virgin Islands. NuPipe International, Inc., a wholly-owned
subsidiary of NuPipe, Inc., has entered into a number of licensing arrangements
outside of the United States, and has identified, and is engaged in discussions
with, additional prospective licensees. During the year ended December 31, 1994,
ITI recognized royalty income and license fees from its NuPipe licensees in the
amount of approximately $254,000, or .2% of consolidated revenues.
As a result of ITI's acquisition during 1994 of certain territories
initially reserved by the seller of the PRI Technologies, ITI assumed the
seller's obligations under the grant of an exclusive license of the PRI
Technologies for much of the Middle East, in exchange for royalty payments based
upon gross profits. ITI also has an agreement-in-principle for an exclusive
license covering in-field lining and factory-lined pipe utilizing the PRI
Technologies in Africa south of the equator, which remains subject to
formulation of definitive terms. The license would be for an initial term of
five years expiring in 2000, renewable for an additional five-year term at the
licensee's option, and provide for continuing royalties based upon net selling
price of the products and services under license and a license fee of $300,000
(one-half of which would be payable at inception, and the remainder of which
would be paid in installments through 1998).
Insituform License Agreements. Each licensee has entered into an agreement
with ITI setting forth the rights and obligations of the parties with respect to
the exploitation of the Insituform Process. Each of ITI's domestic Insituform
licensees pays a minimum annual royalty, which varies according to the
population of the licensed territory, against a royalty of 8% of the gross
contract price (9% in the case of contracts in Puerto Rico and the United States
Virgin Islands) of all sales and contracts utilizing the Insituform Process,
including any preparatory and finishing work performed and subject to specified
allowances. Domestic licensees are also obligated to pay a royalty surcharge of
8% to 12% of their sales and contracts utilizing the Insituform Process outside
of their licensed territories. The amount of such surcharges are then paid by
ITI to the domestic licensee in whose territory the installation was performed.
In the event any domestic Insituform licensee has, for any year, produced
to ITI an acceptable plan for marketing and sales penetration, minimum royalties
otherwise established for such year will not apply, subject to achievement of
performance objectives established with respect to utilization of ITI's
trenchless rehabilitation processes. In addition, ITI is obligated to pay to
Insituform East, Incorporated ("Insituform East"), a domestic licensee, one-half
of one percent of the gross contract value of certain contracts using the
Insituform Process entered into by licensees introduced to ITI by Insituform
East's predecessor-in-interest, SAW Associates, and also one-half of one percent
of the reported turnover of Insituform East.
Insituform licensees outside of the United States are obligated to pay
royalties, calculated by reference to the gross contract price of all contracts
utilizing the Insituform Process, ranging from 5% to 8%. Foreign licenses may
also provide for minimum annual royalties as well as initial license fees and
trademark fees.
ITI requires its licensees to be well-trained and fully qualified in the
installation and service of the Insituform Process. ITI typically establishes
certain financial, professional and operating requirements which must be met by
each licensee. In addition to possessing adequate capital and competent
technical personnel each licensee must demonstrate an ability to market the
Insituform Process aggressively to potential users within its territory.
Any improvements or modifications a licensee may make in the Insituform
Process during the term of the license agreement becomes the property of ITI or
are licensed to ITI. ITI is generally required to disseminate
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all information with regard to the Insituform Process developed by it or any
licensee to all licensees, without any additional royalty.
Should a licensee fail to meet its royalty obligations or other material
obligations, ITI may terminate the license. Many licensees (including all
domestic licensees), upon prior notice to ITI, may also terminate the license
for any reason. ITI may vary the agreement used with new licensees according to
prevailing conditions.
IMA, ITI's largest domestic licensee, has reported its acquisition of an
exclusive license for substantially all of North America to use a
"cured-in-place" rehabilitation technology potentially competitive in some
applications with the Insituform Process, known as the PALTEM systems. ITI has
communicated to IMA its concerns regarding the ability of IMA to operate in
compliance with its Insituform licenses in view thereof, and has notified IMA of
its obligations not to use, nor induce any other Insituform licensee to use,
"Insituform" as a trademark in connection with the exploitation of PALTEM, nor
to associate "Insituform" with the PALTEM systems; not to interfere with ITI's
relations with its other licensees by inducing them to divert their efforts from
promotion of the Insituform Process; not to utilize or disclose any information
proprietary to ITI in the commercialization of PALTEM; and not to violate its
obligations regarding utilization of all reasonable endeavors to create a demand
within its licensed territory for Insituform products.
In January 1995, ITI received a request from Enviroq, another domestic
licensee, for ITI to grant its consent under various Insituform and NuPipe
license agreements with Enviroq's subsidiaries, in connection with the
transactions contemplated by the Enviroq Agreement pursuant to which IMA, on
April 18, 1995, acquired the pipeline rehabilitation business of Enviroq. The
Insituform and NuPipe license agreements (see "-- NuPipe Process License
Agreements" below), respectively, contain certain provisions which require the
consent of the licensor in order to avoid termination in the event of change in
control of the licensee and/or assignment of the licenses. ITI has declined to
grant its consent, as requested by Enviroq and, as described under "-- Legal
Proceedings" below, has initiated the Declaratory Action in Tennessee Chancery
Court (subsequently removed by defendants to federal district court) seeking a
declaratory judgment confirming such action.
See "-- Investments" below for a description of arbitration proceedings
initiated by Insituform East against Enviroq seeking a declaration that an event
of default has occurred under the partnership agreement of Midsouth Partners,
another domestic licensee in which subsidiaries of Enviroq, Insituform East and
ITI are partners, as a result of the execution by Enviroq of the Enviroq
Agreement. ITI has agreed with IMA that, unless the Merger Agreement is
terminated, neither party will take any further action in the Declaratory
Action, or to assert any rights in dispute as a result of the Enviroq
Acquisition without consent of ITI, except for certain procedural steps to
preserve the respective rights of the parties.
NuPipe Process License Agreements. In consideration for its NuPipe
license, each domestic NuPipe licensee has paid an initial license fee of
$60,000, and has agreed thereafter to pay a royalty of 6.75% of the gross
contract price (including sales) of all contracts to the extent covering
installations performed utilizing the NuPipe Process. "Gross contract price" is
defined to include preparatory and finishing work and does not exclude certain
allowances as does the comparable calculations utilized by ITI for domestic
Insituform royalties. If the licensee commercializes the NuPipe Process outside
of its assigned territory, it will be obligated to pay to ITI, for repayment in
turn to the licensee assigned such territory, 10.125% of the gross contract
price of such installations. In connection with its introduction in 1995 of a
second fold and formed product, ITI has offered domestic licensees the right to
elect to modify royalty calculations so as to be based upon linear feet of pipe
delivered, but has not completed such arrangements with its unaffiliated
licensees.
Each domestic NuPipe licensee has committed to use its best efforts to
create a demand for the NuPipe Process within the territory covered by its
license, and to use its best efforts to fill such demand. In furtherance of its
commitments under the license, each domestic licensee has agreed that, in order
to maintain the license it will, during each year of the term of the license,
complete contracts covering the repair, rehabilitation or reconstruction in its
territory, by utilizing ITI's trenchless rehabilitation processes, of the
minimum quantities of length of pipeline as established under the license.
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Each domestic licensee has, pursuant to its license, entered into a supply
agreement with ITI relating to its requirements of the thermoplastic pipe
utilized in the application of the NuPipe Process, as described under
"-- Manufacturing and Product Sales" above. Domestic NuPipe licensees are
subject to terms similar to those in ITI's Insituform licenses with respect to
maintenance of quality standards, rights in improvements to the process and
termination of the license.
ITI has entered into licensing arrangements covering Sweden and
Switzerland, agreed in principle to licenses in certain Pacific Rim territories,
and also, through affiliates, introduced the NuPipe Process in the United
Kingdom and Canada. In consideration for its NuPipe license, each unaffiliated
foreign NuPipe licensee has paid an initial license fee, and each foreign
licensee remains obligated to pay a royalty of 8% of its net invoices in
connection with the operation of the NuPipe Process in its exclusive territory,
subject to minimum royalty payments, throughout the life of the 20-year
agreements. Under the agreements, the licensees have committed to use their best
efforts to promote the operation of the NuPipe Process in their respective
territories, but may, upon six months' prior notice, terminate the license. The
licensor may also terminate the license in the event the licensee fails to make
payments when due, or fails to meet its other material obligations. Foreign
licensees have granted to the licensor a non-exclusive, royalty-free license,
without limit of time, covering all improvements to the NuPipe Process that the
licensees may develop or acquire.
NuPipe Acquisition Arrangements. Under the terms of the agreement pursuant
to which ITI acquired the NuPipe Process, ITI was obligated to make ongoing
payments to the former stockholders of the predecessor of NuPipe, Inc. until the
later to occur of 15 years after the closing of the transaction or the
expiration of all patents or copyrights granted with respect to the NuPipe
Process. Payments amounted to 35% of the royalty income collected by ITI in
connection with the NuPipe Process from unaffiliated and affiliated licensees.
Until such arrangements were modified in October 1994, one-half of such payments
were made in cash and one-half in shares of the Series C Cumulative Non-Voting
Preferred Stock, $.10 par value ("Series C Preferred Stock"), of ITI; in October
1994, all such shares were repurchased (for an amount aggregating approximately
$228,000), and the parties agreed that payments would thereafter be made solely
in cash. In March 1995, ITI exercised an option, granted in October 1994, to
acquire all rights to such contingent payments in exchange for ITI's notes
aggregating $1 million, payable over three years, and accruing interest at 5.4%
per annum (reflecting the rate of return on the Series C Preferred Stock).
INVESTMENTS
ITI makes investments in its licensees, and enters into joint ventures,
from time to time so as to encourage additional royalties and sales of its
products and further enable ITI to influence and participate in the exploitation
of its trenchless rehabilitation processes. During the six months ended June 30,
1995 and years ended December 31, 1994, 1993 and 1992, ITI's earnings from such
investments, other than ITI's pro rata portion of the earnings of Insituform
Brochier Rohrsanierungstechnik GmbH ("Insituform Brochier"), were not material
to ITI's results of operations. See Note 7 of the Notes to ITI's Consolidated
Financial Statements included elsewhere herein. ITI has divested minority
positions in licensees as appropriate opportunities arose, in order to focus on
supporting licensee operations through more active marketing, research and
development and technical support efforts.
As a result of the IGL Acquisition, ITI, through its subsidiary, Insituform
Technologies Limited ("ITL"), holds one-third of the equity interest in
Insituform Brochier, ITI's licensee of the Insituform Process in Germany.
Pursuant to Insituform Brochier's joint venture agreement, ITL granted an
exclusive Insituform license to Insituform Brochier covering central and
southern Germany (the remaining territory of which is covered by licenses
assigned by another joint venturer or subsequently extended by IGL). Under the
joint venture arrangements, the managing director of Insituform Brochier is
appointed by the unanimous agreement of the parties, and the joint venture
partners have rights-of-first-refusal in the event any party determines to
divest its interest. During the six months ended June 30, 1995, ITI recorded
earnings of $.1 million based on its investment in Insituform Brochier; during
the year ended December 31, 1994, ITI did not record earnings from such
investment; and during the two prior years recorded earnings of $390,000 and
$675,000, respectively, from such investment.
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ITI holds additional investments in licensees as follows:
<TABLE>
<CAPTION>
LICENSEE PROCESSES TERRITORY INTEREST
------------------- -------------- ------------------------ -----------------------
<S> <C> <C> <C>
Midsouth Partners Insituform Tennessee, portions of 15% general partnership
NuPipe Kentucky and Mississippi interest(1)
N.V. K-Insituform Insituform Belgium, 50% joint venture
S.A. Luxembourg interest(2)
Ka-Te Insituform Insituform Switzerland, 50% joint venture
A.G. Liechtenstein and interest(3)
Voralberg, Austria
</TABLE>
------------------------
(1) The remaining interest is divided equally between Insituform East and
Enviroq.
(2) The remaining interest is held by N.V. Kumpen.
(3) The remaining interest is held by Ka-Te Holding A.G.
The management and conduct of the business of Midsouth Partners is vested
in a management committee comprised of one representative of ITI, three
representatives of Insituform East and three representatives of Enviroq (one of
which is also the chairman of the management committee). Partnership interests
in Midsouth Partners may not be transferred by the subsidiaries of ITI,
Insituform East and Enviroq holding such interests, nor may there be a change in
control of any partner, without the approval of all partners. In December 1994,
Insituform East notified Enviroq of its claim that, as a result of Enviroq's
execution of the Enviroq Agreement with IMA, an event of default had occurred
under the Midsouth Partners partnership agreement. Subsequently, Insituform East
commenced arbitration proceedings seeking a declaration to such effect and
unspecified remedies available under the partnership agreement. The partnership
agreement grants non-defaulting partners the right to require compliance with
the agreement, enjoin any breach or seek dissolution of the partnership, among
other alternatives. ITI is not a party to such arbitration proceedings, which
have been stayed to October 2, 1995. Instituform East also has purported to
exercise its alleged rights as a non-defaulting partner to name a majority of
the members of the management committee, an action to which both ITI and Enviroq
have objected.
The interests in ITI's Belgian joint venture, formed in April 1993, and its
Swiss joint venture, formed in September 1993, are subject to its partners'
right-of-first-refusal. ITI's joint venture in Belgium is managed by four
directors, two named by ITI, who are responsible for technical and financial
matters, and two named by N.V. Kumpen, who are responsible for marketing, sales
and general management. ITI's Swiss joint venture is managed by three directors,
with unanimity required of the directors, or of the shareholders, to take
certain actions. Of the directors of the Swiss joint venture, one is named by
Ka-Te Holding A.G., who is responsible for marketing, sales and general
management, one is named by ITI, who is responsible for technical and financial
matters, and a third is named by ITI with the approval of its partner, which may
not unreasonably be withheld.
Until March 1995, ITI was also a party to a joint venture, called Enhansco,
which develops, blends and sells resins used in connection with the Insituform
Process. At such date, ITI's joint venture partner purchased ITI's one-half
interest in the joint venture for the sum of $400,000, one-half of which was
paid within 30 days of closing and the remainder of which is due on December 31,
1997. ITI has agreed that it will not compete with the continuing resin business
of the joint venture for a period of three years after such buy-out.
MARKETING
ITI's licensees have provided sewer and pipeline repair and rehabilitation
services utilizing ITI's trenchless pipeline rehabilitation processes to
industrial, commercial and municipal users throughout the territories assigned.
ITI's licensees (including affiliated licensees) are responsible for selling and
marketing ITI's trenchless rehabilitation process in their respective
territories and each has a staff for this purpose. In addition, ITI markets its
processes by providing numerous marketing support services to its licensees and
by other means including participation in exhibitions, trade shows, a national
advertising program, press releases in specialized publications, product
literature, informational and sales aids and by making presentations to
prospective clients and interested parties in the municipal, governmental and
industrial fields.
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The bulk of the trenchless repair and rehabilitation services of the
licensees has historically been performed for municipalities, and ITI expects
this to remain the largest part of the licensees' business for the foreseeable
future. ITI believes that other markets and, in particular, the industrial
market, offer significant opportunities for the Insituform Process. ITI believes
that the ability of the Insituform Process to restore effluent and sewer lines
with little or no excavation is important to industrial customers. Furthermore,
the Insituform Process allows the selection of resin systems which are suitable
for a wide range of industrial applications. ITI believes that power generation,
hydrocarbon processing, chemical processing and pulp and paper are the
industries which offer the most potential for use of the Insituform Process. As
part of its increased effort in the industrial market ITI has hired two national
account executives who are former senior executives of the targeted industrial
fields, who provide specialized support and guidance to licensees who are
serving the hydrocarbon processing, chemical processing and pulp and paper
industries.
ITI's open-cut sewer and water operations in Canada have been conducted
primarily with private developers and commercial customers, and approximately
61.3% of IGL Canada's revenues in the most recent fiscal year were derived from
such customers with the remainder from municipalities. See "ITI -- Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" above for information concerning
the proposed disposition of such operations.
ITI expects to continue licensing the Insituform Process, the NuPipe
Process and the PRI Technologies pursuant to existing arrangements and in those
additional areas of the world in which ITI's management believes it would not be
profitable for ITI to exploit such processes directly. ITI intends to continue
to investigate the formation of subsidiaries and other affiliates, including
joint ventures, which will directly provide installation services utilizing
ITI's processes.
No customer accounted for more than 10% of ITI's consolidated revenues
during the years ended December 31, 1994, 1993 and 1992, respectively, except
that, in 1994, the City of Houston, Texas accounted for 11.6% of ITI's
consolidated revenues.
BACKLOG
Orders for Insitutubes are generally shipped within one to two weeks after
receipt, and, accordingly, no substantial backlog of orders for this product
normally exists. At June 30, 1995 and 1994, respectively, ITI recorded contract
backlog from construction operations as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1995 1994
----- -----
(IN MILLIONS)
<S> <C> <C>
Total................................................... $45.4 $48.3
Insituform Southwest.................................. 4.7 1.2
Insituform of New England, Inc.(1).................... 5.1 17.3
Insituform Gulf South, Inc............................ 16.4 15.3
Insituform Midwest, Inc............................... 2.4 5.8
Gelco Services, Inc.(2)............................... 5.6 (3)
IGL Canada Ltd. ...................................... 7.1 7.6
Insituform Permaline Ltd.(4).......................... 2.1 1.1
Pipe Rehab International, Inc......................... .1 --
Insituform Overseas Limited........................... 1.9 --
</TABLE>
---------------
(1) Includes NuPipe of New England, Inc.
(2) Includes Mar-Tech Insituform Ltd. and Gelco NuPipe, Inc.
(3) Gelco Services, Inc. was acquired by ITI in October 1994.
(4) Includes NuPipe Limited.
ITI anticipates that substantially all contract backlog recorded at June 30,
1995 will be completed in 1995, except for certain work in connection with the
projects undertaken by Gulf South (approximately $4.3 million), which may extend
into 1996.
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SEASONALITY
Seasonal variations in ITI's results of operations may arise from the
budgetary and appropriations process of the governmental customers of ITI and
its licensees and the contraction of pipeline rehabilitation activity in certain
northern regions during severe weather conditions. Severe cold weather affects
ITI's operations in Canada in the months of December, January, February and
March where, over the past three years, the volume of work performed in the
first calendar quarter by IGL Canada has averaged 5.9% of the total year's work.
The volume of work reported on a consolidated basis by ITI's licensees
(including affiliated licensees) in the first calendar quarter of the year has
averaged, for the past five years, approximately 21.3% of the work they reported
over the full year.
COMPETITION
The pipeline reconstruction, rehabilitation and repair business is highly
competitive, and ITI competes against many companies, some of which have far
greater financial resources and experience than ITI. Accordingly, there can be
no assurance as to the success of the Insituform Process in competition with
such companies and alternative technologies for pipeline rehabilitation.
ITI currently faces its principal competition from more traditional
pipeline rehabilitation approaches, including: (i) total replacement, which is
the excavation and replacement of an entire section of pipe; (ii) point repair,
which is the replacement of cracked or structurally failed sections of pipes by
actual excavation and replacement; (iii) sliplining, which is the placement of a
smaller pipe within an existing deteriorated pipe; and (iv) grouting, which is
the placement of gelatinous material, hydraulic cement, or other acceptable
material in defective pipe joints to repair leaks and prevent infiltration. In
addition, the Insituform Process more recently has encountered competition from
cured-in-place processes, including one of Japanese origin (PALTEM), as to which
IMA has acquired an exclusive license in substantially all of North America (see
"-- Licensing Operations" above), two of German origin (KM-Liner and InLiner)
and, outside of the United States, from additional cured-in-place processes
currently in regional use in Europe, such as FormaPipe, InPipe, Copeflex,
Phoenix, Rees and Kanal Muller. ITI also faces competition from folded
thermoplastic processes using polyethylene pipe (U-Liner, Compact Pipe) and
polyvinylchloride pipe (AM-Liner, Ex-Pipe). ITI believes that the Insituform
Process generally offers a cost advantage over full replacement, the practical
advantage of avoiding excavation, a higher quality rehabilitation than
sliplining (which may significantly reduce the diameter of the pipe) and a
longer-term rehabilitation than grouting, and competes favorably with all
alternative processes now known.
ITI's Canadian subsidiary conducts its non-trenchless open-cut sewer and
water operations utilizing total replacement, point repair and sliplining
methods, as well as engaging in new excavation and, accordingly, competes with
traditional construction companies. See "ITI -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" above for information concerning the proposed disposition of
such operations.
ITI's in-place polyethylene lining systems for the oil and gas field
transmission market compete against a number of alternative methods, some of
which are provided by companies with a substantial market presence. For example,
competing methods of in-place pressure pipe rehabilitation which offer a
polyethylene liner are marketed by IMA (Tite Liner), British Gas (Swagelining)
and Miller Pipeline Corporation.
PATENTS
The Insituform Process was developed in the United Kingdom in 1971. ITI's
commercialization of the Insituform Process has been protected by patents which
cover certain aspects of the Insituform Process including the Insitutube
construction, the resin saturation process and the process of reconstructing the
pipeline. Pursuant to provisions recently adopted under the General Agreement on
Tariffs and Trade, patents in force on June 8, 1995 are entitled to a patent
term of the longer of 17 years from issuance or 20 years from the earliest
filing date of the patent. ITI currently holds 54 patents in the United States
relating to the Insituform Process, the last to expire of which will remain in
effect until 2013, and has obtained patent protection in its principal overseas
markets covering aspects of the Insituform Process.
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<PAGE> 121
One of the significant patents relating to the Insituform Process, covering
the curing of a resin-impregnated tube, has expired in many countries, in
particular the United States, Canada, Japan, the United Kingdom and Germany.
Another important method patent relating to the Insituform Process, which covers
material aspects of the inversion process has also expired in the United States,
Canada, Japan, the United Kingdom and Germany. The following patents of ITI
relate to the Insituform Process, collectively constituting an integrated
product and service:
<TABLE>
<CAPTION>
EXPIRY EXPIRY EXPIRY EXPIRY
PATENT U.S. DATE CANADA DATE JAPAN DATE U.K. DATE
------- ------- -------- ------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(a) 4366012 02/05/01 -- -- -- -- -- --
(b) 4434115 02/11/02 -- -- -- -- 2096265 02/18/01
(c) 4446181 05/01/01 1134290 10/26/99 1202781 04/25/99 2031107 09/02/99
(d) 4581247 12/27/04 1254852 05/30/06 -- -- -- --
(e) 4776370 10/11/05 -- -- -- -- -- --
(f) 5044405 08/21/09 -- -- -- -- -- --
(g) 5108533 10/10/09 -- -- -- -- -- --
(h) 5154936 10/05/10 * * * * * *
(i) 5167901 10/05/10 * * * * * *
(j) 5285741 03/06/11 * * * * * *
</TABLE>
---------------
(a) Method of serial vacuum impregnation of a resin into an Insitutube.
(b) Method for remote lining of side connections.
(c) Manufacture of tubular laminates.
(d) Method for lining pipes incorporating the curing of a resin-impregnated
liner using a light source.
(e) Apparatus for securing cable to a tubular pipe liner.
(f) Method of installing a lateral lining from the main line by use of a
carrier tube.
(g) Method of installing a lateral lining from the lateral clean-out to the
main.
(h) Apparatus for everting an Insitutube.
(i) Method of everting an Insitutube.
(j) Method of producing a flexible tubular.
* application pending.
In addition, in Germany, applications for patents (h), (i) and (j) are pending,
and an application for patent (d) has been abandoned. In the United Kingdom, in
respect of certain classes of patents, any person has the right to compel the
patent holder to license such person during the last four years of the patent's
life, on such terms as are agreed with the patent holder (including the level
and/or amount of royalty) failing which such terms are judicially determined.
The specifications and/or rights granted in relation to each patent will
vary from jurisdiction to jurisdiction. In addition, as a result of differences
in the nature of the work performed and in the climate of the countries in which
the work is carried out, not every licensee uses each patent, and ITI does not
necessarily seek patent protection for all of its inventions in every
jurisdiction in which it does business.
Although ITI believes these patents are important to the business of ITI,
there can be no assurance that the validity of the patents will not be
successfully challenged or that they are sufficient to afford protection against
another company utilizing a process similar to the Insituform Process. ITI's
business could be adversely affected by increased competition in the event that
one or more of the patents were adjudicated to be invalid or inadequate in scope
to protect ITI's operations or upon expiration of the patents. ITI believes,
however, that while ITI has relied on the strength and validity of its patents,
ITI's long experience with the Insituform Process, its continued commitment to
support and develop the Insituform Process, the strength of its trademarks, and
its degree of market penetration, should enable ITI to continue to compete
effectively in the pipeline rehabilitation market.
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In September 1989, the United States Patent and Trademark Office issued
ITI's initial patent covering the NuPipe Process, which was followed by six
additional patent grants. Patents covering the NuPipe Process or the materials
used in connection with the NuPipe Process have also been issued in 15 other
countries. ITI intends aggressively to pursue the remaining U.S. and foreign
patent applications related to the NuPipe Process, but there can be no assurance
that any of the remaining patents will issue as a result of such applications,
or that any patent granted will be sufficient to afford protection against
another company utilizing a process similar to the NuPipe Process.
The PRI Technologies acquired by ITI in November 1991, and complementary
rights acquired in December 1992, included certain United States patents and
patent applications. ITI is also pursuing patent applications in a number of
foreign jurisdictions covering the PRI Technologies. Although ITI will rely upon
a combination of patents and trade secrets to protect the PRI Technologies, ITI
believes that the success of its processes addressing the oil and gas field
transmission market will depend primarily upon its proprietary know-how and its
marketing and sales skills.
RESEARCH AND DEVELOPMENT
ITI, by utilizing its own laboratories and test facilities and outside
consulting organizations and academic institutions, continues to develop
improvements to the Insituform and NuPipe Processes, including the materials
used and the methods of manufacturing and installing pipe. During the years
ended December 31, 1994, 1993 and 1992, ITI spent $1.5 million, $2.7 million and
$4.3 million, respectively, on all research and development activities, and, for
the six-month periods ended June 30, 1995 and 1994, respectively (excluding
strategic marketing costs), spent $.9 million and $.3 million on such
activities.
EMPLOYEES
As of June 1, 1995, ITI employed 882 individuals, including five officers,
149 technical specialists and managers, 121 manufacturing staff, 400 direct
installation staff, 137 administrative personnel and 70 marketing personnel.
During peak seasons, IGL Canada typically employs 80 to 100 additional employees
in direct installation operations. Each of Insituform Southwest and Insituform
Midwest is a party to a collective bargaining agreement covering an aggregate of
79 employees engaged in direct installation activities. None of ITI's other
employees is represented by a labor union, although Insituform Permaline belongs
to a trade association that prescribes minimum terms of employment for members.
ITI generally considers its relations with its employees to be good.
GOVERNMENT REGULATION
ITI and its licensees are required to comply with all national, state and
local statutes, regulations and ordinances, including those disclosure and
filing requirements relating to the grant of licenses. In addition, ITI's
licensees (including ITI's direct installation operations) may have to comply
with building code specifications, permit requirements, and extensive bonding
and insurance requirements with regard to installation activities as well as
with fire regulations relating to the storage, handling and transporting of
flammable materials. ITI's manufacturing facilities, as well as its direct
installation operations and those of its licensees, are subject to state and
national environmental protection regulations, none of which presently has any
material effect on ITI's capital expenditures, earnings or competitive position
in connection with ITI's present business. However, while ITI's direct
installation operations have established monitoring programs relating to the use
of solvents in the installation process, further restrictions could be imposed
on the use of solvents or the thermosetting resins used in the Insituform
Process. ITI believes that it is in material compliance with environmental laws
and regulations applicable to it.
The use of both thermoplastics and thermosetting resin materials in contact
with drinking water is strictly regulated in most countries. In the United
States, a consortium led by NSF International ("NSF"), under arrangements with
the United States Environmental Protection Agency (the "EPA"), establishes
criteria for materials that come into contact with drinking water. The NSF
standards establish minimum requirements for the control of potential human
health effects from substances added indirectly to water via contact with
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<PAGE> 123
treatment, storage, transmission and distribution system components, by defining
the maximum permissible concentration of materials which may be leached from
such components into drinking water, and methods for testing them. The NSF
assumes no liability for use of any products, and the NSF's arrangements with
the EPA do not constitute the EPA's endorsement of the NSF, the NSF's policies
or its standards. ITI does not currently have an NSF certified product, but has
submitted an improved product for NSF certification.
PROPERTIES
In May 1993, ITI relocated its executive offices to a new site in Memphis,
at 1770 Kirby Parkway. ITI's seven-year lease of such premises with an
unaffiliated party covers 17,885 square feet of office space, at an annual
rental of $254,868, plus taxes and operating expenses in excess of a base
amount.
ITI's manufacturing facilities in Memphis, Tennessee are sub-leased from an
unaffiliated entity for an initial term of 40 years expiring on December 31,
2020. The annual rental cost to ITI during the initial term of the lease is
currently $28,956, plus real estate taxes, and increases by varying percentages
every five years to $44,952, plus real estate taxes, in 2016 and thereafter. The
premises consist of 56,000 square feet of manufacturing space, with an adjoining
6,000 square foot administrative office complex, the cost of a portion of which,
together with certain machinery and equipment, was financed from the sale of a
$1.5 million industrial development bond and secured by a mortgage on the
premises and equipment. See Note 11 of the Notes to ITI's Consolidated Financial
Statements included elsewhere herein. An additional 2,700 square feet of space
added to the facility is used for research and development.
ITI maintains 87,000 square feet of space on 20 acres of land in
Batesville, Mississippi, 27,000 square feet of which is utilized as an
Insitutube fabrication facility, 27,000 square feet as a contiguous felt
manufacturing facility, 27,000 square feet as warehousing space, and 6,000
square feet as office space. The costs relating to the acquisition, construction
and equipping of the Batesville facilities, in the aggregate amount of $5.5
million, were financed from the proceeds of the sale of an industrial
development bond and secured by the issuer's title to the property, which is
leased to ITI for a term that expires concurrently with maturity of the bond in
January 2004. See Note 11 of the Notes to ITI's Consolidated Financial
Statements included elsewhere herein.
In January 1995 ITI sold to Linings (a 51%-owned subsidiary), for a sale
price of L750,000, the land and building previously leased to Linings and
comprising its Insitutube manufacturing facility located on 1.3 acres and
comprising 25,100 square feet of space in Wellingborough, England. ITI leases
additional Insitutube manufacturing space in Matsubuse, Japan, and a facility in
Everman, Texas which has been used for equipment manufacturing and other
activities relating to the PRI Technologies.
In support of its direct installation operations, ITI owns facilities in
Ossett, England (36,250 square feet), Waterville, Maine (7,200 square feet),
Lemont, Illinois (24,378 square feet), and West Edmonton, Canada (16,008 square
feet). The Ossett and Edmonton properties are subject to mortgages granted to,
respectively, National Westminster Bank Plc and Alberta Treasury Branches. ITI
manages installation operations from leased sites in the United States in
Houston, Indianapolis, Santa Fe Springs, Sacramento and Charlton, Massachusetts,
Kent, Washington, Kailua, Hawaii, Hammond, Louisiana and Salem, Oregon; and in
Canada in Edmonton, Alberta, Surrey, British Columbia, Pickering, Ontario and
Vaudreuil, Quebec. ITI's contracting subsidiaries maintain additional sales and
administrative offices in the event required by operations.
ITI remains party to a lease with an unaffiliated entity entered into in
1990 by IGL and expiring in April 2015 for a two-story office building
comprising 12,226 square feet located in Langley, Berkshire, England. The
initial rent under the lease is L245,960 per annum, subject to adjustment every
five years based upon the open market rent applicable at that time.
The foregoing facilities are regarded by management of ITI as adequate for
the current and anticipated future requirements of ITI's business. In order to
rationalize ITI's operations acquired in the IGL Acquisition, ITI intends to
seek to negotiate terminations of its lease in Langley and of leases on certain
additional properties in the United Kingdom. In addition, in view of the
start-up nature of operations that have utilized PRI's Everman, Texas facility,
ITI will consider alternatives to the continued maintenance thereof, including,
in the event of consummation of the Merger, consolidation with IMA's larger
corrosion and abrasion protection activities. See "ITI -- Management's
Discussion and Analysis of Results of Operations -- Liquidity and Capital
Resources" above for information concerning the proposed disposition of IGL
Canada's non-trenchless operations, which may include certain Canadian
facilities.
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LEGAL PROCEEDINGS
A stockholder of ITI has filed an action in the United States District
Court for the Western District of Tennessee against ITI and one former and one
current officer alleging various misstatements and omissions, relating to, among
other things, acquisition and restructuring costs arising from the IGL
Acquisition in December 1992, in public disclosures by ITI during the period
from October 28, 1992 to May 12, 1993 in violation of, among other things, Rule
10b-5 under the Exchange Act (Neil Weinberg, on behalf of himself and all others
similarly situated, Plaintiffs v. Insituform Technologies, Inc., William C.
Willis, Jr., and William A. Martin, Defendants (United States District Court for
the Western District of Tennessee, Western Division)). On September 30, 1994,
the court ruled on ITI's motion to dismiss the first amended complaint, granting
in part and denying in part ITI's motion. The court further granted plaintiffs
leave to amend their complaint insofar as defective from a pleading perspective.
ITI has filed an answer to the complaint as so amended, denying its material
allegations. On April 7, 1995, the court issued its order certifying the action
as a class action on behalf of all purchasers of ITI Common Stock during the
relevant time period. The court has entered a scheduling order which establishes
a trial date in November 1995.
Notwithstanding ITI's belief that it has defenses to the plaintiff's claim
that are well grounded in fact and law, on May 23, 1995 ITI entered into a
memorandum of understanding to settle such litigation and, on September 11,
1995, executed a stipulation of settlement in evidence thereof. Under the
settlement, which remains subject to court approval and other customary
conditions, ITI would make a cash payment to class members in the amount of $3.2
million (which ITI has deposited into escrow) and issue to class members 30,000
shares of ITI Common Stock.
In October 1992, Naylor sold (the "NISI Sale") all of the common stock of
Naylor Industrial Services, Inc. ("NISI"), which was engaged primarily in the
provision of industrial cleaning services to refineries and chemical and
petrochemical manufacturing plants. The NISI Sale followed the sale in September
1992 of substantially all of the inventory, equipment and patents related to
NISI's specialized project services division. As part of the NISI Sale, Naylor
agreed to indemnify the purchaser, with certain exceptions and subject to
certain specified limitations, against certain claims that may arise out of the
breach by Naylor of its representations, warranties and covenants to the
purchaser or from actions or omissions of Naylor prior to the NISI Sale, and
further to indemnify the purchaser for certain pending or threatened litigation
claims that were known to Naylor as of the date of purchase. Among other
matters, NISI has been one of approximately 181 defendants in approximately
3,029 plaintiff cases, collectively known as the Lone Star Steel litigation
pending in Morris County, Texas, in which plaintiffs allege unspecified damages
against defendants, who supplied services or products to Lone Star Steel over a
period in excess of 40 years, arising from the alleged exposure of Lone Star's
workers to toxic and hazardous circumstances (Sam Fowler, et al. v. Union
Carbide, Naylor Industrial Services, Inc., et al., Case No. 15477, District
Court, Morris County, Texas 76th Judicial District (July, 1987)). ITI has been
advised that NISI utilized non-toxic detergents performing its cleaning services
during an eight-year period ending in 1987. Although it has not been possible to
assess likely jury verdicts at such an early stage in the proceedings or any
allocation of the amount of any such verdict, Naylor's position has been that
there is no substantial medical evidence connecting NISI to plaintiffs' alleged
injuries. In August 1995, the court entered an order that dismissed the lawsuit
against Naylor without prejudice of plaintiffs to refile such claims, in
connection with plantiffs' failure to connect NISI to such injuries.
Naylor is among approximately 210 other parties served with a third-party
complaint by McDermott, Inc. ("McDermott") in an action filed by more than 1,200
named plaintiffs (on behalf of a potential class of over 8,000 plaintiffs)
against 84 defendants including McDermott (In re: Combustion, Inc. Hazardous
Substance Litigation (United States District Court for the Middle District of
Louisiana transferred to the Western District of Louisiana)). Plaintiffs seek
damages for personal injury, property diminution, mental anguish and other
injuries allegedly resulting from alleged exposure to an escape of hazardous
substances from an oil reclamation facility located near Dernham Springs,
Louisiana and operated from 1964 through 1982 by Earl G. Dubose/Dubose Oil
Company and later Arthur Gammons/Combustion, Inc. McDermott's third-party
complaint seeks, among other things, clean-up costs under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") and tort
contribution and indemnity. The cases, initiated in the Twenty-First District
Court in the Parish of Livingston, Louisiana, were subsequently removed to the
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United States District Court for the Middle District of Louisiana and
transferred to the Western District of Louisiana, with the initial phases of the
trial scheduled for late 1996. By court order, all defendants and third party
defendants were deemed to have cross-claimed and counter-claimed against the
others for contribution under CERCLA and indemnity. In July 1995, Naylor entered
into a settlement agreement which, subject to court approval, would resolve all
claims for personal injuries, property diminution, mental anguish and other
injuries which were asserted or which could have been asserted against Naylor,
for the amount of $50,000. The court has scheduled a fairness hearing on the
proposed settlement for September 1995. The claims asserted under CERCLA remain
outstanding, and it is probable that Naylor's exposure will be limited to a pro
rata or proportionate share of all defendants' and third party defendants'
liability, if any.
ITI, together with Insituform Licensees B.V., an indirect, wholly-owned
subsidiary of IGL and, prior to the IGL Acquisition, ITI's licensor of the
Insituform Process, has filed suit against competitors alleging infringement of
certain of the Insituform patents in connection with projects undertaken in
Houston, Texas and Pittsburgh, Pennsylvania, respectively. The proceedings
pending in the United States District Court for the District of New Jersey (the
"New Jersey Proceedings") against Spiniello Limited, Inc. and Spiniello
Construction Co. (Civil Action No. 89-4174 (MTB)) address certain conduit
relining work to be performed in Pittsburgh by certain licensees of
Kanal-Mueller-Grappe-Frehruhngs-Gesselschaft ("KM"). The proceedings pending in
the United States District Court for the Southern District of Texas, Houston
Division (the "Texas Proceedings") against Cat Contracting, Inc. et al. (Civil
Action No. H-90-1690) address certain conduit relining work performed in Houston
by certain licensees of KM. In both proceedings, defendants asserted
counterclaims alleging that suit was brought in bad faith, certain antitrust
violations, and, in the Texas proceedings, defendants alleged that ITI engaged
in unfair competition. The New Jersey Proceedings have been stayed pending a
final judgment in the Texas Proceedings.
In June 1991, the jury in the Texas Proceedings rendered its verdict
finding that the competitors named as defendants had infringed the Insituform
patents at issue, and that such patents were not invalid. The court had also
previously severed defendants' antitrust counterclaims, for hearing at a later
date. In the continuing proceedings, the court, in August 1991, declined to
declare such patents invalid, as was requested by defendants, and did not
disturb the jury's verdict finding that the plaintiffs were not liable on the
defendant's counterclaims alleging that the suit had been brought in bad faith
and that plaintiffs had engaged in unfair competition. The court, however,
granted the defendants a new trial on the matter of whether they had infringed
certain Insituform patents, under the doctrine of equivalents, setting aside
that portion of the jury's verdict, and granting defendants judgment
notwithstanding the jury verdict on the issue of literal infringement of that
patent. The new trial was concluded in February 1995 and the matter is sub
judice.
In August 1995, ITI also applied for a preliminary injunction in the United
States District Court for the Central District of California against Spiniello
Limited, Inc., Spiniello Construction Co. and certain former employees of ITI's
licensees (Civil Action No. 95-5484 (GHK)) prohibiting use or disclosure of
ITI's trade secrets, in a suit alleging infringement of certain Insituform
patents in connection with rehabilitation work being performed in Los Angeles,
California. Defendants have not yet filed an answer to the complaint.
ITI has commenced an action in Tennessee Chancery Court (which was
subsequently removed by defendants to the United States District Court for the
Western District of Tennessee, Western Division), captioned Insituform North
America Corp. and NuPipe, Inc. v. Insituform Southeast, Inc., NuPipe Southeast,
Inc., Enviroq Corporation and Insituform Mid-America Inc., seeking a declaratory
judgment confirming its action in declining to grant its consent as requested by
Enviroq, under the various Insituform and NuPipe license agreements with
Enviroq's subsidiaries, in connection with the transactions contemplated by the
Enviroq Agreement. ITI has agreed with IMA that, unless the Merger Agreement is
terminated, neither party will take any further action in such suit, or to
assert any rights in dispute as a result of the consummation of the Enviroq
Acquisition without ITI's consent, except for certain procedural steps to
preserve the respective rights of the parties. In this connection, the court, by
order dated July 5, 1995, has stayed all proceedings until such time as closing
under the Merger Agreement is effectuated, at which time the case would be
dismissed, or until January 31, 1996, whichever date occurs first. See "The
Merger -- Basic Terms of Merger Agreement -- Cooperation Agreement" above.
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<PAGE> 126
ITI is involved in certain additional litigation incidental to the conduct
of its business and affairs, among other matters in the Maine Superior Court
(Griffin and others vs. Insituform of New England, Inc., Docket No. CV-91-606),
as described under "ITI -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Management of ITI does not believe that the outcome of any such litigation will
have a material adverse effect on the consolidated financial condition or
operations of ITI.
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<PAGE> 127
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS
AND MANAGEMENT OF ITI
The following table sets forth certain information as of June 1, 1995 with
respect to the number of shares of ITI Common Stock beneficially owned by (i)
each person known by ITI to own beneficially more than 5% of the outstanding
shares of ITI Common Stock, (ii) each director of ITI, (iii) each current and
former executive officer of ITI named in the summary compensation table under
"Election of ITI Directors" above and (iv) all directors and executive officers
of ITI as a group:
<TABLE>
<CAPTION>
SHARES OF ITI COMMON
SHARES OF ITI STOCK BENEFICIALLY OWNED
COMMON STOCK SUBSEQUENT TO THE
BENEFICIALLY OWNED(1) MERGER(1)
------------------------ -------------------------
NUMBER PERCENT NUMBER PERCENT
BENEFICIAL OWNER OF SHARES OF CLASS OF SHARES OF CLASS
-------------------------------------------- --------- -------- --------- --------
<S> <C> <C> <C> <C>
Group comprised of Parkwood Limited, as
trustee of the Anthony Basmadjian "P"
Settlement, Brian Chandler, Ringwood
Limited, Barford Limited, as trustee of
the Anthony Basmadjian Settlement, and
Douglas K. Chick.......................... 1,512,773(2) 10.5% 1,512,773 5.7%
Parkwood Limited, as trustee of the
Anthony Basmadjian "P" Settlement,
c/o Century House
Richmond Road
Hamilton, Bermuda(3)................... 880,641 6.1 880,641 3.3
Brian Chandler
8933 St. Gallen 60
Steiermark, Austria(4)................. 632,132 4.4 632,132 2.4
Ringwood Limited
Century House
Richmond Road
Hamilton, Bermuda(4)................... 461,391 3.2 461,391 1.7
Barford Limited, as trustee of the Anthony
Basmadjian Settlement
LeGrand Dixcart
Sark, Channel Islands(4)(5)............ 461,391 3.2 461,391 1.7
Douglas K. Chick
Bays Hill Cottage
Barnett Lane
Elstree, Hertfordshire
United Kingdom(3)(4)(5)................ 1,342,032 9.3 1,342,032 5.0
Interstate Properties
Park 80 West-Plaza Two
Saddle Brook, New Jersey 07663(6)......... 1,660,072 11.5 1,660,072 6.2
David Mandelbaum
80 Main Street
West Orange, New Jersey 07052.......... 1,660,072(7) 11.5 1,660,072 6.2
Steven Roth
Park 80 West-Plaza Two
Saddle Brook, New Jersey 07663......... 1,670,072(7) 11.6 1,670,072 6.2
Russell B. Wight, Jr.
Park 80 West-Plaza Two
Saddle Brook, New Jersey 07663......... 1,670,294(7)(8) 11.6 1,670,294 6.3
</TABLE>
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<PAGE> 128
<TABLE>
<CAPTION>
SHARES OF ITI COMMON
SHARES OF ITI STOCK BENEFICIALLY OWNED
COMMON STOCK SUBSEQUENT TO THE
BENEFICIALLY OWNED(1) MERGER(1)
------------------------ -------------------------
NUMBER PERCENT NUMBER PERCENT
BENEFICIAL OWNER OF SHARES OF CLASS OF SHARES OF CLASS
-------------------------------------------- --------- -------- --------- --------
<S> <C> <C> <C> <C>
T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, Maryland 21202................. 1,407,400(9) 9.8% 1,810,590(10) 6.8%
Paul A. Biddelman........................... 380,877(11) 2.6 380,877 1.4
William Gorham.............................. 56,995(12) (13) 67,345(14) (13)
James D. Krugman............................ 131,164(15) (13) 131,164 (13)
Silas Spengler.............................. 2,000 (13) 2,000 (13)
Sheldon Weinig.............................. 28,749(16) (13) 28,749 (13)
Jean-Paul Richard........................... 60,900(17) (13) 310,900(18) 1.1
William A. Martin........................... 30,625(19) (13) 30,625 (13)
R. William Pittman.......................... 56,000(20) (13) 56,000 (13)
Anthony W. Hooper........................... 46,300(21) (13) 46,300 (13)
Raymond P. Toth............................. 4,000(20) (13) 4,000 (13)
Directors and Executive Officers
as a group (14 persons)................... 3,932,357(22) 26.1 4,192,707(17) 15.3
</TABLE>
---------------
(1) Except as otherwise indicated, all of such shares are owned with sole
voting and investment power.
(2) Represents: (i) 170,741 shares beneficially owned by Mr. Chandler; (ii)
880,641 shares beneficially owned by Parkwood, with shared voting and
investment power with Mr. Chick (see footnote (3)); (iii) 461,391 shares
beneficially owned by Ringwood with shared voting and investment power with
Mr. Chandler, Barford, and Mr. Chick (see footnotes (4) and (5)).
(3) In a Statement on Schedule 13D, as amended (the "Ringwood Schedule 13D"),
filed with the Commission by the Ringwood Group and its members, Parkwood
and Mr. Chick have reported that the 880,641 shares of ITI Common Stock
beneficially owned by Parkwood are held with shared voting and investment
power with Mr. Chick under an oral agreement under which Parkwood will not
vote or dispose of any securities of ITI without the written approval of
Mr. Chick having first been obtained. Parkwood and Mr. Chick have also
reported that the settlor of the Anthony Basmadjian "P" Settlement, as to
which Parkwood acts as trustee, has expressed his wishes to the effect that
the powers of the trustee be exercised in consultation with Mr. Chick with
due regard to any suggestions made, and that, accordingly, Mr. Chick has an
informal ability to influence decisions of Parkwood with respect to the
securities of ITI held by Parkwood as trustee of such settlement, but,
under governing law, no right to enforce such settlement so as to override
or compel the trustee or the councillors who nominate beneficiaries of the
settlement in the exercise of a trust power or discretion in a particular
manner.
(4) In the Ringwood Schedule 13D, the Ringwood Group has reported that Ringwood
is a holding company whose stockholders are Mr. Chandler and Barford, and
that the 461,391 shares of ITI Common Stock beneficially owned by Ringwood
are held with shared voting and investment power with Mr. Chandler and
Barford and, as a result of the arrangements described under footnote (5),
Mr. Chick.
(5) In the Ringwood Schedule 13D, Barford and Mr. Chick have reported that any
securities of ITI that may become beneficially owned by Barford will be
held with shared voting and investment power with Mr. Chick under an oral
agreement under which Barford will not vote or dispose of any securities of
ITI without the written approval of Mr. Chick having first been obtained.
Barford and Mr. Chick have also reported that the settlor of the Anthony
Basmadjian Settlement, as to which Barford acts as trustee, has expressed
his wishes to the effect that the powers of the trustee be exercised in
consultation with Mr. Chick with due regard to any suggestions made, and
that, accordingly, Mr. Chick has an informal ability to influence decisions
of Barford with respect to any securities of ITI that may become held by
Barford as trustee of such settlement, but, under governing law, no right
to enforce such settlement so as
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<PAGE> 129
to override or compel the trustee or the councillors who nominate
beneficiaries of the settlement in the exercise of a trust power or
discretion in a particular manner.
(6) In a Statement on Schedule 13D filed with the Commission by Interstate and
its partners, such parties has reported that Interstate is a general
partnership consisting of David Mandelbaum, Steven Roth and Russell B.
Wight, Jr.
(7) Includes 1,660,072 shares beneficially owned by Interstate.
(8) Includes 5,550 shares issuable upon exercise of stock options granted by
ITI and exercisable within 60 days of June 1, 1995.
(9) Includes 961,200 shares beneficially owned by T. Rowe Price New Horizons
Fund, Inc. (the "Fund"), a registered investment company. In a Statement on
Schedule 13G filed with the Commission, T. Rowe Price Associates, Inc.
("Associates"), a registered investment advisor, and the Fund have reported
that Associates has sole investment power over all such 1,407,400 shares,
and that Associates and the Fund have sole voting power over, respectively,
112,000 shares and 961,200 shares.
(10) Includes 403,190 shares issuable pursuant to the Merger in exchange for
shares of IMA Class A Common Stock held.
(11) Includes 350,877 shares issuable pursuant to currently exercisable warrants
granted by ITI to Hanseatic and held for discretionary customer accounts.
Mr. Biddelman is Treasurer of Hanseatic and, accordingly, would hold shared
voting and investment power in the event of exercise of such warrants. See
"Election of ITI Directors -- Compensation Committee Interlocks and Insider
Participation" above.
(12) Includes 52,170 shares issuable upon exercise of stock options granted by
ITI and exercisable within 60 days of June 1, 1995.
(13) Less than one percent.
(14) Includes 4,600 shares jointly owned with Gail Gorham, Mr. Gorham's wife,
and 5,750 shares held by an employee benefit plan on behalf of Mr. Gorham,
in each case issuable pursuant to the Merger in exchange for shares of IMA
Class A Common Stock so held.
(15) Includes 47,500 shares issuable upon exercise of stock options granted by
ITI and exercisable within 60 days of June 1, 1995, 40,364 shares held by a
general partnership whose managing partner is James D. Krugman and 33,300
shares, as to which Mr. Krugman holds shared voting and investment power,
held by a general partnership in which Mr. Krugman's mother has an
interest.
(16) Includes 16,650 shares issuable upon exercise of stock options granted by
ITI and exercisable within 60 days of June 1, 1995.
(17) Includes 50,000 shares issuable upon exercise of stock options granted by
ITI and exercisable within 60 days of June 1, 1995.
(18) As a result of consummation of the Merger, an additional 250,000 shares
issuable upon exercise of currently outstanding stock options granted by
ITI to Mr. Richard will become exercisable. See "The Merger -- Interests of
Certain Persons in the Merger and Related Transactions" above.
(19) Includes 25,250 shares issuable upon exercise of stock options granted by
ITI and exercisable within 60 days of June 1, 1995.
(20) Represents shares issuable upon exercise of stock options granted by ITI
and exercisable within 60 days of June 1, 1995.
(21) Includes 31,000 shares issuable upon stock options granted by ITI and
exercisable within 60 days of June 1, 1995.
(22) Includes 613,997 shares issuable upon exercise of stock options granted by
ITI and exercisable within 60 days of June 1, 1995 and currently
exercisable warrants held by Hanseatic.
122
<PAGE> 130
BUSINESS OF IMA
GENERAL
IMA applies various trenchless and other technologies to solve problems
requiring rehabilitation, new construction and improvement of pipeline systems,
including sewers, industrial waste lines, water lines, slurry lines and oil
field and industrial process pipelines. IMA's trenchless technologies require
little or no excavation and eliminate the need to replace a deteriorating pipe.
IMA believes its trenchless technologies offer significant advantages over
traditional methods including, in certain applications, reduced cost, faster
installation, increased pipeline system life, minimal disruption of traffic and
commercial activity and reduced environmental impact. IMA's rehabilitation and
new construction customers principally include municipalities and state
agencies.
Rehabilitation revenues, primarily derived from the Insituform Process,
accounted for approximately 68% of IMA's fiscal 1994 contract revenues. IMA,
together with its subsidiaries (including subsidiaries of Enviroq), are licensed
to provide the Insituform technology in all or a portion of 22 states, Puerto
Rico and the U.S. Virgin Islands. See "The Merger -- Basic Terms of Merger
Agreement -- Cooperation Agreement" above for a description of the moratorium on
assertion of rights in dispute, including with respect to the Insituform
licenses of Enviroq's subsidiaries, as a result of the consummation of the
Enviroq Acquisition without ITI's consent. A subsidiary of IMA acquired in the
Enviroq Acquisition owns a 42.5% general partnership interest in Midsouth
Partners which is an Insituform licensee for a territory which covers all or a
portion of three additional states. One of the partners in such partnership has
initiated an arbitration proceeding alleging an event of default by such
subsidiary. See "Business of ITI -- Investments" above.
IMA also is the exclusive North American licensee of Ashimori proprietary
pipeline rehabilitation technologies ("Ashimori Products"). As such, IMA
utilizes the PALTEM-HL system of rehabilitating pressure pipes. IMA is actively
pursuing development of its Ashimori Products business, including regulatory
approval to apply the technology for potable water line repair and
rehabilitation.
In addition to its pipeline system rehabilitation methods, IMA utilizes
trenchless technologies to construct tunnels ranging from four to ten feet in
diameter through a variety of soils and provides the Tite Liner process, a
method of inserting a corrosive and abrasive-resistant lining in oil field,
mining and industrial process pipelines.
Since 1968, IMA's Affholder, Inc. subsidiary has offered a broad range of
traditional pipe rehabilitation and construction services, including tunneling,
point repairs, shaft work and pipe cleaning. IMA became a sub-licensee for the
Insituform Process in December 1982 and began to perform significant Insituform
Process operations during fiscal 1984. Since 1982, IMA's Insituform licensed
territories have been expanded on six occasions, including the Enviroq
Acquisition. In 1992, IMA acquired the license for Ashimori Products.
Unless the context otherwise indicates, "IMA," as used herein, refers to
IMA and its subsidiaries.
For certain financial information concerning foreign and domestic
operations and export sales of IMA, see Note N of the Notes to IMA's
Consolidated Financial Statements included elsewhere in this Joint Proxy
Statement/Prospectus.
ENVIROQ ACQUISITION
On April 18, 1995, IMA completed its acquisition of the pipeline
rehabilitation business of Enviroq, including Enviroq's Insituform Process
business which is conducted by its Insituform Southeast, Inc. subsidiary.
Insituform Southeast, Inc. operates in a licensed territory consisting of
Alabama, Florida, Georgia, North Carolina and South Carolina. It also owns 42.5%
of Midsouth Partners, which is the licensee of the Insituform Process in
Tennessee, most of Kentucky and northern Mississippi. For its fiscal year ended
March 1995, Enviroq reported pipeline system rehabilitation revenues of $20.3
million.
Under the terms of the transaction, all assets and liabilities related to
Enviroq's interest in Synox Corporation (a development stage company which is
engaged in the business of developing and testing a
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<PAGE> 131
process for the treatment of municipal wastewater "sludge"), and its ownership
interest in Sprayroq Corporation (a development stage company which offers a
spray-applied resinous product used in rehabilitation of manholes, among other
applications) were transferred to a newly organized subsidiary, the stock of
which was distributed to Enviroq's stockholders immediately prior to the
transaction with IMA. In addition, Enviroq transferred $500,000 cash and the
currently undeveloped portion of the real estate which it owns in Jacksonville,
Florida to the corporation spun-off.
Pursuant to the transaction, IMA paid $15.25 million cash. In addition, it
has issued a $3.0 million five-year subordinated promissory note in
consideration for a covenant not to compete and entered into an agreement for
consulting services providing for IMA's payment of $1.0 million over five years.
See "Business of ITI -- Investments" for a description of Midsouth
Partners, "The Merger -- Basic Terms of Merger Agreement -- Cooperation
Agreement" for a description of the moratorium on rights in dispute, including
with respect to the Insituform licenses of Enviroq's subsidiaries, as a result
of the consummation of the Enviroq Acquisition without ITI's consent, and
"Business of ITI -- Investments" above for information concerning arbitration
proceedings initiated by one of the partners of Midsouth Partners, alleging an
event of default by the Enviroq subsidiary partner thereto, and regarding
demands made for payment under the Subordinated Enviroq Note.
TECHNOLOGIES
IMA's products generally can be categorized into three groups of
technologies -- pipeline rehabilitation, tunneling and corrosion and abrasion
protection. During the nine months ended June 30, 1995 and the past three fiscal
years, the percentage of IMA's contract revenues contributed by each of these
groups was as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
JUNE 30,
1995 FISCAL 1994 FISCAL 1993 FISCAL 1992
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Pipeline system rehabilitation............... 53.2% 68.1% 73.2% 62.6%
Corrosion and abrasion protection............ 29.5 18.8 17.2 14.4
Tunneling.................................... 17.3 13.1 9.6 23.0
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
Pipeline System Rehabilitation
Insituform Process. IMA became a licensee for the Insituform Process in
December 1982. IMA's Insituform licensed territory (including territories
acquired in the Enviroq Acquisition) includes all or a portion of 22 states,
Puerto Rico and the U.S. Virgin Islands. See "The Merger -- Basic Terms of
Merger Agreement -- Cooperation Agreement" above for a description of the
moratorium on assertion of rights in dispute as a result of the consummation of
the Enviroq Acquisition without ITI's consent. A subsidiary of IMA acquired in
the Enviroq Acquisition owns a 42.5% general partnership interest in Midsouth
Partners, which is the Insituform licensee in all or a portion of three
additional states. See "Business of ITI -- Investments" above. IMA offers the
Insituform Process pursuant to license agreements with a subsidiary of ITI.
For a description of the Insituform Process, see "Business of
ITI -- Trenchless Rehabilitation Processes -- The Insituform Process" above.
IMA pays a royalty to ITI, based on contract revenues. IMA also has
purchased substantially all of its Insitutube requirements from ITI. IMA has
announced the planned construction of a manufacturing facility in the St. Louis,
Missouri area, which is intended primarily to perform certain manufacturing
processes in fabricating Ashimori Products but which also would have the
capability to produce Insitutubes. See "The Merger -- Basic Terms of the Merger
Agreement" for a description of covenants governing construction while the
Merger Agreement is in effect.
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<PAGE> 132
Ashimori Products. IMA has the exclusive license to offer Ashimori
Products, including the PALTEM-HL system, in substantially all of North America
and the exclusive right in the territory to utilize, manufacture and sell
materials and proprietary rehabilitation technologies of Ashimori, for use in
pipeline rehabilitation. At this time, the Ashimori Products licensed to IMA are
in various stages of development. IMA is actively engaged in research and
development activities relative to certain of these products. See "-- Research
and Development" below.
The PALTEM-HL system is a patented process for rehabilitating pressure
pipes. The system utilizes a woven polyester hose with an elastomer coating
called a "PAL-Liner," which is custom-manufactured to the dimensions of the pipe
to be rehabilitated. Prior to installation, the PAL-Liner hose is filled with an
epoxy resin. Compressed air or other suitable means is then used to invert and
propel the PAL-Liner through the pipe from an access pit. After the PAL-Liner
reaches a receiving pit, the resin hardens and causes the PAL-Liner to adhere to
the host pipe, with a smooth, pressure resistant lining on the inside surface of
the pipe. The process was originally developed for use in the gas distribution
industry. IMA believes, however, that the PALTEM-HL system is suitable for a
range of other industrial applications as well. In addition, PALTEM products are
being used to rehabilitate potable water lines in Europe and NSF approval for
PALTEM has been sought in the United States.
In addition to the PALTEM-HL system, IMA has acquired the rights to
utilize, manufacture and sell the following development stage Ashimori Products:
(i) the PALTEM-Apollo system -- a patent pending process for point repair by
pulling a specially designed robot together with Apollo-Liner into the pipe,
inflating and light-curing the liner to form a new rigid pipe at the spot to be
repaired, including a system for forming a new pipe at a joint of the lateral
and the pipe and reconnecting the lateral; (ii) the PALTEM-Frepp system -- a
patent pending process for restoration of pipes by pulling a partially folded
Frepp-Liner into the pipe and reforming it to form a new pipe within the pipe;
(iii) PALTEM-March products, non-woven fiber tubes with a seamless coating used
in pipeline rehabilitation; and (iv) the PALTEM-SZ system -- a patented process
for restoration of sewer pipes by pulling SZ-Liner into the pipe, inflating, and
forming a new rigid pipe within the pipe utilizing heat curing resin applied to
the liner.
Other. As part of its strategy of offering a broad range of solutions to
pipeline system problems, IMA also offers the NuPipe Process, licensed from a
subsidiary of ITI, the Sprayroq system of spray-applied resin for pipeline
repair and various more traditional pipe rehabilitation services, including
shaft work, pipe threading and pipe cleaning.
Tunneling
Tunneling is a trenchless, subterranean construction process that generally
is utilized for the construction of pipeline systems. IMA constructs four- to
ten-foot diameter tunnels into which pipes are inserted. IMA operates two
large-diameter and two small-diameter tunneling machines. One of IMA's large
diameter tunneling machines, acquired in September 1990, is a state-of-the-art,
earth-pressure-balanced tunneling machine. By virtue of its ability to tunnel
without de-watering the surrounding soils, this machine reduces costs, reduces
risks of subsidence and improves competitiveness. IMA believes that its
tunneling operations also strengthen IMA's relationships with its customers by
positioning IMA as a problem solver for pipeline systems, and enhance its
capabilities to perform large-diameter installations of the Insituform Process.
Corrosion and Abrasion Protection
In March 1991, IMA acquired substantially all of the assets of United
Pipeline Systems USA, Inc. and, pursuant to this acquisition, IMA began offering
the Tite Liner Process. In October 1991, IMA acquired United Pipeline Systems
Inc. of Edmonton, Alberta, Canada, which also utilized the Tite Liner Process.
The Tite Liner Process is a method of lining pipelines with a corrosion and
abrasion resistant pipe in order to substantially extend system life. Oil field,
natural gas distribution lines and certain industrial process systems typically
utilize steel pipe which is subjected to highly corrosive fluids and gases.
Slurry lines used in mining operations are subjected to highly abrasive flows.
The Tite Liner Process utilizes a polyethylene liner which is
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<PAGE> 133
diameter-reduced in a roller box and then pulled through a steel pipe. When the
pulling tension is released, the liner expands to create a tight fit against the
host pipe's inner wall.
During fiscal 1994, IMA commenced operations in Latin America by organizing
a majority-owned subsidiary, United Sistema De Tuberias Ltda. ("United-Chile").
United Chile's first project was as subcontractor to install Tite Liner to
improve a mining pipeline in Chile. Subsequently, United Chile obtained another
contract in Chile to act as general contractor in the construction of a new
pipeline system for a mining operation. Although revenues from IMA's general
contractor activities tend to be higher than when it acts as subcontractor,
profit margins on general contractor projects typically will be lower.
RESEARCH AND DEVELOPMENT
During fiscal 1994, 1993 and 1992, IMA expended $652,000, $61,000 and
$289,000, respectively, on research and development activities and, during the
nine months ended June 30, 1995, expended $768,000 on such activities. Such
expenditures related principally to developing IMA's installation capabilities
for, and the commercial viability of, its licensed technologies.
Much of IMA's research and development activities are conducted in
cooperation with suppliers of proprietary technologies. During fiscal 1994, IMA
undertook a demonstration project in conjunction with the Gas Research Institute
(an association of natural gas utilities) and a major natural gas utility to
determine the suitability of PALTEM hose linings for seismic protection. As a
result of such demonstration project, IMA has determined that its PALTEM
rehabilitation process will meet seismic specifications for natural gas pipes.
CUSTOMERS
Municipalities and state agencies comprised approximately 75%, 79% and 78%
of IMA's contract revenues in fiscal 1994, 1993, and 1992, respectively. A
significant portion of IMA's business is from repeat customers.
Of the 513 projects in fiscal 1994, 40% were Insituform projects performed
in IMA's Insituform licensed territory. Of the 325 customers served in that
fiscal year, the five customers accounting for more than 5% of contract revenues
were as follows:
<TABLE>
<CAPTION>
NUMBER OF TOTAL PERCENT OF
CUSTOMER PROJECTS REVENUE ANNUAL TOTAL
-------- --------- ----------- ------------
<S> <C> <C> <C>
Metropolitan St. Louis Sewer District.............. 19 $14,314,000 19.0%
City of Riverview.................................. 2 6,406,000 8.5
Northeast Ohio Regional Sewer District............. 1 4,648,000 6.2
Dallas Water Utilities............................. 3 4,213,000 5.6
Minera Escondida................................... 2 3,740,000 5.0
--
----------- -----
27 $33,321,000 44.3%
======== ========== =========
</TABLE>
The foregoing data reflects direct and indirect customer relationships.
Municipality and state agency projects comprised approximately 96% of
Insituform Southeast, Inc.'s and NuPipe Southeast, Inc.'s combined contract
revenues in the fiscal year ended March 1995. Of the 71 customers served by such
corporations during such fiscal year, customers accounting for more than 5% of
combined contract revenues were Miami-Dade Water & Sewer Authority with one
project which accounted for revenues of $3.9 million, or 19.1% of total annual
revenues, and the City of Atlanta, with two projects accounting for total
revenues of $1.4 million, or 6.8% of total revenues.
Although municipal and state agency projects represented approximately 75%
of IMA's business in fiscal 1994, management of IMA believes that commercial,
industrial and other markets offer significant opportunities. The Insituform
Process may be advantageous to industry because of minimization of plant
downtime and disruption, and because Insitupipe's corrosion-resistant
characteristics can be customized to resist acids and caustics. In these cases,
management believes that the process could be a viable alternative to
conventional
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<PAGE> 134
industrial pipe repair or replacement. Customers for the Tite Liner Process are
oil field, mining and industrial process construction contractors and operators.
IMA markets its PALTEM products principally to natural gas distribution and
transmission companies, although the PALTEM systems are suitable for other
industrial applications as well. IMA's tunneling customers generally consist of
the same type of municipalities and state agencies as its Insituform customers.
MARKETING
IMA's strategy is to proactively market the application of its technologies
directly to customers and engineers, with a view toward having its technologies
permitted or required in bid specifications. IMA has attempted to build
long-term relationships with its customers for the utilization of IMA's
expanding product line. IMA currently has 28 salespersons located in various
locations. Establishing the relationships required to generate business in a
particular locality often has taken three to four years, and a key component of
IMA's marketing program has been and will continue to be educating customers and
potential customers about the advantages of IMA's technologies.
IMA OPERATIONS
IMA is headquartered in the St. Louis, Missouri area and has operations
facilities in: St. Louis; Denver; Dallas; Houston; Wichita; Owosso, Michigan;
Tampa, Florida; Ft. Lauderdale, Florida; Atlanta, Georgia; Birmingham, Alabama;
Durango, Colorado; Jacksonville, Florida; Grand Prairie, Texas; Puerto Rico;
Edmonton, Alberta; and Antofagasta, Chile. The field operations are organized
into 42 field installation and construction crews.
Each Insituform crew is typically equipped with a high pressure water
cleaning unit, a boiler, a refrigeration truck, a television van with two
Insitucutters, other support trucks and vans, and pumping and safety equipment.
IMA estimates the cost to equip an Insituform field installation crew to be
approximately $550,000. The field crews are based throughout the licensed
territory and are dispatched to the job site, where they remain until the job is
completed. Materials and supplies are either sent to the job site from one of
IMA's operations facilities or sent directly from the manufacturer. IMA
manufactures the Insitutube for its Caribbean operations in its Puerto Rico
facility and also manufactures small diameter Insitutubes at its headquarters
facility.
Each PALTEM crew is typically equipped with a turning truck, resin mixers,
pulling machine and other supporting trucks and equipment. IMA estimates the
cost to equip a PALTEM field installation crew to be approximately $350,000.
A Tite Liner installation crew is typically equipped with a wire line unit,
roller boxes, fusion machines, spool trailer, picker trucks and other supporting
trucks and equipment. IMA estimates the cost to equip a Tite Liner field
installation crew to be approximately $550,000.
IMA incurs substantial costs in establishing new field installation crews
and in training new operations personnel. IMA utilizes a field training program
for its new operations personnel by having these individuals work with
established crews under the supervision of experienced operations personnel for
varying periods of time. New field installation crews are generally staffed with
experienced personnel from IMA's existing field installation crews. During
fiscal 1994, IMA expended approximately $6.5 million to enhance equipment for
existing crews and equip new crews for installation and new construction
purposes.
IMA's tunneling operations typically involve contracts in the range of $3
million to $12 million, obtained through competitive bidding. Tunneling jobs
generally require from six to 24 months for completion. The tunneling crew first
digs a work shaft and then constructs the tunnel, installs pipe in the new
tunnel and backfills the newly constructed pipeline with grout.
IMA operates a project-oriented business which frequently involves
fixed-price contracts. As a result of unforeseen conditions or events related to
IMA's various operations, IMA may underestimate costs, resulting in a reduction
in profits or an actual loss. IMA may also be adversely affected by the unknowns
associated with subsurface operations, cold weather, rain, flooding and water
table conditions.
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<PAGE> 135
LICENSE AGREEMENTS AND PATENTS
Insituform and NuPipe Processes
IMA has been granted the rights to utilize the patents, trademarks and
know-how related to the Insituform Process and the NuPipe Process for Missouri,
Kansas, Colorado, Oklahoma, Nebraska, Minnesota, Arkansas, North Dakota, South
Dakota, Utah, Wyoming, Michigan, Puerto Rico and the U.S. Virgin Islands, and
for portions of Texas, Illinois, Iowa, Montana and Wisconsin, pursuant to
license agreements. The Insituform license agreements (the "IMA License
Agreements") require IMA to pay the licensor a royalty of 8% (9% in the case of
Puerto Rico and the U.S. Virgin Islands) of gross contract revenues and also
provide for the payment of minimum annual royalties. Effective as of December
1990, in the event IMA has, for any year, produced to the licensor an acceptable
plan for marketing and sales penetration, minimum royalties otherwise
established for such year will not apply, subject to ITI's approval of
performance standards established with respect to the Insituform Process and the
NuPipe Process.
Insituform Southeast, Inc. and NuPipe Southeast, Inc., which were acquired
by IMA in the Enviroq Acquisition, have been granted the rights to utilize the
Insituform Process and the NuPipe Process for Alabama, Florida, Georgia, North
Carolina and South Carolina. A subsidiary of Insituform Southeast, Inc. also
owns a 42.5% general partner interest in Midsouth Partners, which is the
Insituform licensee for Tennessee, most of Kentucky and northern Mississippi.
The Instituform licenses acquired in the Enviroq Acquisition contain similar
terms to the IMA License Agreements. As a result of IMA's effecting the Enviroq
Acquisition without ITI's consent, ITI instituted the Declaratory Action
relative to the Insituform Southeast and NuPipe Southeast license agreements.
See "Business of ITI -- Legal Proceedings" above for information concerning such
proceedings and "The Merger -- Basic Terms of Merger Agreement -- Cooperation
Agreement" above for a description of the moratorium on assertion of rights in
dispute as a result of the consummation of the Enviroq Acquisition without ITI's
consent. In addition, a subsidiary of Insituform East, which is a partner in
Midsouth Partners, has commenced an arbitration proceeding alleging that the
execution of the Enviroq Agreement created an event of default under the
partnership agreement of Midsouth Partners. See "Business of ITI -- Investments"
above.
The IMA License Agreements extend for the life of the last of the
underlying patent rights, including any improvements or modifications extending
such life. Accordingly, the IMA License Agreements would expire in 2013, based
upon the latest patent filings, although two important method patents for
Insituform (one of which covers material aspects of the inversion process)
expired in 1994. The IMA License Agreements may be terminated by IMA upon two
calendar quarters' written notice to the licensor and by the licensor upon
certain events of default by IMA, such as failure to pay royalties.
Under the IMA License Agreements, IMA has the right to use 54 Insituform
United States patents. For additional information concerning the Insituform and
NuPipe patents, see "Business of ITI -- Patents" above. There can be no
assurance that the validity of the patents will not be successfully challenged
or that they are sufficient to afford protection against another company
utilizing a process similar to the Insituform or NuPipe process.
Any information concerning improvements or modifications to the Insituform
Process developed by IMA or its employees must be reported to the licensor and
become the licensor's property. The licensor is required to disseminate all such
information to its licensees, including IMA, without any additional royalty
therefor. The IMA License Agreements reserve to the licensor the right to
approve IMA's suppliers and the specifications of equipment and materials not
purchased directly from the licensor. Although the IMA License Agreements
contain no requirement that IMA purchase materials from the licensor, IMA has
entered into a supply agreement with ITI for Insitutubes and related products
utilized in the Insituform process, which is automatically renewable on a
year-to-year basis unless notice of termination is provided by either party six
months prior to expiration. The agreement provides for IMA to purchase at least
60% of its requirements from ITI and requires ITI to limit annual price
increases to the greater of 6% or the rate of inflation (or greater if supported
by abnormal costs to ITI).
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The IMA License Agreements also provide for IMA to pay a 12% surcharge in
addition to the royalty in the event of use of the Insituform Process by IMA in
territories licensed to others (except that the surcharge will be 8% with
respect to installations in such territories in which the Insituform licensee is
obligated for a similar surcharge at the lower rate). The amount of this
surcharge may be increased by the licensor from time to time to reflect the
costs of market development. The IMA License Agreements exclude the right to use
the process in the repair of pipelines, tunnels or passageways transmitting
hazardous gases.
In connection with IMA's November 1992 acquisition of licenses for Ashimori
Products, ITI has communicated to IMA its concerns described above under "The
Merger -- Background" and "Business of ITI -- Licensing Operations -- Insituform
License Agreements" above. IMA has advised ITI that it has fulfilled and will
continue to fulfill all of its commitments to ITI and does not intend to utilize
any of ITI's trademarks in violation of the rights previously granted to IMA.
IMA has reported its belief that the concerns raised by ITI are substantially
similar to the publicly announced concerns expressed to ITI by IGL with respect
to the NuPipe Process prior to the IGL Acquisition.
Ashimori Products
Pursuant to a license agreement with Ashimori, as amended (the "Ashimori
License"), IMA has been granted the exclusive rights to use the patents,
trademarks and know-how related to the Ashimori Products for all of North
America, including the rights to manufacture and sell Ashimori Products. In
connection with the Ashimori License, IMA paid an initial license fee of
$200,000 and is obligated to pay royalties of 6% on PALTEM-HL and March
installations and 7% on installations of other licensed Ashimori Products. The
Ashimori License includes various minimum and maximum levels of royalties in
specified periods during the term of the agreement. The Ashimori License
provides that the parties will enter into a separate agreement for IMA to
license the Tite Liner Process to Ashimori for installations in Japan.
The Ashimori License extends for an initial term of 15 years, and
automatically is renewed for successive one-year terms, unless IMA gives notice
of non-renewal of at least 90 days prior to the end of a term. In addition, the
Ashimori License is subject to termination in the event of specified defaults.
BACKLOG
As of June 30, 1995 and 1994, IMA's aggregate backlog by business type was
as follows (in millions):
<TABLE>
<CAPTION>
JUNE 30,
-----------------
1995 1994
----- -----
<S> <C> <C>
Pipeline system rehabilitation............................. $40.3 $21.8
Tunneling.................................................. 17.3 12.0
Corrosion and abrasion protection.......................... 7.6 14.7
----- -----
$65.2 $48.5
===== =====
</TABLE>
At June 30, 1995, the backlog reported by IMA included $8.3 in contracts
attributable to Insituform Southeast, Inc. and NuPipe Southeast, Inc., which
were acquired in April 1995. IMA anticipates that substantially all backlog at
June 30, 1995 will be completed in the immediately succeeding twelve months.
Historically, the composition of IMA's revenues and backlog by major customers
has varied materially from year-to-year due to size and timing of particular
projects and the availability of funding. IMA's contracts with governmental
agencies may be amended or terminated at the convenience of such agencies. IMA
believes that its relationships with its significant customers are excellent.
SEASONALITY
IMA's business may be affected by various climatic seasons throughout its
license territories, as well as by the fiscal years and budgetary processes of
IMA's governmental customers.
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EMPLOYEES
At June 1, 1995, IMA employed approximately 707 persons, including 102 in
management and administration, 27 in sales and 463 in operations. Of the
operations employees, 120 are covered by collective bargaining agreements.
Management of IMA believes that IMA's relations with its employees are
satisfactory.
SUPPLIERS
IMA's materials and equipment, including resins, are available from a
variety of suppliers. Currently, IMA purchases substantially all its Insitutube
requirements from ITI pursuant to a manufacturing supply agreement. IMA also
manufactures limited amounts of Insitutubes at its Puerto Rico facility and
small diameter Insitutubes at its headquarters facilities. IMA has not
experienced any difficulty in obtaining adequate supplies of Insitutubes.
Management of IMA believes that there are a limited number of other sources
available. If IMA were unable to obtain Insitutubes from ITI, IMA might be
adversely affected on a short-term basis. During 1994, IMA announced plans to
construct a manufacturing facility in the St. Louis, Missouri area which would
have the capacity to manufacture Insitutubes. See "The Merger -- Basic Terms of
Merger Agreement" above for a description of covenants governing construction
while the Merger Agreement is in effect.
IMA is required by contract to purchase all its thermoplastic folded pipe
used for the NuPipe process from NuPipe, Inc., a wholly-owned subsidiary of ITI.
IMA currently purchases the PAL-Liner it uses from Ashimori. IMA expects
that it (or ITI, subsequent to consummation of the Merger) will perform the
coating function necessary in manufacturing PAL-Liner for substantially all its
requirements at some future time. Longer-term, IMA expects to weave the lining
material to further vertically integrate its PAL-Liner operations.
REGULATIONS AND BONDING
IMA is subject to various local, state and federal laws, regulations,
ordinances, building code specifications and permit requirements. IMA's
operations facilities are subject to state and federal environmental protection
regulations. IMA is also subject to fire regulations relating to the storage,
handling and transporting of flammable materials.
IMA believes that it is in material compliance with environmental laws and
regulations applicable to it. IMA does not anticipate any material impediments
to its business arising from existing or anticipated future regulations or
requirements.
IMA is required to carry insurance and bonding in connection with certain
projects. IMA has arranged bonding capacity for bid, performance and payment
bonds with limits of $125 million in the aggregate. Typically, the cost of a
performance bond is approximately 1% of the contract value.
PROPERTIES
IMA owns its headquarters and operations building in St. Louis, Missouri.
The construction of the original facility was completed in 1987 and an addition
was completed in 1993. The building is located on 2.5 acres and contains
approximately 17,000 square feet of office space and approximately 21,000 square
feet of operations space. In July 1993, the facility was severely damaged by
flooding and all activities that were performed at this facility were relocated
to various leased premises. IMA reoccupied the renovated facility during fiscal
1994.
IMA owns a building in Owosso, Michigan, which is situated on approximately
4.0 acres and contains approximately 2,000 square feet of office space and
approximately 19,500 square feet of operations space. IMA also owns a newly
constructed building in Denver, Colorado, which is located on approximately 2.5
acres of land and contains approximately 8,000 square feet of operations space
and a small amount of office space. IMA occupied this facility as of October
1990. IMA also owns a 9,000 square foot building located on
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<PAGE> 138
3.8 acres in Grand Prairie, Texas. IMA leases an operations and manufacturing
facility in Gurabo, Puerto Rico, which consists of approximately 16,800 square
feet.
IMA owns its facility in Jacksonville, Florida which contains approximately
25,000 square feet of office and operations space and is situated on
approximately 8.6 acres.
In October 1993, IMA's United States Tite Liner Process operations moved
into a newly constructed building in Durango, Colorado. The building is located
on 4.0 acres and contains approximately 12,000 square feet of operations space.
In connection with its Canadian Tite Liner Process operations, IMA leases an
office and operations facility in Edmonton, Alberta which has approximately
4,400 square feet of office space and 10,900 square feet of operations space.
In April 1994, IMA purchased a marketing and operation facility in Wichita,
Kansas. The facility is located on approximately 2.1 acres of land and contains
4,125 square feet of office space and approximately 10,000 square feet of
operations space.
IMA also owns approximately 2.3 acres of land across the street from its
headquarters, on which its former headquarters and operations facility was
located. The building was severely damaged by the flooding in July 1993 and has
been demolished.
IMA has granted mortgages on its headquarters facilities and its facilities
in Durango, Colorado and Grand Prairie, Texas to secure its bank debt. In
addition, IMA acquired Insituform Southeast, Inc., which owns the Jacksonville,
Florida facility subject to a mortgage which secures certain indebtedness under
an industrial revenue bond financing.
During April 1995, IMA commenced construction of a manufacturing facility
to produce materials used for proprietary rehabilitation technologies, including
those licensed under its agreement with Ashimori. IMA acquired approximately 5.4
acres of land adjacent to its headquarters building in fiscal 1994 for the
construction of the facility. Prior to the execution of the Merger Agreement,
construction activities had progressed to site excavation, completion of the
foundation and erection of a portion of the structural steel. As a result of the
Merger Agreement, IMA and ITI have discussed the possible relocation of the
planned manufacturing processes. As of the date hereof, construction activities
have been suspended and IMA has not determined whether, in view of the covenants
contained in and consents required under the Merger Agreement, to complete
construction of the building for use as a manufacturing facility or as an office
and operations facility or whether to seek to dispose of the property. See "The
Merger Agreement -- Basic Terms of Merger Agreement" above.
IMA believes that its facilities generally are in good condition,
well-maintained and suitable for their anticipated uses.
LEGAL PROCEEDINGS
Pursuant to citations issued December 15, 1993, the Occupational Safety and
Health Administration, Kansas City Area Office ("OSHA"), alleged that IMA and
its subsidiaries violated certain provisions of the Occupational Safety and
Health Act of 1970 in connection with rehabilitation activities in Kansas City,
Missouri in June 1993. The allegations relate to an accident in which one of the
employees of an IMA subsidiary was swept away and drowned in a flash flood
resulting from a sudden and torrential thunderstorm. OSHA alleges that the
subsidiary's safety procedures were inadequate and has assessed penalties
aggregating approximately $1 million. IMA believes that OSHA's allegations
neither accurately reflect the facts and circumstances of the accident nor
accurately characterize IMA's strong safety program and commitment to its safety
program. IMA cooperated fully with OSHA in its investigation and does not
believe that the allegations were warranted. To avoid the costs and
uncertainties of defending the citations in adversarial proceedings, IMA settled
this claim in July 1995 by agreeing to pay OSHA an aggregate of $325,000 in
equal semi-annual installments through January 1997.
Pursuant to a complaint filed August 1, 1995, New Enviroq initiated an
action in the Circuit Court of Jefferson County, Alabama, for a judgment on the
Subordinated Enviroq Note issued in connection with the
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Enviroq Acquisition. New Enviroq claims that IMA is in default under the
Subordinated Enviroq Note. IMA denies liability and intends to vigorously defend
the suit and pursue claims against New Enviroq arising out of the Enviroq
Acquisition, including New Enviroq's obligations under the Enviroq Agreement. In
IMA's opinion, the ultimate resolution of this litigation will not have a
material adverse effect upon IMA's financial condition or results of operations.
IMA is also subject to a lawsuit and arbitration proceeding arising out of
the Enviroq Acquisition. See "Business of ITI -- Legal Proceedings" and
"-- Investments" above.
IMA is involved in certain additional litigation incidental to the conduct
of its business and affairs. IMA does not believe that the outcome of any
additional litigation to which it is a party will have a material adverse effect
on its financial condition or results of operations.
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MANAGEMENT OF IMA
The directors and executive officers of IMA, and their respective ages and
positions with IMA, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH IMA
------------------------------------- --- -----------------------------------------------
<S> <C> <C>
Jerome Kalishman..................... 67 Chairman of the Board; Director
Robert W. Affholder.................. 59 President; Director
Lee M. Liberman...................... 73 Director
Alvin J. Siteman..................... 66 Director
Robert M. Leopold.................... 68 Director
Joseph F. Olson...................... 50 Vice President -- Finance and Administration,
Secretary
James L. Tadtman..................... 50 Vice President -- Rehabilitation
</TABLE>
For information concerning Messrs. Kalishman, Affholder and Siteman, see
"Election of ITI Directors" above.
Lee M. Liberman has served as a director of IMA since 1987. Mr. Liberman
has served as Chairman Emeritus of Laclede Gas Company, a regulated public
utility, since 1994. Prior to such time, he served as Chairman of the Board of
Laclede Gas Company for more than five years. Mr. Liberman serves as a director
of the following publicly-held companies: Detroit Tool Industries, Boatmen's
Bancshares, Inc., Angelica Corporation, CPI Corporation, Falcon Products, Inc.
and Interco Incorporated.
Robert M. Leopold has served as a director of IMA since its founding in
1983. Mr. Leopold has served as President of Huguenot Associates, Inc., a
financial and business consulting firm, for more than five years. Mr. Leopold
served as Chief Executive Officer of ITI from November 1986 to March 1989. From
November 1986 until October 1987 he served as Chairman of ITI and he was Vice
Chairman of ITI from 1982 until November 1986. Mr. Leopold serves as a director
of Infodata Systems Inc.
Joseph F. Olson has been Vice President -- Finance and Administration of
IMA since 1985 and Secretary of IMA since 1986.
James L. Tadtman has served as Vice President -- Rehabilitation of IMA
since January 1995. From 1988 until such time, he served as West Region Manager
of IMA.
DIRECTOR COMPENSATION
Directors of IMA are paid an annual fee of $5,000 plus $1,000 for each
board meeting attended and are reimbursed for their expenses in attending board
and committee meetings. Directors (other than the members of the IMA Stock
Option Committee) also are eligible to be granted stock options.
Robert M. Leopold, Lee M. Liberman and Alvin J. Siteman hold options
granted under the IMA Stock Option Plan covering, respectively, 13,660 shares of
IMA Class A Common Stock (at exercise prices ranging from $4.12 to $11.25 per
share), 33,335 shares (at exercise prices ranging from $3.00 to $11.25 per
share), and 33,335 shares (at exercise prices ranging from $3.00 to $11.25 per
share). Such exercise prices represent the fair market value of the IMA Class A
Common Stock on the date of grant of such options.
Mr. Leopold provides certain business and financial consulting services to
IMA. During fiscal 1994, IMA paid Mr. Leopold $165,000 for consulting and
advisory fees and reimbursed him for $45,207 of related out-of-pocket expenses.
IMA believes that the terms of the consulting arrangement with Mr. Leopold are
no less favorable than could be obtained from third parties.
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<PAGE> 141
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the cash
compensation paid to IMA's chief executive officer and each of IMA's other
executive officers whose total salary and bonus exceeded $100,000 during the
fiscal year ended September 30, 1994:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL ------------
COMPENSATION SECURITIES
NAME AND FISCAL ------------------ UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION(2)
-------------------------------------------- ------- -------- ------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Jerome Kalishman............................ 1994 $225,000 $ -- -- $ --
Chairman, Chief Executive Officer 1993 225,000 37,500 -- 7,000
1992 225,000 75,000 -- 12,705
Robert W. Affholder......................... 1994 225,000 -- -- --
Vice Chairman 1993 225,000 37,500 -- 7,000
1992 225,000 75,000 -- 12,705
--
E. Randolph Jayne II(1)..................... 1994 215,625 -- -- --
President
Joseph F. Olson............................. 1994 107,917 -- -- --
Vice President -- Finance and 1993 105,000 2,000 -- 3,400
Administration, Secretary 1992 101,250 24,000 6,667 5,082
</TABLE>
---------------
(1) Mr. Jayne resigned as an officer, director and employee of IMA in September
1994.
Year-End Option Table. The following table set forth information as of
September 30, 1994 with respect to stock options held by the executive officers
named in the Summary Compensation Table:
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR-END(#) AT YEAR-END(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jerome Kalishman................................. -- -- -- --
Robert W. Affholder.............................. -- -- -- --
E. Randolph Jayne II............................. 20,000 -- -- --
Joseph F. Olson.................................. 24,001 2,667 $83,337 --
</TABLE>
---------------
(1) Calculated on the basis of the fair market value of the underlying
securities at the exercise date or at year-end, as the case may be, minus
the exercise price.
SEVERANCE AGREEMENT
E. Randolph Jayne II resigned as President and a director of IMA effective
September 15, 1994. In connection with such resignation, IMA and Mr. Jayne
entered into an agreement (the "Severance Agreement") dated September 15, 1994,
which sets forth the terms and conditions of the termination of Mr. Jayne's
employment agreement with IMA. Pursuant to the Severance Agreement, IMA agreed
to continue to pay annual base salary of $125,000 per year and provide health
insurance for Mr. Jayne and his family for the twelve-month period immediately
following the date of the Severance Agreement. In addition, IMA agreed to pay
Mr. Jayne the aggregate sum of $100,000 in twelve equal monthly installments
through September 1995. Mr. Jayne continues to be subject to an agreement not to
compete with IMA's business for three years after termination of employment and
an obligation to preserve the confidentiality of IMA's confidential information.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
IMA's Compensation Committee consists of Messrs. Kalishman, Liberman and
Siteman.
Mr. Kalishman is Chairman of the Board and Chief Executive Officer of IMA.
Commencing with fiscal 1994, John Kalishman, who is the son of Jerome and Nancy
F. Kalishman, has provided certain business and marketing consulting services to
IMA. During fiscal 1994, IMA paid John Kalishman $82,000 for consulting and
advisory fees and reimbursed him for $9,026 of related expenses. No such
payments in excess of $60,000 were made during fiscal 1992 and 1993.
Mr. Siteman is the largest shareholder and Chairman of the Board of the
parent of Mark Twain, and Mr. Liberman is a director of the parent of Boatmen's.
At June 1, 1995, IMA's term loan facility with such banks established in April
1995 was in the aggregate principal amount of $15.25 million ($5.0 to Mark Twain
and $10.25 to Boatmen's). IMA also maintains a $20 million line of credit with
Mark Twain and Boatmen's (which was further increased to $23 million in
September 1995), $11.675 million of which was outstanding on May 31, 1995.
During fiscal 1994, 1993 and 1992, IMA paid $272,414, $145,333 and $96,643,
respectively, in interest on a prior credit facility maintained with Mark Twain.
During fiscal 1992, IMA made rental payments aggregating $75,106 to A-Y-K-E
Partnership, a partnership of which Mr. Kalishman and Robert W. Affholder,
President of IMA, are partners, for the use of tunneling equipment owned by such
partnership. No such payments were made during fiscal 1993 and 1994 in excess of
$60,000 for either such year.
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SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS
AND MANAGEMENT OF IMA
The following table sets forth certain information as of June 1, 1995 with
respect to the number of shares of IMA Class A Common Stock and IMA Class B
Common Stock beneficially owned by: (i) each person known by IMA to own
beneficially more than 5% of the outstanding shares of either such class; (ii)
each director of IMA; (iii) each executive officer of IMA; and (iv) all
directors and executive officers of IMA as a group.
<TABLE>
<CAPTION>
SHARES OF IMA SHARES OF IMA
CLASS A COMMON STOCK CLASS B COMMON STOCK
BENEFICIALLY OWNED(1)(2) BENEFICIALLY OWNED(1)
------------------------ ----------------------
NUMBER OF PERCENT NUMBER OF PERCENT
BENEFICIAL OWNER SHARES OF CLASS SHARES OF CLASS
------------------------------------------------ --------- -------- --------- --------
<S> <C> <C> <C> <C>
Jerome Kalishman and Nancy F. Kalishman
17988 Edison Avenue
Chesterfield, Missouri 63005-3700............. 907,447(3) 10.9% 1,895,021(4) 76.6%
Robert W. Affholder
17988 Edison Avenue
Chesterfield, Missouri 63005-3700............. 665,968 8.0 471,300 19.1
Robert M. Leopold............................... 13,334(5) (6) -- --
Lee M. Liberman................................. 37,934(7) (6) -- --
Alvin J. Siteman................................ 166,832(8) 2.0 -- --
Joseph F. Olson................................. 24,134(9) (6) -- --
James L. Tadtman................................ 15,667(10) (6) -- --
All executive officers and directors as a group
(seven persons)(11)........................... 1,831,316 21.9 2,366,321 95.7
</TABLE>
---------------
(1) Except as otherwise indicated, all of such shares are owned with sole
voting and investment power.
(2) Does not include the shares of IMA Class A Common Stock issuable upon
conversion of shares of IMA Class B Common Stock indicated as beneficially
owned by such stockholder. Each share of IMA Class B Common Stock is
convertible into one share of IMA Class A Common Stock at the option of the
holder.
(3) Represents: (i) 135,781 shares held by Mr. and Mrs. Kalishman as tenants by
the entirety; (ii) 600,000 shares owned of record by Xanadu Investments,
L.P. (the general partners of which are The Jerome Kalishman Revocable
Trust, of which Mr. Kalishman is trustee, and The Nancy F. Kalishman
Revocable Trust, of which Mrs. Kalishman is trustee), (iii) 71,666 shares
held by Mr. Kalishman, as trustee of the Jerome and Nancy Kalishman Family
Fund, and (iv) 100,000 shares held by Mr. Kalishman, as trustee of the
Jerome and Nancy Kalishman Irrevocable Grandchildren's Trust. Mrs.
Kalishman disclaims beneficial ownership of the shares referenced in
clauses (iii) and (iv) of the immediately preceding sentence.
(4) Represents shares owned of record by Xanadu Investments, L.P.
(5) Includes 5,334 shares issuable upon exercise of stock options granted by
IMA and exercisable within 60 days of June 1, 1995.
(6) Less than one percent.
(7) Represents 5,666 shares held by Mr. Liberman, 1,000 shares held by Mr.
Liberman as trustee of a trust, 600 shares held by Mr. Liberman's spouse,
as to which Mr. Liberman disclaims beneficial ownership, and 30,668 shares
issuable upon exercise of stock options granted by IMA and exercisable
within 60 days of June 1, 1995.
(8) Represents 130,332 shares held by Mr. Siteman, as trustee of the Alvin J.
Siteman Revocable Trust, 5,832 shares held by Mr. Siteman, as trustee of
four trusts for the benefit of members of his immediate family, and 30,668
shares issuable upon exercise of stock options granted by IMA and
exercisable within 60 days of June 1, 1995.
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(9) Includes 24,001 shares issuable upon exercise of stock options granted by
IMA and exercisable within 60 days of June 1, 1995.
(10) Represents 15,667 shares issuable upon exercise of stock options granted by
IMA and exercisable within 60 days of June 1, 1995.
(11) Includes the above-referenced forms of beneficial ownership.
DESCRIPTION OF ITI CAPITAL STOCK
The authorized capital stock of ITI consists of 25,000,000 shares of ITI
Common Stock and 2,000,000 shares of ITI Preferred Stock. As of August 30, 1995,
there were 14,609,804 shares of ITI Common Stock outstanding, held of record by
1,842 holders. As of such date, no shares of ITI Preferred Stock were
outstanding and no shares of capital stock were held in the treasury of ITI. The
following summary of certain provisions of ITI's capital stock describes all
material provisions of, but does not purport to be complete and is subject to
and qualified in its entirety by, the ITI Charter and ITI's By-Laws that are
included or incorporated by reference as exhibits to the Registration Statement
of which this Joint Proxy Statement/Prospectus forms a part and by the
provisions of applicable law.
COMMON STOCK
Holders of shares of ITI Common Stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Subject to the prior rights of
the holders of ITI Preferred Stock, holders of ITI Common Stock are entitled to
receive dividends when, as and if declared by the Board of Directors of ITI from
funds legally available therefor, and to share ratably in the assets of ITI
legally available for distribution to the stockholders in the event of
liquidation or dissolution. The ITI Common Stock has no preemptive rights and no
subscription or redemption privileges. The ITI Common Stock does not have
cumulative voting rights, which means the holder or holders of more than half of
the shares voting for the election of directors can elect all the directors then
being elected, less the number, if any, elected by the holders of any series of
ITI Preferred Stock. All the outstanding shares of ITI Common Stock are, and the
shares to be issued in the Merger when issued will be, fully paid and not liable
for further call or assessment.
PREFERRED STOCK
ITI's Board of Directors has the authority by resolution, without any
action of stockholders, to issue from time to time up to 2,000,000 shares of ITI
Preferred Stock in one or more series with such terms and designations as the
Board of Directors of ITI may fix, including dividend rates, redemption rights,
conversion rights, liquidation preferences and voting rights. The Board of
Directors of ITI may designate that the holders of one or more series of ITI
Preferred Stock shall be entitled as a series to elect one director and the
Board of Directors of ITI may at its discretion grant the holders of one or more
series of ITI Preferred Stock the right to elect additional directors in the
event that dividends on such series are in arrears.
The authority possessed by the Board of Directors of ITI to issue ITI
Preferred Stock could potentially be used to discourage attempts by others to
obtain control of ITI through merger, tender offer, proxy, consent or otherwise
by making such attempts more difficult to achieve or more costly. The Board of
Directors of ITI may issue ITI Preferred Stock without stockholder approval, and
with voting and conversion rights which could adversely affect the voting power
of holders of the ITI Common Stock. There are no agreements or understandings
for the issuance of ITI Preferred Stock, and the Board of Directors of ITI has
no present intention to issue ITI Preferred Stock, nor is it aware of any
pending or proposed transactions that would be affected by such issuance.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
ITI is subject to the provisions of Section 203 of the General Corporation
Law of Delaware. In general, this statute prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transactions in
which the person becomes an interested stockholder, unless the business
combination is approved in a prescribed manner. An
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<PAGE> 145
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within the prior three years did own) 15% or more of the
corporation's voting stock.
ITI has included in its Certificate of Incorporation provisions to
eliminate the personal liability of its directors for monetary damages resulting
from breaches of their fiduciary duty to the extent permitted by the Delaware
General Corporation Law and to indemnify its directors and officers to the
fullest extent permitted by Section 145 of the Delaware General Corporation Law.
ANTI-TAKEOVER PROVISIONS
Classified Board of Directors. As more fully described under "Election of
ITI Directors" above, the ITI Charter provides for its Board of Directors to be
divided into three classes of directors serving staggered three-year terms. As a
result, approximately one-third of the Board of Directors of ITI will be elected
each year. The classified board could, accordingly, have the effect of extending
the time required to change a majority of the Board of Directors to two annual
meetings of stockholders, instead of one. Since it would take a third party
longer to obtain control of the Board of Directors, the classified board may
deter certain mergers, tender offers or other future takeover attempts which
some or a majority of stockholders may deem to be in their best interests.
Special Meetings of Stockholders. The ITI Charter provides that, subject
to the rights of the holders of any class or series of ITI Preferred Stock set
forth in the ITI Charter, the certificate of designation relating to such class
or series of ITI Preferred Stock, or as otherwise required by law, any
stockholder action may be taken only at a meeting of stockholders. The
affirmative vote of the holders of at least 80% of the capital stock entitled to
vote for the election of directors is required to amend, repeal or adopt any
provision inconsistent with such arrangement. These provisions may make it more
difficult for stockholders to take action opposed by ITI's Board of Directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for ITI's Common Stock is American Stock
Transfer & Trust Company.
COMPARATIVE RIGHTS OF STOCKHOLDERS OF
ITI AND IMA
The rights of the stockholders of both IMA and ITI are governed by the
provisions of Delaware law as well as each of their respective Certificates of
Incorporation and By-Laws. If the Merger is consummated, the stockholders of IMA
will become stockholders of ITI and their rights will be governed by the ITI
Charter and ITI's By-Laws. The following is a summary discussion of the most
material differences between the rights of stockholders of IMA and ITI. This
summary is not intended to be a complete description of all of the differences
between the rights of stockholders of ITI and IMA and is qualified in its
entirety by reference to the Delaware General Corporation Law (the "Delaware
Law") and the governing corporate instruments of ITI and IMA referred to above.
RIGHTS OF HOLDERS OF COMMON STOCK
IMA has issued and outstanding shares of IMA Class A Common Stock and
shares of IMA Class B Common Stock. Each share of IMA Class A Common Stock is
identical in all respects to each share of IMA Class B Common Stock, except that
(i) no cash dividend may be declared or paid on shares of IMA Class B Common
Stock unless, simultaneously therewith or prior thereto, there is or has been
declared or paid (as the case may be) a cash dividend on each share of IMA Class
A Common Stock of at least 110% of the per share dividend on IMA Class B Common
Stock, (ii) in the election of directors, holders of IMA Class B Common Stock,
voting as a separate class, are entitled to elect 55% of the IMA Board of
Directors (rounded up to the nearest whole number), and the holders of IMA Class
A Common Stock, voting as a separate class, are entitled to elect the remaining
directors, (iii) no IMA Class A director can be removed from office, except by
vote of the holders of IMA Class A Common Stock, and no IMA Class B director can
be removed from office,
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<PAGE> 146
except by vote of the holders of IMA Class B Common Stock, (iv) in the event of
liquidation or dissolution of IMA prior to January 1, 1997, the holders of IMA
Class A Common Stock are entitled to receive, out of assets legally available
for distribution to the common stockholders, an aggregate amount equal to $8.00
per share before any amount is paid to holders of IMA Class B Common Stock, (v)
each share of IMA Class B Common Stock is convertible by the holder into one
share of IMA Class A Common Stock at any time, and (vi) in the event of any
merger, consolidation, sale of substantially all the IMA's assets or IMA's
entering into certain business combinations (such as the Merger), holders of the
IMA Class A Common Stock must be offered consideration per share of at least
equal value as the highest price paid or to be paid to any holder of IMA Class B
Common Stock in connection with such transaction.
ITI has authorized, issued and outstanding just one class of shares of ITI
Common Stock.
CLASSIFIED BOARD OF DIRECTORS
Under the Delaware Law, the certificate of incorporation of a company may
provide that the Board of Directors may be divided into one or more classes,
with directors in such classes having staggered terms. IMA's Certificate of
Incorporation does not provide for a classified board of directors. Under IMA's
Certificate of Incorporation and By-Laws, each director holds office until the
next annual meeting of stockholders or until his successor shall have been
elected and qualified or until his prior resignation, removal from office or
death.
The ITI Charter provides for a classified board of directors serving
staggered three-year terms. As described under "The Merger -- Management of ITI
Following Consummation of the Merger" above, at the Effective Time the Board of
Directors of ITI will be divided into the Merger Class I Directors, the Merger
Class II Directors and the Merger Class III Directors, initially consisting of,
respectively, four directors, four directors and five directors. The Merger
Class I Directors will hold office until the annual meeting of stockholders in
1996, the Merger Class II Directors will hold office until the annual meeting of
stockholders in 1997 and the Merger Class III Directors will hold office until
the annual meeting of stockholders in 1998; and, in each case, until their
successors are duly elected and qualified, or until their resignation, removal
from office or death. As a result, one class of directors will be elected at
each annual meeting of stockholders with the remaining classes continuing their
respective terms.
CHANGE IN NUMBER OF DIRECTORS
Under the Delaware Law, the number of directors of a company is fixed by,
or in the manner provided in, the by-laws, unless the certificate of
incorporation fixes the number of directors, in which case a change in the
number of directors may be made only by amendment of the certification of
incorporation. IMA's By-Laws provide that the number of directors may be no less
than two nor more than nine, as may be fixed by resolution of the Board of
Directors. Such provisions of IMA's By-Laws may be modified by the affirmative
vote of a majority of the members of the IMA Board of Directors or as otherwise
permitted under the Delaware Law, which allows amendment, alteration or repeal
of the By-Laws by stockholders representing a majority of the issued and
outstanding shares entitled to vote.
The ITI Charter provides that the number of directors comprising the Board
shall be no less than six nor more than 15, the exact number to be specified in
ITI's By-Laws. At the Effective Time, ITI's By-Laws will provide for a Board of
Directors of 13 members. Such provisions of ITI's By-Laws, subsequent to the
Effective Time, will be subject to amendment only by a vote of at least 80% of
the members of the Board of Directors of ITI or by a vote of stockholders
representing a majority of the shares issued and outstanding and entitled to
vote.
REMOVAL OF DIRECTORS
Under the Delaware Law, a director of a company may be removed from office,
with or without cause, by the holders of a majority of the shares then entitled
to vote at an election of directors, unless otherwise specified in a company's
certificate of incorporation. If the board of directors is classified, however,
a director may be removed by a vote of stockholders only for cause, unless
otherwise specified in a company's certificate of incorporation.
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<PAGE> 147
IMA's Certificate of Incorporation does not provide for a classified board
of directors and, accordingly, IMA's directors may be removed with or without
cause. As described above under "-- Common Stock Classification," IMA's
Certificate of Incorporation provides that no IMA Class A director can be
removed from office, except by vote of the holders of IMA Class A Common Stock,
and no IMA Class B director can be removed from office, except by vote of the
holders of IMA Class B Common Stock.
ITI's Board of Directors is classified. The ITI Charter does not contain
any provisions regarding the removal of directors. Accordingly, directors may be
removed only for cause. Although the definition of "cause" has not been clearly
established under Delaware Law, courts in various states have found "cause" to
include malfeasance while in office, gross misconduct or neglect, false or
fraudulent misrepresentations inducing the directors' appointment, willful
conversion of corporate funds, breach of the obligation to make full disclosure,
incompetency, gross inefficiency and moral turpitude.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
As permitted under the Delaware Law, IMA's By-Laws provide that any vacancy
on the Board of Directors of IMA or any newly-created directorship resulting
from an increase in the number of persons to comprise the board may be filled by
the affirmative vote of a majority of the surviving or remaining directors then
in office, even though fewer than a quorum are present.
ITI's By-Laws provide that the filling of vacancies on ITI's Board of
Directors will be made in accordance with the ITI Charter. The ITI Charter
provides that vacancies resulting from newly-created directorships shall be
filled by the affirmative vote of a majority of the directors then in office or
such greater affirmative vote of directors as may be specified in ITI's By-Laws,
provided a quorum is present; and, at the Effective Time, will provide that
other vacancies will be filled by the affirmative vote of a majority of the
directors then in office in accordance with the Merger Agreement. See "The
Merger -- The Board Vacancy Amendment" above. Under the Delaware Law, if at the
time of filling any vacancy on the Board of Directors or newly-created
directorship the directors then in office constitute less than a majority of the
entire Board of Directors as constituted immediately prior to any such increase,
the Delaware Court of Chancery may, upon application of any stockholder or
stockholders holding at least 10% of the total number of shares at the time
outstanding having the right to vote for such directors, order an election to be
held to fill any such vacancies or newly-created directorships or to replace the
directors chosen by the directors then in office.
SPECIAL STOCKHOLDER MEETINGS
Under Delaware Law, a special meeting of stockholders of a company may be
called only by the board of directors or such person or persons as may be
authorized by the certificate of incorporation or by-laws. IMA's By-Laws provide
that a special meeting of stockholders may be called by the Board of Directors,
President or by the holders of shares representing at least a majority of all
outstanding shares entitled to vote at the meeting.
At the Effective Time, ITI's By-Laws will provide that a special meeting of
stockholders may be called by the Chairman of the Board, President or the Board
of Directors and shall be called by the President at the request of holders of
not less than 50% of the outstanding shares entitled to vote at the meeting.
STOCKHOLDER ACTION WITHOUT A MEETING
Under the Delaware Law, unless otherwise provided in a company's
certificate of incorporation, any action required or permitted to be taken at
any meeting of stockholders may instead be taken without a meeting, without
prior notice and a vote, if a written consent setting forth the action taken is
signed by holders of outstanding stock having at least the number of votes that
would be required to authorize such action at a meeting of stockholders at which
all shares entitled to vote thereon were present and voting and a prompt notice
of the action so taken is provided to those stockholders who have not consented
in writing. IMA's Certificate of Incorporation and By-Laws permits stockholder
action by written consent.
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The ITI Charter provides that all actions required to be taken by the
stockholders of ITI shall be taken solely at a duly called annual or special
meeting of stockholders and prohibits stockholder action by written consent.
Such provisions may only be amended with the affirmative vote of the holders of
at least 80% of the outstanding shares entitled to vote thereon.
ADJOURNMENT OF MEETINGS
In the event sufficient votes in favor of approving the Merger Agreement,
the proposed Capitalization Amendment and the proposed Board Vacancy Amendment
are not received by the time scheduled for the ITI Meeting, the Board of
Directors of ITI intends to recommend that the ITI Meeting be adjourned to
permit the further solicitation of proxies. A resolution will be proposed at the
ITI Meeting authorizing the Board of Directors of ITI, at its discretion, to
adjourn the ITI Meeting for the purpose of further soliciting proxies, if
necessary, to obtain a sufficient number of votes in favor of approving the
Merger Agreement, the proposed Capitalization Amendment and the proposed Board
Vacancy Amendment. The proposal to authorize the Board of Directors of ITI to
adjourn the ITI Meeting in order to permit the further solicitation of proxies,
if necessary, must be approved by an affirmative vote of holders of a majority
of the outstanding shares of ITI Common Stock present in person or represented
by proxy and entitled to vote at the ITI Meeting. The Board of Directors of ITI
believes that such proposal is in the best interests of ITI and the ITI
Stockholders and recommends that the ITI Stockholders vote FOR approval of such
proposal.
In the event sufficient votes in favor of approving the Merger Agreement
are not received by the time scheduled for the IMA Meeting, the Board of
Directors of IMA intends to recommend that the IMA Meeting be adjourned to
permit the further solicitation of proxies. A resolution will be proposed at the
IMA Meeting authorizing the Board of Directors of IMA, at its discretion, to
adjourn the IMA Meeting for the purpose of further soliciting proxies, if
necessary, to obtain a sufficient number of votes in favor of approving the
Merger Agreement. The proposal to authorize the Board of Directors of IMA to
adjourn the IMA Meeting in order to permit the further solicitation of proxies,
if necessary, must be approved by an affirmative vote of holders of a majority
of the shares of IMA Class A Common Stock and IMA Class B Common Stock present
in person or represented by proxy and entitled to vote at the IMA Meeting voting
together as one class. The Board of Directors of IMA believes that such proposal
is in the best interests of IMA and the IMA Stockholders and recommends that the
IMA Stockholders vote FOR approval of such proposal.
LEGAL MATTERS
The validity of the ITI Common Stock offered hereby will be passed upon for
ITI by Krugman, Chapnick & Grimshaw, Saddle Brook, New Jersey. James D. Krugman,
a partner of Krugman, Chapnick & Grimshaw, is a director and Chairman of the
Board of ITI, and Howard Kailes, a partner of such firm, is Secretary of ITI.
Mr. Krugman owns 10,000 shares of ITI Common Stock; is managing partner of a
partnership which owns 40,364 shares of ITI Common Stock (in 5,046 shares of
which Mr. Krugman has a beneficial interest); has shared voting and investment
power over 33,300 shares of ITI Common Stock held by a general partnership in
which his mother has an interest; and has the right to acquire 95,000 additional
shares which are issuable upon the exercise of options granted by ITI. See
"Election of ITI Directors" and "Security Ownership of Principal Stockholders
and Management of ITI" above. Certain tax consequences of the Merger will be
passed upon for IMA by Thompson & Mitchell, St. Louis, Missouri.
EXPERTS
The consolidated financial statements of ITI and its subsidiaries included
in this Joint Proxy Statement/Prospectus and in the Registration Statement have
been audited by BDO Seidman, LLP, independent certified public accountants, to
the extent and for the periods set forth in their reports appearing elsewhere
herein, and are included herein in reliance upon such reports given upon the
authority of said firm as experts in accounting and auditing.
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<PAGE> 149
The consolidated financial statements of IMA and subsidiaries as of
September 30, 1994 and 1993, and for each of the years in the three-year period
ended September 30, 1994, have been included in this Joint Proxy
Statement/Prospectus and in the Registration Statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of Enviroq and its subsidiaries
(renamed IMA Merger Sub, Inc.) as of March 25, 1995 and March 26, 1994 and for
the two-year period ended March 25, 1995 included in this Joint Proxy
Statement/Prospectus and in the Registration Statement have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report herein,
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The combined financial statements of Gelco and its affiliates as of
December 31, 1993 and 1992 have been audited by Aldrich, Kilbride and Tatone,
independent certified public accountants, to the extent and for the periods set
forth in their report appearing elsewhere herein, and are included herein in
reliance upon such report given upon the authority of said firm as experts in
accounting and auditing.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS OF ITI:
Report of Independent Certified Public Accountants.................................... F-1
Consolidated Balance Sheets, December 31, 1994 and 1993............................... F-2
Consolidated Statements of Operations for each of the three years in the period ended
December 31, 1994................................................................... F-4
Consolidated Statements of Stockholders' Equity for each of the three years in the
period ended December 31, 1994...................................................... F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 1994................................................................... F-6
Summary of Accounting Policies........................................................ F-8
Notes to Consolidated Financial Statements............................................ F-11
Consolidated Balance Sheets as of June 30, 1995 (unaudited) and December 31, 1994..... F-30
Consolidated Statements of Operations for the six months ended June 30, 1995 and 1994
(unaudited)......................................................................... F-32
Consolidated Statements of Cash Flows for the six months ended June 30, 1995 and 1994
(unaudited)......................................................................... F-33
Notes to Consolidated Financial Statements (unaudited)................................ F-35
FINANCIAL STATEMENTS OF IMA:
Independent Auditors' Report.......................................................... F-41
Consolidated Balance Sheets as of September 30, 1994 and 1993......................... F-42
Consolidated Statements of Income for the years ended September 30, 1994, 1993 and
1992................................................................................ F-44
Consolidated Statements of Changes in Stockholders' Equity for the years ended
September 30, 1994, 1993 and 1992................................................... F-45
Consolidated Statements of Cash Flows for the years ended September 30, 1994, 1993 and
1992................................................................................ F-46
Notes to Consolidated Financial Statements............................................ F-47
Consolidated Balance Sheets as of June 30, 1995 (unaudited) and September 30, 1994.... F-56
Consolidated Statements of Income for the nine months ended June 30, 1995 and 1994
(unaudited)......................................................................... F-58
Consolidated Statements of Cash Flows for the nine months ended June 30, 1995 and 1994
(unaudited)......................................................................... F-59
Notes to Consolidated Financial Statements (unaudited)................................ F-60
FINANCIAL STATEMENTS OF ENVIROQ:
Independent Auditors' Report.......................................................... F-64
Consolidated Balance Sheets as of March 25, 1995 and March 26, 1994................... F-65
Consolidated Statements of Operations for the years ended March 25, 1995 and March 26,
1994................................................................................ F-66
Consolidated Statements of Stockholders' Equity for the years ended March 25, 1995 and
March 26, 1994...................................................................... F-67
Consolidated Statements of Cash Flows for the years ended March 25, 1995 and March 26,
1994................................................................................ F-68
Notes to Consolidated Financial Statements............................................ F-69
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS OF GELCO
INSITUFORM/NUPIPE ENTITIES:
Independent Auditors' Report.......................................................... F-80
Combined Balance Sheets as of December 31, 1993 and 1992.............................. F-81
Combined Statements of Income for the years ended December 31, 1993 and 1992.......... F-82
Combined Statements of Equity for the years ended December 31, 1993 and 1992.......... F-83
Combined Statements of Cash Flows for the years ended December 31, 1993 and 1992...... F-84
Notes to Combined Financial Statements................................................ F-85
Combined Balance Sheets as of June 30, 1994 (unaudited) and December 31, 1993......... F-94
Combined Statements of Income for the six months ended June 30, 1994 and 1993
(unaudited)......................................................................... F-95
Combined Statements of Equity for the six months ended June 30, 1994 and 1993
(unaudited)......................................................................... F-96
Combined Statements of Cash Flows for the six months ended June 30, 1994 and 1993
(unaudited)......................................................................... F-97
Notes to Combined Financial Statements (unaudited).................................... F-98
</TABLE>
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Insituform Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Insituform
Technologies, Inc. and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Insituform
Technologies, Inc. and subsidiaries at December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1994, in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
Memphis, Tennessee
March 9, 1995
F-1
<PAGE> 153
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents, restricted $3,836 and $4,082 (Note 20).... $ 16,635 $ 15,662
Investments in securities (Note 2)................................... 1,107 401
Receivables (Note 3)................................................. 35,243 26,126
Costs and estimated earnings in excess of billings (Note 4).......... 6,422 3,474
Inventories (Note 5)................................................. 7,029 6,622
Deferred income taxes (Note 17)...................................... 2,807 1,919
Prepaid expenses and miscellaneous................................... 2,496 2,733
-------- --------
TOTAL CURRENT ASSETS......................................... 71,739 56,937
-------- --------
PROPERTY AND EQUIPMENT, less accumulated depreciation and amortization
(Notes 6, 9 and 11).................................................. 29,809 24,377
-------- --------
OTHER ASSETS
Costs in excess of net assets of businesses acquired, less
accumulated amortization of $3,838 and $2,126 (Note 1)............ 49,995 36,538
Patents and patent applications, less accumulated amortization of
$1,909 and $1,553................................................. 5,606 5,180
Investments in licensees and affiliated companies (Note 7)........... 2,033 1,978
Deferred income taxes (Note 17)...................................... 1,417 1,361
Miscellaneous (Note 8)............................................... 1,895 2,804
-------- --------
TOTAL OTHER ASSETS........................................... 60,946 47,861
-------- --------
$162,494 $129,175
======== ========
</TABLE>
F-2
<PAGE> 154
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
-------- --------
(IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks (Note 9)...................................... $ 277 $ 467
Accounts payable and accruals (Note 10).............................. 22,760 18,689
Income taxes payable (Note 17)....................................... 3,801 1,766
Deferred income taxes (Note 17)...................................... 524 432
Current maturities of long-term debt (Note 11)....................... 11,572 6,679
-------- --------
TOTAL CURRENT LIABILITIES.................................... 38,934 28,033
LONG-TERM DEBT, less current maturities (Note 11)...................... 47,347 36,297
DEFERRED INCOME TAXES (Note 17)........................................ 937 433
-------- --------
TOTAL LIABILITIES............................................ 87,218 64,763
-------- --------
MINORITY INTERESTS..................................................... 1,352 860
-------- --------
REDEEMABLE PREFERRED STOCK (Note 12)................................... -- 157
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 9, 12, 15, and 20)
COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY (Note 13):
Preferred stock, undesignated, $.10 par -- shares authorized
1,800,000; none outstanding....................................... -- --
Common stock, $.01 par -- shares authorized 25,000,000; shares
outstanding 14,346,005 and 14,244,585............................. 143 142
Additional paid-in capital........................................... 44,937 43,680
Retained earnings (Notes 9 and 11)................................... 33,300 24,675
-------- --------
78,380 68,497
Cumulative foreign currency translation adjustments.................. (1,270) (1,478)
Unrealized holding gains on investments available-for-sale (Note
2)................................................................ 438 --
Notes receivable from affiliates (Note 14)........................... (3,624) (3,624)
-------- --------
TOTAL COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY............ 73,924 63,395
-------- --------
$162,494 $129,175
======== ========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
<PAGE> 155
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
REVENUES (Notes 15 and 19)
Net sales................................................ $ 28,265 $ 27,080 $ 29,909
Royalties and license fees............................... 10,272 10,475 12,414
Construction contracts................................... 109,710 62,953 53,236
-------- -------- --------
Total revenues............................................. 148,247 100,508 95,559
-------- -------- --------
OPERATING COSTS AND EXPENSES
Cost of sales............................................ 17,174 15,039 18,593
Royalty expense (Note 15)................................ 223 281 352
Cost of construction contracts........................... 77,232 44,746 40,776
Selling, administrative and general...................... 33,560 27,672 21,982
Research and development................................. 1,509 2,718 4,349
Merger and restructuring costs (Note 1).................. -- (981) 14,572
-------- -------- --------
Operating costs and expenses............................... 129,698 89,475 100,624
-------- -------- --------
Operating income (loss).................................... 18,549 11,033 (5,065)
OTHER INCOME (EXPENSE)
Interest expense......................................... (3,152) (1,351) (236)
Other (Note 16).......................................... 712 840 3,104
-------- -------- --------
Other income (expense)..................................... (2,440) (511) 2,868
-------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES ON
INCOME................................................... 16,109 10,522 (2,197)
TAXES ON INCOME (Note 17).................................. 6,140 3,314 4,223
MINORITY INTERESTS......................................... (584) (408) (248)
EQUITY IN EARNINGS OF AFFILIATED COMPANIES (Note 7)........ 409 460 997
-------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS................... 9,794 7,260 (5,671)
LOSS FROM DISCONTINUED OPERATIONS (Note 8)................. (1,164) (2,465) (540)
-------- -------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE................................................... 8,630 4,795 (6,211)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (Note 17)........... -- 218 --
-------- -------- --------
NET INCOME (LOSS).......................................... $ 8,630 $ 5,013 $ (6,211)
======== ======== ========
EARNINGS (LOSS) PER SHARE OF COMMON STOCK AND COMMON STOCK
EQUIVALENTS
Income from continuing operations........................ $ .68 $ .51 $ (.41)
Discontinued operations.................................. (.08) (.17) (.04)
Cumulative effect of accounting change................... -- .02 --
-------- -------- --------
Net income (loss)........................................ $ .60 $ .35 $ (.45)
======== ======== ========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
<PAGE> 156
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
CUMULATIVE COMMON
FOREIGN UNREALIZED NOTES STOCK AND
COMMON STOCK ADDITIONAL CURRENCY HOLDING RECEIVABLE OTHER
------------------ PAID-IN RETAINED TREASURY TRANSLATION GAINS ON FROM STOCKHOLDERS'
NO. SHARES AMOUNT CAPITAL EARNINGS STOCK ADJUSTMENTS INVESTMENTS AFFILIATES EQUITY
---------- ------ ---------- ------- -------- ------------ ----------- ----------- ------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1991................... 13,794,808 $138 $ 37,823 $25,885 $ (123) $ 3,029 $ -- $(3,437) $ 63,315
Net loss for the year.... -- -- -- (6,211) -- -- -- -- (6,211)
Issuance of common stock
upon exercise of
options................ 133,324 1 1,227 -- -- -- -- -- 1,228
Tax benefit related to
exercise of stock
options................ -- -- 784 -- -- -- -- -- 784
Issuance of affiliate
note receivable (Note
14).................... -- -- -- -- -- -- -- (187) (187)
Retirement of treasury
stock.................. (5,000) -- (123) -- 123 -- -- -- --
Dividends paid on
redeemable preferred
stock.................. -- -- -- (3) -- -- -- -- (3)
Translation
adjustments............ -- -- -- -- -- (4,431) -- -- (4,431)
---------- ------ ---------- ------- -------- ------------ ----------- ----------- ------------
BALANCE, December 31,
1992................... 13,923,132 139 39,711 19,671 -- (1,402) -- (3,624) 54,495
Net income for the
year................... -- -- -- 5,013 -- -- -- -- 5,013
Issuance of common stock
upon exercise of
options................ 281,357 3 2,212 -- -- -- -- -- 2,215
Stock issued in
conjunction with
acquisition (Notes 1
and 10)................ 40,096 -- 500 -- -- -- -- -- 500
Warrants issued with
subordinated debt (Note
13).................... -- -- 413 -- -- -- -- -- 413
Tax benefit related to
exercise of stock
options................ -- -- 844 -- -- -- -- -- 844
Other.................... -- -- -- (9) -- (76) -- -- (85)
---------- ------ ---------- ------- -------- ------------ ----------- ----------- ------------
BALANCE, December 31,
1993................... 14,244,585 142 43,680 24,675 -- (1,478) -- (3,624) 63,395
Net income for the
year................... -- -- -- 8,630 -- -- -- -- 8,630
Issuance of common stock
upon exercise of
options................ 30,448 -- 174 -- -- -- -- -- 174
Stock issued in
conjunction with
acquisition (Notes 1
and 10)................ 70,972 1 999 -- -- -- -- -- 1,000
Tax benefit related to
exercise of stock
options................ -- -- 84 -- -- -- -- -- 84
Other.................... -- -- -- (5) -- 208 438 -- 641
---------- ------ ---------- ------- -------- ------------ ----------- ----------- ------------
BALANCE, December 31,
1994................... 14,346,005 $143 $ 44,937 $33,300 $ -- $ (1,270) $ 438 $(3,624) $ 73,924
========== ======= ========= ======== ======== ============ ========== ========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE> 157
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1993 1992
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) from continuing operations.................. $ 9,794 $ 7,260 $ (5,671)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Minority interest in net income........................ 584 408 248
Provision for restructuring costs...................... -- (981) 4,905
Depreciation and amortization.......................... 7,516 6,304 3,957
Loss on investments sold............................... -- -- 161
Miscellaneous.......................................... 311 114 206
Deferred income taxes.................................. (615) (1,714) (99)
Loss (gain) on sale of fixed assets.................... 258 79 (127)
Undistributed earnings of affiliated companies......... (409) (460) (997)
Changes in operating assets and liabilities, net of
effect of businesses purchased (Note 1):
Receivables.......................................... (9,887) 162 83
Inventories.......................................... 369 (307) (696)
Prepaid expenses and miscellaneous................... 382 1,251 (79)
Miscellaneous other assets........................... (59) 911 (414)
Accounts payable and accruals........................ 2,322 (7,257) 863
Income taxes payable................................. 4,267 (504) (1,704)
------- -------- --------
Net cash provided by continuing operations.................. 14,833 5,266 636
------- -------- --------
Net cash used by discontinued operations.................... (99) (940) (492)
------- -------- --------
Net cash provided by operating activities................... 14,734 4,326 144
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................................... (9,019) (5,272) (6,073)
Investments in licensees and affiliated companies......... 407 231 (105)
Purchase of patents and applications...................... (811) (332) (489)
Purchases of businesses, net of cash acquired (Note 1).... (9,379) (32,588) (9,849)
Proceeds on disposal of property and equipment............ 1,242 540 360
Miscellaneous other....................................... -- -- 115
------- -------- --------
Net cash used by investing activities....................... (17,560) (37,421) (16,041)
------- -------- --------
Continued
</TABLE>
F-6
<PAGE> 158
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1993 1992
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock.................... $ 174 $ 2,215 $ 1,228
Proceeds from long-term debt.............................. 9,828 35,430 --
Redemption of redeemable preferred stock.................. (228) -- --
Dividends paid by subsidiary to minority interests........ (150) (91) (140)
Principal payments on long-term debt...................... (5,846) (2,637) (1,330)
Increase (decrease) in short-term borrowings.............. (213) 125 (13,211)
------- -------- --------
Net cash provided (used) by financing activities............ 3,565 35,042 (13,453)
------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 234 (154) (2,172)
------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE
YEAR...................................................... 973 1,793 (31,522)
CASH AND CASH EQUIVALENTS, beginning of year................ 15,662 13,869 45,391
------- -------- --------
CASH AND CASH EQUIVALENTS, end of year...................... $16,635 $ 15,662 $ 13,869
======= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
CASH PAID DURING THE YEAR FOR
Interest (net of amount capitalized)...................... $ 3,197 $ 1,602 $ 519
Income taxes.............................................. 1,601 2,039 6,053
NON-CASH INVESTING AND FINANCING ACTIVITIES
Deferred consideration for patents acquired............... -- -- 150
Additional paid-in capital increased by reduction in
income taxes payable for tax benefit arising from
exercise of stock options.............................. 84 844 784
Deferred consideration for businesses acquired (Note 1)... 11,850 1,000 2,800
Common stock issued in connection with purchase of
business (Note 1)...................................... 1,000 500 --
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-7
<PAGE> 159
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
INDUSTRY INFORMATION
Insituform Technologies, Inc. (the "Company" or "ITI") provides techniques
for the reconstruction of deteriorated pipelines and manholes utilizing
trenchless, no dig processes, including the Insituform(R) Process and the
NuPipe(R) Process, worldwide through licensees or its subsidiaries. The Company
sells the materials used in these processes to many of its licensees.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries, including a 51% owned subsidiary,
Insituform Linings, Plc., a United Kingdom company. All material intercompany
balances, transactions and stockholdings are eliminated.
ACQUISITIONS AND MERGERS
The accounts and operations of businesses acquired in exchange for common
stock, and which were accounted for as poolings-of-interests, are included in
the financial statements as if they had always been subsidiaries.
The net assets of businesses acquired and accounted for using the purchase
method of accounting are recorded at their fair 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 "Costs in excess of net assets of businesses
acquired."
TAXES ON INCOME
Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). Under FAS 109, the Company provides for estimated income taxes payable or
refundable on current year income tax returns as well as the estimated future
tax effects attributable to temporary differences and carryforwards, based upon
enacted tax laws and tax rates. The Company considers the amount of any deferred
tax asset valuation allowances on an individual subsidiary basis, considering
historical and projected earnings. Deferred tax assets and liabilities are
classified based upon an analysis of each taxing jurisdiction.
U.S. and foreign income taxes are not provided on undistributed earnings of
foreign subsidiaries where it is the Company's intention to indefinitely
reinvest such earnings in the subsidiary's operations and not to transfer them
in a taxable transaction.
FOREIGN CURRENCY TRANSLATION
Results of operations for foreign entities are translated using the average
exchange rates during the period. Assets and liabilities are translated to U.S.
dollars using the exchange rates in effect at the balance sheet date, and the
related translation adjustments are reported as a separate component of
stockholders' equity.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company classifies cash
on hand and in savings, money market, certificates of deposit, and checking
accounts, as well as other highly liquid debt securities with original
maturities of 90 days or less, as cash equivalents.
F-8
<PAGE> 160
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED)
INVESTMENTS
Effective January 1, 1994, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("FAS 115"). Under FAS 115, the Company has
classified investments in equity securities that have readily determinable fair
values and all investments in debt securities as available-for-sale. These
investments are reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of stockholders'
equity.
For years prior to 1994, the Company accounted for investments in
marketable securities in accordance with the requirements of Statement of
Financial Accounting Standards No. 12, "Accounting for Certain Marketable
Securities" ("FAS 12").
Corporate investments are carried 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. For those investments accounted for on
the equity method, intercompany profits and losses are eliminated.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
market. Maintenance and office supplies are not inventoried.
PROPERTY, EQUIPMENT, DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation and amortization on
property and equipment are computed using the straight-line method for financial
reporting purposes over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Land improvements............................................ 20
Buildings and improvements................................... 10-40
Machinery and equipment...................................... 4-10
Furniture and fixtures....................................... 3-10
Autos and trucks............................................. 3-10
</TABLE>
For income tax purposes, depreciation and amortization are computed using
accelerated methods over the estimated useful lives.
INTANGIBLES
The Company amortizes any excess of cost of businesses acquired over the
fair value of the net assets at dates of acquisition over periods not in excess
of 25 years on the straight-line basis.
Patent costs are amortized on a straight-line basis over 17 years. Existing
patents acquired are amortized on a straight-line basis over the shorter of 17
years or the remaining life of the respective patent.
Noncompete agreements are amortized on a straight-line basis over the term
of the applicable agreements.
The Company's management continually evaluates the market coverage and
earnings capacity of its acquirees and its patented processes to determine if
the unamortized balances can be recovered from their undiscounted future cash
flows.
F-9
<PAGE> 161
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED)
ROYALTY REVENUES AND LICENSE FEES
Royalty revenues are accrued as earned in accordance with the provisions of
the license agreements and are recorded based upon reports submitted by the
licensees. License fees are recognized as revenues when all material services
have been substantially performed.
CONSTRUCTION AND INSTALLATION REVENUES
Construction and installation revenues are recognized using the
percentage-of-completion method. Contract costs include all direct material and
labor costs and those indirect costs related to contract performance, such as
indirect labor, supplies, tools and equipment costs. Changes in estimated total
contract costs are recognized in the period they are determined. Where a
contract loss is forecast, the full amount of the anticipated loss is recognized
in the period the loss is determined.
STOCK OPTIONS
Stock options are typically granted to certain officers, directors, and
employees at the prevailing market price on the date of the grant. The Company
generally makes no charge to earnings with respect to these options. Proceeds
from the sale of common stock issued under these options are credited to common
stock and additional paid-in capital at the time the options are exercised.
With respect to non-qualified stock options, the Company recognizes a tax
benefit upon exercise in an amount equal to the difference between the exercise
price and the fair market value of the common stock. With respect to incentive
stock options, tax benefits arising from disqualifying dispositions are
generally recognized at the time of disposition. Tax benefits related to stock
options are credited to additional paid-in capital.
RETIREMENT PLANS
The Company provides a non-contributory profit sharing/voluntary
contributory 401(k) plan which covers substantially all domestic employees. The
Company's policy is to annually fund the retirement plan costs accrued for that
year.
EARNINGS PER SHARE
Earnings per share are computed on the basis of the weighted average number
of common equivalent shares outstanding during each year and include the common
and common equivalent shares issued in acquisitions of businesses accounted for
as a pooling-of-interests as if such shares had been outstanding in all periods.
Earnings per share has been computed using 14,413,985, 14,329,880 and
13,883,526 shares in 1994, 1993 and 1992, respectively, which represents the
weighted average number of common and common equivalent shares required to be
recognized during the respective periods. Common stock equivalents were not
considered in the 1992 calculation as the effect would be anti-dilutive.
F-10
<PAGE> 162
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS ACQUISITIONS
During the three-year period ended December 31, 1994, the Company completed
acquisitions of four of its domestic licensees, as follows:
Gelco Companies
On October 21, 1994, the Company acquired all of the outstanding common
stock of Gelco Services, Inc., Gelco NuPipe, Inc., GelTech Constructors, Inc.
and Mar-Tech Insituform Ltd. (the "Gelco companies"), the Company's licensees of
the Insituform and NuPipe processes in Oregon, Washington, Idaho, Alaska,
Hawaii, Guam, northern California and northern Nevada, portions of Montana and
British Columbia. In addition, the Company acquired related assets of an
affiliated company. The purchase price of $18,000,000 was paid $9,000,000 in
cash, together with promissory notes aggregating $9,000,000 due on the first and
second anniversaries of the closing date. In addition, the Company issued
promissory notes aggregating $2,850,000, representing net current liabilities
(as defined) of the acquired Gelco companies to related parties and a portion of
working capital at closing.
Insituform Midwest, Inc.
On July 26, 1993, the Company acquired the common stock and related assets
of Insituform Midwest, Inc. ("Midwest"), its licensee in Indiana and portions of
Illinois, Iowa and Wisconsin. The base purchase price of $14.5 million
(including $750,000 in payment of a five-year non-competition agreement from the
sellers), was paid $14,000,000 in cash together with 40,096 unregistered shares
of the Company's Class A common stock, $.01 par value ("Common Stock"). Further,
during 1994 the sellers received contingent consideration in the amount of
70,972 additional shares of Common Stock, based on the obtainment of 1993 gross
contracts, as defined. The contingent consideration (valued at $1,000,000) was
accounted for in 1993 as costs in excess of assets acquired.
Naylor Industries, Inc.
On July 14, 1993, the Company completed the acquisition of Naylor
Industries, Inc. ("Naylor") for a cash purchase price of $23,550,000, including
transaction costs. Naylor is the parent of Insituform Gulf South, Inc. ("IGS"),
the Company's licensee in Louisiana and portions of Texas and Mississippi.
H.T. Schneider, Inc.
On December 31, 1992, the Company acquired all of the outstanding stock of
H.T.Schneider, Inc. ("HTS"), the parent of Insituform of New England, Inc.
("INE") and NuPipe New England, Inc., the Company's licensees in New England,
for $3,000,000 in cash and $2,800,000 in deferred purchase consideration (see
Note 11). The Company also (i) delivered to the seller $1,000,000, in cash, for
a three-year non-competition commitment, (ii) discharged outstanding bank debt
and stockholder loans and (iii) paid $200,000 to an affiliate of the seller for
certain real estate used in INE's operations.
Each of these acquisitions have been accounted for using the purchase
method of accounting. Except as otherwise described, these acquisitions have
been funded primarily from the proceeds of the Company's credit facility with
Third National Bank in Nashville, and from working capital and the issuance of
subordinated and purchase-money debt.
F-11
<PAGE> 163
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The excess of the purchase price over the estimated fair value of the net
assets acquired is being amortized over 25 years on the straight-line basis.
Allocation of the purchase prices of these acquisitions is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
ALLOCATED TO
------------------------------------------------
COST IN
TOTAL PROPERTY EXCESS OF
PURCHASE WORKING AND OTHER NET ASSETS
PRICE CAPITAL EQUIPMENT ASSETS ACQUIRED
-------- ------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Gelco Companies........................ $ 21,613 $2,209 $3,003 $1,349 $ 15,052
Year ended December 31, 1993:
Naylor................................. 23,550 5,664 3,058 (247) 15,075
Midwest................................ 15,790 2,533 3,096 84 10,077
Year ended December 31, 1992:
HTS.................................... 7,166 180 863 682 5,441
</TABLE>
The following table presents summarized consolidated unaudited pro forma
results of operations for 1994, 1993 and 1992 as if the Gelco acquisition had
occurred at the beginning of 1993 and the Naylor, Midwest and HTS acquisitions
had occurred at the beginning of 1992. 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Total revenues............................................. $164,078 $129,741 $135,067
Income (loss) from continuing operations................... 10,957 5,946 (6,122)
Income (loss) from continuing operations per common and
common equivalent share.................................. .76 .41 (.44)
</TABLE>
Insituform Group Limited
On December 9, 1992, the Company, through its wholly-owned subsidiary, INA
Acquisition Corp., completed the acquisition (the "IGL Acquisition") of
Insituform Group Limited ("IGL"), in which the Company issued an aggregate of
5,859,181 shares of Common Stock to prior holders of IGL's ordinary shares
(other than the Company).
The IGL Acquisition 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.
Costs related to the IGL Acquisition of $9,667,000 were charged to expense,
primarily during the fourth quarter of 1992. (See Note 17 for information
regarding the related impact on taxes on income.) The Company also recorded a
pre-tax charge of $4,905,000 for restructuring costs for asset-related
writeoffs, lease termination provisions and personnel related costs in the
fourth quarter of 1992.
2. SECURITIES AVAILABLE-FOR-SALE
Effective January 1, 1994, the Company adopted FAS 115. The adoption of FAS
115 changes the Company's method of accounting for investments in equity
securities from the lower of cost or market method
F-12
<PAGE> 164
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
previously used under FAS 12 to a fair value approach, with the unrealized
holding gains and losses reported, net of income taxes, as a separate component
of stockholders' equity. The effect of this accounting change at January 1, 1994
was to recognize as a separate component of stockholders' equity an unrealized
holding gain, net of tax effect, of $495,000. The cost of these investments is
$401,000. Except for this adjustment, the application of this statement had no
material effect on the 1994 consolidated financial statements.
Investments in securities available-for-sale consist principally of a 7.6%
investment in ENVIROQ Corporation, the parent of the Company's licensee in the
southeastern United States.
3. RECEIVABLES
Receivables consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1993
------- -------
<S> <C> <C>
Trade, less allowance for possible losses of $638 and $495....... $29,002 $19,805
Retainage under construction contracts (Note 4).................. 6,167 4,248
Refundable income taxes.......................................... 74 2,073
------- -------
Receivables...................................................... $35,243 $26,126
======= =======
</TABLE>
Activity in the allowance for possible losses is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Balance, at beginning of period............................ $ 495 $ 456 $ 702
Charged to expense......................................... 575 106 259
Increase resulting from business acquisitions.............. -- 212 36
Uncollected balances written off, net of recoveries........ (432) (279) (541)
----- ----- -----
Balance, at end of period.................................. $ 638 $ 495 $ 456
===== ===== =====
</TABLE>
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consist of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
-------- --------
<S> <C> <C>
Costs incurred on uncompleted contracts........................ $ 44,388 $ 18,355
Estimated earnings............................................. 14,409 9,269
-------- --------
58,797 27,624
Less billings to date.......................................... (53,487) (24,496)
-------- --------
$ 5,310 $ 3,128
======== ========
Included in the accompanying balance sheets under the following
captions:
Costs and estimated earnings in excess of billings........... $ 6,422 $ 3,474
Billings in excess of costs and estimated earnings on
uncompleted contracts (see Note 10)....................... (1,112) (346)
-------- --------
$ 5,310 $ 3,128
======== ========
</TABLE>
F-13
<PAGE> 165
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVENTORIES
Inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
-------- --------
<S> <C> <C>
Finished products.............................................. $ 765 $ 996
Work-in-process................................................ 418 690
Construction materials......................................... 3,153 1,433
Raw materials.................................................. 2,693 3,503
-------- --------
Inventories.................................................... $ 7,029 $ 6,622
======== ========
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
-------- --------
<S> <C> <C>
Land and land improvements..................................... $ 1,249 $ 1,376
Buildings and improvements..................................... 7,887 7,732
Machinery and equipment........................................ 28,544 22,104
Furniture and fixtures......................................... 3,969 3,417
Autos and trucks............................................... 3,026 2,550
Construction in progress....................................... 1,809 700
-------- --------
46,484 37,879
Less accumulated depreciation.................................. (16,675) (13,502)
-------- --------
Net property and equipment..................................... $ 29,809 $ 24,377
======== ========
</TABLE>
7. INVESTMENTS IN LICENSEES AND AFFILIATED COMPANIES
Investments in licensees and affiliated companies, all of which are
accounted for on the equity method, consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1993
------ ------
<S> <C> <C>
Partnership interests:
Midsouth Partners (15%).................................................. $ 466 $ 319
Enhansco Joint Venture (50%)............................................. 383 625
Corporations:
Insituform Brochier Rohrsanierungstechnik GmbH (33%)..................... 823 899
KA-TE Insituform AG (50%)................................................ 244 120
N.V. K -- Insituform S.A. (50%).......................................... 117 15
------ ------
Investments in licensees and affiliated companies.......................... $2,033 $1,978
====== ======
</TABLE>
F-14
<PAGE> 166
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summary unaudited combined financial data of the companies accounted for on
the equity method are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Current assets................................................ $13,226 $12,858 $11,766
Noncurrent assets............................................. 4,176 3,603 7,534
------- ------- -------
Total assets.................................................. 17,402 16,461 19,300
------- ------- -------
Current liabilities........................................... 10,388 10,696 8,763
Noncurrent liabilities........................................ 527 369 132
------- ------- -------
Total liabilities............................................. 10,915 11,065 8,895
------- ------- -------
Net assets.................................................... $ 6,487 $ 5,396 $10,405
======= ======= =======
Revenues...................................................... $42,745 $32,904 $38,284
======= ======= =======
Gross profit.................................................. $14,102 $11,688 $14,456
======= ======= =======
Net income.................................................... $ 1,602 $ 1,336 $ 3,690
======= ======= =======
Company's interest:
Share in net assets......................................... $ 1,799 $ 1,563 $ 1,836
======= ======= =======
Share in net income......................................... $ 409 $ 460 $ 997
======= ======= =======
</TABLE>
Enhansco Joint Venture
In March 1995, the Company sold its interest in the Enhansco Joint Venture
to its partner for $400,000, one-half of which is due three years after closing.
8. DISCONTINUED OPERATIONS
On December 30, 1993, the Company adopted a plan to discontinue the
operation of its division engaged in the off-site rehabilitation of downhole
tubulars for the oil and gas industry. The Company was unable to sell the
business during 1994. As a result, the Company has decided to liquidate the
division's assets, and during the fourth quarter a provision was made to write
down the assets to their estimated liquidation values and accrue the estimated
costs of closing the operation.
The loss from discontinued operations includes the following amounts (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1993 1992
------- ------- -----
<S> <C> <C> <C>
Loss from operations (less applicable income tax benefits of $0,
$592, and $278)............................................... $ -- $(1,145) $(540)
Estimated loss on disposal, including a provision of $1,427 and
$585, respectively, for losses during the phase-out period
(less applicable income tax benefits of $627 and $680)........ (1,164) (1,320) --
------- ------- -----
$(1,164) $(2,465) $(540)
======= ======= =====
</TABLE>
The division's revenues for the years ended December 31, 1994, 1993 and
1992 were $1,137,000, $1,889,000 and $216,000, respectively. The assets and
liabilities of the discontinued operations have been
F-15
<PAGE> 167
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reclassified on the balance sheet and principally consist of property and
equipment, patents, inventory and accrued losses during the phase-out period. At
December 31, 1993, net assets of discontinued operations of $566,000 are
included in miscellaneous other assets. Net liabilities of $500,000 at December
31, 1994 are included in accounts payable and accruals.
9. LINES OF CREDIT
IGL Canada and its subsidiary, Neptune Coring, Ltd., have obtained lines of
credit facilities aggregating C$3,900,000 (US$2,780,000) with Alberta Treasury
Branches ("ATB") which bear interest at ATB's prime rate (8.0% at December 31,
1994) plus 1/2%, are available through August 1995, and are collateralized by an
interest in the assets of IGL Canada (totaling C$17,079,000 [US$12,176,000] at
December 31, 1994). Outstanding balances under the lines were C$389,000
(US$277,000) at December 31, 1994. No balance was outstanding at December 31,
1993.
Insituform Permaline Ltd. ("Permaline") has a line of credit and overdraft
facility of L700,000 (US$1,095,000) with National Westminster Bank Plc
("NatWest") which bears interest at NatWest's base rate (6.25% at December 31,
1994) plus 2.0%, is available through January 1995, and is secured by
Permaline's real property and the Company's guarantee. At December 31, 1994, no
amounts were outstanding under this facility.
Insituform Japan KK ("Japan") also has a line of credit facility of
Y80,000,000 (US$832,000) with Fuji Bank which bears interest at Fuji Bank's base
rate (3.50% at December 31, 1994) and is available through December 1995. At
December 31, 1994, no amounts were outstanding under this facility.
10. ACCOUNTS PAYABLE AND ACCRUALS
Accounts payable and accruals consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1993
------- -------
<S> <C> <C>
Accounts payable -- trade................................................ $ 8,699 $ 8,353
Compensation............................................................. 2,887 1,119
Accrual for pending litigation and claims (Note 20)...................... 1,941 2,082
Billings in excess of costs and earnings (Note 4)........................ 1,112 346
Bank overdrafts.......................................................... 1,020 482
Warranty accrual......................................................... 925 356
Restructuring (Note 1)................................................... 685 1,365
Contingent consideration to former owners (Note 1)....................... -- 1,000
Miscellaneous (Note 8)................................................... 5,491 3,586
------- -------
Accounts payable and accruals............................................ $22,760 $18,689
======= =======
</TABLE>
F-16
<PAGE> 168
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
-------- -------
<S> <C> <C>
Long-term debt:
Third National Bank credit facility................................... $ 35,211 $30,000
8.5% senior subordinated note, payable in $1,000,000 installments
annually each July 1998 through 2001, with the entire remaining
balance due in July 2002 with interest quarterly (net of
unamortized discount of $329 and $388)............................. 4,671 4,612
Industrial revenue bond, payments ranging from $75,000 to $170,000
through January 2004, with interest at 90% of prime (prime was 8.5%
at December 31, 1994).............................................. 3,941 4,306
Industrial development bond, quarterly principal payments ranging from
$21,000 to $51,000 through January 2003, with interest at
approximately 79% of prime (prime was 8.5% at December 31, 1994)... 1,107 1,203
Deferred purchase consideration:
Promissory notes to former shareholders, payable $5,000,000 in October
1995 with balance due October 1996, interest payable quarterly at
lesser of prime (currently 8.5%) or LIBOR + 2.75%, secured by
pledge of assets of the acquired companies......................... 9,000 --
Promissory notes payable to affiliates of former shareholders of Gelco
companies, payable in two equal installments in October 1996 and
1997, with interest payable quarterly at lesser of prime or LIBOR +
2.75%.............................................................. 2,850 --
Obligation, secured by stand-by letter of credit, due December 31,
1994, with interest at prime....................................... 1,050 1,050
Other notes........................................................... 1,089 1,805
-------- -------
58,919 42,976
Less current maturities................................................. (11,572) (6,679)
-------- -------
Long-term debt.......................................................... $ 47,347 $36,297
======== =======
</TABLE>
In July 1993, the Company obtained from Third National a credit facility
initially providing for advances of up to $30,000,000. Borrowings under this
facility bear interest, payable quarterly at the lesser of (i) Third National's
prime rate (8.5% at December 31, 1994) or (ii) 2.75% above the 30-day adjusted
London Inter-Bank Offer Rate ("LIBOR") (or subsequent to December 31, 1994, at
2.25% above LIBOR if the Company maintains certain financial ratios). Quarterly
principal payments of $1,072,000 are required with the remaining principal due
December 31, 1997. This facility is guaranteed by certain of the Company's
domestic subsidiaries and was utilized to fund the acquisitions of Naylor and
Midwest (see Note 1).
In August 1994, the Third National Bank agreement was amended to provide
for an increase in the facility of up to $12,000,000 (as later reduced).
Borrowings under this increased facility bear interest, payable monthly through
August 1995 and, thereafter, together with each principal payment, in accordance
with the same terms as the $30,000,000 facility. Additional quarterly principal
payments of $339,000 are required to commence in September 1995. This increased
facility was utilized to fund the acquisition of the Gelco companies (see Note
1).
Under the terms of the Third National Bank agreement, the Company is
required to comply with covenants restricting the distribution of dividends,
purchase of additional investments, and incurrence of additional debt.
Essentially all of the Company's retained earnings at December 31, 1994 are
restricted under such covenants.
F-17
<PAGE> 169
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 8.5% senior subordinated note is subordinated in right to the Company's
bank and other institutional financing and to deferred consideration incurred in
connection with business acquisitions. As discussed in Note 13, warrants to
purchase 350,877 unregistered shares of Common Stock were also issued to the
lender. The note is prepayable at the Company's option after July 1995, at
premiums until July 1998 ranging from 3% to 1% of the amount prepaid, and is
subject to defeasance in certain circumstances. The subordinated note also
restricts the Company's ability to pay dividends and repurchase outstanding
common stock.
The industrial revenue bond may be called by the holder, an institutional
purchaser, in 1999 or each year thereafter until maturity. Property and
equipment with a net book value of approximately $3,500,000 is pledged to
collateralize these bonds. These bonds also restrict the Company's ability to
pay dividends.
Principal payments required to be made for each of the next five years and
thereafter are summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
--------------------- -------
<S> <C>
1995............................................. $11,572
1996............................................. 11,915
1997............................................. 27,064
1998............................................. 1,546
1999............................................. 603
After 1999....................................... 6,219
-------
Total............................................ $58,919
=======
</TABLE>
12. REDEEMABLE PREFERRED STOCK
The Board of Directors has designated 200,000 shares of the Company's
preferred stock as Series C cumulative, non-voting preferred stock. Each share
carries a semi-annual dividend rate of $5.40 and is redeemable five years after
issuance for $200 per share, plus any accrued but unpaid dividends. In October
1994, all outstanding shares were redeemed and retired (see Note 15). At
December 31, 1994, no shares of Series C preferred stock were outstanding.
13. COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
The Company has granted stock options to certain officers, directors,
employees and other stockholders. The exercise price is typically the fair
market value on the date the option is granted. Options generally expire up to
five years from the date of grant. Options to purchase 300,000 shares, issued to
the Company's chief executive officer, are exercisable 50,000 at the date of
grant and the remainder commencing three years from the grant date.
F-18
<PAGE> 170
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in options outstanding are summarized as follows:
<TABLE>
<CAPTION>
OPTION PRICE
PER SHARE
SHARES $
---------- --------------
<S> <C> <C>
BALANCE, December 31, 1991............................... 1,017,716 2.875-19.125
Granted.................................................. 176,490 9.23 -10.36
Exercised................................................ (133,324) 3.625-19.125
Cancelled................................................ (133,977) 3.625-19.125
---------- --------------
BALANCE, December 31, 1992............................... 926,905 2.875-19.125
Granted.................................................. 712,885 9.68 -25.00
Exercised................................................ (281,357) 3.625-19.125
Cancelled................................................ (29,935) 3.625-25.00
---------- --------------
BALANCE, December 31, 1993............................... 1,328,498 2.875-25.00
Granted.................................................. 187,600 13.31 -14.125
Exercised................................................ (30,448) 3.625- 8.125
Cancelled................................................ (199,900) 2.875-25.00
---------- --------------
BALANCE, December 31, 1994............................... 1,285,750 3.625-25.00
========= ============
</TABLE>
At December 31, 1994, 2,259,627 shares of Common Stock were reserved
pursuant to stock options and warrants. Options for 898,071 shares were
currently exercisable.
In July 1993, the Company issued to Hanseatic Corporation warrants to
purchase 350,877 unregistered shares of Common Stock in connection with the
issuance of subordinated debt (see Note 11). The warrants are exercisable at
$14.25 per share and expire on July 26, 1998. Paul Biddelman, a director of the
Company, is Treasurer of Hanseatic.
14. NOTES RECEIVABLE FROM AFFILIATES
On July 3, 1992, ITI, Ringwood Limited ("Ringwood"), Parkwood Limited
("Parkwood") and Douglas K. Chick and Brian Chandler entered into an agreement
whereby Messrs. Chick and Chandler and Ringwood executed a secured non-recourse
promissory note in the amount of $3,624,000 which bears interest at Citibank's
prime rate plus 2 1/2% (11.0% at December 31, 1994) and is due July 3, 1995. As
security for the note, Ringwood and Messrs. Chick and Chandler have pledged to
ITI 255,801 shares of ITI's stock beneficially owned by them. Messrs. Chandler
and Chick are directors of ITI.
15. LICENSEES
The Company markets the Insituform Process and the NuPipe Process in
selected territories by utilization of licensees.
The Insituform Process license agreements require royalty payments based
upon 5% to 9% (generally 8% in the U.S.) of the gross contract price, as
defined, often with varying minimum annual royalties. In the event any domestic
licensee has, for any year, produced to the Company an acceptable plan for
marketing and sales penetration, minimum royalties otherwise established for
such year may be waived, subject to the achievement of performance objectives
established with respect to the utilization of the Company's trenchless
rehabilitation processes.
In addition to an initial license fee, the NuPipe Process license
agreements require continuing royalty payments based upon 6.75% to 8% of the
gross contract price, as defined.
F-19
<PAGE> 171
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The former stockholders of NuPipe, Inc. were entitled to receive 35% of the
royalty income collected by the Company in connection with the NuPipe technology
acquired by the Company in 1988. In March 1995, the Company exercised an option,
granted in October 1994, to acquire such parties' interest in such payments in
exchange for issuance of the Company's promissory notes aggregating $1,000,000.
The notes are payable in quarterly installments over three years and bear
interest at 5.4% per annum.
16. OTHER INCOME (EXPENSE)
Other income (expense) is comprised of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993 1992
----- ----- ------
<S> <C> <C> <C>
Investment income................................................. $ 959 $ 824 $1,925
Foreign currency transaction gain................................. 97 58 924
Costs associated with abandoned common stock offering............. -- (276) --
Miscellaneous..................................................... (344) 234 255
----- ----- ------
$ 712 $ 840 $3,104
===== ===== ======
</TABLE>
17. TAXES ON INCOME
Effective January 1, 1993, the Company adopted FAS 109. As permitted by FAS
109, the Company has elected to not restate prior periods' consolidated
financial statements. Except for the cumulative effect of the accounting change
of $218,000, or $.02 per share, the application of this statement had no
material effect on the 1993 results of operations.
Deferred federal income taxes are not provided on the unremitted earnings
of foreign subsidiaries since it has been the practice and is the intention of
the Company to continue to reinvest these earnings in the business outside the
United States. The cumulative amount of unremitted foreign earnings at December
31, 1994 was approximately $6,900,000. It is not practicable to estimate the
amount of the unrecognized deferred tax liability on such earnings.
F-20
<PAGE> 172
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net deferred tax assets consisted of the following (in thousands) at
December 31:
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards....................................... $ 4,924 $ 5,097
Foreign tax credit carryforwards....................................... 1,397 680
Accrued compensation................................................... 594 123
Inventory valuation.................................................... 241 139
Accrual for pending litigation and claims.............................. 738 791
Estimated loss on disposal of discontinued operation................... 880 680
Warranty accrual....................................................... 433 72
Other.................................................................. 254 196
------- -------
Gross deferred income tax assets......................................... 9,461 7,778
Valuation allowance...................................................... (3,404) (2,335)
------- -------
Total deferred income tax assets......................................... 6,057 5,443
------- -------
Deferred income tax liabilities:
Depreciation........................................................... (2,445) (2,206)
Deferred revenue....................................................... (431) (502)
Unrealized holding gains on investments, available-for-sale............ (268) --
Other.................................................................. (150) (320)
------- -------
Total deferred income tax liabilities.................................... (3,294) (3,028)
------- -------
Net deferred income tax assets........................................... $ 2,763 $ 2,415
======= =======
</TABLE>
Income (loss) from continuing operations before taxes on income is as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Domestic...................................................... $15,096 $11,280 $ 2,610
Foreign....................................................... 1,013 (758) (4,807)
------- ------- -------
Totals........................................................ $16,109 $10,522 $(2,197)
======= ======= =======
</TABLE>
F-21
<PAGE> 173
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Provisions for taxes on income from continuing operations consist of the
following components (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Current:
Federal........................................................ $4,887 $2,024 $1,800
Foreign........................................................ 914 1,226 1,582
State.......................................................... 670 254 156
------ ------ ------
6,471 3,504 3,538
------ ------ ------
Current tax benefit related
to exercise of stock options................................... 84 844 784
------ ------ ------
Deferred:
Federal........................................................ (454) (473) 310
Foreign........................................................ 127 (162) (386)
State.......................................................... (88) 24 (23)
Adjustments to beginning of year valuation allowance........... -- (423) --
------ ------ ------
(415) (1,034) (99)
------ ------ ------
Total taxes on income............................................ $6,140 $3,314 $4,223
====== ====== ======
</TABLE>
The effective tax rate was different than the U.S. federal statutory tax
rate. The following summary reconciles taxes at the maximum U.S. federal
statutory tax rate with the effective rates:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
---- ---- -------
<S> <C> <C> <C>
Income taxes at U.S. federal statutory tax rate..................... 34.0% 34.0% 34.0%
Increase (decrease) in taxes resulting from:
State income taxes, net of federal income tax benefit............. 2.4 2.3 (6.5)
Effect of foreign income taxed at foreign rates................... 0.1 (0.8) 9.3
Tax amortization of intangibles................................... (4.9) (7.2) --
Tax benefit not currently recognizable on losses of
subsidiaries................................................... 0.8 3.1 (66.5)
Merger costs capitalized for tax purposes......................... -- -- (148.4)
Merger-related taxes.............................................. -- -- (16.4)
Utilization of net operating losses............................... -- (4.0) 14.3
Other items....................................................... 5.7 4.1 (12.0)
---- ---- -------
Total taxes on income............................................... 38.1% 31.5% (192.2)%
==== ==== =======
</TABLE>
F-22
<PAGE> 174
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain of the Company's subsidiaries have available tax operating loss
carryforwards utilizable to the extent of such subsidiaries' future taxable
income as follows:
<TABLE>
<CAPTION>
EXPIRATION
SUBSIDIARY JURISDICTION DATE
------------------------------------------------------- ------------ AMOUNT ----------
--------------
(IN THOUSANDS)
<S> <C> <C> <C>
Insituform California, Inc. ........................... US $1,938 1995 to
1999
H.T. Schneider, Inc. .................................. US $1,206 2007
NuPipe, Ltd. .......................................... UK $4,776 Indefinite
Insituform Permaline Limited........................... UK $3,276 Indefinite
Insituform Technologies Ltd. .......................... UK $1,108 Indefinite
Insituform Technical Services, Ltd. ................... UK $ 925 Indefinite
Insituform Overseas Limited............................ UK $ 155 Indefinite
Drain 2000 Ltd. ....................................... UK $ 51 Indefinite
IGL Canada Limited..................................... Canada $ 683 1997 to
2000
Mar-Tech Insituform Ltd. .............................. Canada $ 69 1999
</TABLE>
18. MAJOR CUSTOMER
In 1994, the City of Houston, Texas accounted for 11.6% of total revenues.
No customer provided 10% of the Company's revenues in 1993 or 1992.
19. SEGMENT AND GEOGRAPHIC INFORMATION
The Company's continuing operations include the following reportable
segments:
"Pipeline Technology" -- includes licensing, selling and servicing
trenchless, onsite pipeline reconstruction technology and products.
"Construction" -- includes the installation of trenchless pipeline
reconstruction materials as well as nontrenchless pipeline construction.
Operating profit (loss) by business segment and by geographic area are
defined as revenues less operating costs and expenses. Income and expense not
allocated to business segments or geographic areas include investment income and
corporate expenses.
Identifiable assets are those assets used exclusively in the operations of
each business segment or geographic area, or which are allocated, when used
jointly. Corporate assets are principally comprised of cash equivalents and
investments.
F-23
<PAGE> 175
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial information by industry segment is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1993 1992
-------- -------- -------
<S> <C> <C> <C>
PIPELINE TECHNOLOGY
Revenues:
Unaffiliated companies................................. $ 38,537 $ 37,555 $42,323
Intersegment........................................... 27,895 17,224 7,908
-------- -------- -------
Total revenues............................................ 66,432 54,779 50,231
-------- -------- -------
Operating income.......................................... 25,582 17,066 4,317
Identifiable assets....................................... 25,020 27,195 32,542
Capital expenditures...................................... 950 709 1,069
Depreciation and amortization............................. 1,465 1,387 2,036
CONSTRUCTION
Revenues.................................................. $109,710 $ 62,953 $53,236
Operating income (loss)................................... 1,289 (2,003) (534)
Identifiable assets....................................... 116,699 84,862 41,091
Capital expenditures...................................... 7,981 4,011 4,168
Depreciation and amortization............................. 5,656 4,295 1,299
ELIMINATIONS AND CORPORATE ITEMS
Revenues.................................................. $(27,895) $(17,224) $(7,908)
Operating loss............................................ (8,322) (4,030) (8,848)
Identifiable assets....................................... 20,775 17,118 13,746
Capital expenditures...................................... 88 552 836
Depreciation and amortization............................. 395 622 622
CONSOLIDATED
Revenues.................................................. $148,247 $100,508 $95,559
Operating income (loss)................................... 18,549 11,033 (5,065)
Identifiable assets....................................... 162,494 129,175 87,379
Capital expenditures...................................... 9,019 5,272 6,073
Depreciation and amortization............................. 7,516 6,304 3,957
Financial information by geographic area is as follows (in thousands):
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1993 1992
-------- -------- -------
<S> <C> <C> <C>
UNITED STATES
Revenues:
Unaffiliated companies................................. $104,061 $ 61,325 $39,216
Between geographic areas............................... 23,476 11,830 6,974
-------- -------- -------
Total revenues............................................ 127,537 73,155 46,190
-------- -------- -------
Operating income.......................................... 16,782 12,476 6,258
Identifiable assets....................................... 130,658 98,453 41,576
</TABLE>
F-24
<PAGE> 176
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
CANADA
Revenues:
Unaffiliated companies................................ $ 19,934 $ 18,915 $ 30,457
Between geographic areas.............................. 1,190 967 92
-------- -------- --------
Total revenues........................................... 21,124 19,882 30,549
-------- -------- --------
Operating income......................................... 496 492 120
Identifiable assets...................................... 13,521 11,798 13,604
EUROPE, ASIA AND AUSTRALIA
Revenues:
Unaffiliated companies................................ $ 24,252 $ 20,268 $ 25,886
Between geographic areas.............................. 3,063 4,427 842
-------- -------- --------
Total revenues........................................... 27,315 24,695 26,728
-------- -------- --------
Operating income (loss).................................. 9,883 2,095 (2,595)
Identifiable assets...................................... 13,438 13,533 21,068
ELIMINATIONS AND CORPORATE ITEMS
Revenues:
Between geographic areas.............................. $(27,729) $(17,224) $ (7,908)
Operating loss........................................... (8,612) (4,030) (8,848)
Identifiable assets...................................... 4,877 5,391 11,131
CONSOLIDATED
Revenues................................................. $148,247 $100,508 $ 95,559
Operating income (loss).................................. 18,549 11,033 (5,065)
Identifiable assets...................................... 162,494 129,175 87,379
</TABLE>
20. COMMITMENTS AND CONTINGENCIES
A. LEASES
The Company leases a number of its administrative operations facilities
under noncancellable operating leases expiring at various dates through 2020. In
addition, the Company also leases certain construction and automotive equipment
on a multi-year, monthly, or daily basis. Rent expense under all operating
leases for 1994, 1993 and 1992 was $3,326,000, $1,599,000 and $2,002,000,
respectively.
F-25
<PAGE> 177
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1994, the future minimum lease payments required under the
noncancellable operating leases were as follows (in thousands):
<TABLE>
<CAPTION>
MINIMUM
LEASE
YEAR ENDING DECEMBER 31, PAYMENTS
------------------------------------------------- -------
<S> <C>
1995........................................ $ 2,167
1996........................................ 1,905
1997........................................ 1,622
1998........................................ 1,285
1999........................................ 1,023
After 1999.................................. 8,040
-------
Total....................................... $16,042
=======
</TABLE>
B. EMPLOYMENT AGREEMENTS
The Company and certain of its subsidiaries have employment contracts with
various officers with remaining terms ranging from six months to four years at
amounts approximating their current levels of compensation. The companies'
minimum aggregate commitment at December 31, 1994 under such contracts is
approximately $3,647,000.
C. LITIGATION
A shareholder of the Company has filed an action in the United States
District Court for the Western District of Tennessee against the Company and one
former and one current officer alleging various misstatements and omissions,
relating to, among other things, acquisition and restructuring costs arising
from the IGL Acquisition in December 1992, in public disclosures by the Company
during the period from October 28, 1992 to May 12, 1993 in violation of, among
other things, Rule 10b-5 under the Securities Exchange Act of 1934. The
plaintiff seeks to maintain the action as a class action on behalf of all
purchasers of the Company's Common Stock during such period and to recoup
damages in an unspecified amount. On September 30, 1994, the court ruled on the
Company's motion to dismiss the first amended complaint, granting in part and
denying in part the Company's motion. The Court further granted plaintiffs leave
to amend their complaint insofar as defective from a pleading perspective. The
Company has filed an answer to the complaint as so amended, denying its material
allegations. Plaintiff's motion for class certification has been fully briefed
and the motion is pending before the court. The court has entered a scheduling
order which establishes a trial date in November 1995. Plaintiff's counsel has
recently tendered a settlement proposal entailing a sum which could be material
to the Company's consolidated financial statements. Although the Company has
rejected the proposal, settlement discussions are continuing. While it is not
possible to render an opinion as to the outcome of this litigation or its effect
on the Company's consolidated financial statements, and notwithstanding the
Company's consideration of a settlement of the litigation upon reasonable
financial terms, the Company continues to believe that, it has defenses to the
plaintiff's claim that are well grounded in fact and law, and, based upon such
belief, does not currently anticipate any material adverse effect from this
litigation on the financial position of the Company.
Prior to its acquisition by the Company, Naylor sold all of the common
stock of Naylor Industrial Services, Inc. ("NISI"), which provided industrial
cleaning services to refineries and chemical and petrochemical manufacturing
plants. As part of such sale, Naylor agreed to indemnify the purchaser for
certain pending or threatened litigation claims that were known to Naylor as of
the date of sale. Among other matters, NISI is one of approximately 181
defendants in approximately 3,029 plaintiff cases, collectively known as the
Lone Star Steel litigation, pending in Morris County, Texas, in which plaintiffs
allege
F-26
<PAGE> 178
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unspecified damages against defendants, who supplied services or products to
Lone Star Steel over a period in excess of 40 years, arising from the alleged
exposure of Lone Star's workers to toxic and hazardous circumstances.
Naylor, among approximately 210 other parties, has been served with a third
party complaint by McDermott, Inc. ("McDermott") in a class action filed by more
than 1,200 plaintiffs (on behalf of a potential class of over 8,000 plaintiffs)
against 84 defendants, including McDermott. Plaintiffs seek damages resulting
from alleged exposure to an escape of hazardous substances from an oil
reclamation facility. McDermott's third party complaints seek, among other
things, clean-up costs under the Comprehensive Environmental Response,
Compensation and Liability Act and tort contribution and indemnity. Based on
available facts, it appears that McDermott has substantial defenses to
plaintiff's claims, and it is probable that Naylor's exposure is limited to a
pro rata or proportionate share of McDermott's liability, if any.
The financial statements include the estimated amounts of liabilities that
are likely to be incurred from these and various other pending Naylor litigation
and claims.
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 or
results of operations.
D. RETIREMENT PLANS
The Company and certain domestic subsidiaries maintain profit
sharing/401(k) plans which cover substantially all eligible domestic employees.
Company profit sharing contributions are discretionary. Under the terms of its
401(k) features, the Plan also provides for the Company to contribute 50% of the
participating employee's contribution, subject to limitation. Certain recently
acquired domestic subsidiaries have continued to maintain their pre-existing
profit sharing plans until such time as their employees can be added to the
Company's Plan. Total contributions to the domestic plans were $715,000,
$535,000 and $321,000 for the years ended December 31, 1994, 1993 and 1992,
respectively.
In addition, certain foreign subsidiaries maintain various other defined
contribution retirement plans. Company contributions to such plans for the years
ended December 31, 1994, 1993 and 1992 were $125,000, $197,000 and $225,000,
respectively.
E. OTHER
Guarantees have been issued by the Company in support of its subsidiaries
as described in the following paragraphs.
Naylor has outstanding letter of credit commitments totaling $2,700,000
from Texas Commerce Bank to its insurance carriers. Cash equivalents totaling
$2,877,000 are pledged to secure these commitments at December 31, 1994.
At December 31, 1994, Insituform Permaline has outstanding performance
bonds aggregating L204,264 (US$320,000).
In November 1991, the Company, through its subsidiary, Pipe Rehab
International, Inc., acquired certain patents and patent applications from
Plastic Lining Systems, Inc. ("PLS"). Under terms of the purchase agreement, as
amended in April 1994, subsequent to an initial grace period, the Company agreed
to pay PLS amounts ranging from 10% to 15% of royalties imposed on the Company's
licensees for certain uses of the technology purchased under the agreement and
5% to 10% of initial license fees for use of the assets purchased. The Company
incurred no royalty expense under this agreement in 1994, 1993 or 1992.
Subsequent to such grace period, payments will also be made to PLS based on the
footage, or diameter inch per linear foot, of pipe lined using the purchased
technology at graduated rates ranging from $.04 to $.20, and
F-27
<PAGE> 179
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3% to 5% of net sales of certain product manufactured by the Company in each
case for 15 years or the expiration of the patents, whichever is later.
21. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
For financial instruments bearing a variable interest rate, it is presumed
that recorded book values are reasonable estimates of fair value. For all other
financial instruments, the following methods and assumptions are used to
estimate fair values:
CASH AND CASH EQUIVALENTS, RECEIVABLES, ACCOUNTS PAYABLE AND ACCRUED
EXPENSES -- Recorded book values are a reasonable estimate of fair value.
INVESTMENTS IN SECURITIES -- Quoted market prices for the specific
instruments owned, or for similar securities, are used to determine estimated
fair value.
LONG-TERM DEBT -- Current market values for debt instruments with fixed
interest rates are estimated based on borrowing rates currently available to the
Company for loans with similar terms. At December 31, 1994, the estimated fair
value of debt instruments with fixed interest rates was approximately $4,200,000
as compared with carrying value of such instruments of $4,671,000.
The remaining assets and liabilities of the Company are not considered
financial instruments and have not been valued differently than is customary
under historical cost accounting.
22. SUBSEQUENT EVENTS
On February 16, 1995, the Company acquired 66% of the common stock of
Insituform France, S.A., a newly formed subsidiary of its former French
licensee, for FF7,400,000 (US$1,463,000).
F-28
<PAGE> 180
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
23. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Year ended December 31, 1994:
Revenues $30,481 $31,802 $40,947 $45,017
Gross profit 11,249 11,638 15,068 15,663
Income from continuing operations 1,471 2,172 3,619 2,532
Loss from discontinued operations (Note 8) -- -- -- (1,164)
Net income 1,471 2,172 3,619 1,368
Earnings per share of common stock and common
stock equivalents:
Income from continuing operations .10 .15 .25 .18
Loss from discontinued operations -- -- -- (.08)
Net income .10 .15 .25 .10
Year ended December 31, 1993:
Revenues 16,078 20,778 32,198 31,454
Gross profit 7,898 8,542 13,603 10,399
Income from continuing operations 2,614 1,409 2,953 284
Loss from discontinued operations (Note 8) (380) (336) (253) (1,496)
Cumulative effect of accounting change 218 -- -- --
Net income (loss) 2,452 1,073 2,700 (1,212)
Earnings per share of common stock and common
stock equivalents:
Income from continuing operations .18 .10 .21 .02
Loss from discontinued operations (.03) (.02) (.02) (.11)
Cumulative effect of accounting change .02 -- -- --
Net income (loss) .17 .08 .19 (.09)
</TABLE>
F-29
<PAGE> 181
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1994
JUNE 30, 1995 -----------------
-------------
(UNAUDITED)
<S> <C> <C>
(IN THOUSANDS)
ASSETS
CURRENT
Cash and cash equivalents, restricted $1,390 and $3,836...... $ 10,553 $ 16,635
Investments in securities.................................... 1 1,107
Receivables (Note 4)......................................... 34,936 35,243
Costs and estimated earnings in excess of billings........... 9,482 6,422
Inventories (Note 5)......................................... 8,197 7,029
Deferred income taxes........................................ 2,256 2,807
Prepaid expenses and miscellaneous (Note 12)................. 5,477 2,496
------------- -----------------
TOTAL CURRENT ASSETS........................................... 70,902 71,739
------------- -----------------
PROPERTY AND EQUIPMENT, less accumulated depreciation and
amortization (Note 6)........................................ 30,646 29,809
------------- -----------------
OTHER ASSETS
Investments in licensees and associated companies (Note 2)... 1,940 2,033
Patents and patent applications, less accumulated
amortization of $2,062 and $1,909......................... 5,780 5,606
Cost in excess of net assets of businesses acquired, less
accumulated amortization of $5,014 and $3,838 (Notes 2 and
3)........................................................ 50,326 49,995
Deferred income taxes........................................ 1,586 1,417
Miscellaneous................................................ 3,640 1,895
------------- -----------------
TOTAL OTHER ASSETS............................................. 63,272 60,946
------------- -----------------
$ 164,820 $ 162,494
========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE> 182
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1994
JUNE 30, 1995 -----------------
-------------
(UNAUDITED)
<S> <C> <C>
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks................................. $ 880 $ 277
Accounts payable and accruals (Note 8)................. 20,636 22,760
Income taxes payable (Note 9).......................... 1,945 3,801
Deferred income taxes.................................. 536 524
Current maturities of long-term debt (Note 10)......... 6,405 11,572
------------- -----------------
TOTAL CURRENT LIABILITIES................................ 30,402 38,934
Long-term debt, less current maturities (Note 10)........ 53,131 47,347
Deferred income taxes.................................... 1,073 937
------------- -----------------
TOTAL LIABILITIES........................................ 84,606 87,218
------------- -----------------
Commitments and contingencies (Notes 10, 11 and 12)
Minority interests....................................... 2,345 1,352
------------- -----------------
COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
Preferred stock, $.10 par -- shares authorized
2,000,000; none outstanding......................... 0 0
Common stock, $.01 par -- shares authorized 25,000,000;
shares outstanding 14,437,657 and 14,346,005........ 144 143
Additional paid-in capital............................. 45,867 44,937
Retained earnings (Note 10)............................ 36,295 33,300
------------- -----------------
82,306 78,380
Cumulative foreign currency translation adjustments.... (813) (1,270)
Unrealized holding gains on investments
available-for-sale (Note 2)......................... 0 438
Notes receivable from affiliates (Note 7).............. (3,624) (3,624)
------------- -----------------
TOTAL COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY........ 77,869 73,924
------------- -----------------
$ 164,820 $ 162,494
============ =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE> 183
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
---------------------
1995 1994
------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
REVENUES:
Net sales............................................................ $13,165 $14,311
Royalties and license fees........................................... 5,761 5,337
Construction contracts............................................... 64,520 42,635
------- -------
TOTAL REVENUES......................................................... 83,446 62,283
------- -------
OPERATING COSTS AND EXPENSES:
Cost of sales........................................................ 8,464 8,636
Royalty expense (Note 10)............................................ 106 89
Cost of construction contracts....................................... 44,673 30,671
Selling, administrative and general.................................. 17,254 13,448
Strategic marketing and product development.......................... 3,315 2,964
------- -------
TOTAL OPERATING COSTS AND EXPENSES..................................... 73,812 55,808
------- -------
OPERATING INCOME....................................................... 9,634 6,475
OTHER INCOME (EXPENSE)
Litigation settlement (Note 11)...................................... (3,598) 0
Realized gain on disposal of investment (Note 2)..................... 755 0
Other expense........................................................ (1,940) (853)
------- -------
TOTAL OTHER EXPENSE.................................................... (4,783) (853)
------- -------
INCOME BEFORE TAXES ON INCOME.......................................... 4,851 5,622
TAXES ON INCOME (NOTE 9)............................................... 1,911 2,035
------- -------
INCOME BEFORE MINORITY INTERESTS AND EQUITY IN EARNINGS OF AFFILIATED
COMPANIES............................................................ 2,940 3,587
MINORITY INTERESTS..................................................... (260) (216)
EQUITY IN EARNINGS OF AFFILIATED COMPANIES............................. 315 272
------- -------
NET INCOME............................................................. $ 2,995 $ 3,643
======= =======
EARNINGS PER SHARE OF COMMON STOCK AND COMMON STOCK EQUIVALENTS (NOTE
2):
NET INCOME........................................................... $ 0.21 $ 0.25
======= =======
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING..................................... 14,442 14,412
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE> 184
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
---------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME............................................................. $ 2,995 $ 3,643
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED (USED) BY
OPERATING ACTIVITIES:
Depreciation and amortization........................................ 3,893 3,708
Provision for losses on accounts receivable.......................... (45) (89)
Undistributed earnings of affiliated companies....................... (315) (272)
Loss on disposals of property and equipment.......................... 217 173
Gain on disposals of investments..................................... (772) 0
Minority interest in net income...................................... 261 216
Royalties paid with redeemable preferred stock....................... 0 41
Deferred income taxes................................................ 92 (260)
Translation adjustments.............................................. 457 273
CHANGES IN OPERATING ASSETS AND LIABILITIES (NET OF EFFECT OF
BUSINESSES PURCHASED):
Receivables.......................................................... (1,118) (2,304)
Inventories.......................................................... (1,168) (496)
Prepaid expenses and miscellaneous................................... (1,921) (674)
Miscellaneous other assets........................................... (1,060) 241
Accounts payable and accruals........................................ (1,887) (1,290)
Income taxes payable................................................. (2,511) 3,240
------- -------
NET CASH PROVIDED (USED) BY CONTINUING OPERATIONS...................... (2,882) 6,150
------- -------
NET CASH USED BY DISCONTINUED OPERATIONS............................... (85) (426)
------- -------
NET CASH PROVIDED (USED) BY OPERATIONS................................. (2,967) 5,724
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................. (2,695) (3,190)
Proceeds on disposal of property and equipment....................... 365 136
Investments in licensees/affiliated companies........................ 443 284
Patents and patent applications...................................... (338) (392)
Purchase of businesses, net of cash acquired (Note 3)................ (1,431) 0
------- -------
NET CASH USED BY INVESTING ACTIVITIES.................................. (3,656) (3,162)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock............................... 649 32
Increase in short-term borrowings.................................... 597 48
Net repayments of long-term debt..................................... (647) (2,539)
Dividends paid by subsidiary to minority interests................... (156) (147)
------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES....................... 443 (2,606)
------- -------
Effect of exchange rates changes on cash............................... 98 175
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE PERIOD.... (6,082) 131
------- -------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......................... 16,635 15,662
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................... $10,553 $15,793
======= =======
(Continued)
</TABLE>
F-33
<PAGE> 185
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
---------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
CASH PAID (RECEIVED) DURING THE SIX MONTHS ENDED JUNE 30, FOR:
Interest............................................................. $ 2,549 $ 1,463
Income taxes......................................................... 3,990 (985)
NON-CASH INVESTING AND FINANCING ACTIVITIES
Additional paid-in capital increased by a reduction in income taxes
payable for tax benefit arising from exercise of stock options.... $ 282 $ 25
Common stock issued in connection with purchase of business (Note
3)................................................................ 0 1,000
Deferred consideration in connection with royalty termination
agreement (Note 10)............................................... 1,000 0
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE> 186
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1995
1. In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of June 30, 1995
(unaudited) and the unaudited results of operations and cash flows for the six
months ended June 30, 1995 and 1994. 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 set forth
elsewhere in this Joint Proxy Statement/Prospectus.
Reclassifications of prior period amounts have been made to conform with
current period presentation.
The results of operations for the six months ended June 30, 1995 and 1994
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 subsidiary,
Insituform Linings Plc, a United Kingdom company, and a two-thirds owned
subsidiary, Insituform France S.A. 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 "Costs in excess of net
assets of businesses acquired."
The Company classifies investments in equity securities that have readily
determinable fair values and all investments in debt securities as
available-for-sale. These investments are reported at fair value, with
unrealized gains and loss excluded from earnings and reported in a separate
component of stockholders' equity. In April 1995, the Company realized a gain on
the disposal of its investment in Enviroq Corporation (renamed IMA Merger Sub,
Inc.; "Enviroq") of approximately $.8 million, as a result of the acquisition
(the "Enviroq Acquisition") of the pipeline rehabilitation business of Enviroq
by Insituform Mid-America, Inc. ("IMA").
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.
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 21, 1994, the Company acquired all of the outstanding common
stock of Gelco Services, Inc., Gelco NuPipe, Inc., GelTech Constructors, Inc.
and Mar-Tech Insituform Ltd. (collectively, the "Gelco companies"), the
Company's licensees of the Insituform and NuPipe processes in Oregon,
Washington, Idaho, Alaska, Hawaii, Guam, northern California and northern
Nevada, portions of Montana and British Columbia. In addition, the Company
acquired related assets of an affiliated company. The purchase price of
F-35
<PAGE> 187
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
$18,000,000 was paid $9,000,000 in cash, together with promissory notes
aggregating $9,000,000 due on the first and second anniversaries of the closing
date. In addition, the Company issued promissory notes aggregating $2,850,000,
representing net current liabilities (as defined) of the acquired Gelco
companies to related parties and a portion of working capital at closing.
The following table presents summarized consolidated unaudited pro forma
results of operations for the six months ended June 30, 1994 as if the
acquisition of the Gelco companies had occurred at the beginning of the year.
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 date indicated or which may be obtained in
the future (in thousands):
<TABLE>
<S> <C>
Total revenues..................................... $70,569
Income from continuing operations.................. 4,255
Income from continuing operations per common and
common equivalent share.......................... 0.30
</TABLE>
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 (US$1,431,000). The purchase price was funded by the
Company's debt facility with Third National Bank in Nashville (see Note 10).
4. Receivables consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
-------- ------------
<S> <C> <C>
Trade, less allowance for possible losses of $593 and $638.... $ 28,224 $ 29,002
Retainage under construction contracts........................ 5,034 6,167
Refundable income taxes....................................... 1,678 74
-------- ------------
$ 34,936 $ 35,243
======= ==========
</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>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
--------- ------------
<S> <C> <C>
Finished goods............................................... $ 659 $ 765
Work-in-process.............................................. 578 418
Construction materials....................................... 4,030 3,153
Raw materials................................................ 2,930 2,693
--------- ------------
$ 8,197 $7,029
======= ==========
</TABLE>
F-36
<PAGE> 188
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
6. Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
--------- ------------
<S> <C> <C>
Land and land improvements................................... $ 1,196 $ 1,249
Buildings.................................................... 8,068 7,887
Machinery and equipment...................................... 31,758 28,544
Furniture and fixtures....................................... 4,434 3,969
Autos and trucks............................................. 3,270 3,026
Construction in progress..................................... 1,852 1,809
--------- ------------
50,578 46,484
Less: Accumulated depreciation............................... (19,932) (16,675)
--------- ------------
$ 30,646 $ 29,809
======== ==========
</TABLE>
7. On July 3, 1992, Ringwood Limited ("Ringwood"), Parkwood Limited
("Parkwood"), and Douglas Chick and Brian Chandler entered into an agreement
whereby Messrs. Chick and Chandler and Ringwood executed a secured non-recourse
promissory note in the amount of $3,624,000 which bears interest at Citibank's
prime rate plus 2 1/2% and originally was due July 3, 1995. As security for the
note, Ringwood and Messrs. Chick and Chandler have pledged to the Company
255,801 shares of the Company's stock beneficially owned by them. Parkwood,
Ringwood and Messrs. Chandler and Chick are principal stockholders of the
Company, and Messrs. Chandler and Chick are directors of the Company. On May 21,
1995, the Company extended the maturity date of the note to July 3, 1996
pursuant to prior authorization by its Board of Directors.
8. On December 30, 1993, the Company adopted a plan to discontinue the
operations of its division engaged in the off-site rehabilitation of downhole
tubulars for the oil and gas industry. The Company was unable to sell the
business during 1994. As a result, the Company decided to liquidate the
division's assets, and during the fourth quarter of 1994 recorded a provision to
write down the assets to their estimated liquidation values and accrue the
estimated costs of closing the operation. As of June 30, 1995, all assets
related to discontinued operations had been written off and/or liquidated
leaving a reserve for estimated remaining costs of $414,000 in accounts payable
and accruals.
9. Provision for federal and state income taxes in the consolidated
statements of income are made up of the following components (in thousands) for
the six months ended June 30, 1995 and 1994, respectively:
<TABLE>
<CAPTION>
JUNE 30,
-----------------
1995 1994
------ ------
<S> <C> <C>
Current:
Federal.......................................................... $ 892 $1,260
Foreign.......................................................... 823 846
State............................................................ 80 189
------ ------
1,795 2,295
------ ------
Deferred:
Federal.......................................................... $ 232 $ (129)
Foreign.......................................................... (116) (131)
State............................................................ -- --
------ ------
116 (260)
------ ------
Total taxes on income.............................................. $1,911 $2,035
====== ======
</TABLE>
F-37
<PAGE> 189
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The effective tax rate on income before taxes for the six months ended June
30, 1995 and 1994 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:
<TABLE>
<CAPTION>
1995 1994
------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
<S> <C> <C> <C> <C>
Taxes on income at U.S. federal statutory rate.......... $1,649 34.0% $1,911 34.0%
Increase (decrease) in taxes resulting from:
State income taxes, net of federal income tax
benefit............................................ 49 1.0 125 2.2
Effect of foreign income taxed at foreign rates....... 36 0.7 (47) (0.8)
Tax amortization of intangibles....................... (257) (5.3) (252) (4.5)
Tax benefit not currently recognizable on losses of
subsidiaries....................................... 201 4.1 167 3.0
Utilization of net operating losses and other
carryforwards...................................... -- -- (121) (2.2)
Amortization of goodwill, not allowed for tax
purposes........................................... 270 5.6 279 5.0
Other items........................................... (37) (0.7) (27) (0.5)
------ ------- ------ -------
Total taxes on income................................... $1,911 39.4% $2,035 36.2%
====== ===== ====== =====
</TABLE>
10. The Company has outstanding borrowings of $35.5 million under its
credit agreement with Third National Bank in Nashville entered into in July
1993, which initially provided for advances of up to $30 million and was amended
in August 1994 to provide for an additional $12 million (as subsequently
reduced) so as to aggregate up to $42 million. On June 7, 1995, the Company
further amended and restated the facility providing for additional credit,
available for two years on a revolving basis, in the amount, together with the
existing facility, aggregating up to $50 million, the additional amounts to be
utilized for working capital and expansion of the Company's business. The
amended facility provides that all new advances, together with all existing
indebtedness, are due in June 2000, subject to earlier installments after June
1997 based on a five-year amortization schedule for the existing and additional
indebtedness. Under the revised arrangements, interest on all existing and
additional indebtedness would be payable quarterly at a rate selected monthly by
the Company as either the bank's prime rate, plus a margin up to .25% in the
event certain financial ratios are not maintained, or a 30-day adjusted LIBOR
rate, plus a margin ranging from 1.75% to 2.25 %, depending on maintenance of
certain financial ratios. The 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 their properties, and
requires guarantees of certain domestic subsidiaries.
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 the Company's Common Stock
were also issued to the lender. The note is prepayable at the Company's option
after July 1995, at premiums until July 1998 ranging from 3% to 1% of the amount
prepaid, and is subject to defeasance in certain circumstances. The subordinated
note also restricts the Company's ability to pay dividends and repurchase
outstanding common stock.
The Company's subsidiaries, IGL Canada Limited, 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 $880,000 at June 30, 1995.
As of December 31, 1994, the former stockholders of NuPipe, Inc. were
entitled to receive 35% of the royalty income collected by the Company in
connection with the NuPipe technology acquired by the Company in 1988. In March
1995, the Company exercised an option, granted in October 1994, to acquire such
F-38
<PAGE> 190
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
parties' interest in such payments in exchange for issuance of the Company's
promissory notes aggregating $1,000,000. The notes are payable in quarterly
installments over three years and bear interest at 5.4% per annum.
11. On May 23, 1995, the Company, notwithstanding its belief that it has
defenses to plaintiff's claim that are 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 (Neil Weinberg, on behalf of himself and
all others similarly situated, Plaintiffs. v. Insituform Technologies, Inc., et
al., Defendants), 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 settlement, which has
been evidenced by a stipulation of settlement and remains subject to court
approval and other customary conditions, the Company would make a cash payment
to class members in the amount of $3.2 million (which the Company has deposited
into escrow) and issue to class members 30,000 shares of the Company's class A
common stock, which resulted in an after-tax charge against 1995 second quarter
net income of approximately $2.2 million.
The Company is a party to an action in Tennessee Chancery Court
(subsequently removed by defendants to federal district court) against certain
of its licensees, captioned Insituform North America Corp. and NuPipe, Inc. v.
Insituform Southeast, Inc., NuPipe Southeast, Inc., Enviroq Corporation and
Insituform Mid-America, Inc. seeking a declaratory judgment confirming its
action in declining to grant its consent as requested by Enviroq, under the
various Insituform(R) and NuPipe(R) license agreements with Enviroq's
affiliates, in connection with the transactions contemplated by the agreement
dated November 2, 1994 entered into by Enviroq with IMA. The Company has agreed
with Enviroq and IMA that, unless the Company's agreement with IMA is terminated
(see Note 12), neither party will take any further action in such suit to assert
any rights in dispute as a result of the consummation of the Enviroq Acquisition
without the Company's consent, except for certain procedural steps to preserve
the respective rights of the parties.
Prior to its acquisition by the Company, Naylor Industries, Inc. ("Naylor")
sold all of the common stock of Naylor Industrial Services, Inc., ("NISI"),
which provided industrial cleaning services to refineries and chemical and
petrochemical manufacturing plants. As part of such sale, Naylor agreed to
indemnify the purchaser for certain pending or threatened litigation claims that
were known to Naylor as of the date of sale. Among other matters, NISI has been
one of approximately 181 defendants in approximately 3,029 plaintiff cases,
collectively known as the Lone Star Steel litigation, pending in Morris County,
Texas, in which plaintiffs allege unspecified damages against defendants, who
supplied services or products to Lone Star Steel over a period in excess of 40
years, arising from the alleged exposure of Lone Star's workers to toxic and
hazardous circumstances. ITI has been advised that NISI utilized non-toxic
detergents performing its cleaning services during an eight-year period ending
in 1987. Although, it has not been possible to assess likely jury verdicts at
such an early stage in the proceedings or any allocation of the amount of any
such verdict, Naylor's position has been that there is no substantial medical
evidence connecting NISI to plaintiffs' alleged injuries. In August 1995, the
court entered an order that dismissed the lawsuit against Naylor without
prejudice of plaintiffs to refile such claims in connection with plaintiffs'
failure to connect NISI to such injuries.
Naylor, among approximately 210 other parties, has been served with a third
party complaint by McDermott, Inc. ("McDermott") in a class action filed by more
than 1,200 plaintiffs (on behalf of a potential class of over 8,000 plaintiffs)
against 84 defendants, including McDermott. Plaintiffs seek damages resulting
from alleged exposure to an escape of hazardous substances from an oil
reclamation facility. McDermott's third party complaints seek, among other
things, clean-up costs under the Comprehensive Environmental
F-39
<PAGE> 191
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Response, Compensation and Liability Act ("CERCLA") and tort contribution and
indemnity. By court order, all defendants and third party defendants were deemed
to have cross-claimed and counter-claimed against the others for contribution
under CERCLA. Naylor has entered into a settlement agreement which, subject to
court approval, would settle all claims for personal injuries, property
diminution, mental anguish and other injuries which were asserted or which could
have been asserted against Naylor, for the amount of $50,000. The claims
asserted under CERCLA would remain outstanding, and it is probable that Naylor's
exposure is limited to a pro rata or proportionate share of all defendants' and
third party defendants' liability, if any.
The financial statements include the estimated amounts of liabilities that
are likely to be incurred from these and various other pending Naylor litigation
and claims.
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 and
results of operations.
12. On May 23, 1995, the Company, ITI Acquisition Corp., a wholly-owned
subsidiary of the Company ("ITI Sub"), and IMA executed an Agreement and Plan of
Merger dated such date (the "Merger Agreement") which provides for the merger
(the "Merger") into IMA of ITI Sub, as a result of which IMA would become a
wholly-owned subsidiary of the Company.
Pursuant to the Merger, at the Effective Time (as defined in the Merger
Agreement) holders of the class A common stock, $.01 par value (the "IMA Class A
Common Stock"), of IMA will receive 1.15 shares of the class A common stock,
$.01 par value, of the Company for each share of IMA Class A Common Stock held.
Holders of the class B common stock, $.01 par value (the "IMA Class B Common
Stock"), of IMA have agreed to convert their shares into IMA Class A Common
Stock on a share-for-share basis in connection with the transaction.
Consummation of the Merger and the transactions contemplated by the Merger
Agreement are subject to, among other things, approval by the stockholders of
both the Company and IMA, registration under the Securities Act of 1933 of the
shares of the Company's Class A Common Stock to be issued in the Merger, receipt
of a legal opinion that the Merger will qualify as a tax-free reorganization,
confirmation that the Merger will qualify for pooling-of-interests accounting
treatment, and other customary conditions.
The Company has deferred approximately $0.8 million of expenses incurred
through June 30, 1995 related to the transaction, which will be expensed in the
quarter in which the transaction is completed. The Company anticipates that the
total amount of expenses, exclusive of reorganization provisions, related to the
transaction (including amounts deferred through June 30, 1995) will be
approximately $6.5 million, $3.8 million of which the Company estimates will be
incurred by it and $2.7 million of which IMA estimates will be incurred by it.
F-40
<PAGE> 192
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Insituform Mid-America, Inc.
We have audited the accompanying consolidated balance sheets of Insituform
Mid-America, Inc. and subsidiaries as of September 30, 1994 and 1993, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended September 30,
1994. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Insituform
Mid-America, Inc. and subsidiaries as of September 30, 1994 and 1993, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1994, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
St. Louis, Missouri
November 15, 1994
F-41
<PAGE> 193
INSITUFORM MID-AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------------
1994 1993
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents....................................... $ 3,111,664 $ 2,088,966
Accounts receivable, including retained amounts of $2,876,514 in
1994 and $3,075,456 in 1993.................................. 15,770,080 15,448,035
Costs and estimated earnings in excess of billings on
uncompleted contracts........................................ 8,419,956 4,155,413
Insurance claim receivable...................................... -- 3,003,511
Inventory....................................................... 2,938,463 1,586,789
Prepaid and refundable income taxes............................. 521,272 846,513
Prepaid expenses and other current assets....................... 2,782,654 1,124,566
----------- -----------
TOTAL CURRENT ASSETS....................................... 33,544,089 28,253,793
----------- -----------
PROPERTY AND EQUIPMENT
Land............................................................ 675,486 608,414
Buildings and improvements...................................... 4,877,630 2,602,231
Machinery and equipment......................................... 23,962,374 17,900,068
Furniture and fixtures.......................................... 2,560,483 657,889
Construction-in-progress........................................ 1,949,898 3,095,481
----------- -----------
34,025,871 24,864,083
Less accumulated depreciation..................................... 12,018,479 9,196,683
----------- -----------
TOTAL PROPERTY AND EQUIPMENT............................... 22,007,392 15,667,400
----------- -----------
OTHER ASSETS
Sub-license costs, net of accumulated amortization of $421,526
in 1994 and $340,384 in 1993................................. 1,770,546 1,851,688
Excess of cost over fair value of net assets acquired, net of
accumulated amortization of $396,140 in 1994 and $258,469 in
1993......................................................... 2,141,353 2,279,024
Deferred non-compete expense, net of accumulated amortization of
$502,561 in 1994 and $350,004 in 1993........................ 923,046 1,075,603
Patent cost, net of accumulated amortization of $943,863 in 1994
and $628,256 in 1993......................................... 3,492,509 3,808,116
----------- -----------
TOTAL OTHER ASSETS......................................... 8,327,454 9,014,431
----------- -----------
$63,878,935 $52,935,624
========== ==========
</TABLE>
(Continued)
See notes to consolidated financial statements.
F-42
<PAGE> 194
INSITUFORM MID-AMERICA, INC.
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------------
1994 1993
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to bank............................................ $ 6,460,214 $ 5,028,000
Accounts payable................................................ 8,181,616 5,268,904
Accrued income taxes............................................ 411,249 15,050
Accrued expenses................................................ 6,810,141 4,961,529
Billings in excess of costs and estimated earnings on
uncompleted contracts........................................ 63,071 473,226
Deferred income taxes........................................... -- 872,067
----------- -----------
TOTAL CURRENT LIABILITIES.................................. 21,926,291 16,618,776
----------- -----------
LONG-TERM LIABILITIES
Deferred income taxes........................................... 1,217,641 --
Minority interest............................................... 575,501 --
Other........................................................... 283,748 --
----------- -----------
TOTAL LONG-TERM LIABILITIES................................ 2,076,890 --
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Preferred stock -- $.01 par value, 500,000 shares authorized,
none issued or outstanding................................... -- --
Common stock:
Class A -- $.01 par value, 13,000,000 shares authorized,
8,279,342 and 8,278,340 shares issued and outstanding in
1994 and 1993, respectively (liquidation preference $8.00
per share).................................................. 82,793 82,783
Class B -- convertible, $.01 par value, 6,000,000 shares
authorized, 2,472,985 shares issued and outstanding in 1994
and 1993.................................................... 24,730 24,730
Additional paid-in capital...................................... 18,333,959 18,324,450
Retained earnings............................................... 21,765,402 18,189,985
Cumulative foreign currency translation adjustment.............. (331,130) (305,100)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY................................. 39,875,754 36,316,848
----------- -----------
$63,878,935 $52,935,624
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-43
<PAGE> 195
INSITUFORM MID-AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
---------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Contract revenues..................................... $75,279,329 $60,085,786 $66,689,904
Cost of contracts..................................... 54,472,300 43,546,991 45,396,191
----------- ----------- -----------
GROSS PROFIT....................................... 20,807,029 16,538,795 21,293,713
----------- ----------- -----------
Operating expenses:
General and administrative expenses................ 7,779,777 6,875,287 6,169,243
Selling expenses................................... 3,170,447 3,601,807 2,577,521
Research and development expenses.................. 652,166 60,867 288,834
----------- ----------- -----------
11,602,390 10,537,961 9,035,598
----------- ----------- -----------
INCOME FROM OPERATIONS............................. 9,204,639 6,000,834 12,258,115
----------- ----------- -----------
Other income (expense):
Interest income.................................... 131,218 69,860 59,212
Interest expense................................... (324,422) (174,138) (136,363)
Joint venture income............................... 164,298 194,224 244,892
Other net.......................................... (211,991) (369,070) (306,883)
----------- ----------- -----------
(240,897) (279,124) (139,142)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST... 8,963,742 5,721,710 12,118,973
Provision for income taxes............................ 3,734,824 2,314,070 4,443,039
----------- ----------- -----------
INCOME BEFORE MINORITY INTEREST.................... 5,228,918 3,407,640 7,675,934
Minority interest in income of consolidated
subsidiary......................................... (179,867) -- --
----------- ----------- -----------
NET INCOME......................................... $ 5,049,051 $ 3,407,640 $ 7,675,934
========== ========== ==========
EARNINGS PER SHARE................................. $.45 $.31 $.70
</TABLE>
See notes to consolidated financial statements.
F-44
<PAGE> 196
INSITUFORM MID-AMERICA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------- CUMULATIVE
FOREIGN
CLASS A CLASS B ADDITIONAL CURRENCY
------------------- ------------------- PAID-IN RETAINED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT TOTAL
--------- ------- --------- ------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1991... 8,240,465 $61,805 2,472,988 $18,548 $18,141,776 $ 9,715,431 $ -- $27,937,560
Exercise of stock options..... 18,134 136 -- -- 80,354 -- -- 80,490
Dividend to common
stockholders................ -- -- -- -- -- (1,101,335) -- (1,101,335)
Net income.................... -- -- -- -- -- 7,675,934 -- 7,675,934
Foreign currency translation
adjustment.................. -- -- -- -- -- -- (145,675 ) (145,675)
--------- ------- --------- ------- ----------- ----------- ---------- -----------
BALANCE AT SEPTEMBER 30, 1992... 8,258,599 61,941 2,472,988 18,548 18,222,130 16,290,030 (145,675 ) 34,446,974
Exercise of stock options..... 20,027 200 -- -- 102,320 -- -- 102,520
Four-for-three stock split.... -- 20,645 -- 6,182 -- (26,827) -- --
Fractional share payout....... (286) (3) (3) -- -- (7,450) -- (7,453)
Dividend to common
stockholders................ -- -- -- -- -- (1,473,408) -- (1,473,408)
Net income.................... -- -- -- -- -- 3,407,640 -- 3,407,640
Foreign currency translation
adjustment.................. -- -- -- -- -- -- (159,425 ) (159,425)
--------- ------- --------- ------- ----------- ----------- ---------- -----------
BALANCE AT SEPTEMBER 30, 1993... 8,278,340 82,783 2,472,985 24,730 18,324,450 18,189,985 (305,100 ) 36,316,848
Exercise of stock options..... 1,002 10 -- -- 9,509 -- -- 9,519
Dividend to common
stockholders................ -- -- -- -- -- (1,473,634) -- (1,473,634)
Net income.................... -- -- -- -- -- 5,049,051 -- 5,049,051
Foreign currency translation
adjustment.................. -- -- -- -- -- -- (26,030 ) (26,030)
--------- ------- --------- ------- ----------- ----------- ---------- -----------
BALANCE AT SEPTEMBER 30, 1994... 8,279,342 $82,793 2,472,985 $24,730 $18,333,959 $21,765,402 $(331,130 ) $39,875,754
======== ======= ======== ======= ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-45
<PAGE> 197
INSITUFORM MID-AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
-------------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 5,049,051 $ 3,407,640 $ 7,675,934
Adjustments to reconcile net income to net cash:
Change in assets and liabilities, net of
effects of acquisitions:
Increase in accounts receivable.............. (322,045) (1,510,375) (3,339,766)
Decrease (increase) in costs and estimated
earnings in excess of billings on
uncompleted contracts..................... (4,264,543) 2,690,735 (2,108,271)
Decrease in insurance claim receivable....... 3,003,511 -- --
Increase in inventory........................ (1,351,674) (980,734) (490,439)
Decrease (increase) in refundable income
taxes..................................... 387,285 (637,648) (208,865)
Decrease (increase) in prepaid expenses and
other current assets...................... (1,658,088) (54,547) 235,976
Increase in accounts payable................. 2,912,712 1,094,731 752,889
Increase (decrease) in accrued income
taxes..................................... 396,199 (370,577) (446,569)
Increase (decrease) in accrued expenses...... 1,848,612 (306,095) 650,145
Increase (decrease) in billings in excess of
costs and estimated earnings on
uncompleted contracts..................... (410,155) 421,503 51,723
Depreciation................................... 3,258,781 2,673,114 2,101,881
Amortization................................... 686,977 601,818 552,052
Loss (gain) on sale of property and
equipment.................................... 8,933 10,621 (12,916)
Deferred income tax provision.................. 283,531 136,638 327,317
Minority interest in income of consolidated
subsidiary................................... 575,501 -- --
Other.......................................... 283,748 -- --
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES.............................. 10,688,336 7,176,824 5,741,091
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term bank borrowings............ 1,432,214 3,971,000 1,057,000
Retirement of long-term debt...................... -- (359,768) (88,011)
Dividends paid to common stockholders............. (1,473,634) (1,473,408) (1,101,335)
Proceeds from exercise of stock options........... 9,519 102,520 80,490
Other............................................. -- (7,453) --
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES.............................. (31,901) 2,232,891 (51,856)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment............... (9,915,506) (5,348,757) (3,524,715)
Sub-license cost.................................. -- -- (19,928)
Patent cost....................................... -- (10,638) (297,854)
Deferred non-compete cost......................... -- -- (40,500)
Proceeds from sale of property and equipment...... 307,799 395,814 49,442
Acquisitions of businesses........................ -- (3,689,635) (5,030,041)
Other, net........................................ -- 174,813 (174,815)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES..... (9,607,707) (8,478,403) (9,038,411)
----------- ----------- -----------
Effect of exchange rate changes on cash............. (26,030) (159,425) 50,651
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... 1,022,698 771,887 (3,298,525)
Cash and cash equivalents, beginning of year........ 2,088,966 1,317,079 4,615,604
----------- ----------- -----------
Cash and cash equivalents, end of year.............. $ 3,111,664 $ 2,088,966 $ 1,317,079
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-46
<PAGE> 198
INSITUFORM MID-AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of Insituform Mid-America, Inc. and its majority owned
subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation. Except as otherwise indicated herein, references to
the "Company" are to Insituform Mid-America, Inc. and its subsidiaries.
Company's Activities: The Company utilizes various trenchless and other
technologies for rehabilitation, new construction and improvement of pipeline
systems, including sewers, gas lines, industrial waste lines, water line and oil
field, mining and industrial process pipelines. The Company's trenchless
technologies require little or no excavation and eliminate the need to replace
deteriorating pipe. The work typically is performed under fixed-price contracts.
Revenue and Cost Recognition: The Company recognizes revenue from
contracts using the percentage of completion method of accounting. Percentage of
completion is generally measured by the percentage of direct costs incurred for
work completed to total estimated direct costs for each contract (cost-to-cost
method). Project costs include direct and indirect labor, materials, equipment
usage, subcontracts, royalties and other miscellaneous costs directly associated
with a project. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined. Claims are included in
revenues when realization is probable and the amount can be reliably estimated.
Accounts Receivable: The Company regularly reviews its collection
experience and does not believe an allowance for doubtful accounts is necessary.
Inventory: Inventory is stated at the lower of cost (first-in, first-out)
or market. The majority of inventory represents raw materials used in the
installation processes.
Prepaid Expenses and Other Current Assets: Prepaid expenses and other
current assets at September 30, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Prepaid construction costs.......................... $1,115,040 $ 356,786
Prepaid value added tax............................. 446,380 --
Prepaid expenses.................................... 329,254 108,090
Equity in joint venture............................. 98,902 174,604
Other............................................... 793,078 485,086
--------- ---------
$2,782,654 $1,124,566
========= =========
</TABLE>
Property and Equipment: Property and equipment are recorded at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets. Estimated useful lives are five to 40
years for buildings and improvements and three to 15 years for other depreciable
assets.
Intangible Assets: The cost of sub-license agreements is being amortized
using the straight-line method over their estimated useful lives of five to 30
years. The excess of cost over the fair value of assets acquired is being
amortized using the straight-line method over their estimated useful lives of 15
to 30 years. The cost of deferred non-compete contracts is being amortized using
the straight-line method over a five year period. The cost of patents is being
amortized using the straight-line method over their approximate useful lives,
not to exceed their statutory life.
Income Taxes: In February 1992, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes (Statement 109). Statement 109 requires a change from the deferred
method of accounting for income taxes of APB Opinion 11 to the asset and
liability method of accounting for income taxes. Under the asset and liability
method of Statement 109 deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences
F-47
<PAGE> 199
INSITUFORM MID-AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under Statement 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.
Effective October 1, 1993, the Company adopted Statement 109. The
cumulative effect of that change in the method of accounting for income taxes
was immaterial to the 1994 consolidated statements of income.
Pursuant to the deferred method under APB Opinion 11, which was applied in
fiscal 1993 and prior years, deferred income taxes are recognized for income and
expense items that are reported in different years for financial reporting
purposes and income tax purposes using the tax rate applicable for the year of
the calculation. Under the deferred method, deferred taxes are not adjusted for
subsequent changes in tax rates.
Pension Expense: The Company contributes to various multi-employer pension
plans covering a majority of its construction craft employees. Pension expense
is recorded when accrued, based on terms specified in union agreements. Pension
expense charged to construction costs was $355,981, $227,407 and $231,647 for
the years ended September 30, 1994, 1993 and 1992, respectively. The actuarial
present value of vested and non-vested accumulated benefits, net assets
available for benefits and assumed rates of return are not practicable to
determine.
Research and Development Expenses: The Company expenses research and
development costs in the year incurred. Such costs include the cost of
developing new installation processes for its licensed technologies.
Accrued Expenses: Accrued expenses at September 30, 1994 and 1993 were as
follows:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Construction costs................................ $5,394,840 $2,415,756
Other............................................. 1,401,523 2,248,642
Accrued bonuses................................... 13,778 297,131
--------- ---------
$6,810,141 $4,961,529
========= =========
</TABLE>
Foreign Currency Translation: In accordance with Statement of Financial
Accounting Standards No. 52, Foreign Currency Translation, the assets and
liabilities denominated in foreign currency are translated into U.S. dollars at
the rate of exchange existing at year-end and revenues and expenses are
translated at the average monthly exchange rates. Transaction gains (losses)
included in income before taxes for the years ended September 30, 1994, 1993 and
1992 were $(9,642), $34,183 and $41,681, respectively.
Warranties: The Company's warranties of labor and material generally vary
from one to three years after the work is completed, based on contract bid
specifications or negotiated terms. The Company has not recognized any warranty
expense because it has not experienced, and does not anticipate, any significant
post-installation warranty claims.
Cash Equivalents: For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Related Party Transactions: During 1994, 1993 and 1992, a director of the
Company was paid approximately $208,000, $209,000 and $219,000, respectively,
for consulting services and related expenses.
During 1994, the son of the Chairman of the Company and principal
stockholder was paid approximately $91,000 for consulting services and related
expenses.
The Company's unsecured bank line of credit arrangement is maintained with
a bank where a director of the Company is Chairman and a majority stockholder.
F-48
<PAGE> 200
INSITUFORM MID-AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassification: Certain amounts reported in prior years have been
reclassified to conform with current year presentation.
NOTE B -- ACQUISITIONS
On November 12, 1992, the Company acquired from Ashimori Industry Company
Ltd. of Osaka, Japan (Ashimori) the exclusive license to offer the PALTEM-HL(R)
and PALTEM-SZ(R) systems of pipeline rehabilitation in substantially all of
North America and the exclusive right in the territory to utilize and sell
materials manufactured by Ashimori for use in pipeline rehabilitation. The
Company also acquired substantially all of the operating assets of Pipeline
Rehabilitation Systems of Denver, Colorado, a company then engaged in the
business of rehabilitation and improving pipelines in twelve states using the
PALTEM-HL system. In connection with the transactions, which were accounted for
as a purchase, the Company paid approximately $3,690,000 for equipment and
inventory having a fair market value of approximately $2,090,000 and recorded
$1,600,000 in excess of cost over fair value of net assets acquired.
On October 15, 1991, the Company, through a wholly-owned subsidiary,
acquired United Pipeline Systems Inc. (UPSI) of Edmonton, Alberta, Canada. UPSI
offers the Tite Liner process of lining oil field and industrial process
pipelines in Canada and internationally, except in the United States. In
connection with the acquisition, the Company acquired all the outstanding stock
of United Corrosion Corporation (UCC), the parent of UPSI, from the 19 former
stockholders of UCC.
In connection with the transaction, which was accounted for as a purchase,
the Company paid Canadian $5,670,000 cash (or approximately U.S. $5,030,000)
plus a promissory note in principal amount of Canadian $1,526,560 (or
approximately U.S. $1,335,740). UCC's assets unrelated to the business of UPSI
were sold to a corporation organized by UCC's former stockholders and the
Company's promissory note was canceled in such transaction. In this transaction,
the Company acquired property and equipment with a fair market value of
$1,020,000, patents with a fair market value of $4,127,000, and a working
capital deficit of $117,000.
The consolidated statements of income include the acquired operations from
the respective dates of acquisition. Unaudited pro forma results of operations,
assuming the UPSI acquisition had occurred as of October 1, 1991 and the PALTEM
acquisition had occurred as of October 1, 1992, are as follows:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Contract revenues................................. $60,303,122 $69,189,268
Net income........................................ 3,372,857 7,171,266
Earnings per share................................ .31 .66
</TABLE>
This pro forma information does not purport to be indicative of the results
that actually would have been obtained if the operations had been combined
during the periods presented and is not intended to be a projection of future
results.
NOTE C -- EARNINGS PER SHARE
Earnings per share is based upon the weighted average number of shares of
Class A and Class B common stock outstanding.
Stock options were considered common stock equivalents for earnings per
share purposes for all years presented.
The weighted average number of common shares outstanding used in
determining earnings per share for the years ended September 30, 1994, 1993 and
1992 was 11,101,593, 11,019,144 and 10,934,519, respectively.
F-49
<PAGE> 201
INSITUFORM MID-AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- CONTRACTS-IN-PROGRESS
The following table summarizes the billing status of uncompleted contracts
at September 30:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Contract costs incurred to date................... $21,030,395 $30,712,251
Estimated gross profits earned to date............ 2,954,195 10,014,675
---------- ----------
Contract revenues earned to date.................. 23,984,590 40,726,926
Less actual billings to date...................... 15,627,705 37,044,739
---------- ----------
Excess of revenues earned over billings to date... $8,356,885 $3,682,187
========== ==========
</TABLE>
The excess of revenues earned over actual billings to date was included in
the accompanying balance sheets at September 30 as:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Costs and estimated earnings in excess of billings $8,419,956 $4,155,413
on uncompleted contracts..........................
Billings in excess of costs and estimated earnings (63,071) (473,226)
on uncompleted contracts..........................
--------- ---------
$8,356,885 $3,682,187
========= =========
</TABLE>
Claims included in revenues for the fiscal year ended September 30, 1993
were $1.3 million. No claims were included in revenues for the fiscal year ended
September 30, 1994.
NOTE E -- SHORT-TERM BORROWINGS
The following table summarizes bank borrowings for the years 1994, 1993 and
1992, which were available under a line of credit arrangement.
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Balance at end of year................................. $6,460,214 $5,028,000 $1,057,000
Interest rate at end of year........................... 7.75% 6.00% 6.00%
Maximum amount outstanding during year................. $6,753,000 $5,028,000 $6,366,052
Average amount outstanding during year................. $4,187,071 $2,535,869 $1,604,661
Weighted average interest rate during year............. 6.60% 6.00% 6.45%
</TABLE>
The Company paid interest associated with all borrowings in 1994, 1993 and
1992 of $272,414, $145,433 and $96,643, respectively.
At September 30, 1994, the Company had available for working capital
purposes a $10,000,000 unsecured bank line of credit arrangement, including
letters of credit. The arrangement provides for borrowings at the prime rate
(7.75% at September 30, 1994) with interest payable monthly and no compensating
balance requirements. At September 30, 1994, letters of credit in the aggregate
amount of $2,605,301 were outstanding. The amount available under this agreement
at September 30, 1994 was $934,485. Subsequent to September 30, 1994, the
Company increased its unsecured bank line of credit arrangement to $13,000,000,
which expires in December 1994. The Company has the ability and intent to renew
this arrangement.
F-50
<PAGE> 202
INSITUFORM MID-AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- INCOME TAXES
The components of income before income taxes and minority interest were as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ----------
<S> <C> <C> <C>
Domestic operations................................... $7,612,176 $5,383,399 $9,925,102
Foreign operations.................................... 1,351,566 338,311 2,193,871
--------- --------- ----------
$8,963,742 $5,721,710 $12,118,973
========= ========= ==========
</TABLE>
The provision for income taxes was comprised of the following:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal........................................... $2,239,476 $1,578,000 $3,041,000
State............................................. 519,219 318,903 374,643
Foreign........................................... 692,598 280,529 669,744
--------- --------- ---------
3,451,293 2,177,432 4,085,387
--------- --------- ---------
Deferred:
Federal........................................... 285,724 125,000 176,000
State............................................. 50,993 1,711 22,000
Foreign........................................... (53,186) 9,927 159,652
--------- --------- ---------
283,531 136,638 357,652
--------- --------- ---------
$3,734,824 $2,314,070 $4,443,039
========= ========= =========
</TABLE>
Effective October 1, 1993, the Company adopted Statement 109. Statement 109
requires a change from the deferred method of accounting for income taxes under
APB Opinion No. 11 to the asset and liability method of accounting for income
taxes. Under the asset and liability method of Statement 109, deferred tax
assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. The cumulative effect of this change in accounting for income taxes was
immaterial to the consolidated financial statements of the Company. The Company
has not reflected a valuation allowance against its deferred tax assets.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at September
30, 1994 were as follows:
<TABLE>
<S> <C>
DEFERRED TAX ASSETS:
Employee benefits consisting principally of health, welfare $ 29,836
and compensated absences.................................
Uniform inventory capitalization........................... 111,625
Foreign tax credit carry-forward........................... 108,583
Uncompleted contract adjustment............................ 9,426
----------
Total gross deferred tax assets....................... 259,470
----------
DEFERRED TAX LIABILITIES:
Property and equipment, licenses and patents, principally (1,326,224)
due to differences in depreciation and amortization......
State income taxes......................................... (88,843)
----------
Total gross deferred tax liabilities.................. (1,415,067)
----------
Net deferred tax liability............................ $(1,155,597)
==========
</TABLE>
F-51
<PAGE> 203
INSITUFORM MID-AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the years ended September 30, 1993 and 1992, deferred income tax
expense of $136,638 and $357,652, respectively, resulted from timing differences
in the recognition of income and expense for income tax and financial reporting
purposes. The sources and tax effects of those timing differences are presented
below:
<TABLE>
<CAPTION>
1993 1992
-------- --------
<S> <C> <C>
Depreciation and amortization.......................... $174,919 $432,169
Uniform inventory capitalization....................... (52,334) (56,288)
Other, net............................................. 14,053 (18,229)
-------- --------
$136,638 $357,652
======== ========
</TABLE>
A reconciliation between the provision for income taxes and the amount
computed by applying the statutory Federal income tax rate of 34% to income
before income taxes is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Provision for income taxes at statutory Federal rate... $3,047,672 $1,945,381 $4,120,450
State and local taxes, net of Federal benefit.......... 376,340 211,605 260,700
Foreign operations with tax rates lower than Federal (62,026) (4,435) (177,664)
rate.................................................
Other foreign operations............................... 241,904 179,590 275,980
Other, net............................................. 130,934 (18,071) (36,427)
--------- --------- ---------
$3,734,824 $2,314,070 $4,443,039
========= ========= =========
</TABLE>
The cumulative amount of undistributed earnings of foreign subsidiaries for
which U.S. Federal income taxes have not been provided were approximately
$1,304,000 at September 30, 1994.
The Company paid income taxes of $2,633,844, $3,202,146 and $4,587,861 for
1994, 1993 and 1992, respectively.
NOTE G -- LEASES
The Company has entered into various noncancelable operating leases for a
building, equipment and automobiles ranging over periods from two to ten years.
Certain expenses applicable to the leases including taxes, insurance and repairs
and maintenance, are also payable by the Company.
Rent expense under long-term operating leases was $737,464, $706,345 and
$703,286 for 1994, 1993 and 1992, respectively.
Future minimum payments under noncancelable operating leases with initial
or remaining terms of one year or more consisted of the following at September
30, 1994:
<TABLE>
<S> <C>
1995..................................................... $ 680,557
1996..................................................... 434,226
1997..................................................... 205,530
1998..................................................... 36,097
1999..................................................... 3,173
---------
$1,359,583
=========
</TABLE>
NOTE H -- COMMITMENTS
The Company has obtained the use of certain patent rights and know-how
relative to methods, apparatuses and materials used in the Insituform and NuPipe
processes of rehabilitation of sewers and pipe
F-52
<PAGE> 204
INSITUFORM MID-AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
through license agreements with subsidiaries of Insituform Technologies, Inc.
Under the terms of its license agreements for the Insituform process, the
Company must pay royalty fees from 8% to 9% of Insituform gross contract
revenues, less deductions for certain preparatory and finishing costs. Under the
terms of its license agreement for NuPipe, the Company must pay royalty fees
equal to 6.75% of NuPipe gross contract revenues. Each of the license agreements
for Insituform and NuPipe extends for the life of the licensed patent rights
(each of which expires in 2011) and is cancelable either by the licensee upon
written notice or by the licensor upon nonpayment of royalties or certain other
events, as specified in the agreements.
Pursuant to a License Agreement with Ashimori (the "PALTEM License"), the
Company has been granted the exclusive rights to use the patents, trademarks and
know-how related to the PALTEM-HL system (for all of North America) and
PALTEM-SZ system (for all of the North America except the states of Connecticut,
Maine, Maryland, Massachusetts, Rhode Island, Vermont and Virginia in the United
States). In connection with the PALTEM License, the Company is obligated to pay
royalties of 6% on PALTEM-HL installations and 7% on PALTEM-SZ installations.
The PALTEM License also provides that if the Company does not purchase specified
minimum amounts of PAL-Liner during periods specified in the agreement, the
PALTEM License could be changed to a non-exclusive basis and, if such minimum
purchases continue not to be met, the agreement could be terminated. The PALTEM
License provides that the parties will enter into a separate supply agreement
for materials used in PALTEM system installations, and a separate cross-license
agreement for Ashimori's Apollo system of point repair and the Tite Liner
system.
The PALTEM License extends for an initial term of 15 years as to the
PALTEM-HL system and for an initial term ending December 31, 1994 for the
PALTEM-SZ system, provided, however, that the parties have agreed to make a good
faith effort to agree prior to such date to an extension of the PALTEM-SZ
license. In addition, the PALTEM License is subject to termination in the event
of specified defaults.
NOTE I -- COMMON STOCK
Except in elections of directors, the holders of the Class A and Class B
common stock vote together as a singe class, with each share of Class A common
stock entitled to one vote and each share of Class B common stock entitled to
one vote. The holders of Class B common stock are entitled to elect 55% of the
members of the Board of Directors (rounded up to the nearest whole number) and
the holders of Class A common stock are entitled to elect the remainder.
The holders of Class A common stock are entitled to a cash dividend in an
amount equal to at least 110% of any cash dividend paid on Class B common stock.
The holders of Class A common stock also are entitled to a liquidation
preference equal to the initial public offering price per share of $8.00, before
any liquidating distribution on Class B common stock prior to January 1, 1997.
Each share of Class B common stock is convertible by the holder into one share
of Class A common stock at any time. If the number of shares of Class B common
stock outstanding is less than 12-1/2% of the aggregate number of outstanding
shares of both classes of common stock, then all Class B common stock shall be
automatically converted into Class A common stock. Holders of Class A common
stock have no conversion rights.
NOTE J -- SIGNIFICANT CUSTOMERS
Revenues from major customers (including direct and indirect contracts),
representing at least 10% of total annual contract revenues, were as follows for
the years ended September 30:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Metropolitan St. Louis Sewer District............... $14,314,000 $11,665,000 $9,643,000
City of Houston, Texas.............................. -- -- 11,308,000
---------- ---------- ----------
$14,314,000 $11,665,000 $20,951,000
========== ========== ==========
</TABLE>
F-53
<PAGE> 205
INSITUFORM MID-AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- STOCK OPTION PLAN
During 1986, the Company established the Insituform Mid-America, Inc. Stock
Option Plan (Plan) which, as amended, provides for the granting to employees,
officers and directors of the Company options to purchase a maximum of 1,000,000
shares of Class A common stock. The Plan provides for granting of incentive
stock options and non-qualified stock options.
All options granted under the Plan must have an exercise price of not less
than 100% of the fair market value of the Class A common stock on the date of
grant. In lieu of exercise, the optionee may request payment of a stock
appreciation right measured as of the date of the request, subject to approval
by the Stock Option Committee. Changes in the number of shares subject to
options for the years ended September 30 are summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------------------- --------------------- ---------------------
SHARES SHARES SHARES
AVERAGE SUBJECT AVERAGE SUBJECT AVERAGE SUBJECT
PRICE TO OPTION PRICE TO OPTION PRICE TO OPTION
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year............................. $ 9.00 350,580 $ 7.83 271,780 $ 4.82 169,287
Options granted............................... 13.14 29,400 11.50 100,000 11.25 120,626
Options exercised............................. 9.50 (1,002) 5.38 (20,027) 4.50 (18,133)
Options cancelled............................. 10.39 (5,070) 11.25 (1,173) -- --
--------- --------- ---------
End of year................................... 9.31 373,908 9.00 350,580 7.83 271,780
======= ========= ======= ========= ======= =========
Exercisable at year-end....................... 226,888 174,603 159,653
</TABLE>
There was no expense recorded with respect to the Plan for 1994, 1993 and
1992.
NOTE L -- PROFIT-SHARING PLAN
The Company maintains a profit-sharing plan for employees not covered by a
collective bargaining agreement. Employer contributions are discretionary and
may be made from current or accumulated net profits at the discretion of the
Company's Board of Directors. The Company did not record any profit-sharing
expense for 1994. For 1993 and 1992, the Company recorded profit-sharing expense
of $200,000 and $230,000, respectively.
NOTE M -- LITIGATION
The Company has been cited by the U.S. Occupational Safety and Health
Administration (OSHA) for alleged violations of the Occupational Safety and
Health Act of 1970 in connection with a jobsite accident. OSHA has assessed
penalties aggregating approximately $1,000,000 arising out of the accident. The
Company believes that OSHA's allegations neither accurately reflect the facts
and circumstances of the accident nor accurately characterize the Company's
strong safety program and commitment thereto. The Company also is involved in
other litigation arising in the ordinary course of business. In the opinion of
management, the amount of ultimate liability, if any, with respect to these
actions (including the OSHA citation) will not materially affect the financial
position of the Company.
NOTE N -- SEGMENT INFORMATION
The Company's operations consist of a single business segment which applies
various trenchless technologies, principally the Insituform process, to solve
problems requiring rehabilitation, new construction and improvement of pipeline
systems including sewers, industrial waste lines, water lines and oil field,
mining and industrial process pipelines.
F-54
<PAGE> 206
INSITUFORM MID-AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information concerning the Company's geographic segments for the years
ended September 30, was as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
CONTRACT REVENUES:
United States.................................. $64,617,104 $54,652,542 $59,591,684
Canada......................................... 7,201,951 5,621,272 7,053,206
Latin America.................................. 3,740,233 -- --
Other areas.................................... -- 48,300 286,850
Eliminations................................... (279,959) (236,328) (241,836)
---------- ---------- ----------
$75,279,329 $60,085,786 $66,689,904
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
INCOME FROM OPERATIONS:
United States.................................. $7,001,687 $4,924,332 $9,975,243
Canada......................................... 1,721,385 1,091,034 2,330,335
Latin America.................................. 481,567 -- --
Other areas.................................... -- (14,532) (47,463)
---------- ---------- ----------
$9,204,639 $6,000,834 $12,258,115
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS:
United States.................................. $55,745,124 $51,646,959 $43,930,662
Canada......................................... 8,649,246 8,035,778 7,363,694
Latin America.................................. 7,245,451 -- --
Other areas.................................... -- 4,800 161,420
Eliminations................................... (7,760,886) (6,751,913) (6,339,700)
---------- ---------- ----------
$63,878,935 $52,935,624 $45,116,076
========== ========== ==========
</TABLE>
NOTE O -- SUBSEQUENT EVENT
In November 1994, the Company announced the proposed acquisition of the
pipeline rehabilitation business of ENVIROQ Corporation ("Enviroq"), including
Enviroq's Insituform process business which is conducted by its Insituform
Southeast, Inc. subsidiary. Insituform Southeast, Inc. operates in a licensed
territory consisting of Alabama, Florida, Georgia, North Carolina and South
Carolina. It also owns 42.5% of Midsouth Partners, which is the licensee of the
Insituform process in Tennessee, most of Kentucky and northern Mississippi.
Under the terms of the proposed transaction, all assets and liabilities
related to Enviroq's interest in Synox Corporation (a development stage company
which is engaged in the business of developing and testing a process for the
treatment of municipal wastewater "sludge"), and its ownership interest in
SPRAYROQ Corporation (a development stage company which offers a spray-applied
resinous product used in rehabilitation of manholes, among other applications)
will be transferred to a newly organized subsidiary, the stock of which will be
distributed to Enviroq's stockholders, immediately prior to the transaction with
the Company. In addition, Enviroq will transfer $500,000 cash and the currently
undeveloped portion of the real estate which it owns in Jacksonville, Florida to
the corporation to be spun-off.
Pursuant to the proposed transaction, which will be accounted for as a
purchase, the Company has agreed to pay $15.25 million cash. In addition, it has
agreed to issue a $3 million five-year subordinated promissory note in
consideration for a covenant not to compete and enter into an agreement for
consulting services providing for the Company's payment of $1 million over five
years. Completion of the transaction is subject to customary closing conditions,
including approval by the stockholders of Enviroq.
F-55
<PAGE> 207
INSITUFORM MID-AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER
30
1994
JUNE 30 -----------
1995
-----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents....................................... $ 2,924,814 $ 3,111,664
Accounts receivable............................................. 16,857,017 15,770,080
Costs and estimated earnings in excess of billings on
uncompleted contracts........................................ 14,714,348 8,419,956
Prepaid/refundable income taxes................................. 418,739 521,272
Inventory....................................................... 5,376,083 2,938,463
Prepaid expenses and other current assets....................... 4,485,481 2,782,654
----------- -----------
TOTAL CURRENT ASSETS.................................... 44,776,482 33,544,089
----------- -----------
PROPERTY AND EQUIPMENT............................................ 51,116,101 34,025,871
Less accumulated depreciation..................................... 21,979,637 12,018,479
----------- -----------
TOTAL PROPERTY AND EQUIPMENT............................ 29,136,464 22,007,392
----------- -----------
LICENSE COSTS..................................................... 1,872,686 1,770,546
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED............. 6,303,878 2,141,353
DEFERRED NON-COMPETE EXPENSE...................................... 3,669,200 923,046
PATENTS........................................................... 3,255,805 3,492,509
OTHER............................................................. 2,905,538 --
----------- -----------
TOTAL OTHER ASSETS...................................... 18,007,107 8,327,454
----------- -----------
$91,920,053 $63,878,935
========== ==========
(Continued)
</TABLE>
See notes to condensed consolidated financial statements.
F-56
<PAGE> 208
INSITUFORM MID-AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER
30
1994
JUNE 30 -----------
1995
-----------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks.......................................... $12,726,000 $ 6,460,214
Subordinated promissory note.................................... 3,000,000 --
Current portion of long-term debt............................... 1,529,528 --
Accounts payable................................................ 8,413,659 8,181,616
Dividends payable............................................... 157,282 --
Accrued income taxes............................................ 132,801 411,249
Accrued expenses................................................ 4,963,449 6,810,141
Billings in excess of costs and estimated earnings on
uncompleted contracts........................................ 140,939 63,071
----------- -----------
TOTAL CURRENT LIABILITIES............................... 31,063,658 21,926,291
----------- -----------
LONG-TERM LIABILITIES
Long-term debt less current portion............................. 14,024,344 --
Minority interest............................................... 1,390,902 575,501
Deferred income taxes........................................... 1,018,293 1,217,641
Other........................................................... 890,872 283,748
----------- -----------
TOTAL LONG-TERM LIABILITIES............................. 17,324,411 2,076,890
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Preferred Stock -- $.01 par value, 500,000 shares authorized,
none issued or outstanding................................... -- --
Common Stock:
Class A -- $.01 par value, 13,000,000 shares authorized,
8,310,046 shares issued and outstanding at June 30, 1995,
8,279,342 shares issued and outstanding at September 30,
1994........................................................ 83,100 82,793
Class B -- convertible $.01 par value, 6,000,000 shares
authorized, 2,472,985 shares issued and outstanding......... 24,730 24,730
Additional paid-in capital...................................... 18,564,514 18,333,959
Retained earnings............................................... 25,245,279 21,765,402
Cumulative translation adjustments.............................. (385,639) (331,130)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY.............................. 43,531,984 39,875,754
----------- -----------
$91,920,053 $63,878,935
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-57
<PAGE> 209
INSITUFORM MID-AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
Contract revenues............................................................. $77,611,419 $54,292,881
Cost of contract revenues..................................................... 57,270,715 39,182,517
----------- -----------
Gross profit.................................................................. 20,340,704 15,110,364
Costs and expenses:
General and administrative expenses......................................... 7,856,049 6,323,656
Selling expenses............................................................ 2,523,701 2,353,575
Research and development expenses........................................... 768,054 37,782
----------- -----------
11,147,804 8,715,013
----------- -----------
Income from operations........................................................ 9,192,900 6,395,351
Interest income............................................................... 100,528 43,475
Interest expense.............................................................. (782,679) (182,773)
Joint venture income.......................................................... 385,011 143,865
Other expense................................................................. (153,308) (248,500)
----------- -----------
Income before income taxes and minority interest.............................. 8,742,452 6,151,418
Provision for income taxes.................................................... 2,972,435 2,337,539
----------- -----------
Income before minority interest............................................... 5,770,017 3,813,879
Minority interest in income of consolidated subsidiary........................ (814,501) (70,981)
----------- -----------
Net income.................................................................... $ 4,955,516 $ 3,742,898
========== ==========
Net income per common share................................................... $.45 $.34
</TABLE>
See notes to condensed consolidated financial statements.
F-58
<PAGE> 210
INSITUFORM MID-AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30
----------------------------
1995 1994
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income..................................................... $ 4,955,516 $ 3,742,898
Adjustments to reconcile net income to net cash:
Decrease in accounts receivable............................. 1,249,920 2,254,370
Increase in costs and estimated earnings in excess of
billings on uncompleted contracts......................... (4,490,518) (2,683,917)
Decrease in insurance claim receivable...................... -- 3,003,511
Decrease in prepaid/refundable income taxes................. 215,213 52,793
Increase in inventory....................................... (1,567,622) (46,807)
Increase in prepaid expenses and other current assets....... (898,876) (906,063)
Increase (decrease) in accounts payable..................... (689,959) 719,009
Increase in dividends payable............................... 157,282 --
Increase (decrease) in accrued income taxes................. (278,448) 177,982
Decrease in accrued expenses................................ (3,348,045) (572,487)
Increase (decrease) in billings in excess of costs and
estimated earnings on uncompleted contracts............... 77,868 (419,084)
Depreciation................................................ 3,548,053 2,224,429
Amortization................................................ 686,692 502,091
Gain on sale of property and equipment...................... (7,158) (3,877)
Deferred income tax provision............................... (199,348) (6,095)
Minority interest in income of consolidated subsidiary...... 815,401 70,981
Other, net.................................................. (497,088) --
------------ -----------
Net cash provided (used) by operating activities....... (271,117) 8,109,734
------------ -----------
Cash flows from financing activities:
Increase (decrease) in notes payable to banks.................. 6,815,333 (1,015,000)
Increase in long-term debt..................................... 15,250,000 --
Repayment of current portion of long-term debt................. (151,310) --
Increase in subordinated promissory note....................... 3,000,000 --
Dividends paid to common stockholders.......................... (1,475,639) (1,473,629)
Proceeds from exercise of stock options........................ 230,862 9,519
Proceeds from minority interest participation.................. -- 400,000
------------ -----------
Net cash provided (used) by financing activities....... 23,669,246 (2,079,110)
------------ -----------
Cash flows from investing activities:
Additions to property and equipment............................ (5,342,721) (5,671,136)
Proceeds from sale of property and equipment................... 162,251 233,758
Acquisition of business........................................ (18,250,000) --
Increase in license costs...................................... (100,000) --
------------ -----------
Net cash used by investing activities.................. (23,530,470) (5,437,378)
------------ -----------
Effect of exchange rate changes on cash.......................... (54,509) (82,003)
------------ -----------
Net increase (decrease) in cash and cash equivalents............. (186,850) 511,243
Cash and cash equivalents at September 30........................ 3,111,664 2,088,966
------------ -----------
Cash and cash equivalents at June 30............................. $ 2,924,814 $ 2,600,209
============ ===========
Supplemental cash flow information:
Interest paid.................................................. $ 405,138 $ 181,972
Income taxes paid.............................................. 3,068,084 2,256,650
</TABLE>
See notes to condensed consolidated financial statements.
F-59
<PAGE> 211
INSITUFORM MID-AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normally recurring accruals) considered necessary for a fair presentation
have been included. For further information, refer to the consolidated financial
statements and footnotes thereto included elsewhere in this Joint Proxy
Statement/Prospectus for the fiscal year ended September 30, 1994.
Operating results for the nine months ended June 30, 1995 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 1995.
2. COMPUTATION OF INCOME PER SHARE
Net income per common share was computed by dividing net income by the
weighted average number of common shares and common share equivalents
outstanding during the period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
Weighted average number shares outstanding.................. 11,088,223 11,117,438
</TABLE>
3. LEGAL PROCEEDINGS
By letters, dated April 4, 1995, Insituform North America Corp. and NuPipe,
Inc., subsidiaries of Insituform Technologies, Inc. ("ITI"), notified Insituform
Southeast, Inc. and NuPipe Southeast Corporation, then subsidiaries of Enviroq
Corporation ("Enviroq"), that the ITI subsidiaries refused to grant their
consent under the Insituform and NuPipe license agreements with the subsidiaries
of Enviroq to the transactions contemplated by the acquisition agreement under
which the Company acquired the pipeline rehabilitation business of Enviroq. On
April 4, 1995, Insituform North America Corp. and NuPipe, Inc. (collectively,
the "ITI Plaintiffs") filed a Complaint for Declaratory Relief (the "Declaratory
Action") against Insituform Southeast, Inc., NuPipe Southeast Corporation,
Enviroq and the Company in the Chancery Court for the Thirtieth Judicial
District at Memphis, Shelby County, Tennessee. In the Declaratory Action, the
ITI Plaintiffs are seeking a declaratory judgment that they were within their
rights to refuse to consent under Insituform and NuPipe license agreements with
subsidiaries of Enviroq, to the transactions contemplated by the acquisition
agreement, and that they possess all legal rights under such agreements arising
out of the failure by the respective licensees to obtain such consent. The
defendants have caused the Declaratory Action to be removed to Federal District
Court for the Western District of Tennessee. Pursuant to agreements between the
parties to the Declaratory Action, the proceedings have been stayed by Court
order until the earlier to occur of the completion of the proposed merger (the
"Merger") with ITI Acquisition Corp., as a result of which the Company would
become a wholly-owned subsidiary of ITI (see Note 6), or January 31, 1996. The
parties also have agreed to take no further legal action with respect to the ITI
Plaintiffs' failure to grant consent, in the Declaratory Action or otherwise,
through the earlier to occur of the Merger or the termination of the related
Agreement and Plan of Merger prior to the Merger.
Insitu, Inc. ("Insitu"), one of the three partners in MidSouth Partners, a
Tennessee general partnership, has filed a demand for arbitration claiming that
E-MidSouth, Inc. ("E-MidSouth"), another partner in MidSouth Partners and a
wholly-owned subsidiary of Insituform Southeast, Inc. (an indirect wholly-owned
subsidiary of the Company), has breached the partnership agreement by Enviroq's
entering into the
F-60
<PAGE> 212
INSITUFORM MID-AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
acquisition agreement with the Company. E-MidSouth denies that it has breached
the partnership agreement. The arbitration proceeding has been stayed until
October 2, 1995 by consent of the parties.
Pursuant to citations issued December 15, 1993, the Occupational Safety and
Health Administration, Kansas City Area Office ("OSHA"), alleged that the
Company and its subsidiaries violated certain provisions of the Occupational
Safety and Health Act of 1970 in connection with rehabilitation activities in
Kansas City, Missouri in June 1993. The allegations related to an accident in
which one of the employees of a Company subsidiary was swept away and drowned in
a flash flood resulting from a sudden and torrential thunderstorm. OSHA alleged
that the subsidiary's safety procedures were inadequate and assessed penalties
aggregating approximately $1 million. The Company believes that OSHA's
allegations neither accurately reflected the facts and circumstances of the
accident nor accurately characterized the Company's strong safety program and
commitment thereto. The Company cooperated fully with OSHA in its investigation
and does not believe that the allegations were warranted. To avoid the costs and
uncertainties of defending the citations in adversarial proceedings, the Company
settled this claim in July 1995 by agreeing to pay OSHA an aggregate of $325,000
in equal semi-annual installments through January 1997.
Pursuant to a complaint filed August 1, 1995, Enviroq Corporation
(formerly, New Enviroq Corporation; "New Enviroq") initiated an action in the
Circuit Court of Jefferson County, Alabama, for a judgment on the $3.0 million
Subordinated Promissory Note (the "Subordinated Note") issued in connection with
the Company's acquisition of Insituform Southeast, Inc. and related corporations
in April 1995 (the "Enviroq Acquisition"). New Enviroq claims that the Company
is in default under the Subordinated Note. The Company denies liability and
intends to vigorously defend the suit and pursue claims against New Enviroq
arising out of the Enviroq Acquisition, including New Enviroq's obligations
under the acquisition agreement. In the Company's opinion, the ultimate
resolution of this litigation will not have a material adverse effect upon the
Company's financial condition or results of operations.
4. LONG-TERM DEBT
As of June 30, 1995, the Company was in default under the tangible net
worth covenants in its term loan agreement, for which the lenders have granted a
waiver. The Company's lenders also have waived the event of default arising out
of developments with respect to the Company's $3.0 million Subordinated Note as
described in Note 7.
5. ACQUISITION
On April 18, 1995, the Company completed the acquisition of the pipeline
rehabilitation business of Enviroq, including Enviroq's Insituform process
business which is conducted by its Insituform Southeast, Inc. subsidiary.
Insituform Southeast, Inc. operates in a licensed territory consisting of
Alabama, Florida, Georgia, North Carolina and South Carolina. It indirectly also
owns 42.5% of Midsouth Partners, which is the licensee of the Insituform process
in Tennessee, most of Kentucky and northern Mississippi.
Under the terms of the transaction, all assets and liabilities related to
Enviroq's interest in Synox Corporation (a development stage company which is
engaged in the business of developing and testing a process for the treatment of
municipal wastewater "sludge"), and its ownership in SPRAYROQ Corporation (a
development stage company which offers a spray-applied resinous product used in
rehabilitation of manholes, among other applications) were transferred to a
newly organized subsidiary, the stock of which was distributed to Enviroq's
stockholders immediately prior to the transaction with the Company. In addition,
Enviroq transferred $500,000 cash and the undeveloped portion of real estate
which it owned in Jacksonville, Florida to the corporation spun-off.
F-61
<PAGE> 213
INSITUFORM MID-AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Pursuant to the transaction, which was accounted for as a purchase of
stock, the Company paid $15.25 million cash and issued a $3.0 million five-year
subordinated promissory note in consideration for a covenant not to compete and
entered into an agreement for consulting services providing for the Company's
payment of $1 million over five years. See Note 7 for information regarding
demands made for payment under the Subordinated Note.
The condensed consolidated statements of income include the Enviroq
operations from the dates the respective stock was acquired. Unaudited pro forma
results of operations, assuming the above-described acquisition had occurred at
October 1, 1993 are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-------------------------
1995 1994
----------- -----------
<S> <C> <C>
Contract revenues................................................... $89,663,163 $70,849,130
Net income.......................................................... 4,272,540 3,902,226
Earnings per share.................................................. $.39 $.35
</TABLE>
This pro forma information does not purport to be indicative of the results
that actually would have been obtained if the operations had been combined as of
October 1, 1993, and is not intended to be a projection of future results.
See Note 3 for a description of the moratorium on rights in dispute,
including with respect to the Insituform licenses of Enviroq's subsidiaries as a
result of the consummation of the transaction without ITI's consent and
information concerning arbitration proceedings initiated by one of the partners
of MidSouth Partners alleging an event of default by the Enviroq subsidiary
partner thereto.
6. MERGER AGREEMENT
The Company has entered into an Agreement and Plan of Merger (the "Merger
Agreement"), dated as of May 23, 1995, by and among the Company, Insituform
Technologies, Inc. ("ITI"), and ITI Acquisition Corp. ("ITI Sub"), a
wholly-owned subsidiary of ITI, providing for the merger of ITI Sub into the
Company, as a result of which the Company would become a wholly-owned subsidiary
of ITI. Pursuant to the terms of the Merger Agreement, holders of the Class A
Common Stock of the Company would be entitled to receive 1.15 shares of Class A
Common Stock of ITI ("ITI Stock") for each share of the Company's Class A Common
Stock held. In connection with the Merger, the holders of the Company's Class B
Common Stock have agreed to convert their shares into Class A Common Stock on a
share-for-share basis immediately prior to the consummation of the Merger.
It is anticipated that the Merger will constitute a tax-free reorganization
under federal income tax laws and, accordingly, holders of IMA Class A Common
Stock would not recognize taxable gain or loss upon their receipt of ITI Stock
in the Merger. In addition, it is anticipated that the Merger would be accounted
for using the pooling-of-interests method of accounting.
Consummation of the Merger is subject to customary closing conditions,
including approval by the respective stockholders of the Company and ITI.
Pending completion of the Merger, the Company and ITI agreed to certain
covenants relating to the operation of their respective businesses. The Merger
Agreement also provides that it may be terminated prior to closing under certain
circumstances, including if the closing has not occurred by January 31, 1996.
F-62
<PAGE> 214
INSITUFORM MID-AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
7. SUBSEQUENT EVENT
By letter, dated July 14, 1995, counsel for New Enviroq alleged that a
default had occurred with respect to the payment of the interest due to New
Enviroq on June 30, 1995 under the Subordinated Note in the principal amount of
$3.0 million issued by the Company in April 1995 in connection with the
acquisition described in Note 5. New Enviroq demanded payment of such interest
installment and purported to declare the entire principal due and payable. The
Company advised New Enviroq that such purported acceleration was improper and
directed New Enviroq to withdraw it. On August 1, 1995, New Enviroq filed a
lawsuit against the Company in the Circuit Court of Jefferson County, Alabama,
seeking a judgment in respect of the Company's alleged default under the
Subordinated Note.
The Company believes it is not in default under the Subordinated Note and
intends to vigorously defend the lawsuit and pursue claims against New Enviroq
arising out of the Enviroq Acquisition, including New Enviroq's obligations
under the acquisition agreement. The Company's senior lenders have waived the
event of default under the Company's principal financing agreements which
otherwise would have occurred as a result of New Enviroq's actions in respect of
the Subordinated Note. The Company is seeking to negotiate a mutually acceptable
resolution regarding the status of the Subordinated Note. Pending such
resolution, the Company classified the obligation as a current liability in the
accompanying balance sheet. In the Company's opinion, the ultimate resolution
thereof will not have a material adverse effect upon the Company's financial
condition or results of operations.
F-63
<PAGE> 215
INDEPENDENT AUDITORS' REPORT
IMA Merger Sub, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Enviroq
Corporation and subsidiaries (renamed IMA Merger Sub, Inc.) as of March 25, 1995
and March 26, 1994, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended March 25, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Enviroq
Corporation and subsidiaries as of March 25, 1995 and March 26, 1994, and the
results of their operations and their cash flows for each of the two years in
the period ended March 25, 1995 in conformity with generally accepted accounting
principles.
As discussed in Note 1, to the consolidated financial statements, the
Company discontinued the operations of two of its subsidiaries; Synox
Corporation and Sprayroq, Inc. and spun off their related assets, together with
certain other assets, to a newly formed company on April 18, 1995. The loss from
operations of these subsidiaries is included in income from discontinued
operations in the accompanying consolidated financial statements. In addition on
April 18, 1995, the Company sold all of its common stock to Insituform
Mid-America, Inc.
As discussed in Note 16, the Company is involved in certain litigation and
arbitration proceedings in connection with the merger with Insituform
Mid-America, Inc. regarding certain aspects of its Insituform and NuPipe
licensing agreements and the partnership agreement of Midsouth Partners. The
ultimate outcome of these litigation and arbitration proceedings cannot
presently be determined. Accordingly, no provision for any loss that may result
upon resolution of these matters has been made in the accompanying consolidated
financial statements.
Deloitte & Touche LLP
Jacksonville, Florida
June 9, 1995
F-64
<PAGE> 216
ENVIROQ CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 1995 MARCH 1994
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 621,477 $ 218,806
Contracts receivable (net of allowance for doubtful accounts of $0)....... 3,671,831 3,315,651
Marketable securities (at amortized cost which approximates market
value).................................................................. 203,083 360,485
Inventories............................................................... 960,716 876,083
Costs and estimated earnings in excess of related billings................ 966,245 1,751,194
Receivables from related parties.......................................... 15,978 86,358
Income taxes receivable................................................... 112,998
Prepaid expenses and other assets......................................... 219,316 259,876
----------- -----------
6,771,644 6,868,453
----------- -----------
Investment and other assets:
Investments in and advances to affiliate.................................. 1,322,529 913,808
Receivable from New Enviroq............................................... 344,162
Deferred income taxes..................................................... 131,806 170,332
Other assets.............................................................. 987,852 1,024,802
----------- -----------
2,786,349 2,108,942
----------- -----------
Property, plant and equipment, at cost:
Land...................................................................... 252,789 252,789
Buildings................................................................. 2,589,081 2,523,441
Construction equipment.................................................... 5,543,573 5,608,100
Other equipment and vehicles.............................................. 2,448,462 1,985,306
Construction in process................................................... 182,952 89,069
----------- -----------
11,016,857 10,458,705
Less accumulated depreciation............................................. (6,595,047) (6,549,775)
----------- -----------
4,421,810 3,908,930
----------- -----------
Net assets of discontinued operations....................................... 1,943,227 2,718,767
----------- -----------
$15,923,030 $15,605,092
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable.............................................................. $ 1,000 $ 1,000
Accounts payable and accrued expenses..................................... 2,071,227 1,226,867
Salaries, wages and related taxes......................................... 251,252 275,044
Billings in excess of costs and estimated earnings........................ 34,706
Due to related parties.................................................... 696,726 914,295
Income taxes payable...................................................... 74,106
Current portion of long-term debt and capital leases...................... 126,115 121,663
----------- -----------
3,146,320 2,647,681
Long-term debt and capital leases........................................... 339,401 465,515
Deferred compensation....................................................... 560,783 412,498
----------- -----------
4,046,504 3,525,694
----------- -----------
Commitments and contingencies (Notes 4, 7 and 16)
Stockholders' Equity:
Class C preferred stock -- $1 par value; authorized 1,000,000 shares, none
issued or outstanding
Common stock -- $.44 par value; authorized 15,000,000 shares, issued
4,916,791 shares........................................................ 2,163,388 2,163,388
Additional paid-in capital................................................ 9,700,619 10,178,748
Retained earnings (deficit)............................................... 134,311 (140,946)
----------- -----------
11,998,318 12,201,190
Less treasury stock at cost, 51,404 shares................................ (121,792) (121,792)
----------- -----------
11,876,526 12,079,398
----------- -----------
$15,923,030 $15,605,092
=========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-65
<PAGE> 217
ENVIROQ CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------
MARCH 1995 MARCH 1994
----------- -----------
<S> <C> <C>
Revenues.......................................................... $21,263,498 $22,015,031
Cost of revenues.................................................. 17,252,236 17,903,924
----------- -----------
Gross profit.................................................... 4,011,262 4,111,107
Selling, general and administrative expenses...................... 2,868,240 2,657,907
----------- -----------
Income from operations.......................................... 1,143,022 1,453,200
----------- -----------
Other income:
Equity in income of affiliate................................... 531,971 150,254
Interest........................................................ 78,897 57,042
Other........................................................... 208,342 138,050
----------- -----------
819,210 345,346
----------- -----------
Other expense:
Interest........................................................ 85,299 57,437
Other........................................................... 45,268 48,159
----------- -----------
130,567 105,596
----------- -----------
Income from continuing operations before income taxes............. 1,831,665 1,692,950
Income tax provision.............................................. (794,000) (671,000)
----------- -----------
Income from continuing operations................................. 1,037,665 1,021,950
Discontinued operations (Note 1):
Loss from operations of discontinued subsidiaries Synox and
Sprayroq (less applicable income tax benefit of $272,000 and
$265,000).................................................... (762,408) (647,206)
----------- -----------
Net income........................................................ $ 275,257 $ 374,744
========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-66
<PAGE> 218
ENVIROQ CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK
($.44 PAR VALUE) ADDITIONAL RETAINED TREASURY STOCK
---------------------- PAID-IN EARNINGS ------------------
SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT TOTAL
--------- ---------- ----------- --------- ------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance March 27, 1993...... 4,871,791 $2,143,588 $10,072,923 $(515,690) 51,404 $(121,792) $11,579,029
Net income.................. 374,744 374,744
Issuance of common stock.... 45,000 19,800 105,825 125,625
--------- ---------- ----------- --------- ------ --------- -----------
Balance March 26, 1994...... 4,916,791 2,163,388 10,178,748 (140,946) 51,404 (121,792) 12,079,398
Net income.................. 275,257 275,257
Organization costs of Synox
and Sprayroq.............. (478,129) (478,129)
--------- ---------- ----------- --------- ------ --------- -----------
Balance March 25, 1995...... 4,916,791 $2,163,388 $ 9,700,619 $ 134,311 51,404 $(121,792) $11,876,526
========= ========== ============ ========== ====== ========== ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-67
<PAGE> 219
ENVIROQ CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------
MARCH 1995 MARCH 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 275,257 $ 374,744
Adjustments to reconcile net income as adjusted to net cash
provided by operating activities:
Depreciation.................................................... 975,922 1,099,004
Amortization.................................................... 193,908 142,018
Gain on disposal of fixed assets................................ (74,059) (36,638)
Gain on disposal of securities.................................. (1,500) (3,145)
Decrease in deferred income taxes............................... 38,526 69,008
Equity in income of affiliates.................................. (531,971) (150,254)
Increase in contracts receivable................................ (356,180) (1,182,237)
(Increase) decrease in income taxes receivable.................. (112,998) 96,414
Receivable from New Enviroq..................................... (344,162)
Decrease (increase) in receivable from related parties.......... 70,380 (47,523)
Increase in inventories......................................... (84,633) (139,905)
Decrease (increase) in costs and estimated earnings in excess of
related billings............................................. 784,949 (1,027,533)
Decrease (increase) in prepaid expenses and other current
assets....................................................... 40,560 (207,088)
Increase in other assets........................................ (156,958) (262,847)
Increase in accounts payable and accrued expenses............... 809,526 16,211
(Decrease) increase in salaries, wages and related taxes........ (23,792) 160,063
Decrease in billings in excess of costs and estimated
earnings..................................................... (34,706) (37,294)
(Decrease) increase in due to related parties................... (182,735) 726,826
(Decrease) increase in income taxes payable..................... (74,106) 74,106
Increase in deferred compensation............................... 148,285 62,923
Discontinued operations -- non cash charges and working
capital changes.............................................. 285,358 233,920
----------- -----------
Net cash provided by (used in) operating activities............... 1,644,871 (39,227)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities................................ (8,870,000) (3,500,000)
Sales of marketable securities.................................... 9,028,902 4,504,668
Proceeds from sale of equipment................................... 129,613 38,781
Additions to property, plant and equipment........................ (1,544,356) (856,603)
Distribution of Midsouth Partnership Capital...................... 123,250
Cash provided by (used in) discontinued segment................... 500,362 (62,817)
----------- -----------
Net cash (used in) provided by investing activities............... (632,229) 124,029
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on obligations under capital leases...................... (52,698) (39,331)
Payments on long-term debt........................................ (68,964) (68,966)
Issuance of additional common stock............................... 84,375
----------- -----------
Net cash used in financing activities............................. (121,662) (23,922)
----------- -----------
Net increase in cash and cash equivalents....................... 890,980 60,880
Cash and cash equivalents at beginning of year.................. 235,666 174,786
----------- -----------
Cash and cash equivalents at end of year........................ $ 1,126,646 $ 235,666
========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-68
<PAGE> 220
ENVIROQ CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. GENERAL INFORMATION
Pursuant to a Merger Agreement, dated November 2, 1994, by and among
Enviroq Corporation ("Enviroq"), Insituform Mid-America, Inc. ("IMA") and IMA
Acquisition Corp. ("Acquisition Corp."), on April 18, 1995, Acquisition Corp.
acquired the common stock of and merged into Enviroq which changed its name to
IMA Acquisition Corp. and, together with its wholly-owned subsidiaries,
Insituform Southeast, Inc., Enviroq Services, Inc. (which subsequently changed
its name to ISE Services, Inc.), E-Midsouth, Inc. and NuPipe Southeast, Inc.
became subsidiaries of IMA. Immediately prior to the merger, the net assets of
Synox Corporation ("Synox"), a wholly-owned subsidiary of Enviroq, and Sprayroq,
Inc. ("Sprayroq"), a 50% owned subsidiary of Enviroq, approximately 11 acres of
unimproved land and $500,000 in cash were transferred to New Enviroq, a newly
formed public company, at their respective book values and all of the shares of
New Enviroq were spun off by Enviroq to its shareholders. Each share of common
stock of Enviroq issued and outstanding was converted into a right to receive a
cash payment equal to the pro rata portion of the merger consideration of
$15,250,000.
The consolidated financial statements of the Company have been restated to
reflect Synox and Sprayroq as discontinued operations. Summarized financial
information for the discontinued operations as of and for the years ended March
1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Balance Sheet Data:
Assets
Current Assets
Cash and cash equivalents....................................... $ 505,169 $ 16,860
Marketable securities........................................... 500,000
Other current assets............................................ 171,709 261,430
----------- ----------
676,878 778,290
Other Noncurrent Assets............................................ 722,211 807,555
Net Property, Plant and Equipment.................................. 1,153,873 1,247,538
----------- ----------
Total Assets......................................................... 2,552,962 2,833,383
----------- ----------
Liabilities
Current Liabilities................................................ 45,902 77,531
Noncurrent Liabilities............................................. 563,833 37,085
----------- ----------
Total Liabilities.................................................... 609,735 114,616
----------- ----------
Net Assets of Discontinued Operations................................ $ 1,943,227 $2,718,767
========== =========
Discontinued Loss Data:
Related Party Revenues............................................... $ 173,523 $ 142,796
Other Revenues....................................................... 43,110 78,322
----------- ----------
Total Revenues....................................................... 216,633 221,118
----------- ----------
Loss Before Income Taxes............................................. (1,034,408) (912,206)
Income Tax Benefit................................................... 272,000 265,000
----------- ----------
Net Loss............................................................. $ (762,408) $ (647,206)
========== =========
</TABLE>
F-69
<PAGE> 221
ENVIROQ CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 1995 AND 1994
The Merger Agreement provides that New Enviroq will be responsible to
reimburse Enviroq/IMA and pay all transaction costs incurred by Enviroq in
connection with the negotiation and consummation of the Merger Agreement. These
costs include:
- Registration of New Enviroq shares,
- Preparation and filing of Enviroq's Proxy Statement, and
- All related professional fees and expenses and printing costs including
the investment banking fees associated with the fairness opinion.
B. BASIS OF PRESENTATION
Principles of Consolidation
The consolidated financial statements include the accounts of Enviroq
Corporation, its wholly-owned subsidiaries, and its 50% owned subsidiary,
Sprayroq, Inc. Sprayroq, Inc. is included on a consolidated basis because the
Company has a majority voting interest of the stock of Sprayroq, Inc. As
previously disclosed, the accounts of Synox and Sprayroq are disclosed as
discontinued operations in the consolidated financial statements. All
significant intercompany transactions are eliminated. The equity method of
accounting is used for the Company's investment in its unconsolidated affiliate.
Allocated Revenues and Expenses
Certain subsidiaries of Enviroq purchased chemical products from Sprayroq
in order to fulfill requirements of outside contracts. The revenues earned from
these outside contracts were allocated to Sprayroq based on the fair value of
the products. Revenues allocated to Sprayroq were approximately $174,000 and
$143,000 in 1995 and 1994. In addition, a pro-rata share of general and
administrative corporate costs incurred by Enviroq have been allocated to Synox
and Sprayroq based upon estimated time expended by corporate employees, services
performed by outside vendors and usage of various corporate materials related to
the operations of Synox and Sprayroq. General and administrative expenses
allocated to Synox and Sprayroq were approximately $219,000 in 1995 and 1994.
Management believes the above stated allocations of revenues and expenses were
made on a reasonable basis; however, they do not necessarily reflect the results
of operations which would have occurred had Synox and Sprayroq been independent
entities nor are they necessarily indicative of future revenues or expenses.
C. FISCAL YEAR
Enviroq's fiscal year ends on the last Saturday in March. Fiscal years 1995
and 1994 consisted of 52 weeks.
D. ENVIROQ'S BUSINESS AND OPERATING CYCLE
Enviroq is engaged in the business of pipeline, sewer and conduit
reconstruction, repair and rehabilitation using a process that provides a
continuous, jointless tube with little or no excavation under normal conditions.
Enviroq has the exclusive licensee for the Insituform and NuPipe processes in
Alabama, Florida, Georgia, North Carolina, and South Carolina, and in addition,
own 42.5% of Midsouth Partners, a general partnership which is the exclusive
licensee of the Insituform and NuPipe processes in Tennessee, most of Kentucky,
and northern Mississippi.
The work is performed under cost-plus-fee and fixed-priced contracts,
primarily with state and local government agencies. Because such contracts do
not extend beyond one year, the accompanying balance sheets are presented on a
classified basis.
F-70
<PAGE> 222
ENVIROQ CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 1995 AND 1994
E. REVENUE AND COST RECOGNITION
Revenues from construction contracts are recognized on the
percentage-of-completion method, measured by the percentage of costs incurred to
total estimated costs for each contract (cost-to-cost method). This method is
used because management considers costs incurred to be the best available
measure of progress on these contracts. Revenues from cost-plus-fee contracts
are recognized on the basis of costs incurred during the period plus the fee
earned, measured by the cost-to-cost method.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation. Selling, general and administrative
costs are charged to expense as incurred. Changes in job performance, conditions
and estimated profitability may result in subsequent revisions to costs and
income. When possible, such revisions are recognized in the period that the
related contract revenues and costs are recorded. Otherwise, they are recognized
in the period in which the revisions are determined. The asset, "Costs and
estimated earnings in excess of related billings", represents revenues
recognized in excess of amounts billed. The liability, "Billings in excess of
costs and estimated earnings", represents billings in excess of revenues
recognized.
F. CASH AND CASH EQUIVALENTS
Enviroq considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents except for certain short
term state and municipal bond funds.
G. INVENTORIES
Inventories, consisting of raw materials and supplies, are valued at the
lower of cost (first-in, first-out method) or market.
H. MARKETABLE SECURITIES
Marketable securities consist primarily of state and municipal tax exempt
bonds and bond funds of various maturities carried at amortized cost which
approximates market value. These investments are subject to market risk
associated with fixed income securities. Enviroq classifies all debt and
marketable equity securities in one or more of the following three categories:
(1) Held-to-Maturity; (2) Available-for-Sale; and (3) Trading. Enviroq considers
all securities to be available-for-sale securities. Realized gains and losses on
these securities are determined on a specific identification basis. There were
no unrealized holding gains or losses at March 1995 and 1994.
I. INVESTMENT IN AND ADVANCES TO AFFILIATE
Enviroq's investment in Midsouth Partners, a general partnership, is
accounted for by the equity method. Under the terms of the partnership
agreement, Enviroq has a 42.5% interest in the partnership's profits or losses.
J. INTANGIBLES
Costs incurred for certain sub-license agreements are being amortized over
a 12 year period using the straight-line method.
Organizational costs for NuPipe Southeast, Inc. and Enviroq Services, Inc.
are being amortized over a three year period using the straight-line method.
F-71
<PAGE> 223
ENVIROQ CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 1995 AND 1994
Enviroq purchased a license agreement from NU-PIPE, Inc. in December 1990.
This agreement provides NuPipe Southeast, Inc. exclusive process rights within
its territory and use of copyrighted information. This cost is being amortized
over the life of the agreement (15 years) using the straight-line method.
The excess of Enviroq's basis in Synox over the underlying net asset value
is being amortized over a 15 year period using the straight-line method.
Management periodically evaluates the likelihood of impairment of its
intangible assets based upon anticipated future cash flows.
K. PROPERTY, PLANT AND EQUIPMENT
Depreciation is provided principally on the straight-line method over the
following estimated useful lives of the assets:
<TABLE>
<CAPTION>
YEARS
--------
<S> <C>
Buildings................................................... 5 to 40
Construction equipment...................................... 2 to 15
Other equipment and vehicles................................ 2 to 7
</TABLE>
Repairs and maintenance costs are charged to expense as incurred.
L. CAPITALIZATION OF INTEREST
Interest incurred on major capital expenditures is capitalized during the
period of construction. Capitalized interest was $14,357 and $3,664 for the
years ended March 1995 and 1994, respectively.
M. RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. For the years
ended March 1995 and 1994 such costs relating to continuing operations were
$69,295 and $47,320, respectively.
N. INCOME TAXES
Enviroq Corporation files consolidated federal income tax returns. Income
tax expense (benefit) is allocated to each member of the consolidated group on
the basis of their respective taxable income or loss included in the
consolidated income tax returns. Enviroq utilizes an asset and liability
approach to financial accounting for income taxes. Under this method deferred
tax assets and liabilities are recognized based on differences between financial
statement and tax basis of assets and liabilities using presently enacted tax
rates.
In 1995 and 1994, deferred income taxes are provided for the temporary
differences between the financial reporting basis and the tax basis of Enviroq
assets and liabilities.
O. PRODUCT WARRANTIES
Enviroq generally warrants that its products meet contract specifications.
Such warranties cover materials and workmanship and are generally effective for
a period of one year from date of contract completion. Liability for warranty
claims is accrued when management determines that a specific liability exists
and the amount can be reasonably estimated.
F-72
<PAGE> 224
ENVIROQ CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 1995 AND 1994
P. RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 consolidated financial
statements to conform with the presentation adopted for 1995.
2. CONTRACTS RECEIVABLE
Substantially all the contracts are with governmental units located within
Enviroq's geographic territory. Contracts receivable are as follows:
<TABLE>
<CAPTION>
MARCH 1995 MARCH 1994
---------- ----------
<S> <C> <C>
Completed contracts......................................... $ 826,556 $1,077,604
Contracts in process........................................ 2,100,609 1,960,791
Retained.................................................... 744,666 277,256
---------- ----------
$3,671,831 $3,315,651
========== ==========
</TABLE>
3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
MARCH 1995 MARCH 1994
----------- -----------
<S> <C> <C>
Costs on uncompleted contracts............................ $ 5,424,974 $ 4,848,507
Estimated earnings........................................ 452,204 1,366,433
----------- -----------
5,877,178 6,214,940
Less billings to date..................................... (4,910,933) (4,498,452)
----------- -----------
$ 966,245 $ 1,716,488
=========== ===========
</TABLE>
Included in the accompanying consolidated balance sheets under the
following captions:
<TABLE>
<CAPTION>
MARCH 1995 MARCH 1994
----------- -----------
<S> <C> <C>
Costs and estimated earnings in excess of billings........ $ 966,245 $ 1,751,194
Billings in excess of costs and estimated earnings........ (34,706)
-------- ----------
$ 966,245 $ 1,716,488
======== ==========
</TABLE>
4. INVESTMENT IN AND ADVANCES TO AFFILIATE
The Midsouth Partners partnership agreement requires each partner to fund
additional capital contributions as may be necessary for operations of the
partnership in proportion to their respective interests. In addition, Enviroq
and one other partner are each obligated to loan up to $250,000 to Midsouth
Partners for operating capital. As of March 1995, Enviroq had no loans
outstanding under this agreement. During the year ended March 1995, Midsouth
Partners distributed $290,000 to its owners. Enviroq's portion of this
distribution
F-73
<PAGE> 225
ENVIROQ CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 1995 AND 1994
was $123,250. Summary information for Midsouth Partners as of March 1995 and
1994 and for the twelve month periods then ended is as follows:
<TABLE>
<CAPTION>
1995 1994
(UNAUDITED) (UNAUDITED)
---------- ----------
<S> <C> <C>
Current assets.............................................. $2,545,224 $2,026,386
Long-term assets............................................ 1,293,161 971,842
---------- ----------
Total assets................................................ $3,838,385 $2,998,228
========== ==========
Current liabilities......................................... $ 691,335 $ 765,582
Long-term liabilities....................................... 35,218 82,510
---------- ----------
Total liabilities........................................... $ 726,553 $ 848,092
========== ==========
Partnership equity.......................................... $3,111,832 $2,150,136
========== ==========
Revenues.................................................... $7,857,190 $6,357,515
========== ==========
Gross profit................................................ $2,227,243 $1,479,577
========== ==========
Net income.................................................. $1,251,696 $ 352,855
========== ==========
Enviroq's interest:
Share of cumulative undistributed partnership income...... $1,322,529 $ 913,808
========== ==========
</TABLE>
5. LONG-TERM DEBT AND CAPITAL LEASES
<TABLE>
<CAPTION>
MARCH 1995 MARCH 1994
---------- ----------
<S> <C> <C>
Mortgage obligation under industrial development bond........ $396,551 $465,516
Less current portion......................................... (68,966) (68,965)
-------- --------
$327,585 $396,551
======== ========
</TABLE>
In December 1985, Enviroq received proceeds of $965,145 from the issuance
of a $1,000,000 Industrial Development Bond (the "Bond") by the City of
Jacksonville, Florida and financed by Barnett Bank of Jacksonville, N.A. (the
"Bank"). Principal is due in 174 equal monthly installments of $5,747 beginning
July 1986 plus interest. Interest is computed at a rate of 91.7% of the Bank's
base lending rate. The Bank's base lending rate was 9% at March 1995. The
obligation is redeemable at the Bank's option, every five years beginning
December 1, 1988 or upon occurrence of a tax violation as defined in the
agreements. The obligation is secured by a first mortgage and a first security
interest in substantially all of Enviroq's real and personal properties at March
1995.
Restrictive covenants include: restrictions on the sale or transfer of
project assets, change in entities, material adverse change in financial
condition or operations, the subordination of all notes payable to stockholders,
affiliates or related parties, limitations on additional funded debt, permitting
total debt not to exceed 3 times net worth (including subordinated debt),
maintaining net worth (including subordinated debt) of not less than $2,000,000,
maintaining cash flow available for debt service at 1.5 times annual debt
service for all funded debt before dividends may be paid, and maintaining a
current ratio of at least 1.3-to-1.
F-74
<PAGE> 226
ENVIROQ CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 1995 AND 1994
Aggregate long-term debt maturities subsequent to March 1995 are as
follows:
<TABLE>
<CAPTION>
MARCH
--------------------------------------------------------------------
<S> <C>
1996...................................................... $ 68,966
1997...................................................... 68,966
1998...................................................... 68,966
1999...................................................... 68,966
2000...................................................... 68,966
Thereafter................................................ 51,721
--------
$396,551
========
</TABLE>
Enviroq acquired some of its vehicles subject to leasing arrangements that
qualify for capitalization. The net book value of leased vehicles at March 25,
1995 is approximately $64,000.
Future minimum rental payments for obligations under capital leases at
March 25, 1995 are as follows:
<TABLE>
<S> <C>
1996...................................................... $ 60,662
1997...................................................... 11,956
--------
Total........................................... 72,618
Less interest................................... (3,653)
--------
Total principal portion......................... $ 68,965
========
</TABLE>
At March 25, 1995, Enviroq had available two bank lines of credit
aggregating $2,500,000 which terminated effective with the merger.
6. INCOME TAXES
The provision for income taxes from continuing operations for the years
ended March 1995 and 1994 includes the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Current........................................................ $755,000 $602,000
Deferred....................................................... 39,000 69,000
-------- --------
Income tax provision........................................... $794,000 $671,000
======== ========
</TABLE>
The differences between the provision for income taxes from continuing
operations and income taxes computed using the Federal statutory rate for the
years ended March 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Taxes computed at Federal statutory rate....................... $623,000 $576,000
State income taxes, net of Federal tax benefit................. 76,000 61,000
Nondeductible expenses......................................... 95,000 34,000
-------- --------
$794,000 $671,000
======== ========
</TABLE>
F-75
<PAGE> 227
ENVIROQ CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 1995 AND 1994
The types of temporary differences and their related tax effects which
create deferred taxes at March 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Assets:
Deferred compensation....................................... $ 209,172 $156,733
Other....................................................... 73,802 61,732
--------- --------
Total assets........................................ 282,974 218,465
--------- --------
Liabilities:
Equity in Midsouth Partners................................. (92,632) (48,133)
Other....................................................... (58,536)
--------- --------
Total liabilities................................... (151,168) (48,133)
--------- --------
Net deferred tax asset.............................. $ 131,806 $170,332
========= ========
</TABLE>
7. COMMITMENTS
Enviroq leases certain vehicles and equipment used in its operations on a
month-to-month basis. Total rent expense for all operating leases for the years
ended March 1995 and 1994 was approximately $207,000 and $212,000 respectively.
These amounts do not include equipment rented on a day-to-day basis.
Under the terms of its sublicense agreements, Enviroq is obligated to pay
the licensor royalties of 8% of contract revenue, excluding certain preparatory
and finishing work. These agreements require the payment of minimum royalties of
approximately $448,000 per year as of March 1995; extend for the life of the
underlying patents and are cancelable, either by the licensee upon written
notice, or by the licensor upon nonpayment of royalties or certain other events
as defined.
Pursuant to a supplement to the Sublicense Agreement dated December 1,
1990, future minimum royalties may be waived by the licensor if the licensor
approves Enviroq's marketing and sales plan with respect to licensed processes.
The Company has submitted such a plan which has been approved for the 1995
royalty year.
8. RELATED PARTY TRANSACTIONS
Substantially all of Enviroq's insurance is purchased through Assurance
Agency, Inc., an affiliate of SCE, Incorporated ("SCE"), a principal stockholder
of Enviroq until April 18, 1995. Enviroq leases warehouse space from Sullivan,
Long and Hagerty ("SLH") (the parent of SCE). The lease term is one year,
renewable annually, and requires monthly payments of $1,750. Enviroq also
purchased marketing promotion and related services from Market Potential,
Incorporated, which is owned by a party associated with SCE.
Enviroq purchased Insitutube, NuPipe and related products from Insituform
Technologies, Inc. ("ITI") which was a stockholder of Enviroq until April 18,
1995.
F-76
<PAGE> 228
ENVIROQ CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 1995 AND 1994
Total expenditures by Enviroq to the above affiliates for the years ended
March 1995 and 1994 were approximately as follows:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
ITI......................................................... $ 4,560,000 $4,223,000
SCE and affiliates.......................................... 1,063,000 1,053,000
SLH......................................................... 27,000 27,000
----------- ----------
5,650,000 5,303,000
Capitalized expenditures.................................... (41,000)
----------- ----------
Amounts charged to cost of revenues and selling, general and
administrative............................................ $ 5,650,000 $5,262,000
========= =========
</TABLE>
For the years ended March 1995 and 1994 Enviroq provided $17,000 and
$71,000, respectively, of operational support and contract related services to
Midsouth Partners. For the years ended March 1995 and 1994, Midsouth Partners
provided operational support to Enviroq of $15,000 and $298,000, respectively.
Due to related parties is comprised of the following:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Royalties payable to licensors.............................. $ 360,000 $ 341,000
Inventory purchases payable to ITI.......................... 257,000 395,000
Insurance payable to Assurance Agency, Inc.................. 50,000 111,000
Inventory purchases payable to Sprayroq..................... 22,000 35,000
Payables to SCE and SLH..................................... 8,000
Payable to Midsouth Partners................................ 32,000
----------- ----------
$ 697,000 $ 914,000
========= =========
</TABLE>
9. RETIREMENT PLAN
Enviroq has a Retirement Plan (the "Plan") for its employees, which remains
in effect with the IMA merger, which allows participants to make contributions
by salary reduction pursuant to Section 401(K) of the Internal Revenue Code. The
Board of Directors approved Enviroq contributions to the Plan for the year ended
March 1995 and 1994 of $43,268 and $40,096, respectively, for allocation to
eligible participant individual accounts. Participants under the Plan are fully
vested within one year for Enviroq contributions.
10. STATEMENT OF CASH FLOWS
Supplemental disclosure of cash flow information for the years ended March
1995 and 1994 follows:
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Cash paid for:
Interest...................................................... $ 38,681 $ 61,355
Income taxes.................................................. $ 483,323 $ 89,130
</TABLE>
Non-cash investing transactions for 1995 include the write-off of fully
depreciated property, plant and equipment of $930,650. Non-cash financing
transactions for 1995 include the accrual of organization costs of approximately
$478,000 with a corresponding reduction in additional paid-in capital.
F-77
<PAGE> 229
ENVIROQ CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 1995 AND 1994
Non-cash investing and financing transactions for 1994 includes $161,000
related to assets acquired under capital leases and the issuance of 15,000
shares of common stock valued at $41,250 related to a previous acquisition
described in Note 14.
11. PRINCIPAL CUSTOMER INFORMATION
Revenues from major customers (those providing over 10% of total revenues)
were $2,880,000 and $2,975,000 (Miami/Dade County, Florida) for fiscal years
1995 and 1994, and $3,866,000 (Cobb County, Georgia) for fiscal year 1994.
12. STOCK OPTION PLANS
In August 1986, Enviroq adopted an incentive stock option plan and a
non-qualified stock option plan. As of March 1994, options to purchase 491,060
shares of Enviroq common stock were outstanding. The IMA merger consideration
cash payment of $15,250,000 included payment to stock option holders under both
plans with stock options having an exercise price of less than the merger
consideration price of $3.13 per share. As of April 18, 1995, the IMA merger
date, holders of options to purchase 143,500 shares with exercise prices ranging
from $2.125 to $2.9167 were paid the difference between the merger consideration
price per share of $3.13 and the applicable exercise price per share which
totalled approximately $46,000. In addition, on April 18, 1995, options to
purchase 38,000 shares were exercised at exercise prices ranging from $3.1875 to
$3.5063. Stock options to purchase 209,384 shares of common stock with exercise
prices in excess of $3.13 per share were terminated effective with the merger.
The remaining options to purchase 100,176 shares of Enviroq common stock
expired.
13. DEFERRED COMPENSATION BENEFITS
Enviroq established non-qualified deferred compensation agreements, as
amended, for certain employees providing for fixed annual benefits ranging from
$10,000 to $100,000 payable over a period of 10 years in event of death, full
disability or retirement at age 65. These deferred compensation agreements
remain in effect subsequent to the merger with IMA on April 18, 1995.
Benefits will be funded by life insurance contracts purchased by Enviroq.
The cost of these benefits is being charged to expense and accrued using a
present value method over the expected terms of employment. The charge to
expense in continuing operations for the years ended March 1995 and 1994 was
$231,842 and $93,640, respectively. Enviroq (IMA subsequent to April 18, 1995)
reserves the right to terminate these agreements.
14. PURCHASE OF C&L WATERPROOFING, INC.
On January 2, 1991, Enviroq purchased substantially all the assets of C&L
Waterproofing, Inc., a manhole reconstruction company for $320,000. The
transaction was accounted for by the purchase method. Results of this business
from January 2, 1991 are included in the accompanying consolidated financial
statements.
Because of a contingent purchase price provision, Enviroq issued 15,000
shares of common stock to the seller in fiscal year 1994. The fair value of the
stock issued is accounted for as an additional cost of the acquired business.
15. OFFICERS INDEMNIFICATION TRUST
Enviroq (IMA subsequent to April 18, 1995) maintains a trust fund to
indemnify officers and directors in the event legal proceedings are undertaken
against the officers or directors as a result of actions on behalf of
F-78
<PAGE> 230
ENVIROQ CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 1995 AND 1994
Enviroq. Trust investments are United States Treasury notes and bonds with
varying maturity dates. Trust assets may only be used upon approval of the Board
of Directors and for the uses specified in the trust agreement. The trust
balance as of March 1995 and 1994 was $354,745 and $334,568, respectively.
16. LEGAL PROCEEDINGS
Enviroq is involved in certain litigation and arbitration proceedings in
connection with the IMA merger regarding certain aspects of its Insituform and
NuPipe licensing agreements and the partnership agreement of Midsouth Partners.
The principal issues involve the failure by Insituform North America Corp. and
NuPipe, Inc., subsidiaries of Insituform Technologies, Inc. ("ITI"), to grant
consent under their respective licenses, and of a partner of Midsouth Partners,
owned by Insituform East, to grant consent under the governing partnership
agreement, to the transactions under the merger agreement between IMA and
Enviroq. ITI, IMA and Enviroq have entered into various agreements to take no
further legal action regarding such issues pending consummation of the
transactions proposed between ITI and IMA or termination of such arrangements.
Management is unable at this time to determine the effect, which could be
material, of the ultimate outcome of these litigation and arbitration
proceedings. Accordingly, no provision for any loss that may result upon
resolution of these matters has been made in these consolidated financial
statements.
17. SUBSEQUENT EVENTS
In addition to the Enviroq merger into IMA on April 18, 1995, ITI and IMA
on May 23, 1995 entered into a definitive agreement which provides for the
merger into IMA of a subsidiary of ITI formed for that purpose, as a result of
which IMA would become a wholly-owned subsidiary of ITI. The ITI and IMA merger
transaction is conditional upon obtaining certain approvals and other conditions
being met.
F-79
<PAGE> 231
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Gelco Insituform/NuPipe Entities
Salem, Oregon
We have audited the accompanying combined balance sheets of Gelco
Insituform/NuPipe Entities as of December 31, 1993 and 1992, and the related
combined statements of income, equity, and cash flows for the years then ended.
These combined financial statements are the responsibility of the Entities'
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the accompanying combined financial statements present
fairly, in all material respects, the financial position of Gelco
Insituform/NuPipe Entities as of December 31, 1993 and 1992, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
ALDRICH, KILBRIDE & TATONE
March 7, 1994 (except for Note 13, which is dated August 24, 1994)
Salem, Oregon
F-80
<PAGE> 232
GELCO INSITUFORM/NUPIPE ENTITIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1993 1992
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.............................................................. $ -- $ 154,961
---------- ----------
Receivables:
Trade, less allowance for doubtful accounts of zero............ 3,490,385 3,291,180
Retainage...................................................... 378,139 521,691
Other.......................................................... 6,845 --
Related party (Note 2)......................................... 2,769 16,332
Notes, related party (Note 2).................................. 256,000 --
---------- ----------
Total receivables............................................ 4,134,138 3,829,203
Inventories (Notes 1 and 6)....................................... 686,927 458,691
Prepaid expenses.................................................. 62,142 21,213
Costs and earnings in excess of billings (Note 11)................ 280,477 200,731
---------- ----------
TOTAL CURRENT ASSETS......................................... 5,163,684 4,664,799
PROPERTY AND EQUIPMENT, NET (NOTES 1, 3 AND 6)...................... 3,260,656 2,611,564
OTHER............................................................... 24,900 36,900
---------- ----------
$8,449,240 $7,313,263
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft.................................................... $ 26,008 $ --
Bank lines of credit (Note 6)..................................... 204,001 102,835
Payables:
Trade.......................................................... 727,584 371,459
Related party (Note 2)......................................... 602,773 614,369
Retainage...................................................... 4,691 --
Accrued expenses (Note 8)......................................... 603,682 682,004
Billings in excess of costs and estimated earnings (Note 11)...... 287,842 15,274
Current portion of long-term debt (Note 7)........................ 33,232 11,696
Notes and advances, related party (Note 2)........................ 2,243,373 1,750,000
---------- ----------
TOTAL CURRENT LIABILITIES.................................... 4,733,186 3,547,637
---------- ----------
LONG-TERM DEBT, NET OF CURRENT PORTION (NOTE 7)..................... 129,686 --
---------- ----------
MINORITY INTEREST IN SUBSIDIARIES (NOTE 1).......................... 87,953 91,290
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTES 6, 9, 10 AND 14)
STOCKHOLDERS' EQUITY:
Common stock (Note 1)............................................. 315,875 315,875
Contributed capital............................................... 1,195,182 1,495,161
Cumulative foreign currency translation adjustments (Note 1)...... (27,411) (22,735)
Retained earnings (Note 1)........................................ 2,014,769 1,886,035
---------- ----------
TOTAL STOCKHOLDERS' EQUITY................................... 3,498,415 3,674,336
---------- ----------
$8,449,240 $7,313,263
========= =========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-81
<PAGE> 233
GELCO INSITUFORM/NUPIPE ENTITIES
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1993 1992
----------- -----------
<S> <C> <C>
CONSTRUCTION REVENUES (NOTE 12)................................... $17,688,948 $21,038,781
CONSTRUCTION COSTS (NOTES 2 AND 11)............................... 11,308,664 12,363,916
----------- -----------
Gross profit................................................. 6,380,284 8,674,865
GENERAL AND ADMINISTRATIVE EXPENSES (NOTE 2)...................... 5,411,868 4,516,224
----------- -----------
Income from operations....................................... 968,416 4,158,641
----------- -----------
OTHER INCOME (EXPENSE):
Interest........................................................ (86,095) (11,933)
Miscellaneous................................................... 47,472 26,157
----------- -----------
Total other income (expense)................................. (38,623) 14,224
----------- -----------
Income before minority interest in subsidiaries.............. 929,793 4,172,865
MINORITY INTEREST IN INCOME OF SUBSIDIARIES....................... (1,059) (58,296)
----------- -----------
Net income................................................... $ 928,734 $ 4,114,569
=========== ===========
PRO FORMA INCOME TAXES:
Income before income taxes...................................... $ 929,793 $ 4,172,865
Pro forma income taxes (Notes 1 and 5).......................... 308,534 1,580,879
----------- -----------
Pro forma net income......................................... $ 621,259 $ 2,591,986
=========== ===========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-82
<PAGE> 234
GELCO INSITUFORM/NUPIPE ENTITIES
COMBINED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1993 AND 1992
---------------------------------------------------------------
CUMULATIVE
FOREIGN
CURRENCY
COMMON CONTRIBUTED RETAINED TRANSLATION
STOCK CAPITAL EARNINGS ADJUSTMENTS TOTAL
-------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES, December 31, 1991.......... $315,875 $1,003,185 $ 2,452,528 $ 14,090 $ 3,785,678
Distributions...................... -- -- (4,681,062) -- (4,681,062)
Contributions...................... -- 491,976 -- -- 491,976
Translation adjustments............ -- -- -- (36,825) (36,825)
Net income for the year............ -- -- 4,114,569 -- 4,114,569
-------- ---------- ----------- ----------- -----------
BALANCES, December 31, 1992.......... 315,875 1,495,161 1,886,035 (22,735) 3,674,336
Distributions...................... -- (299,979) (800,000) -- (1,099,979)
Translation adjustments............ -- -- -- (4,676) (4,676)
Net income for the year............ -- -- 928,734 -- 928,734
-------- ---------- ----------- ----------- -----------
BALANCES, December 31, 1993.......... $315,875 $1,195,182 $ 2,014,769 $ (27,411) $ 3,498,415
======== ========= ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-83
<PAGE> 235
GELCO INSITUFORM/NUPIPE ENTITIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1993 1992
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 928,734 $ 4,114,569
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................ 1,032,753 817,070
(Gain) on sale of assets..................................... -- (10,662)
Currency translation......................................... 9,474 (2,612)
Minority interest in income of subsidiaries.................. 1,059 58,296
Changes in operating assets and liabilities:
(Increase) in receivables.................................. (48,935) (1,779,092)
(Increase) decrease in prepaid expenses.................... (40,929) 26,106
(Increase) decrease in inventories......................... (228,236) 3,616
Increase in accounts payable and accrued expenses.......... 270,898 470,869
(Increase) decrease in underbillings....................... (79,746) 39,252
Increase in overbillings................................... 272,568 1,944
----------- -----------
Net cash provided by operating activities............... 2,117,640 3,739,356
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.............................. (1,688,391) (841,756)
Proceeds from sale of equipment................................. -- 21,205
Net loans to related parties.................................... (562,627) (245,899)
----------- -----------
Net cash used by investing activities................... (2,251,018) (1,066,450)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on bank lines of credit................................ 101,166 102,835
Proceeds from long-term debt.................................... 162,918 --
Distributions to stockholders................................... (299,979) (2,879,562)
Contributions from stockholders................................. -- 238,667
Principal payments on debt...................................... (11,696) (13,612)
----------- -----------
Net cash used by financing activities................... (47,591) (2,551,672)
----------- -----------
Net increase (decrease) in cash......................... (180,969) 121,234
CASH, BEGINNING OF YEAR........................................... 154,961 33,727
----------- -----------
CASH, END OF YEAR................................................. $ (26,008) $ 154,961
=========== ===========
SUPPLEMENTAL INFORMATION:
Cash paid for interest.......................................... $ 86,095 $ 11,933
=========== ===========
Noncash investing and financing activities for 1993:
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS CONTRIBUTIONS
----------- -----------
<S> <C> <C>
Total........................................................... $(1,099,979) $ --
Noncash equity transfers by reduction of intercompany debt...... 800,000 --
----------- ---------
Cash (distributed)...................................... $ (299,979) $ --
=========== =========
Noncash investing and financing activities for 1992:
Total........................................................... $(4,681,062) $ 491,976
Noncash equity transfers by reduction of intercompany debt...... 1,801,500 (253,309)
----------- ---------
Cash (distributed) contributed.......................... $(2,879,562) $ 238,667
=========== =========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-84
<PAGE> 236
GELCO INSITUFORM/NUPIPE ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1992
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
PRINCIPLES OF COMBINATION
These combined financial statements include Gelco Services, Inc. (an
S-Corporation), Geltech Constructors, Inc. (an S-Corporation), Mar-Tech
Insituform, Ltd. (a Canadian Corporation), Gelco Nu-Pipe, Inc. (an
S-Corporation), Gelco Insituform West (a Partnership) for 1992, and certain
assets owned by Gelco Corporation (an S-Corporation) (the "Gelco
Insituform/NuPipe Entities"). The Gelco Insituform/NuPipe Entities are part of a
group of companies jointly owned by James Monaghan and Richard Beck, and
represent principally the operations of the Insituform and NuPipe processes of
pipeline repair and reconstruction. In August 1994, the Entities' stockholders
entered into a letter of intent with Insituform Technologies, Inc. whereby
Insituform Technologies, Inc. is to purchase the Gelco Insituform/NuPipe
Entities.
Therefore, these financial statements have been prepared as if the Entities
had operated as a single group since their respective dates of organization, and
have been accounted for as a combination of companies under common control at
historical book values. All significant intercompany balances and transactions
have been eliminated.
Gelco Insituform West was dissolved, and its assets distributed to Gelco
Services, Inc. as of December 31, 1992.
BUSINESS ACTIVITIES
Gelco Services, Inc., Geltech Constructors, Inc., Mar-Tech Insituform,
Ltd., Gelco NuPipe, Inc., and Gelco Insituform West for 1992, are engaged
primarily in the reconstruction and repair of underground pipelines for public,
private and governmental clients through the use of the Insituform and NuPipe
processes. The Entities grant credit to their customers who are located
primarily in Oregon, Washington, Alaska, Idaho, Montana, California, Nevada,
Hawaii and British Columbia.
OWNERSHIP AND MINORITY INTEREST
The Gelco Insituform/NuPipe Entities, with the exception of Mar-Tech
Insituform, Ltd. and Gelco Insituform West, are owned 66.67% by James Monaghan
and 33.33% by Richard Beck. Mar-Tech Insituform, Ltd. is owned 73% by Gelco
Services, Inc., and 27% by an unrelated party. Gelco Insituform West was owned
66.67% by Bemo, Inc. and 33.33% by Gelco Services, Inc. Bemo, Inc. is owned by
James Monaghan (66.67%) and Richard Beck (33.33%).
REVENUE RECOGNITION
Revenue is recognized using the percentage-of-completion method of
accounting and takes into account the cost and estimated earnings and revenue to
date on contracts not yet completed.
The amount of revenue recognized is that portion of the total contract
price that cost incurred to date bears to anticipated final total cost, based on
current estimates of cost to complete.
Contract costs include all direct labor and related payroll benefits,
materials, and equipment costs.
As long-term contracts extend over one or more accounting periods,
revisions in cost and earnings estimated during the course of the work are
reflected in the accounting period in which the facts which require the revision
become known.
At the time a loss on a contract becomes known, the entire amount of the
estimated ultimate loss is recognized in the financial statements.
F-85
<PAGE> 237
GELCO INSITUFORM/NUPIPE ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993 AND 1992
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES -- (CONTINUED)
REVENUE RECOGNITION -- (CONTINUED)
Contracts which are substantially complete are considered closed for
financial statement purposes.
The current asset, "costs and estimated earnings in excess of billings,"
represents revenues recognized in excess of amounts billed (underbillings). The
current liability, "billings in excess of costs and estimated earnings,"
represents billings in excess of revenues recognized (overbillings).
INVENTORIES
Inventories consist of materials and supplies and are stated at the lower
of cost or market (first-in, first-out).
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line and declining balance methods. Estimated useful lives are as
follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Leasehold improvements............................................... 5-31
Construction equipment............................................... 3-7
Office furniture and equipment....................................... 3-7
</TABLE>
Maintenance and repairs are charged to expense when incurred. Renewals and
betterments are capitalized. Upon the sale or other disposition of equipment,
the original cost and accumulated depreciation are eliminated from the accounts,
and gains and losses are recognized currently.
CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Assets and liabilities of foreign subsidiaries are translated into U.S.
Dollars at the exchange rates in effect at the balance sheet date. Revenues and
expenses are translated at average rates for the period. The cumulative
translation adjustments are recorded as a separate component of stockholders'
equity.
COMMON STOCK
The common stock of the corporations at December 31, 1993 and 1992, is as
follows:
<TABLE>
<CAPTION>
SHARES
SHARES ISSUED AND
PAR VALUE AUTHORIZED OUTSTANDING
--------- ---------- -----------
<S> <C> <C> <C>
Gelco Services, Inc. ............................. None 5,000 3,075
Geltech Constructors, Inc. ....................... None 500 75
Gelco Nu-Pipe, Inc. .............................. $ 1 5,000 900
Mar-Tech Insituform, Ltd. ........................ None 1,000,050 253
</TABLE>
INCOME TAXES
"S" CORPORATIONS
The stockholders of Gelco Services, Inc., Gelco Nu-Pipe, Inc., and Geltech
Constructors, Inc., have elected to be taxed under the provisions of Subchapter
S of the Internal Revenue Code. Under those provisions, the Companies do not pay
corporate income taxes on their taxable income. Instead, the
F-86
<PAGE> 238
GELCO INSITUFORM/NUPIPE ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993 AND 1992
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES -- (CONTINUED)
stockholders are generally individually liable for income taxes on their
respective shares of each company's taxable income (see Note 5). Retained
earnings consists of $1,027,995 of earnings prior to the Subchapter S elections.
The remainder is attributable to undistributed earnings under the provisions of
Subchapter S.
CANADIAN CORPORATION
Mar-Tech Insituform, Ltd. is a corporation taxable under Canadian law.
Canadian taxes on income, if any, are paid at the corporate level. There were no
material timing differences in reporting revenues and expenses for financial
statement and tax reporting purposes. As of June 30, 1993 (Mar-Tech's tax year),
the Company had net tax operating loss (NOL) carryforwards of approximately
C$109,177 (U.S.$82,472) available to offset its future income tax liability. The
NOL carryforwards begin to expire in the year 2000.
(2) RELATED PARTY TRANSACTIONS
Gelco Services, Inc., Geltech Constructors, Inc., Gelco Nu-Pipe, Inc. and
Mar-Tech Insituform, Ltd. are part of a group of companies owned by James
Monaghan and Richard Beck. Related party transactions with entities which are
not included in these combined financial statements at December 31 are as
follows:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Accounts receivable......................................... $ 2,769 $ 16,332
Notes receivable............................................ 256,000 --
Notes payable and advances.................................. 2,243,373 1,750,000
Accounts payable............................................ 602,773 614,369
</TABLE>
Transactions with related parties not included in the Entities' operations
during the year ended December 31 are as follows:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Construction revenues....................................... $ 20,784 $ 88,989
Interest expense............................................ 68,980 --
Subcontracts and purchases.................................. 653,044 413,894
Equipment operating costs................................... 1,760,528 1,362,256
Management and administration............................... 2,739,023 1,490,359
Marketing................................................... 714,933 663,728
</TABLE>
The Entities have entered into operating leases with Bemo, Inc. and JR
Investment, related parties, for facilities located in Sacramento, California
and Salem, Oregon (see Note 14).
F-87
<PAGE> 239
GELCO INSITUFORM/NUPIPE ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993 AND 1992
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (see Note 1):
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
Construction equipment.................................... $ 6,410,553 $ 4,847,666
Office furniture and equipment............................ 203,186 108,109
Leasehold improvements.................................... 218,391 217,700
---------- ----------
6,832,130 5,173,475
Less accumulated depreciation............................. (3,571,474) (2,561,911)
---------- ----------
$ 3,260,656 $ 2,611,564
========== ==========
</TABLE>
(4) SUB-LICENSE AGREEMENTS
Gelco Services, Inc. holds a sub-license agreement with Insituform North
America Corp. Mar-Tech Insituform, Ltd. holds a sub-license agreement with IGL
Canada, Ltd. Gelco Nu-Pipe, Inc. holds a license agreement with NuPipe, Inc.
These agreements allow them exclusive non-transferable rights and licenses to
the Insituform and NuPipe process throughout their stated territories. Under the
agreements, Gelco Services, Inc. and Gelco Nu-Pipe, Inc. are required to
maintain a tangible net worth, in the aggregate of at least $2,000,000. In
addition, Gelco Services, Inc., Gelco Nu-Pipe, Inc., and Mar-Tech Insituform,
Ltd. are responsible for generating minimum royalty payments each year, adjusted
for construction cost index fluctuations. The royalties are paid quarterly and
are equal to 8% of the gross contract price for Insituform work, and 6.75% for
NuPipe work. Royalty expense was $731,577 for the year ended December 31, 1993
($883,321 in 1992). The license and sub-license agreements may be terminated by
Gelco Services, Inc., Gelco Nu-Pipe, Inc., and Mar-Tech Insituform, Ltd. at any
time by written notice to the sub-licensor or licensor six months in advance of
the effective date.
(5) PRO FORMA INCOME TAXES
Income (loss) before income taxes for domestic and foreign operations is
summarized at December 31 as follows:
<TABLE>
<CAPTION>
1993 1992
-------- ----------
<S> <C> <C>
Domestic..................................................... $926,912 $4,190,346
Foreign...................................................... 2,881 (17,481)
-------- ----------
$929,793 $4,172,865
======== ==========
</TABLE>
Pro forma income tax provisions have been calculated using the accounting
principles of SFAS Statement No. 109, Accounting for Income Taxes, which
requires an asset and liability approach to financial
F-88
<PAGE> 240
GELCO INSITUFORM/NUPIPE ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993 AND 1992
(5) PRO FORMA INCOME TAXES -- (CONTINUED)
accounting and reporting for income taxes. Had the Entities been subject to
corporate income taxes, the deferred income tax liability and the related
provision would have consisted of the following:
<TABLE>
<CAPTION>
1993 1992
-------- ----------
<S> <C> <C>
Pro forma deferred income tax liability...................... $215,000 $ 260,000
======== ==========
Pro forma provision for income taxes:
Current income taxes payable:
Federal................................................. $292,701 $1,305,745
State................................................... 60,833 245,134
-------- ----------
353,534 1,550,879
Pro forma deferred income tax increase (decrease)............ (45,000) 30,000
-------- ----------
Pro forma income tax expense............................ $308,534 $1,580,879
======== ==========
</TABLE>
The deferred income taxes provided above are related to temporary
differences in reporting income for financial statements and corporate income
tax purposes arising from differences in depreciation methods.
(6) BANK LINES OF CREDIT
Gelco Services, Inc. and Geltech Constructors, Inc. are guarantors on a
$2,900,000 bank revolving line of credit, and a $1,000,000 equipment line of
credit for long-term equipment financing on behalf of Gelco Corporation, a
related entity, and are authorized to guarantee additional Gelco Corporation
borrowings to an aggregate of $5,000,000. The operating line is secured by
inventories, receivables, and work-in-process. The equipment line is secured by
specified equipment. Bank advances on the line of credit are payable on demand
or, if no demand is made, on May 5, 1994. Both carry an interest rate of .25%
over the bank's basic commercial lending rate. The amount advanced on the
revolving line of credit at December 31, 1993 was $156,000 (zero at December 31,
1992). The equipment line was unused at December 31, 1993 and 1992. The
revolving line of credit is also personally guaranteed by James Monaghan and
Richard Beck.
Mar-Tech Insituform, Ltd. has a C$400,000 (U.S.$302,160) revolving line of
credit, payable on demand, with interest at prime plus 1%. The line is secured
by accounts receivable and inventories. The amount advanced on the revolving
line of credit was U.S.$204,001 at December 31, 1993 (U.S.$102,835 at December
31, 1992).
Mar-Tech Insituform Ltd. also has a C$250,000 (U.S.$188,850) line of credit
for long-term financing of equipment purchases. The equipment line carries an
interest rate of prime plus 1.5%, and is secured by equipment. The amount
advanced on the equipment line was U.S.$162,918 at December 31, 1993 (zero at
December 31, 1992). Both lines of credit are guaranteed by Gelco Services, Inc.
and are personally guaranteed by Robert Innis, President of Mar-Tech Insituform,
Ltd.
F-89
<PAGE> 241
GELCO INSITUFORM/NUPIPE ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993 AND 1992
(7) LONG-TERM DEBT
<TABLE>
<CAPTION>
1993 1992
-------- -------
<S> <C> <C>
Long-term debt consists of the following:
15.4% note payable in monthly installments of $345 including
interest, secured by telecommunications equipment, maturing
May 1993...................................................... $ -- $ 1,660
13% note payable in monthly installments of $1,297 including
interest, secured by construction equipment, maturing May
1993.......................................................... -- 10,036
Note payable to bank in monthly installments of $2,769 plus
interest at prime plus 1.5%, secured by equipment............. 162,918 --
-------- -------
162,918 11,696
Less current portion............................................ 33,232 11,696
-------- -------
$129,686 $ --
======== =======
</TABLE>
The following is a summary of future principal payments:
<TABLE>
<S> <C>
1995....................................................................... $33,232
1996....................................................................... 33,232
1997....................................................................... 33,232
1998....................................................................... 33,232
Thereafter................................................................. 29,990
</TABLE>
(8) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1993 1992
-------- --------
<S> <C> <C>
State excise taxes (Note 13)................................... $336,125 $273,983
Accrued royalties payable...................................... 173,087 203,952
Other accrued expenses......................................... 94,470 204,069
-------- --------
$603,682 $682,004
======== ========
</TABLE>
(9) PROFIT-SHARING AND PENSION PLAN
(A) PROFIT-SHARING PLAN
Gelco Services, Inc. and Geltech Constructors, Inc. sponsor a
noncontributory profit-sharing plan, covering substantially all full-time
employees, provided they meet certain eligibility requirements. The Companies'
contributions are discretionary and can range from zero to 15%. Contributions to
the profit-sharing plan in 1993 were $95,596 ($113,694 in 1992).
(B) PENSION PLAN
DESCRIPTION OF PLAN
In addition, the Companies are sponsors, together with related companies,
of the Gelco Multiple Employer Defined Benefit Pension and Retirement Plan (the
Plan) for hourly field employees who meet certain service requirements. The Plan
also includes death and disability benefits.
F-90
<PAGE> 242
GELCO INSITUFORM/NUPIPE ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993 AND 1992
(9) PROFIT-SHARING AND PENSION PLAN -- (CONTINUED)
PLAN TERMINATION
The Companies have elected to discontinue their contributions to the Plan
and have expressed an intent to terminate the Plan. The accrued benefits of the
Plan were frozen as of March 15, 1992.
In the event the Plan terminates, the net assets of the Plan will be
allocated as prescribed by ERISA and its related regulations. The sufficiency of
the Plan's net assets, and the level of benefits guaranteed by the Pension
Benefit Guaranty Corporation (PBGC), will determine whether the participants
receive their accumulated benefits should the Plan terminate.
PLAN STATUS
The Internal Revenue Service has not determined that the Plan is qualified
and that the trust established under the Plan is tax-exempt, under the
appropriate sections of the Code. The Plan Administrator and the Plan's tax
counsel believe that the Plan is currently designed and being operated in
compliance with the applicable requirements of the Code. Therefore, they believe
that the Plan was qualified and the related trust was tax-exempt as of December
31, 1993.
LITIGATION
The Plan has filed suit against the Women Construction Owners & Executives,
U.S.A. (WCOE) and various fiduciaries with respect to the WCOE Multiple Employer
Retirement Income Trust and Plan in the amount of $100,000, for recovery of
contributions to the WCOE Plan that dissipated as plan expenses.
Based upon the opinion of the Plan's counsel, the suit could result in a
settlement or award by the Court in favor of the Plan. At this time no estimate
can be made as to the time or the amount, if any, of ultimate recovery.
FUNDING
As of December 31, 1993, the total actuarial present value of accumulated
vested benefits was $223,045, compared to Plan assets of $359,426. Accumulated
vested benefits at December 31, 1992 were $177,077, compared to Plan assets of
$354,064.
(10) GENERAL INDEMNITY AGREEMENT
Gelco Services, Inc. and Geltech Constructors, Inc. have entered into a
general indemnity agreement for the purpose of bonding various construction
jobs, including jobs performed by other commonly controlled companies, and are
jointly and severally liable thereunder. James Monaghan and Richard Beck, as
individuals, are personally liable thereunder.
(11) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
Costs incurred on uncompleted contracts................... $ 3,735,740 $ 820,771
Estimated earnings........................................ 1,571,724 540,339
----------- -----------
5,307,464 1,361,110
Less billings to date..................................... (5,314,829) (1,175,653)
----------- -----------
$ (7,365) $ 185,457
========== ==========
</TABLE>
F-91
<PAGE> 243
GELCO INSITUFORM/NUPIPE ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993 AND 1992
(11) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS -- (CONTINUED)
Included in the accompanying combined balance sheets under the following
captions:
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
Costs and earnings in excess of billings.................. $ 280,477 $ 200,731
Billings in excess of costs and estimated earnings........ (287,842) (15,274)
----------- -----------
$ (7,365) $ 185,457
========== ==========
</TABLE>
(12) CONSTRUCTION REVENUES
Customers who accounted for 10% or more of total revenues for the year
ended December 31 consisted of the following:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
City and County of Honolulu................................. $ -- $6,058,095
========= =========
</TABLE>
(13) RESTATEMENT AND SUBSEQUENT EVENT
The Gelco Insituform/NuPipe Entities have not previously issued combined
financial statements; rather, their financial position and results of operations
were previously included in the combined financial statements of a larger group
of companies owned by Messrs. Monaghan and Beck, the "Gelco Entities."
Subsequent to the issuance of the Gelco Entities' combined financial
statements, management became aware that certain state excise taxes, in the
amount of $116,989 for 1993, and $219,139 for 1992, were not included. The
inclusion of these items in the accompanying combined financial statements has
the effect of increasing current liabilities by $284,950 at December 31, 1993
($219,139 in 1992), and decreasing net income for 1993 and 1992 by $65,811 and
$219,138, respectively.
In August of 1994, Messrs. Monaghan and Beck signed a letter of intent with
Insituform Technologies, Inc. for the sale of the Gelco Insituform/NuPipe
Entities and related assets used in these operations. The Entities and assets
involved are more fully described in Note 1.
(14) COMMITMENTS AND CONTINGENCY
Mar-Tech Insituform, Ltd. is currently involved in a dispute with the
Canadian Department of Revenue and Taxation regarding certain adjustments for
1987 and 1988. Mar-Tech Insituform, Ltd. contests the proposed adjustments, and
currently has an appeal held in abeyance pending a decision by the Canadian
Federal Tax Court of Appeal in a similar case. The amount of proposed adjustment
is C$39,899 (U.S.$30,139), plus interest.
The Entities have entered into operating leases for facilities located in
Salem, Oregon, Sacramento, California, and Kent, Washington. The Sacramento
facilities lease with Bemo, Inc., a related party, was for 15 years at $10,500
per month, and was renegotiated to $12,950 per month for 15 years effective
January 1, 1994. The Salem facilities lease is effective January 1, 1994 at
$10,500 per month for 15 years, with JR Investment, a related party. The Kent
facilities lease is for $2,750 per month for the two years ending September 1,
1995.
Rental expense related to these leases amounted to $158,000 ($122,220 in
1992).
F-92
<PAGE> 244
GELCO INSITUFORM/NUPIPE ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993 AND 1992
(14) COMMITMENTS AND CONTINGENCY -- (CONTINUED)
Following is a summary of the noncancellable operating lease commitments at
December 31, 1993:
<TABLE>
<S> <C>
1994.............................................. $314,400
1995.............................................. 303,400
1996.............................................. 281,400
1997.............................................. 281,400
1998.............................................. 281,400
</TABLE>
F-93
<PAGE> 245
GELCO INSITUFORM/NUPIPE ENTITIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER
31,
1993
JUNE 30, ----------
1994
----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.............................................................. $ 21,734 $ --
---------- ----------
Receivables:
Trade, less allowance for doubtful accounts of zero............ 3,674,597 3,490,385
Retainage...................................................... 496,493 378,139
Other.......................................................... 4,092 6,845
Related party (Note 2)......................................... 1,344 2,769
Notes, related party (Note 2).................................. -- 256,000
---------- ----------
Total receivables......................................... 4,176,526 4,134,138
Inventories (Notes 1 and 6)....................................... 626,641 686,927
Prepaid expenses.................................................. 54,757 62,142
Costs and earnings in excess of billings (Note 11)................ 1,425,966 280,477
---------- ----------
TOTAL CURRENT ASSETS...................................... 6,305,624 5,163,684
---------- ----------
PROPERTY AND EQUIPMENT, NET (NOTES 1, 3 AND 6)...................... 2,908,512 3,260,656
---------- ----------
OTHER............................................................... 87,142 24,900
---------- ----------
$9,301,278 $8,449,240
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft.................................................... $ -- $ 26,008
Bank lines of credit (Note 6)..................................... 131,635 204,001
Payables:
Trade.......................................................... 655,890 727,584
Related party (Note 2)......................................... 359,562 602,773
Retainage...................................................... -- 4,691
Accrued expenses (Note 8)......................................... 1,272,865 603,682
Billings in excess of costs and estimated earnings (Note 11)...... 567,971 287,842
Current portion of long-term debt (Note 7)........................ 67,192 33,232
Notes and advances, related party (Note 2)........................ 1,489,718 2,243,373
---------- ----------
TOTAL CURRENT LIABILITIES................................. 4,544,833 4,733,186
---------- ----------
LONG-TERM DEBT, NET OF CURRENT PORTION (NOTE 7)..................... 211,144 129,686
---------- ----------
MINORITY INTEREST IN SUBSIDIARIES (NOTE 1).......................... 57,471 87,953
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTES 6, 9, 10, 13 AND 14)
STOCKHOLDERS' EQUITY:
Common stock (Note 1)............................................. 315,875 315,875
Contributed capital............................................... 993,400 1,195,182
Cumulative foreign currency translation adjustments (Note 1)...... (36,598) (27,411)
Retained earnings (Note 1)........................................ 3,215,153 2,014,769
---------- ----------
TOTAL STOCKHOLDERS' EQUITY................................ 4,487,830 3,498,415
---------- ----------
$9,301,278 $8,449,240
========= =========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-94
<PAGE> 246
GELCO INSITUFORM/NUPIPE ENTITIES
COMBINED STATEMENTS OF INCOME -- UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------------
1994 1993
------------- -------------
<S> <C> <C>
CONSTRUCTION REVENUES (NOTE 12)................................... $ 10,485,342 $ 6,735,550
CONSTRUCTION COSTS (NOTES 2 AND 11)............................... 6,889,303 4,450,262
----------- ----------
Gross profit................................................. 3,596,039 2,285,288
GENERAL AND ADMINISTRATIVE EXPENSES (NOTE 2)...................... 2,459,163 2,528,095
----------- ----------
Income (loss) from operations................................ 1,136,876 (242,807)
----------- ----------
OTHER INCOME (EXPENSE):
Interest........................................................ (78,686) (51,617)
Miscellaneous................................................... 40,314 64,548
----------- ----------
Total other income (expense)................................. (38,372) 12,931
----------- ----------
Income (loss) before income taxes and minority interest in
subsidiaries................................................ 1,098,504 (229,876)
PROVISION FOR FOREIGN INCOME TAX BENEFIT (NOTE 1)................. 74,776 --
----------- ----------
Net income (loss) before minority interest in subsidiaries... 1,173,280 (229,876)
MINORITY INTEREST IN LOSS OF SUBSIDIARIES......................... 27,104 8,602
----------- ----------
Net income (loss)............................................ $ 1,200,384 $ (221,274)
=========== ==========
PRO FORMA INCOME TAXES:
Income (loss) before taxes...................................... $ 1,098,504 $ (229,876)
Pro forma income tax (expense) benefit (Notes 1 and 5).......... (412,524) 66,000
----------- ----------
Pro forma net income (loss).................................. $ 685,980 $ (163,876)
=========== ==========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-95
<PAGE> 247
GELCO INSITUFORM/NUPIPE ENTITIES
COMBINED STATEMENTS OF EQUITY -- UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1994 AND 1993
--------------------------------------------------------------
CUMULATIVE
FOREIGN
CURRENCY
COMMON CONTRIBUTED RETAINED TRANSLATION
STOCK CAPITAL EARNINGS ADJUSTMENTS TOTAL
-------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCES, December 31, 1992............ $315,875 $ 1,495,161 $1,886,035 $ (22,735) $3,674,336
Distributions........................ -- (150,868) -- -- (150,868)
Translation adjustments.............. -- -- -- (4,674) (4,674)
Net loss............................. -- -- (221,274) -- (221,274)
-------- ---------- ---------- -------- ----------
BALANCES, June 30, 1993................ $315,875 $ 1,344,293 $1,664,761 $ (27,409) $3,297,520
======== ========== ========== ======== ==========
BALANCES, December 31, 1993............ $315,875 $ 1,195,182 $2,014,769 $ (27,411) $3,498,415
Distributions........................ -- (201,782) -- -- (201,782)
Translation adjustments.............. -- -- -- (9,187) (9,187)
Net income........................... -- -- 1,200,384 -- 1,200,384
-------- ---------- ---------- -------- ----------
BALANCES, June 30, 1994................ $315,875 $ 993,400 $3,215,153 $ (36,598) $4,487,830
======== ========== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-96
<PAGE> 248
GELCO INSITUFORM/NUPIPE ENTITIES
COMBINED STATEMENTS OF CASH FLOWS -- UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1994 1993
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................... $ 1,200,384 $ (221,274)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization................................ 606,863 793,505
Increase in other assets..................................... (68,242) --
Translation adjustments...................................... (12,563) (16,348)
Minority interest in loss of subsidiaries.................... (27,104) (8,602)
Changes in operating assets and liabilities:
(Increase) decrease in receivables......................... (298,388) 1,044,636
(Increase) decrease in prepaid expenses.................... 7,385 (286,278)
(Increase) decrease in inventories......................... 60,286 (43,836)
Increase (decrease) in accounts payable and accrued
expenses.................................................. 349,587 (302,816)
(Increase) in underbillings................................ (1,145,489) (498,914)
Increase (decrease) in overbillings........................ 280,129 (15,274)
----------- -----------
Net cash provided by operating activities............... 952,848 444,799
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.............................. (248,721) (904,288)
Net loans to related parties.................................... (497,655) 133,639
----------- -----------
Net cash used by investing activities................... (746,376) (770,649)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments) advances on bank lines of credit..................... (72,366) 144,631
Proceeds from long-term debt.................................... 148,650 162,918
Distributions to stockholders................................... (201,782) (150,868)
Principal payments on debt...................................... (33,232) --
----------- -----------
Net cash provided (used) by financing activities........ (158,730) 156,681
----------- -----------
Net increase (decrease) in cash......................... 47,742 (169,169)
CASH, BEGINNING OF PERIOD......................................... (26,008) 118,506
----------- -----------
CASH, END OF PERIOD............................................... $ 21,734 $ (50,663)
=========== ===========
SUPPLEMENTAL INFORMATION:
Cash paid for interest.......................................... $ 78,686 $ 51,617
=========== ===========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-97
<PAGE> 249
GELCO INSITUFORM/NUPIPE ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
JUNE 30, 1994 (UNAUDITED) AND DECEMBER 31, 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
PRINCIPLES OF COMBINATION
These combined financial statements include Gelco Services, Inc. (an
S-Corporation), Geltech Constructors, Inc. (an S-Corporation), Mar-Tech
Insituform, Ltd. (a Canadian Corporation), Gelco Nu-Pipe, Inc. (an
S-Corporation), and certain assets owned by Gelco Corporation (an S-Corporation)
(the "Gelco Insituform/NuPipe Entities"). The Gelco Insituform/NuPipe Entities
are part of a group of companies jointly owned by James Monaghan and Richard
Beck, and which principally represent the operations of the Insituform and
NuPipe processes of pipeline repair and reconstruction. In August 1994, the
Entities' stockholders entered into a letter of intent with Insituform
Technologies, Inc. whereby Insituform Technologies, Inc. is to purchase the
Gelco Insituform/NuPipe Entities and certain assets leased to those entities by
related companies.
Therefore, these combined financial statements have been prepared as if the
Entities had operated as a single group since their respective dates of
organization, and have been accounted for as a combination of companies under
common control at historical book values. All significant intercompany balances
and transactions have been eliminated.
The accompanying combined interim financial statements are unaudited but
contain, in the opinion of management, all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position as
of June 30, 1994 (unaudited), and the unaudited results of operations and cash
flows for the six months ended June 30, 1994 and 1993, and are not necessarily
indicative of the results to be expected for the full year.
BUSINESS ACTIVITIES
Gelco Services, Inc., Geltech Constructors, Inc., Mar-Tech Insituform,
Ltd., and Gelco Nu-Pipe, Inc., are engaged primarily in the reconstruction and
repair of underground pipelines for public, private and governmental clients
through the use of the Insituform and NuPipe processes. The Entities grant
credit to their customers who are located primarily in Oregon, Washington,
Alaska, Idaho, Montana, California, Nevada, Hawaii and British Columbia.
OWNERSHIP AND MINORITY INTEREST
The Entities, with the exception of Mar-Tech Insituform Ltd., are owned
66.67% by James Monaghan and 33.33% by Richard Beck. Mar-Tech Insituform, Ltd.
is owned 73% by Gelco Services, Inc., and 27% by an unrelated party.
REVENUE RECOGNITION
Revenue is recognized using the percentage-of-completion method of
accounting and takes into account the cost and estimated earnings and revenue to
date on contracts not yet completed.
The amount of revenue recognized is that portion of the total contract
price that cost incurred to date bears to anticipated final total cost, based on
current estimates of cost to complete.
Contract costs include all direct labor and related payroll benefits,
materials, and equipment costs.
As long-term contracts extend over one or more years, revisions in cost and
earnings estimated during the course of the work are reflected in the accounting
period in which the facts which require the revision become known.
At the time a loss on a contract becomes known, the entire amount of the
estimated ultimate loss is recognized in the financial statements.
F-98
<PAGE> 250
GELCO INSITUFORM/NUPIPE ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1994 (UNAUDITED) AND DECEMBER 31, 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES -- (CONTINUED)
REVENUE RECOGNITION -- (CONTINUED)
Contracts which are substantially complete are considered closed for
financial statement purposes.
The current asset, "costs and estimated earnings in excess of billings,"
represents revenues recognized in excess of amounts billed (underbillings). The
current liability, "billings in excess of costs and estimated earnings,"
represents billings in excess of revenues recognized (overbillings).
INVENTORIES
Inventories consist of materials and supplies and are stated at the lower
of cost or market (first-in, first-out).
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line and declining balance methods. Estimated useful lives are as
follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Leasehold improvements............................................... 5-31
Construction equipment............................................... 3-7
Office furniture and equipment....................................... 3-7
</TABLE>
Maintenance and repairs are charged to expense when incurred. Renewals and
betterments are capitalized. Upon the sale or other disposition of equipment,
the original cost and accumulated depreciation are eliminated from the accounts,
and gains and losses are recognized currently.
CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Assets and liabilities of foreign subsidiaries are translated into U.S.
Dollars at the exchange rates in effect at the balance sheet date. Revenues and
expenses are translated at average rates for the period. The cumulative
translation adjustments are recorded as a separate component of stockholders'
equity.
COMMON STOCK
The common stock of the corporations at June 30, 1994 and December 31, 1993
is as follows:
<TABLE>
<CAPTION>
SHARES
SHARES ISSUED AND
PAR VALUE AUTHORIZED OUTSTANDING
--------- ---------- -----------
<S> <C> <C> <C>
Gelco Services, Inc....................................... None 5,000 3,075
Geltech Constructors, Inc................................. None 500 75
Gelco Nu-Pipe, Inc........................................ $ 1 5,000 900
Mar-Tech Insituform, Ltd.................................. None 1,000,050 253
</TABLE>
INCOME TAXES
"S" CORPORATIONS
The stockholders of Gelco Services, Inc., Gelco Nu-Pipe, Inc., and Geltech
Constructors, Inc., have elected to be taxed under the provisions of Subchapter
S of the Internal Revenue Code. Under those
F-99
<PAGE> 251
GELCO INSITUFORM/NUPIPE ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1994 (UNAUDITED) AND DECEMBER 31, 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES -- (CONTINUED)
provisions, the Companies do not pay corporate income taxes on their taxable
income. Instead, the stockholders are individually liable for income taxes on
their respective shares of each company's taxable income (see Note 5). Retained
earnings consists of $1,027,995 of earnings prior to the Subchapter S elections.
The remainder is attributable to undistributed earnings under the provisions of
Subchapter S.
CANADIAN CORPORATION
Mar-Tech Insituform, Ltd. is a corporation taxable under Canadian law.
Canadian taxes on income, if any, are paid at the corporate level. There were no
material timing differences in reporting revenues and expenses for financial
statement and tax reporting purposes. As of June 30, 1994 (Mar-Tech's tax year),
the Company has net tax operating loss (NOL) carryforwards of approximately
C$185,676 (U.S.$140,260) available to offset its future income tax liability.
The NOL carryforwards begin to expire in the year 2000.
(2) RELATED PARTY TRANSACTIONS
Gelco Services, Inc., Geltech Constructors, Inc., Gelco Nu-Pipe, Inc., and
Mar-Tech Insituform, Ltd. are part of a group of companies owned by James
Monaghan and Richard Beck. Related party transactions with entities which are
not included in these combined financial statements at June 30, 1994 and
December 31, 1993 are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
---------- ------------
<S> <C> <C>
Accounts receivable........................................ $ 1,344 $ 2,769
Notes receivable........................................... -- 256,000
Notes payable and advances................................. 1,489,718 2,243,373
Accounts payable........................................... 359,562 602,773
</TABLE>
Transactions with related parties which are not included in the Gelco
Insituform/NuPipe Entities' operations for the six months ended June 30 are as
follows:
<TABLE>
<CAPTION>
1994 1993
-------- ----------
<S> <C> <C>
Construction revenues.......................................... $ 14,616 $ --
Interest expense............................................... 42,841 31,173
Subcontracts and purchases..................................... 272,143 89,171
Equipment operating costs...................................... 389,811 579,936
Management and administration.................................. 748,733 1,450,819
Marketing...................................................... 77,314 313,524
</TABLE>
The Entities have entered into operating leases with Bemo, Inc. and JR
Investment, related parties, for facilities located in Sacramento, California
and Salem, Oregon (see Note 14).
F-100
<PAGE> 252
GELCO INSITUFORM/NUPIPE ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1994 (UNAUDITED) AND DECEMBER 31, 1993
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (see Note 1):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
---------- ------------
<S> <C> <C>
Construction equipment....................................... $6,557,482 $6,410,053
Office furniture and equipment............................... 184,936 203,686
Leasehold improvements....................................... 228,238 218,391
---------- ------------
6,970,656 6,832,130
Less accumulated depreciation................................ (4,062,144) (3,571,474)
---------- ------------
$2,908,512 $3,260,656
========= ==========
</TABLE>
(4) SUB-LICENSE AGREEMENTS
Gelco Services, Inc. holds a sub-license agreement with Insituform North
America Corp. Mar-Tech Insituform, Ltd. holds a sub-license agreement with IGL
Canada, Ltd. Gelco Nu-Pipe, Inc. holds a license agreement with NuPipe, Inc.
These agreements allow them exclusive non-transferable rights and licenses to
the Insituform and NuPipe process throughout their stated territories. Under the
agreements, Gelco Services, Inc. and Gelco Nu-Pipe, Inc. are required to
maintain a tangible net worth, in the aggregate of at least $2,000,000. In
addition, Gelco Services, Inc., Gelco Nu-Pipe, Inc. and Mar-Tech Insituform,
Ltd. are responsible for generating minimum royalty payments each year, adjusted
for construction cost index fluctuations. The royalties are paid quarterly and
are equal to 8% of the gross contract price for Insituform work, and 6.75% for
NuPipe work. Royalty expense was $487,255 for the period ended June 30, 1994
($215,180 in 1993). The license and sub-license agreements may be terminated by
Gelco Services, Inc., Gelco Nu-Pipe, Inc., and Mar-Tech Insituform, Ltd. at any
time by written notice to the sub-licensor or licensor six months in advance of
the effective date.
(5) PRO FORMA INCOME TAXES
Pro forma income tax provisions have been calculated using the accounting
principles of SFAS Statement No. 109, Accounting for Income Taxes, which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Had the domestic Entities been subject to corporate income
taxes, the deferred income tax liability and the related provision would have
consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
---------- ------------
<S> <C> <C>
Pro forma domestic deferred federal and state income tax
liability................................................ $ 275,000 $ 215,000
========== =========
</TABLE>
F-101
<PAGE> 253
GELCO INSITUFORM/NUPIPE ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1994 (UNAUDITED) AND DECEMBER 31, 1993
(5) PRO FORMA INCOME TAXES -- (CONTINUED)
Income (loss) before income taxes for the six months ended June 30 for
domestic and foreign operations is summarized as follows:
<TABLE>
<CAPTION>
1994 1993
---------- ------------
<S> <C> <C>
Domestic................................................... $1,274,125 $ (170,801)
Foreign.................................................... (175,621) (59,075)
---------- ---------
$1,098,504 $ (229,876)
========== =========
Pro forma provision for income taxes
Current income taxes (payable) refund:
Federal............................................... $ (353,800) $ 42,500
State................................................. (73,500) 8,500
---------- ---------
(427,300) 51,000
Pro forma deferred income tax (increase) decrease in
federal and state tax liability.......................... (60,000) 15,000
Foreign income tax benefit................................. 74,776 --
---------- ---------
Pro forma income tax (expense) benefit..................... $ (412,524) $ 66,000
========== =========
</TABLE>
The domestic deferred income tax liability provided is related to temporary
differences in reporting income for financial statements and corporate income
tax purposes arising from differences in depreciation methods. The estimated
deferred tax asset is a result of foreign net operating loss carryforwards, and
is included in other assets at June 30, 1994 (Note 1). The June 30, 1993
effective tax rate varies from the expected rate because of foreign losses.
(6) BANK LINES OF CREDIT
Gelco Services, Inc. and Geltech Constructors, Inc. are guarantors on a
$2,900,000 bank revolving line of credit, and a $1,000,000 equipment line of
credit for long-term equipment financing on behalf of Gelco Corporation, a
related entity, and are authorized to guarantee additional Gelco Corporation
borrowings to an aggregate of $5,000,000. The operating line is secured by
inventories, receivables and work-in-progress. The equipment line is secured by
specified equipment. Bank advances on the line of credit are payable on demand
or, if no demand is made, on May 5, 1995. Both carry an interest rate of .25%
over the bank's basic commercial lending rate. The amount advanced on the
revolving line of credit was zero at June 30, 1994 ($156,000 as of December 31,
1993). The equipment line was unused at June 30, 1994 and December 31, 1993. The
revolving line of credit is personally guaranteed by James Monaghan and Richard
Beck.
At June 30, 1994, Mar-Tech Insituform, Ltd. has a C$250,000 (U.S.$181,600)
revolving line of credit, payable on demand, with interest at prime plus 1%. The
line is secured by accounts receivable and inventories. The amount advanced on
the revolving line of credit was U.S.$131,635 at June 30, 1994 (U.S.$204,001 at
December 31, 1993). Mar-Tech Insituform, Ltd. also had a C$250,000
(U.S.$181,600) line of credit for long-term financing of equipment purchases at
December 31, 1993. The amount advanced on the equipment line was U.S.$162,918 at
December 31, 1993. The equipment line carried an interest rate of prime plus
1.5%, and was secured by equipment. The equipment line of credit was
discontinued in June 1994. Both lines of credit are guaranteed by Gelco
Services, Inc. and are personally guaranteed by Robert Innis, President of
Mar-Tech Insituform, Ltd.
F-102
<PAGE> 254
GELCO INSITUFORM/NUPIPE ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1994 (UNAUDITED) AND DECEMBER 31, 1993
(7) LONG-TERM DEBT
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
-------- ------------
<S> <C> <C>
Note payable to bank in monthly installments of $2,663,
increasing to $7,264 in June 1995, plus interest at prime
plus 1.5%. Secured by equipment............................ $278,336 $162,918
Less current portion......................................... 67,192 33,232
-------- --------
$211,144 $129,686
======== ========
</TABLE>
The following is a summary of future principal payments:
<TABLE>
<S> <C>
1995............................................... $67,192
1996............................................... 87,168
1997............................................... 87,168
1998............................................... 36,808
</TABLE>
(8) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
---------- ------------
<S> <C> <C>
State excise taxes......................................... $ 370,765 $336,125
Accrued royalties payable.................................. 340,490 173,087
Accrued wages payable...................................... 287,387 --
Other accrued expenses..................................... 274,223 94,470
---------- ------------
$1,272,865 $603,682
========= ==========
</TABLE>
(9) PROFIT-SHARING AND PENSION PLAN
(A) PROFIT-SHARING PLAN
Gelco Services, Inc. and Geltech Constructors, Inc. sponsor a
noncontributory profit-sharing plan, covering substantially all full-time
employees, provided they meet certain eligibility requirements. The Companies'
contributions are discretionary and can range from zero to 15%. No contributions
had been made to the profit-sharing plan during the six months ended June 30,
1994 and 1993.
(B) PENSION PLAN
DESCRIPTION OF PLAN
In addition, the Companies are sponsors, together with related companies,
of the Gelco Multiple Employer Defined Benefit Pension and Retirement Plan (the
Plan) for hourly field employees who meet certain service requirements. The Plan
also includes death and disability benefits.
PLAN TERMINATION
The Companies have elected to discontinue their contributions to the Plan
and have expressed an intent to terminate the Plan. The accrued benefits of the
Plan were frozen as of March 15, 1992.
In the event the Plan terminates, the net assets of the Plan will be
allocated as prescribed by ERISA and its related regulations. The sufficiency of
the Plan's net assets, and the level of benefits guaranteed by the
F-103
<PAGE> 255
GELCO INSITUFORM/NUPIPE ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1994 (UNAUDITED) AND DECEMBER 31, 1993
(9) PROFIT-SHARING AND PENSION PLAN -- (CONTINUED)
Pension Benefit Guaranty Corporation (PBGC), will determine whether the
participants receive their accumulated benefits should the Plan terminate.
PLAN STATUS
The Internal Revenue Service has not determined that the Plan is qualified
and that the trust established under the Plan is tax-exempt, under the
appropriate sections of the Code. The Plan Administrator and the Plan's tax
counsel believe that the Plan is currently designed and being operated in
compliance with the applicable requirements of the Code. Therefore, they believe
that the Plan was qualified and the related trust was tax-exempt as of December
31, 1993.
LITIGATION
The Plan has filed suit against the Women Construction Owners & Executives,
U.S.A. (WCOE) and various fiduciaries with respect to the WCOE Multiple Employer
Retirement Income Trust and Plan in the amount of $100,000, for recovery of
contributions to the WCOE Plan that dissipated as plan expenses.
Based upon the opinion of the Plan's counsel, the suit could result in a
settlement or award by the Court in favor of the Plan. At this time no estimate
can be made as to the time or the amount, if any, of ultimate recovery.
FUNDING
As of December 31, 1993, the total actuarial present value of accumulated
vested benefits was $223,045, compared to Plan assets of $359,426.
(10) GENERAL INDEMNITY AGREEMENT
Gelco Services, Inc. and Geltech Constructors, Inc. have entered into a
general indemnity agreement for the purpose of bonding various construction
jobs, including jobs performed by other commonly controlled companies, and are
jointly and severally liable thereunder. James Monaghan and Richard Beck, as
individuals, are personally liable thereunder.
(11) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
Costs incurred on uncompleted contracts.................... $ 7,474,864 $ 3,735,740
Estimated earnings......................................... 5,695,860 1,571,724
------------ ------------
13,170,724 5,307,464
Less billings to date...................................... (12,312,729) (5,314,829)
------------ ------------
$ 857,995 $ (7,365)
=========== ==========
</TABLE>
Included in the accompanying combined balance sheets under the following
captions:
<TABLE>
<S> <C> <C>
Costs and earnings in excess of billings................... $ 1,425,966 $ 280,477
Billings in excess of costs and estimated earnings......... (567,971) (287,842)
------------ ------------
$ 857,995 $ (7,365)
=========== ==========
</TABLE>
F-104
<PAGE> 256
GELCO INSITUFORM/NUPIPE ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1994 (UNAUDITED) AND DECEMBER 31, 1993
(12) CONSTRUCTION REVENUES
Construction revenues in excess of 10% of total revenues consisted of the
following for the six months ended June 30:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
County of Maui...................................... $1,569,405 $ --
========= =========
</TABLE>
(13) RESTATEMENT AND SUBSEQUENT EVENT
The Gelco Insituform/NuPipe Entities have not previously issued combined
financial statements; rather, their financial position and results of operations
were previously included in the combined financial statements of a larger group
of companies owned by Messrs. Monaghan and Beck, the "Gelco Entities."
In August of 1994, Messrs. Monaghan and Beck signed a letter of intent with
Insituform Technologies, Inc. for the sale of the Gelco Insituform/NuPipe
Entities and certain assets used in these operations. The Companies and assets
involved are more fully described in Note 1.
Subsequent to the issuance of the Gelco Entities combined financial
statements, management became aware that certain state excise taxes in the
amount of $116,989 for 1993, and $219,139 for 1992, were not included. The
inclusion of these items in the accompanying combined financial statements has
the effect of increasing current liabilities by $284,950 at December 31, 1993,
and decreasing net income by approximately $45,150 for the six months ended June
30, 1993.
(14) CONTINGENCY AND COMMITMENTS
Mar-Tech Insituform, Ltd. is currently involved in a dispute with the
Canadian Department of Revenue and Taxation regarding certain adjustments for
1987 and 1988. Mar-Tech Insituform, Ltd. contests the proposed adjustments, and
currently has an appeal held in abeyance pending a decision by the Canadian
Federal Tax Court of Appeal in a similar case. The amount of the proposed
adjustments is C$39,899 (U.S.$30,139), plus interest.
The Entities have entered into operating leases for facilities located in
Salem, Oregon, Sacramento, California, and Kent, Washington. The Sacramento
facilities lease with Bemo, Inc., a related party, was for 15 years at $10,500
per month, and was renegotiated to $12,950 per month for 15 years effective
January 1, 1994. The Salem facilities lease is effective January 1, 1994 at
$10,500 per month for 15 years, with JR Investment, a related party. The Kent
facilities lease is for $2,750 per month for the two years ending September 1,
1995.
Rental expense related to these leases amounted to $157,200 and $78,750 for
June 30, 1994 and 1993, respectively.
Following is a summary of the noncancellable operating lease commitments at
June 30, 1994:
<TABLE>
<S> <C>
1995.............................................. $314,400
1996.............................................. 286,900
1997.............................................. 281,400
1998.............................................. 281,400
1999.............................................. 281,400
</TABLE>
F-105
<PAGE> 257
ANNEX A
--------------------------------------------------------------------------------
---------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
DATED AS OF MAY 23, 1995
AMONG
INSITUFORM TECHNOLOGIES, INC.,
ITI ACQUISITION CORP.
AND
INSITUFORM MID-AMERICA, INC.
---------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 258
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I THE MERGER............................................................ 1
1.1 The Merger............................................................ 1
1.2 Effect of Merger...................................................... 2
1.3 Certificate of Incorporation and By-Laws.............................. 2
1.4 Effective Time of Merger.............................................. 2
1.5 IMA Directors and Officers............................................ 2
1.6 Taking of Necessary Action; Further Action............................ 2
ARTICLE II CONVERSION OF SHARES.................................................. 3
2.1 Acquisition Sub Common Stock.......................................... 3
2.2 IMA Common Stock...................................................... 3
2.3 Options to Purchase Shares of IMA Common Stock........................ 3
2.4 ITI Common Stock...................................................... 4
ARTICLE III DISSENTING SHARES; EXCHANGE OF CERTIFICATES........................... 4
3.1 Dissenting Shares..................................................... 4
3.2 Exchange of Shares.................................................... 4
3.3 Dividends and Other Distributions..................................... 5
3.4 IMA Stock Transfer Ledger............................................. 5
3.5 Termination of Exchange Agency........................................ 6
ARTICLE IV CLOSING............................................................... 6
4.1 Time and Place of Closing............................................. 6
4.2 Certificate of Merger................................................. 6
ARTICLE V REPRESENTATIONS AND WARRANTIES OF IMA................................. 7
5.1 Incorporation......................................................... 7
5.2 Authorization......................................................... 7
5.3 Conflicts............................................................. 7
5.4 Capitalization........................................................ 8
5.5 Subsidiaries.......................................................... 8
5.6 Securities Filings.................................................... 9
5.7 Financial Statements.................................................. 9
5.8 Absence of Undisclosed Liabilities.................................... 10
5.9 Absence of Certain Changes............................................ 11
5.10 Pooling............................................................... 11
5.11 Taxes................................................................. 12
5.12 Title................................................................. 12
5.13 Real Estate and Leases................................................ 12
5.14 Contractual and Other Obligations..................................... 13
5.15 Compensation.......................................................... 14
5.16 Employee Benefit Plans................................................ 14
5.17 Labor Relations....................................................... 16
5.18 Interests of Insiders................................................. 16
5.19 Insurance............................................................. 16
5.20 Intellectual Property................................................. 16
5.21 Disputes and Litigation............................................... 17
5.22 Licenses; Franchises; Rights.......................................... 17
5.23 Brokers and Finders................................................... 18
ARTICLE VI REPRESENTATIONS AND WARRANTIES
OF ITI AND ACQUISITION SUB............................................ 18
6.1 Incorporation......................................................... 18
6.2 Authorization......................................................... 18
</TABLE>
i
<PAGE> 259
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
6.3 Conflicts............................................................. 19
6.4 Capitalization........................................................ 19
6.5 Securities Filings.................................................... 19
6.6 Financial Statements.................................................. 20
6.7 Absence of Undisclosed Liabilities.................................... 20
6.8 Absence of Certain Changes............................................ 20
6.9 Pooling............................................................... 20
6.10 Interests of Insiders................................................. 20
6.11 Disputes and Litigation............................................... 21
6.12 Brokers or Finders.................................................... 21
ARTICLE VII CERTAIN COVENANTS..................................................... 21
7.1 IMA Stockholders' Meeting............................................. 21
7.2 ITI Stockholders' Meeting............................................. 21
7.3 ITI Board of Directors................................................ 22
7.4 ITI Officers.......................................................... 22
7.5 Registration Statement; Proxy Statement............................... 22
7.6 HSR Act; Other Governmental and Judicial Filings...................... 23
7.7 Conduct of Business of IMA............................................ 23
7.8 IMA Capitalization.................................................... 25
7.9 Interim Financial Statements; Audited Enviroq Statements.............. 25
7.10 Conduct of Business of ITI; ITI Capitalization........................ 26
7.11 Due Diligence; SEC Filings............................................ 27
7.12 Notification of Certain Matters....................................... 27
7.13 Accounting and Tax Treatment.......................................... 28
7.14 Forbearance........................................................... 28
7.15 Restructuring Transactions............................................ 28
7.16 Indemnification....................................................... 29
7.17 Registration Rights................................................... 29
7.18 Additional Agreements................................................. 30
ARTICLE VIII PUBLICITY............................................................. 30
8.1 Publicity............................................................. 30
ARTICLE IX CONDITIONS TO OBLIGATIONS OF EACH PARTY............................... 30
9.1 Hart-Scott-Rodino Antitrust Improvements Act.......................... 30
9.2 Merger Approval....................................................... 30
9.3 Amendments to ITI's Certificate of Incorporation...................... 31
9.4 Amendments to ITI's By-Laws........................................... 31
9.5 Effectiveness of Registration Statement............................... 31
9.6 Pooling-of-Interests.................................................. 31
9.7 Conversion of IMA Class B Common Stock................................ 31
9.8 No Prohibition on Consummation........................................ 31
9.9 Tax Opinion........................................................... 31
9.10 ITI Board; Officers................................................... 31
ARTICLE X CONDITIONS TO OBLIGATIONS OF IMA...................................... 32
10.1 Opinion of Counsel for ITI and Acquisition Sub........................ 32
10.2 Representations; Warranties; Covenants................................ 32
10.3 Certified Resolutions................................................. 32
10.4 Kalishman and Affholder Agreements.................................... 32
10.5 Fairness Opinion...................................................... 32
10.6 Letter of ITI's Accountants........................................... 32
10.7 Director Indemnification Agreements................................... 32
</TABLE>
ii
<PAGE> 260
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
10.8 Litigation............................................................ 33
10.9 Other Certificates.................................................... 33
ARTICLE XI CONDITIONS TO OBLIGATIONS OF ITI AND ACQUISITION SUB.................. 33
11.1 Opinion of Counsel for IMA............................................ 33
11.2 Representations; Warranties; Covenants................................ 33
11.3 Certified Resolutions; Capitalization................................. 33
11.4 Affiliate Undertakings................................................ 34
11.5 Kalishman and Affholder Agreements.................................... 34
11.6 Dissenters' Rights.................................................... 34
11.7 Third Party Consents.................................................. 34
11.8 Resignations.......................................................... 34
11.9 Fairness Opinion...................................................... 34
11.10 Letter of Accountants for IMA and Enviroq............................. 34
11.11 A-Y-K-E Equipment..................................................... 35
11.12 Litigation............................................................ 35
11.13 Other Certificates.................................................... 35
ARTICLE XII TERMINATION........................................................... 35
12.1 Termination........................................................... 35
12.2 Effect of Termination................................................. 36
ARTICLE XIII MISCELLANEOUS......................................................... 36
13.1 Notices............................................................... 36
13.2 Survival of Representations........................................... 37
13.3 Cooperation Agreement................................................. 37
13.4 Entire Agreement...................................................... 37
13.5 Modification.......................................................... 37
13.6 Further Action........................................................ 37
13.7 Expenses.............................................................. 37
13.8 Governing Law......................................................... 37
13.9 Captions.............................................................. 37
13.10 Accounting Terms...................................................... 38
13.11 Specific Performance.................................................. 38
13.12 Assignment............................................................ 38
13.13 No Third Party Beneficiary............................................ 38
13.14 Partial Invalidity.................................................... 38
13.15 Counterparts.......................................................... 38
Schedule 5.3 -- IMA Third Party Consents
Schedule 5.5 -- Subsidiaries
Schedule 5.8 -- Certain IMA Liabilities
Schedule 5.9 -- Certain IMA Changes since December 31, 1994
Schedule 5.11 -- Tax Deficiencies
Schedule 5.12 -- Exceptions to Title
Schedule 5.13 -- Real Estate
Schedule 5.14 -- Certain Contracts and Agreements
Schedule 5.15 -- Key Employees
Schedule 5.16 -- Employee Benefit Plans
Schedule 5.18 -- IMA Related Party Transactions
Schedule 5.19 -- Insurance and Bonding Arrangements
Schedule 5.20 -- Intellectual Property
Schedule 5.21 -- IMA Litigation
Schedule 5.22 -- State Contractor Permits
</TABLE>
iii
<PAGE> 261
<TABLE>
<S> <C>
Schedule 6.3 -- ITI Third Party Consents
Schedule 6.4 -- ITI Stock Commitments
Schedule 6.7 -- Certain ITI Liabilities
Schedule 6.8 -- Certain ITI Changes since December 31, 1994
Schedule 6.10 -- ITI Related Party Transactions
Schedule 6.11 -- ITI Litigation
Schedule 7.7 -- Conduct of IMA Business
Schedule 7.8 -- IMA Dividends
Schedule 7.10 -- Conduct of ITI Business
Exhibit A -- Agreement of Merger
Exhibit B -- Pooling Letter
Exhibit C-1 -- KPMG Peat Marwick Comfort Letter
Exhibit C-2 -- Deloitte & Touche Comfort Letter
Exhibit D -- BDO Seidman Comfort Letter
Exhibit E -- Amendments to ITI Certificate of Incorporation
Exhibit F -- Amendments to ITI By-Laws
Exhibit G -- Conversion Letter
Exhibit H -- Opinion of Messrs. Krugman, Chapnick & Grimshaw
Exhibit I -- Opinion of Messrs. Thompson & Mitchell
Exhibit J -- Rule 145 Letter
Exhibit K -- Affholder Agreement
Exhibit L -- Kalishman Agreements
</TABLE>
iv
<PAGE> 262
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Acquisition Sub......................................................... Recitals
Acquisition Sub Common Stock............................................ Recitals
Affiliate Agreement..................................................... Section 11.4
Agreement............................................................... Recitals
Benefit Plans........................................................... Section 5.16
business day............................................................ Section 4.1
Certificate of Merger................................................... Section 1.4
Class I Directors....................................................... Section 7.3
Class II Directors...................................................... Section 7.3
Class III Directors..................................................... Section 7.3
Closing................................................................. Section 4.1
Closing Date............................................................ Section 4.1
Code.................................................................... Section 2.3
Confidentiality Agreement............................................... Section 7.11(c)
Constituent Corporations................................................ Recitals
Cooperation Agreement................................................... Section 13.3
Defined Benefit Plans................................................... Section 5.15
Demand Registration..................................................... Section 7.17(b)
Dissenting Shares....................................................... Section 3.1(a)
Effective Time.......................................................... Section 1.4
ERISA................................................................... Section 5.15
Environmental Laws...................................................... Section 5.22(c)
Enviroq................................................................. Section 5.6
Enviroq Audited Financial Statements.................................... Section 5.7(b)
Enviroq Form 10-K....................................................... Section 5.6
Enviroq Form 10-Q....................................................... Section 5.6
Enviroq Interim Financial Statements.................................... Section 5.7(d)
Enviroq Pro Forma Financial Statements.................................. Section 5.7(e)
Enviroq Proxy Statement................................................. Section 5.6
Exchange Act............................................................ Section 5.3
Exchange Agent.......................................................... Section 3.2(a)
GCL..................................................................... Section 1.1
Group................................................................... Section 7.3
HSR Act................................................................. Section 5.3
IGL Group............................................................... Section 7.3
IMA..................................................................... Recitals
IMA Agreements.......................................................... Section 5.14(a)
IMA Audited Financial Statements........................................ Section 5.7(a)
IMA Financial Statements................................................ Section 5.7(c)
IMA Group............................................................... Section 7.3
IMA Interim Financial Statements........................................ Section 5.7(c)
IMA's business or condition............................................. Section 5.4
IMA Preferred Stock..................................................... Recitals
IMA Convertible Preferred Stock......................................... Recitals
IMA Class A Convertible Preferred Stock................................. Recitals
IMA Class A Common Stock................................................ Recitals
IMA Class B Common Stock................................................ Recitals
IMA Common Stock........................................................ Recitals
IMA Form 10-K........................................................... Section 5.6
IMA Form 10-Q........................................................... Section 5.6
IMA Option Plan......................................................... Section 2.3(a)
</TABLE>
v
<PAGE> 263
<TABLE>
<S> <C>
IMA Options............................................................. Section 2.3(a)
IMA SEC Documents....................................................... Section 5.6
INA Group............................................................... Section 7.3
Incidental Registration................................................. Section 7.17(b)(ii)
Insider................................................................. Section 5.14(a)
Insituform Process...................................................... Section 5.19
Intellectual Property................................................... Section 5.20
ITI..................................................................... Recitals
ITI Audited Financial Statements........................................ Section 6.6(a)
ITI Interim Financial Statements........................................ Section 6.6(b)
ITI Form 10-K........................................................... Section 6.5
ITI Form 10-Q........................................................... Section 6.5
ITI Common Stock........................................................ Section 2.2(a)
ITI Preferred Stock..................................................... Section 6.4
ITI SEC Documents....................................................... Section 6.5
Joint Proxy Statement................................................... Section 7.5(b)
Lien.................................................................... Section 5.9
Material Adverse Effect................................................. Section 5.1(b)
Merger.................................................................. Recitals
Multiemployer Plans..................................................... Section 5.16
NuPipe Process.......................................................... Section 5.20
PBGC.................................................................... Section 5.16
Plan of Merger.......................................................... Section 4.1
Prior Registration Rights Agreement..................................... Section 7.17(b)
Registrable Securities.................................................. Section 7.17(b)(i)
Registration Rights Agreement........................................... Section 7.17(a)
Registration Statement.................................................. Section 7.5(a)
Removal Pleadings....................................................... Section 13.3
Stockholder............................................................. Section 7.17(a)
Subsidiary.............................................................. Section 5.1(b)
Subsidiary.............................................................. Section 5.5
SEC..................................................................... Section 2.3(c)
Securities Act.......................................................... Section 3.2(c)
Surviving Corporation................................................... Section 1.1
Term.................................................................... Section 7.3
</TABLE>
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of this 23rd day of May, 1995
(hereinafter referred to as this "Agreement"), by and among INSITUFORM
TECHNOLOGIES, INC., a corporation organized and existing under the laws of the
State of Delaware (hereinafter referred to as "ITI"), ITI ACQUISITION CORP., a
corporation organized and existing under the laws of the State of Delaware and a
wholly-owned subsidiary of ITI (hereinafter referred to as "Acquisition Sub"),
and INSITUFORM MID-AMERICA, INC., a corporation organized and existing under the
laws of the State of Delaware (hereinafter referred to as "IMA"; and, together
with Acquisition Sub, as the "Constituent Corporations").
WITNESSETH:
WHEREAS, IMA, together with its Subsidiaries (as hereinafter defined), is
primarily engaged in the application of trenchless and other technologies to the
rehabilitation, construction and improvement of pipeline systems, and is a
licensee of the Insituform(R) Process (as more particularly hereinafter
described, the "Insituform Process") and the NuPipe(R) Process (as more
particularly hereinafter described, the "NuPipe Process"), in those states and
other territories covered by license agreements extended by, respectively,
Insituform North America Corp. and NuPipe, Inc., both wholly-owned subsidiaries
of ITI; and
WHEREAS, IMA, pursuant to its certificate of incorporation (filed in the
office of the Secretary of State of the State of Delaware on December 22, 1983,
as subsequently amended on, respectively, January 6 and February 8, 1984,
November 6, 1985 and December 10, 1986), has an authorized capital stock
consisting of: 500,000 shares of preferred stock, $.01 par value (hereinafter
referred to as the "IMA Preferred Stock"), none of which are presently issued
and outstanding; 10,000 shares of convertible preferred stock, $100 par value
(hereinafter referred to as the "IMA Convertible Preferred Stock"), none of
which are presently issued and outstanding; 500 shares of class A convertible
preferred stock, $1,000 par value (hereinafter referred to as the "IMA Class A
Convertible Preferred Stock"), none of which are presently issued and
outstanding; 13,000,000 shares of class A common stock, $.01 par value
(hereinafter referred to as the "IMA Class A Common Stock"), of which 8,282,676
shares are presently issued and outstanding, and 6,000,000 shares of class B
common stock, $.01 par value (hereinafter referred to as the "IMA Class B Common
Stock", and together with the IMA Class A Common Stock, the "IMA Common Stock"),
of which 2,472,985 shares are presently issued and outstanding; and
WHEREAS, Acquisition Sub has been duly organized as a corporation under the
laws of the State of Delaware, and, pursuant to its certificate of incorporation
(filed in the office of the Secretary of State of the State of Delaware on March
16, 1995), has an authorized capital stock consisting of 10,000 shares of common
stock, $.01 par value (hereinafter referred to as the "Acquisition Sub Common
Stock"), of which 1,000 shares are issued and outstanding and held by ITI; and
WHEREAS, the respective Boards of Directors of the Constituent
Corporations, and of ITI, deem it advisable and in the best interests of such
corporations and their stockholders, respectively, that Acquisition Sub be
merged into and with IMA (hereinafter referred to as the "Merger"), in
accordance with the terms and conditions hereinafter set forth, so that IMA
shall become a subsidiary of ITI;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties hereby agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger.
At the Effective Time (as hereinafter defined), in accordance with this
Agreement and the Delaware General Corporation Law (hereinafter referred to as
the "GCL"), Acquisition Sub shall be merged into and with IMA, the separate
corporate existence of Acquisition Sub shall cease and IMA shall continue as the
<PAGE> 265
surviving corporation, governed by the laws of the State of Delaware, under the
corporate name it possesses immediately prior to the Effective Time. IMA, from
and after the Effective Time, is hereinafter sometimes referred to as the
"Surviving Corporation".
1.2 Effect of Merger.
(a) At the Effective Time, the Surviving Corporation shall possess all
the rights, privileges, immunities and franchises, as well as of a public as of
a private nature, of the Constituent Corporations. All of the rights,
privileges, immunities and franchises, and all property, real and personal, and
all debts due on whatever account to each of the Constituent Corporations, shall
be taken and deemed to be transferred to and vested in the Surviving Corporation
without further act or deed; and all of the property, rights, privileges,
immunities, powers, franchises and all and every other interest of each of the
Constituent Corporations thereafter shall be vested as effectively and fully in
the Surviving Corporation as they were in each of the Constituent Corporations.
(b) The Surviving Corporation shall be responsible and liable for all of
the liabilities, obligations and penalties of each of the Constituent
Corporations; provided, however, that the liabilities, obligations and penalties
of the Constituent Corporations shall not be affected by the Merger, and that
the rights of the creditors of the Constituent Corporations, or any liens upon
the property of the Constituent Corporations shall not be impaired by the
Merger, and any claim existing or action or proceeding, civil or criminal,
pending by or against the Constituent Corporations may be prosecuted to judgment
as if the Merger had not taken place, or the Surviving Corporation may be
proceeded against or substituted in the place of the Constituent Corporations.
1.3 Certificate of Incorporation and By-Laws.
The certificate of incorporation and by-laws of IMA, as in effect
immediately prior to the Effective Time, shall be the certificate of
incorporation and by-laws of the Surviving Corporation and thereafter shall
continue to be its certificate of incorporation and by-laws until changed as
provided therein and under the laws of the State of Delaware. The first annual
meeting of the stockholders of the Surviving Corporation held after the
Effective Time shall be the next annual meeting of stockholders provided for in
the by-laws of IMA.
1.4 Effective Time of Merger.
The Merger shall become effective at the time of filing of a certificate of
merger with respect to the Merger (hereinafter referred to as the "Certificate
of Merger") in the office of the Secretary of State of the State of Delaware, as
required by the GCL. Such time is herein referred to as the "Effective Time".
1.5 IMA Directors and Officers.
At the Effective Time and until their successors have been duly elected and
have qualified, the Board of Directors of the Surviving Corporation shall
consist of three members, and the members of the Board of Directors of
Acquisition Sub shall become the directors of the Surviving Corporation; and at
the Effective Time and until their successors have been duly elected and have
qualified, the officers of Acquisition Sub shall become the officers of the
Surviving Corporation.
1.6 Taking of Necessary Action; Further Action.
IMA, ITI and Acquisition Sub, respectively, shall take all such lawful
action as may be necessary or appropriate in order to effectuate the
transactions contemplated by this Agreement. In case at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full title
to all assets, rights, privileges, powers, immunities, purposes and franchises
of either of the Constituent Corporations, the officers and directors of such
corporation shall take all such lawful and necessary action.
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ARTICLE II
CONVERSION OF SHARES
The manner and basis of converting in the Merger the outstanding shares of
IMA Common Stock and Acquisition Sub Common Stock into shares of the capital
stock of the Surviving Corporation are as follows:
2.1 Acquisition Sub Common Stock.
Each share of the 1,000 shares of Acquisition Sub Common Stock issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action by the holder thereof, be deemed cancelled and
converted into and shall represent the right to receive one share of the class A
common stock, $.01 par value, of the Surviving Corporation.
2.2 IMA Common Stock.
(a) Each share of IMA Class A Common Stock issued and outstanding
immediately prior to the Effective Time (including, without limitation, all
shares of IMA Class A Common Stock issued upon conversion of the IMA Class B
Common Stock as hereinafter provided, but other than Dissenting Shares [as
defined and to the extent provided in Section 3.1 hereof], if any), shall, by
virtue of the Merger and without any action by the holder thereof, be deemed
cancelled and converted into and shall represent the right to receive 1.15
shares of the class A common stock, $.01 par value (hereinafter referred to as
the "ITI Common Stock"), of ITI.
(b) Solely to avoid the expense and inconvenience to ITI and Acquisition
Sub, and not as separately bargained for consideration, no fractional shares of
ITI Common Stock shall be issued in the Merger and no dividend, stock split or
interest shall relate to any such fractional shares, and such fractional shares
shall not entitle the owner thereof to any rights of a security holder. In lieu
of issuing certificates for fractional shares of ITI Common Stock, the Exchange
Agent (as hereinafter defined) shall, on behalf of all holders of such
fractional shares, on or before the tenth day following the Effective Time,
aggregate all such fractional shares and sell the resulting shares of ITI Common
Stock for the accounts of holders of such respective fractional shares, and such
holders shall thereafter be entitled to receive on a pro rata basis the net
proceeds of the sale thereof, without interest thereon, upon the surrender of
all of such holder's certificates for exchange pursuant to Section 3.2 hereof.
2.3 Options to Purchase Shares of IMA Common Stock.
(a) All options (hereinafter referred to as the "IMA Options") to
acquire IMA Class A Common Stock outstanding, whether or not exercisable at the
Effective Time, under the Insituform Mid-America, Inc. Stock Option Plan
(hereinafter referred to as the "IMA Option Plan"), shall remain outstanding
following the Effective Time. At the Effective Time, the IMA Options shall, by
virtue of the Merger and without any further action on the part of IMA or the
holder thereof, be assumed by ITI in such manner that ITI: (i) is a corporation
"assuming a stock option in a transaction to which Section 424(a) applies"
within the meaning of Section 424 of the United States Internal Revenue Code of
1986, as amended (hereinafter referred to as the "Code"); or (ii) to the extent
that Section 424 of the Code does not apply to any such IMA Options, would be
such a corporation were Section 424 of the Code applicable to such IMA Options.
From and after the Effective Time, all references to IMA in the IMA Stock Option
Plan and the applicable stock option agreements issued thereunder shall be
deemed to refer to ITI, except that each reference to the name of such plan
therein (or any predecessor thereof) shall be deemed a reference to the
"Insituform Mid-America, Inc. Stock Option Plan", and provided that each
reference to the "Stock Option Committee" or "Committee" therein shall be deemed
a reference to ITI's Compensation Committee. Each IMA Option assumed by ITI
shall be exercisable upon the same terms and conditions as under the IMA Stock
Option Plan and the applicable option agreement issued thereunder, except that:
(A) each such IMA Option shall be exercisable for that whole
number of shares of ITI Common Stock (rounded to the nearest whole share)
into which the number of shares of IMA Class A Common Stock subject to such
IMA Option immediately prior to the Effective Time would be convertible
under Section 2.2 hereof if such shares were outstanding at the Effective
Time; and
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(B) the option price per share of ITI Class A Common Stock shall
be an amount equal to the quotient obtained by dividing (x) the product
obtained by multiplying the exercise price per share of IMA Class A Common
Stock subject to such IMA Option in effect immediately prior to the
Effective Time by the number of shares of IMA Class A Common Stock subject
to such option immediately prior to the Effective Time, by (y) the number
of shares of ITI Common Stock covered by the option as so assumed (the
option price as so determined being rounded upward to the nearest full
cent).
No payment or adjustment shall be made for fractional shares which otherwise
would be issuable upon exercise of any IMA Option assumed as aforesaid.
(b) The assumption of IMA Options pursuant hereto shall not confer on
any holder thereof any additional benefits which such holder did not have
immediately prior to the Effective Time, result in any acceleration of any
vesting or exercise schedule for any IMA Option, or release any holder of any
IMA Option of any obligations or restrictions applicable to his option or the
shares obtainable upon exercise of such option. At the Effective Time, the IMA
Option Plan shall, by virtue of the Merger and without any further action on the
part of IMA, be deemed terminated, except for the rights of the holders of
outstanding IMA Options subject to the terms and provisions hereinbefore set
forth, and no further options shall be granted thereunder.
(c) As soon as practicable following the Effective Time, ITI shall
prepare and file with the Securities and Exchange Commission (hereinafter
referred to as the "SEC"), a registration statement on Form S-8 under the
Securities Act of 1933, as amended (hereinafter referred to as the "Securities
Act"), with respect to the shares of ITI Common Stock deliverable by ITI upon
exercise of the IMA Options, as so assumed.
2.4 ITI Common Stock.
The Merger shall effect no change in any shares of ITI Common Stock issued
by ITI prior to the Effective Time.
ARTICLE III
DISSENTING SHARES;
EXCHANGE OF CERTIFICATES
3.1 Dissenting Shares.
Notwithstanding anything in this Agreement to the contrary, shares of IMA
Common Stock which are issued and outstanding immediately prior to the Effective
Time and which are held by stockholders who have not voted such shares in favor
of the Merger and, if entitled to elect to demand the appraisal of such shares
pursuant to Section 262 of the GCL, shall have delivered a written demand for
payment of the fair value of such shares within the time and in the manner
provided in said Section 262 (herein referred to as "Dissenting Shares") shall
not be converted into or be exchangeable for the right to receive the
consideration provided in Article II of this Agreement,unless and until such
holder shall have failed to perfect or shall have effectively withdrawn or lost
his right to appraisal and payment under the GCL. If any such holder shall have
so failed to perfect or shall have effectively withdrawn or lost such right,
such holder's shares of IMA Common Stock shall thereupon be deemed to have been
converted into and to have become exchangeable for, at the Effective Time, the
right to receive the consideration therefor specified under Article II hereof,
without any interest thereon.
3.2 Exchange of Shares.
(a) Prior to the Effective Time, Acquisition Sub shall designate
American Stock Transfer & Trust Company, or, at its election, a bank or trust
company or similar entity, reasonably satisfactory to IMA, which is authorized
to exercise corporate trust or stock powers, to act as the exchange agent
(hereinafter referred to as the "Exchange Agent") in the Merger. Promptly after
the Effective Time, ITI shall cause the delivery to the Exchange Agent of
certificates evidencing the shares of ITI Common Stock contemplated to be issued
by Section 2.2 hereof.
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(b) As soon as practicable after the Effective Time, but in no event
later than 15 business days after the Effective Time, the Exchange Agent shall
send a notice and transmittal form to each holder of a certificate theretofore
evidencing shares of IMA Common Stock, advising such holders of the terms of the
exchange effected by the Merger and the procedure for surrendering to the
Exchange Agent (who may appoint forwarding agents with the approval of ITI) such
record holder's certificate(s) evidencing IMA Common Stock for exchange for
certificates evidencing shares of ITI Common Stock. Each holder of a certificate
theretofore evidencing shares of IMA Common Stock, upon surrender of the same to
the Exchange Agent in accordance with such transmittal form, shall be entitled
to receive, in exchange for such certificate, a certificate evidencing the
number of full shares of ITI Common Stock for which the shares of IMA Common
Stock theretofore represented by the certificate so surrendered shall have been
exchanged pursuant to Section 2.2 hereof and the cash in lieu of fractional
shares hereinabove contemplated, and the certificate so surrendered shall
forthwith be cancelled.
(c) If any certificate evidencing shares of ITI Common Stock is to be
issued in a name other than that in which the certificate surrendered in
exchange therefor is registered, or if any payment of cash is to be made to a
person other than the person in whose name such certificate is registered, it
shall be a condition of the issuance thereof or such payment, as the case may
be, that the certificate so surrendered shall be properly endorsed and otherwise
in proper form for transfer and that the person requesting such exchange (i) pay
to the Exchange Agent any transfer or other taxes required by reason of the
issuance of a certificate for shares of ITI Common Stock in any name other than
that of, and payment of cash to a person other than, the registered holder of
the certificate surrendered or (ii) establish to the satisfaction of the
Exchange Agent that such transfer or other taxes have been paid or are not
applicable. Certificates representing shares of ITI Common Stock issued to IMA
"affiliates", within the meaning of Rule 145 under the Securities Act, shall
bear the legend referred to in Paragraph (a)(ii) of Section 11.4 hereof.
(d) In the event any certificate representing any shares of IMA Common
Stock shall have been lost, stolen or destroyed, upon the making of an affidavit
of that fact by the person claiming such certificate to be lost, stolen or
destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or
destroyed certificate the consideration payable in exchange therefor pursuant to
Article II. The Exchange Agent or the Surviving Corporation may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate to give the Exchange Agent a
bond in such reasonable sum as it may direct as indemnity against any claim that
may be made against the Surviving Corporation with respect to the certificate
alleged to have been lost, stolen or destroyed.
3.3 Dividends and Other Distributions.
No dividends or other distributions to holders of ITI Common Stock as of
any date subsequent to the Effective Time shall be paid to the holders of
outstanding certificates formerly representing shares of IMA Common Stock until
such certificates are so surrendered. Subject to the effect, if any, of
applicable law upon surrender of certificates evidencing shares of IMA Common
Stock, there shall be paid to the record holders of ITI Common Stock issued in
exchange therefor (i) the amount of dividends or other distributions with a
record date for payment after the Effective Time that have theretofore been paid
with respect to full shares of ITI Common Stock as of any date subsequent to the
Effective Time which have not yet been paid to a public official pursuant to
abandoned property laws and (ii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time but
prior to surrender and a payment date subsequent to surrender. No interest shall
be payable with respect to the payment of such dividends or other distributions
on surrender of outstanding certificates. Notwithstanding the foregoing, neither
ITI, Acquisition Sub, the Exchange Agent nor any other party hereto shall be
responsible or liable to any holder of shares of IMA Common Stock for any ITI
Common Stock, or dividends or distributions thereon or cash, including cash in
lieu of fractional share interests, delivered to any public official pursuant to
applicable escheat laws.
3.4 IMA Stock Transfer Ledger.
At the Effective Time, it shall be deemed that the stock transfer books of
IMA are closed, and no transfer of IMA Common Stock on the books of IMA shall
thereafter be made or consummated. Until surrendered
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and exchanged in accordance with the provisions of Section 3.2 hereof, the
outstanding certificates evidencing shares of IMA Common Stock immediately prior
to the Effective Time shall, from and after the Effective Time, be deemed for
all corporate purposes to evidence the right to receive the number of shares of
ITI Common Stock, together with cash in lieu of fractional shares, into which
the shares of IMA Common Stock theretofore evidenced by such certificate or
certificates shall have been so converted, together with any dividends or other
distributions thereon pursuant to Section 3.3 hereof, as though such surrender
and exchange had taken place.
3.5 Termination of Exchange Agency.
Any portion of the shares of ITI Common Stock or cash in lieu of fractional
shares, which remains undistributed to the holders of IMA Common Stock for one
year after the Effective Time shall be delivered to ITI, upon demand, and any
holders of IMA Common Stock who have not theretofore complied with this Article
III shall thereafter look only to ITI for the shares of ITI Common Stock, any
cash in lieu of fractional shares of ITI Common Stock to which they are entitled
pursuant to Paragraph (b) of Section 2.2 hereof and any dividends or other
distributions with respect to ITI Common Stock to which they are entitled
pursuant to Section 3.3. Any portion of such remaining shares or cash unclaimed
by holders of IMA Common Stock as of a date which is immediately prior to such
time as such shares or amounts would otherwise escheat to or become property of
any governmental entity shall, to the extent permitted by applicable law, become
the property of ITI free and clear of any claims or interest of any person
previously entitled thereto.
ARTICLE IV
CLOSING
4.1 Time and Place of Closing.
IMA, ITI and Acquisition Sub shall regularly communicate and consult with
each other with respect to the fulfillment of the various conditions to the
obligations under this Agreement of the parties hereto. The exchange of
certificates, opinions and other documents contemplated by this Agreement
(hereinafter referred to as the "Closing") shall be held at the offices of
Messrs. Krugman, Chapnick & Grimshaw, Park 80 West-Plaza Two, Saddle Brook, New
Jersey 07663, at 10:00 A.M., local time, at such time and date (hereinafter
referred to as the "Closing Date") as the parties may determine, such date to
fall within ten business days after the satisfaction or waiver of the last of
the conditions set forth in Articles IX, X and XI hereof to be satisfied or
waived (other than conditions with respect to actions the parties shall take at
the Closing), and provided that ITI may delay the Closing for up to 15 business
days after the date on which the Closing would otherwise occur as aforesaid in
order to effectuate the restructurings contemplated by Section 7.15 hereof, or
such other time and date as may be agreed upon by the parties hereto. For
purposes of this Agreement, "business day" shall mean any day on which the
principal offices of the SEC in Washington, D.C. are open to accept filings, or,
in the case of determining a date when any payment is due, any day on which
banks are not required or authorized to close in the City of New York.
4.2 Certificate of Merger.
In the event that, at or prior to the Closing, none of the parties has
exercised any right it may have to terminate this Agreement, and no condition to
the obligations of the parties exists that is not waived, the parties shall, on
the Closing Date, execute the agreement of merger, in the form attached hereto
as Exhibit A (hereinafter referred to as the "Plan of Merger"), appropriately
completed, and, as soon thereafter as is practicable cause an appropriate
Certificate of Merger to be executed by the Constituent Corporations and filed
with the Secretary of State of the State of Delaware in accordance with the GCL.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF IMA
IMA represents, warrants and covenants that:
5.1 Incorporation.
(a) IMA is duly organized, validly existing and in good standing under
the laws of the State of Delaware and has full corporate power and authority to
own or hold under lease the assets and properties which it owns or holds under
lease, to conduct its business as currently conducted, to perform all its
obligations under the agreements to which it is a party, including, without
limitation, this Agreement, and to consummate the Merger. IMA is in good
standing in each other jurisdiction wherein the failure so to qualify,
individually or in the aggregate, would have a Material Adverse Effect (as
hereinafter defined). The copies of IMA's certificate of incorporation and
by-laws, each as currently in effect, which have been delivered to ITI and
Acquisition Sub by IMA are complete and correct.
(b) For purposes of this Agreement:
(i) "Material Adverse Effect" with respect to a party shall mean
any change in, or effect on such party or any subsidiary thereof (as
hereinafter defined) which is, or with reasonable probability might be,
materially adverse to the business, properties, operations, income, assets,
prospects or condition, financial or otherwise of such party and its
subsidiaries, taken as a whole; and the term "Material Adverse Effect" used
without a specific reference to a party shall mean a Material Adverse
Effect with respect to IMA and its Subsidiaries, taken as a whole; and
(ii) each reference to a "subsidiary" or "subsidiaries" of any
person means any corporation, partnership, joint venture or other legal
entity of which such person (either alone or through or together with any
other subsidiary), owns, directly or indirectly, more than 50% of the stock
or other equity interests the holder of which are generally entitled to
vote for the election of the board of directors or other governing body of
such corporation or other legal entity.
5.2 Authorization.
The execution and delivery of this Agreement, the performance by IMA of its
covenants and agreements hereunder and the consummation by IMA of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action of IMA, other than the approval of the holders of IMA Common
Stock contemplated under Section 7.1 hereof. When executed and delivered by IMA,
this Agreement shall constitute the valid and legally binding obligation of IMA,
enforceable against IMA in accordance with its terms, except as may be limited
by bankruptcy, insolvency or other laws affecting generally the enforceability
of creditors' rights and by limitations on the availability of equitable
remedies.
5.3 Conflicts.
Neither the execution and delivery of this Agreement, nor the consummation
of the transactions contemplated herein, will violate any provision of IMA's
certificate of incorporation or by-laws, as currently in effect, or, subject to
approval of this Agreement by the holders of IMA Common Stock as contemplated
under Section 7.1 hereof and compliance with the regulatory requirements
hereinafter specified in this Section 5.3, any law, rule, regulation, writ,
judgment, injunction, decree, determination, award or other order of any court,
government or governmental agency or instrumentality, domestic or foreign,
binding upon IMA or any of its Subsidiaries or, except as set forth on Schedule
5.3(A) attached hereto and other than any such conflicts, breaches, creation,
imposition or termination which would not have a Material Adverse Effect,
conflict with or result in any breach of any of the terms of or the creation or
imposition of any mortgage, deed of trust, pledge, lien, security interest or
other charge or encumbrance of any nature pursuant to, or create any cause for
termination under, the terms of any contract or agreement to which IMA or any
Subsidiary is a party or by which IMA or any Subsidiary or any of their
respective properties or assets is bound. Other than the approval of this
Agreement by the holders of IMA Common Stock contemplated under Section 7.1
hereof and except for compliance with the requirements of the federal
Hart-Scott-Rodino Antitrust Improvements Act of 1976,
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as amended (hereinafter referred to as the "HSR Act"), the Securities Act, with
respect to the Registration Statement (as hereinafter defined), the securities
or blue sky laws of the various states, the federal Securities Exchange Act of
1934, as amended (hereinafter referred to as the "Exchange Act"), with respect
to the Joint Proxy Statement (as hereinafter defined), and except as set forth
on Schedule 5.3(A) and (C) and any such consents, approvals, authorizations,
filings or registrations with or notices to any such person or entity other than
any governmental agency or instrumentality the failure to effectuate which would
not have a Material Adverse Effect, no consents, approvals or authorizations, or
registrations with any governmental agency or authority or any other person or
entity and, except as set forth on Schedule 5.3(B), filings with or notices to
any such person or entity, are required in connection with the execution and
delivery of this Agreement by IMA or the consummation by IMA of the transactions
contemplated hereby.
5.4 Capitalization.
The authorized capital stock of IMA consists of 500,000 shares of IMA
Preferred Stock, none of which are issued and outstanding, 10,000 shares of IMA
Convertible Preferred Stock, none of which are issued and outstanding, 500
shares of IMA Class A Convertible Preferred Stock, none of which are issued and
outstanding on the date hereof, 13,000,000 shares of IMA Class A Common Stock,
of which 8,282,676 shares are issued and outstanding, and 6,000,000 shares of
IMA Class B Common Stock, of which 2,472,985 shares are issued and outstanding
on the date hereof. No shares of any class or series of the capital stock of IMA
are held as treasury stock. All of the outstanding shares of IMA Common Stock
are, and all outstanding shares of IMA Class A Common Stock issuable upon
exercise of IMA Options will be, duly authorized, validly issued and fully paid
and non-assessable, issued without violation of the preemptive rights of any
person. There are no subscriptions, warrants, options, calls, commitments by or
agreements to which IMA is bound relating to the issuance, conversion, or
purchase of any shares of IMA Common Stock, or any other capital stock of IMA,
except for the IMA Options granted by IMA pursuant to the IMA Option Plan,
covering an aggregate of 365,040 shares of IMA Class A Common Stock on the date
hereof, and except for this Agreement. IMA has delivered to ITI and Acquisition
Sub true and complete copies of each form of certificate or agreement evidencing
options granted and outstanding under the IMA Option Plan. IMA is not a party to
any agreement or arrangement relating to the voting or control of any of its
capital stock, or obligating IMA, directly or indirectly, to sell any assets in
a transaction which is not in the ordinary course or which is otherwise material
to the businesses, financial condition, results of operations or prospects of
IMA and its Subsidiaries, taken as a whole (hereinafter referred to as "IMA's
business or condition"), except for this Agreement. IMA has no currently
outstanding obligations to register any securities under the Securities Act,
under any arrangements that would require any such registration as a result of
this agreement or the transactions contemplated hereby or under any arrangements
that would permit any party to such arrangements other than IMA to require IMA
to file a registration statement under the Securities Act.
5.5 Subsidiaries.
Schedule 5.5(1), (2) and (3) annexed hereto sets forth the name of each
corporation, partnership, joint venture, business trust or other legal entity in
which IMA, directly or indirectly, beneficially or legally owns or holds any
capital stock or other proprietary interest (herein referred to, individually,
as a "Subsidiary" and, collectively, as the "Subsidiaries"), the jurisdiction of
its incorporation or formation, and IMA's direct or indirect ownership thereof.
Neither IMA nor any Subsidiary, directly or indirectly, beneficially or legally
owns or holds any capital stock of ITI. Each corporate Subsidiary is a
corporation duly organized and in good standing under the laws of the
jurisdiction of its incorporation, and has full corporate power and authority to
own or hold under lease the assets and properties which it owns or holds under
lease and to perform all its obligations under the agreements to which it is a
party and to conduct such Subsidiary's business. Each Subsidiary consisting of a
joint venture, partnership, or limited liability partnership is duly organized,
validly existing and, in the case of any limited liability partnership, in good
standing as such entity under the laws of the jurisdiction of its formation, and
has full partnership authority to own or hold under lease the assets or
properties which it owns or holds under lease and to perform all of its
obligations under the agreements to which it is a party and to conduct such
Subsidiary's business. Each Subsidiary is in good standing in each other
jurisdiction wherein the failure so to qualify would, individually or in the
aggregate, have a Material Adverse Effect. All of the outstanding shares of the
capital stock of each Subsidiary are so owned and are duly
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authorized and validly issued, fully paid and non-assessable, issued without
violation of the preemptive rights of any person, and, except as identified on
Schedule 5.5(4), are owned free and clear of any mortgages, deeds of trust,
pledges, liens, security interests or any charges or encumbrances of any nature.
Except as set forth in Schedule 5.5(5), no shares of capital stock or other
proprietary interest of any Subsidiary is subject to any option, call,
commitment or other agreement of any nature, and there are no subscriptions,
warrants, options, calls, commitments by or agreements to which IMA or any
Subsidiary is bound relating to the issuance or purchase of any shares of
capital stock of any Subsidiary. Except for partnership and joint venture
arrangements as set forth on Schedule 5.5(2) and (3), neither IMA nor any
Subsidiary is party to any agreement or arrangement relating to the voting or
control of any capital stock of any Subsidiary, or obligating IMA or any
Subsidiary to sell any assets of any Subsidiary in a transaction which is not in
the ordinary course or which is otherwise material to IMA's business or
condition. The copies of the certificates of incorporation and by-laws, or other
instruments of formation, as currently in effect, of each such Subsidiary, which
have been delivered or made available to ITI by IMA are complete and correct.
5.6 Securities Filings.
IMA and each Subsidiary have made all filings with the SEC that it has been
required to make under the Securities Act, and the rules and regulations
promulgated thereunder, and the Exchange Act, and the rules and regulations
promulgated thereunder. IMA has provided to ITI and Acquisition Sub complete and
correct copies of all reports, registration statements, final prospectuses,
definitive proxy statements and other filings made by IMA or any Subsidiary with
the SEC, including all exhibits to such filings, since October 1, 1989 (all such
documents that have been filed with the SEC, as amended, hereinafter referred to
as the "IMA SEC Documents"), including, without limitation, IMA's Annual Report
on Form 10-K for the fiscal year ended September 30, 1994, as filed with the SEC
on January 3, 1995 (together with all documents incorporated therein by
reference, hereinafter referred to as the "IMA Form 10-K"), and its Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995, as filed with the SEC
on May 15, 1995 (hereinafter referred to as the "IMA Form 10-Q"), the Annual
Report on Form 10-K for the fiscal year ended March 26, 1994 of IMA Merger Sub,
Inc. (formerly, Enviroq Corporation; hereinafter referred to as "Enviroq"), as
filed with the SEC on June 24, 1994 (together with all documents incorporated
therein by reference, hereinafter referred to as the "Enviroq Form 10-K"),
Enviroq's Quarterly Report on Form 10-Q for the quarter ended December 24, 1994,
as filed with the SEC on February 7, 1995 (hereinafter referred to as the
"Enviroq Form 10-Q"), and Enviroq's Proxy Statement dated March 14, 1995
(hereinafter referred to as the "Enviroq Proxy Statement"). The IMA SEC
Documents comply in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and neither any of the
IMA SEC Documents (as of the date of their respective filing with the SEC), or
any information relating to IMA or any of its Subsidiaries contained in this
Agreement or any schedule hereto, contains any untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
5.7 Financial Statements.
(a) The consolidated financial statements (hereinafter referred to,
collectively, as the "IMA Audited Financial Statements") of IMA and its
consolidated subsidiaries contained or incorporated by reference in the IMA Form
10-K in response to "Item 8. Consolidated Financial Statements and Supplementary
Data", are true and correct and have been prepared in conformity with generally
accepted accounting principles consistently applied throughout the periods to
which such financial statements relate. The IMA Audited Financial Statements
fully and fairly present, in conformity with such principles as so utilized, the
consolidated financial position and results of operations and cash flows of IMA
and its consolidated subsidiaries, at the dates shown and for the periods
therein specified, except as described therein.
(b) The consolidated financial statements (hereinafter referred to,
collectively, as the "Enviroq Audited Financial Statements") of Enviroq and its
consolidated subsidiaries contained or incorporated by reference in the Enviroq
Form 10-K in response to "Item 8. Consolidated Financial Statements and
Supplementary Data", are true and correct and have been prepared in conformity
with generally accepted accounting principles consistently applied throughout
the periods to which such financial statements relate.
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The Enviroq Audited Financial Statements fully and fairly present, in
conformity with such principles as so utilized, the consolidated financial
position and results of operations and cash flows of Enviroq and its
consolidated subsidiaries, at the dates shown and for the periods therein
specified, except as described therein.
(c) The consolidated financial statements (hereinafter referred to as
the "IMA Interim Financial Statements", and, together with the IMA Audited
Financial Statements, herein referred to as the "IMA Financial Statements") of
IMA and its consolidated subsidiaries contained in the IMA Form 10-Q in response
to "Item 1. Financial Statements" are true and correct and have been prepared in
conformity with generally accepted accounting principles consistently applied
throughout the periods to which such financial statements relate, except as
permitted by Form 10-Q. The IMA Interim Financial Statements fully and fairly
present the consolidated financial position and results of operations and cash
flows of IMA and its consolidated subsidiaries, at the dates shown and for the
periods therein specified, subject to normal year-end adjustments in accordance
with generally accepted accounting principles and except as described therein.
(d) The consolidated financial statements (hereinafter referred to as
the "Enviroq Interim Financial Statements") of Enviroq and its consolidated
subsidiaries contained in the Enviroq Form 10-Q in response to "Item 1.
Financial Statements" are true and correct and have been prepared in conformity
with generally accepted accounting principles consistently applied throughout
the periods to which such financial statements relate, except as permitted by
Form 10-Q. The Enviroq Interim Financial Statements fully and fairly present the
consolidated financial position and results of operations and cash flows of
Enviroq and its consolidated subsidiaries, at the dates shown and for the
periods therein specified, subject to normal year-end adjustments in accordance
with generally accepted accounting principles and except as described therein.
(e) The consolidated pro forma financial statements (hereinafter
referred to as the "Enviroq Pro Forma Financial Statements") of Enviroq and its
consolidated subsidiaries contained in the Enviroq Proxy Statement are true and
correct and have been prepared in all material respects in conformity with
Article 11 of Regulation S-X promulgated by the SEC. The Enviroq Pro Forma
Financial Statements fully and fairly present the consolidated financial
position and results of operations of Enviroq and its consolidated subsidiaries,
at the dates shown and for the periods therein specified, after giving pro forma
effect to the transactions described therein.
(f) Each of IMA and each Subsidiary: (i) make and keep books, records,
and accounts, which, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of their respective assets; and (ii) maintain a
system of internal accounting controls sufficient to provide reasonable
assurances that (A) transactions are executed in accordance with management's
general or specific authorization; (B) transactions are recorded as necessary
(I) to permit preparation of financial statements in conformity with generally
accepted accounting principles or any other criteria applicable to such
statements, and (II) to maintain accountability for assets; (C) access to assets
is permitted only in accordance with management's general or specific
authorization; and (D) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
5.8 Absence of Undisclosed Liabilities.
Except to the extent disclosed in the IMA Form 10-K or the IMA Form 10-Q
(in each case without reference to the exhibits thereto), or the Enviroq Pro
Forma Financial Statements (after giving effect to the transactions described
therein), or incurred after December 31, 1994 (or, in the case of Enviroq or its
subsidiaries, December 24, 1994) in the ordinary course of business and
consistent with past practice, neither IMA, nor any of the Subsidiaries has any
liabilities, whether accrued, absolute, contingent, or otherwise, whether due or
to become due and whether the amount thereof is readily ascertainable or not,
other than liabilities which, individually or in the aggregate, would not have a
Material Adverse Effect, or any unrealized or anticipated losses from any
unfavorable commitments or sales of products, other than those which,
individually or in the aggregate, would not have a Material Adverse Effect, in
each case under this Section 5.8 except as set forth in Schedule 5.8.
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5.9 Absence of Certain Changes.
Subsequent to December 31, 1994 (or, in the case of Enviroq or its
subsidiaries, December 24, 1994), neither IMA nor any Subsidiary has:
(a) except as disclosed in Schedule 5.9 attached hereto, declared, set
aside or made any payment or distribution upon any capital stock or, directly or
indirectly, purchased, redeemed or otherwise acquired or disposed of any shares
of capital stock;
(b) except as disclosed in Schedule 5.9 attached hereto, incurred any
liability or obligation under agreements or otherwise, except current
liabilities entered into or incurred in the ordinary course of business
consistent with past practice; issued any notes or other corporate debt
securities or paid or discharged any outstanding indebtedness, except in the
ordinary course of business consistent with past practice; or, in a manner that
would, individually or in the aggregate, have a Material Adverse Effect, waived
any of its respective rights;
(c) mortgaged, pledged or subjected to any Lien (as hereinafter defined)
any of its assets or properties; entered into any lease of real property or
buildings; or, except in the ordinary course of business consistent with past
practice, entered into any lease of machinery or equipment, or sold or
transferred any tangible or intangible asset or property;
(d) effected any increase in salary, wages or other compensation of any
kind, whether current or deferred, to any employee or agent, other than routine
increases in the ordinary course of business consistent with past practice or as
was required from time to time by governmental legislation affecting wages
(provided, however, that in no event was any such increase in compensation made
with respect to any employee or agent earning in excess of $50,000 per annum,
except as identified in Schedule 5.9); except as set forth in Schedule 5.9, made
any bonus, pension, option, deferred compensation, or retirement payment,
severance, profit sharing, or like payment to any employee or agent, except as
required by the terms of plans or arrangements existing prior to such date
(provided, however, that in no event was any such payment made with respect to
any employee or agent earning in excess of $50,000 per annum, except as
identified in Schedule 5.9); or entered into any salary, wage, severance, or
other compensation agreement with a term of one year or longer with any employee
or agent or made any contribution to any trust or plan for the benefit of any
employee or agent, except as required by the terms of plans or arrangements
existing prior to such date;
(e) except as set forth in Schedule 5.9, entered into any transaction
other than in the ordinary course of business consistent with past practice,
except in connection with the execution and performance of this Agreement and
the transactions contemplated hereby;
(f) suffered any damage, destruction, or loss to any of its assets or
properties (whether or not covered by insurance) except for damage, destruction
or loss occurring in the ordinary course of business which, individually or in
the aggregate, would not have a Material Adverse Effect; or
(g) suffered any Material Adverse Effect;
and, since December 31, 1994 (or, in the case of Enviroq and its subsidiaries,
December 24, 1994), there has been no condition, development or contingency
which, so far as reasonably may be foreseen, may, individually or in the
aggregate, have a Material Adverse Effect. For purposes of this Agreement, the
term "Lien" shall be defined to mean any mortgage, deed of trust, security
interest, pledge, lien, or other charge or encumbrance of any nature whatsoever
except: (a) liens disclosed in the IMA Financial Statements; (b) liens for
taxes, assessments, or governmental charges or levies not yet due and
delinquent; and (c) liens consisting of zoning or planning restrictions,
easements, permits, any other restrictions or limitations on the use of real
property or irregularities in title thereto which do not materially detract from
the value of, or impair the use of, such property by IMA or any of its
Subsidiaries.
5.10 Pooling.
As of the date hereof, there has not been any action taken by IMA or any
Subsidiary or affiliate under Rule 1-02 of Regulation S-X of the SEC that would
prevent the Merger from being accounted for as a
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pooling-of-interests. Contemporaneously with the execution and delivery of this
Agreement, IMA has delivered to ITI an executed letter agreement, substantially
in the form of Exhibit B attached hereto (together with such changes therein as
may reasonably have been requested by ITI or IMA, such reasonableness to be
determined in good faith by BDO Seidman), from each such affiliate.
5.11 Taxes.
IMA and each Subsidiary have filed or caused to be filed all foreign,
federal, state, provincial, municipal and other tax returns, reports and
declarations required to be filed by it so as to prevent any Lien of any nature
on the assets or properties of IMA or any of the Subsidiaries, and have paid or
shall pay all taxes which have been or shall become due with respect to the
periods covered by said returns or pursuant to any assessment received by it in
connection therewith. Except as set forth in Schedule 5.11, the Internal Revenue
Service has not examined the federal tax returns of IMA or any of the
Subsidiaries for any period subsequent to September 30, 1993; and only periods
subsequent to September 30, 1993 remain open for examination and assessment of
additional federal income taxes. All assessments and charges (including
penalties and interest, if any) related to periods ended on or before September
30, 1994 have been paid by IMA and each Subsidiary, including any necessary
adjustments with state and local tax authorities, and, except as set forth in
Schedule 5.11, no deficiency in payment of any taxes for any period has been
asserted by any taxing authority which remains unsettled at the date hereof.
Adequate provision has been made in the IMA Financial Statements for the payment
of all then accrued and unpaid federal and other taxes of IMA and its
Subsidiaries, whether or not yet due and payable and whether or not disputed by
IMA. Neither IMA nor any Subsidiary has agreed to the extension of the statute
of limitations with respect to any tax return for any open year.
5.12 Title.
IMA and its Subsidiaries have good and marketable title to all of their
respective assets and properties, in each case, except as set forth on Schedule
5.12(1), (2), (3), (4) and (5), free and clear of all Liens. IMA and the
Subsidiaries lease or own all properties and assets necessary for the operation
of their respective businesses as presently conducted, and the assets and
properties of IMA and its Subsidiaries include all of the assets, of every kind
and nature, whether tangible or intangible, and wherever located, which are
utilized by IMA or its Subsidiaries in the conduct of their respective
businesses. Neither IMA nor its Subsidiaries have received notice of any
violation of, or default under, any law, ordinance, order, regulation, or
governmental or contractual requirement relating to the assets and properties of
IMA or its Subsidiaries which remains uncured or has not been dismissed, other
than with respect to any violation which, individually or in the aggregate,
would not have a Material Adverse Effect and other than as identified on
Schedule 5.12(7). All leases and licenses pursuant to which IMA or the
Subsidiaries lease or license personal and intangible property from others, are
in good standing, valid and effective in accordance with their respective terms,
and there is not, under any of such leases or licenses, any existing default, or
event of default (or event which with notice or lapse of time, or both, would
constitute a default, or would constitute a basis for a claim of force majeure
or other claim of excusable delay or non-performance) caused, by IMA or any
Subsidiary or, to the best of IMA's knowledge, any other party. All the tangible
personal property owned or leased by IMA or its Subsidiaries is in good
operating condition and repair, subject only to ordinary wear and tear, and
conforms in all respects to all applicable laws, ordinances, orders, regulations
or governmental or contractual requirements relating to their operation, except
for any such non-conformity which, individually or in the aggregate, would not
have a Material Adverse Effect.
5.13 Real Estate and Leases.
(a) Set forth in Schedule 5.13 attached hereto is a brief description of
every parcel of real estate owned by IMA or any Subsidiary (including, in each
case, a description of the improvements and uses, the annual taxes payable and
depreciation reserve of any improvements), and lease agreements (including, in
each case, the annual rental payable and the expiration date, the cost and
depreciation reserve of any leasehold improvements and a brief description of
the property covered) under which IMA or any of its Subsidiaries is lessee of,
or holds or operates, any real estate owned by any third party. Each of such
leases and agreements is in full force and effect and constitutes a legal, valid
and binding obligation of the respective parties thereto.
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Neither IMA nor any Subsidiary is in default under any such lease or
agreement, nor, to the best of the knowledge of IMA, is any other party to any
such lease or agreement in default thereunder, and no event has occurred, or is
alleged to have occurred, which constitutes, or with lapse of time or giving of
notice or both would constitute, a default by IMA or any Subsidiary or, to the
best of the knowledge of IMA, any other party to any such lease or agreement, or
a basis for a claim of force majeure or other claim of excusable delay or
non-performance thereunder by IMA or any Subsidiary or, to the best of the
knowledge of IMA, any other party, other than with respect to any default, event
or claim which, individually or in the aggregate, would not have any Material
Adverse Effect.
(b) IMA or a Subsidiary has good, clear and marketable title to the
properties set forth on Schedule 5.13 and all fixtures thereon in fee simple
absolute, subject to no Liens (other than covenants, easements and restrictions
of record which do not, individually or in the aggregate, materially impair the
value or the present use of such properties and other than as set forth in
Schedule 5.13). There is no option or right held by any third party to purchase
any such properties or any part thereof, or any of the fixtures and equipment
thereon. All buildings, driveways and other improvements on such properties,
respectively, are within its boundary lines, and no improvements on adjoining
properties extend across the boundary lines onto such properties.
(c) The foundation, floor and roof of the buildings and all other
structural and mechanical components of the properties owned or leased by IMA or
its Subsidiaries are sound and free of any structural, mechanical or other
defect, and all heating, ventilating, air conditioning, electrical, plumbing and
other mechanical systems and equipment thereon are in good working order, in
each case except for construction-in-progress and except insofar as would not,
individually or in the aggregate, have a Material Adverse Effect. There are no
condemnation or eminent domain proceedings pending or threatened with respect to
the properties owned or leased by IMA or any Subsidiary, all required
certificates of occupancy and other government permits necessary to utilize such
properties as they are presently utilized have been obtained, and such
properties, and the operation thereof, conform to all existing building, zoning,
and other laws and ordinances relating to their use or occupancy, in each case
except insofar as would not, individually or in the aggregate, have a Material
Adverse Effect.
5.14 Contractual and Other Obligations.
(a) As used in this Agreement, the term the "IMA Agreements" shall mean
all mortgages, indentures, notes, agreements, contracts, leases, licenses,
franchises, obligations, instruments or other commitments, arrangements or
understandings of any kind, whether written or oral, binding or non-binding, to
which IMA or any of the Subsidiaries is a party or by which IMA or any of the
Subsidiaries or any of their respective properties may be bound or affected,
other than those which by their terms have expired prior to the date hereof.
There is no IMA Agreement which is material to IMA's business or condition and
which is not otherwise listed in the IMA Form 10-K or otherwise identified
pursuant to the immediately succeeding sentence. Set forth or provided for on
Schedule 5.14 attached hereto is a list, without regard to materiality, of each
of the following IMA Agreements which is not otherwise listed in the IMA Form
10-K: (i) any mortgage, indenture, note, or other instrument, agreement or
arrangement for or relating to any borrowing of money by IMA or any Subsidiary,
or any other installment obligation in excess, individually, of $100,000 per
year; (ii) any guaranty, direct or indirect, by IMA or any Subsidiary of any
obligation for borrowings or otherwise, excluding endorsements made for
collection in the ordinary course of business and guaranties of construction
performance bonds in the ordinary course of business disclosed on Schedule 5.19;
(iii) any IMA Agreement made other than in the ordinary course of its business
or providing for the grant of any preferential rights to purchase or lease any
assets of IMA or any Subsidiary, except for such agreements which, individually
and in the aggregate, are not material to IMA's business or condition; (iv) any
obligation to make payments, contingent or otherwise, arising out of the prior
acquisition of the business, assets or stock of other companies; (v) any
collective bargaining agreement with any trade or labor union; (vi) any IMA
Agreement to which any officer or director of IMA or any stockholder (herein
referred to collectively, as the "Insiders") of IMA beneficially owning (within
the meaning of Section 13(d) of the Exchange Act) more than 5% of the
outstanding shares of IMA Class A Common Stock, or any shares of IMA Class B
Common Stock, is a party; (vii) any IMA Agreement containing noncompetition or
other limitations restricting the conduct of the
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business of IMA or any Subsidiary; (viii) any license agreements to
which IMA or any Subsidiary is a party relating to any Intellectual Property (as
hereinafter defined), other than the Insituform Process or the NuPipe Process;
and (ix) any partnership, shareholder agreement, joint venture or similar
agreement.
(b) No event has occurred, or, is alleged to have occurred, which
constitutes or with lapse of time or giving of notice or both, would constitute
a default or a basis for a claim of force majeure or other claim of excusable
delay or non-performance by IMA or any Subsidiary under any IMA Agreements,
except for any such default or claim which, individually or in the aggregate,
would not have a Material Adverse Effect. To the best of the knowledge of IMA,
no party with whom IMA or any Subsidiary has any IMA Agreement is in default in
the performance of any covenant or condition thereunder or has failed in
performance thereunder by reason of a claim of force majeure or other claim of
excusable delay or non-performance thereunder, except for any such default or
claim which, individually or in the aggregate, would not have a Material Adverse
Effect.
5.15 Compensation.
Except as disclosed in the IMA Form 10-K (including, without limitation,
the proxy statement incorporated therein) or in Schedule 5.14 or Schedule
5.15(2) attached hereto, neither IMA nor any Subsidiary has any agreement with
any employee with regard to compensation, whether individually or collectively,
except agreements terminable by IMA or any Subsidiary at will without penalty,
or oral agreements terminable by IMA or a Subsidiary on not more than 30 days'
notice without penalty, and set forth in Schedule 5.15 is a list of all
employees of IMA and each Subsidiary other than hourly employees subject to
collective bargaining agreements, entitled to receive annual compensation in
excess of $50,000 and their respective positions and salaries. Except for those
unions identified on Schedule 5.14 as parties to IMA Agreements, no union or
other collective bargaining unit has been certified or recognized by IMA or any
Subsidiary as representing any of their respective employees. Without reference
to any plans or proposals of ITI (other than the execution, delivery and
performance of this Agreement), neither IMA nor ITI will incur any liability
with respect to any payment due or damage suffered by any employee of IMA or any
Subsidiary, including, but not limited to, any claims for severance, termination
benefits or similar claims, by virtue of the operation of the Merger and the
transactions contemplated hereby.
5.16 Employee Benefit Plans.
Except as listed and accurately described in Schedule 5.16, IMA and the
Subsidiaries do not maintain or sponsor and are not required to make
contributions to any pension, profit-sharing, bonus, incentive, welfare, or
other employee benefit plan. All pension, profit-sharing, bonus, incentive,
welfare, or other employee benefit plans within the meaning of Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended (hereinafter
referred to as "ERISA"), in which the employees of IMA or its Subsidiaries
participate, or with respect to which IMA or the Subsidiaries have any liability
or obligation (such plans and related trusts, insurance, and annuity contracts,
funding media, and related agreements and arrangements, other than any
"multiemployer plan" (within the meaning of section 3(37) or ERISA) being
hereinafter referred to as the "Benefit Plans", and such multiemployer plans
being hereinafter referred to as the "Multiemployer Plans") comply in form and
as administered in all material respects with all requirements of the U.S.
Department of Labor, the Internal Revenue Service and the Pension Benefit
Guaranty Corp. (hereinafter referred to as "PBGC") promulgated under ERISA and
with all other applicable law (including, without limitation, the health care
continuation coverage requirements of Section 4980B of the Code). Neither IMA
nor any of its Subsidiaries has taken or failed to take any action with respect
to either the Benefit Plans or the Multiemployer Plans which might create any
material liability on the part of IMA, any Subsidiary or ITI. Each "fiduciary"
(within the meaning of section 3(21)(a) of ERISA) as to each Benefit Plan and,
to the best of the knowledge of IMA, as to each Multiemployer Plan has complied
in all material respects with the requirements of ERISA and all other applicable
law in respect of each such Plan. All required employer and employee
contribution and premiums under the Benefit Plans and the Multiemployer Plans to
the date hereof have been paid, the respective fund or funds established under
the Benefit Plans and the Multiemployer Plans are funded in accordance with all
applicable laws and such plans, and no material past service funding liabilities
exist thereunder. IMA has furnished to ITI and Acquisition Sub copies of all
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Benefit Plans, and of all documents relating thereto required by ITI, including,
without limitation, annual reports and financial statements with respect to such
Benefit Plans for all periods ended on a date subsequent to September 30, 1991
during which IMA or any Subsidiary was a sponsor or participating employer in or
was required to make contributions to such Benefit Plans. Such financial
statements are true and correct in all material respects, and none of the
actuarial assumptions underlying such statements have changed since the
respective dates thereof. In addition, as of the date hereof:
(i) No Benefit Plan which is a "defined benefit plan" (within the
meaning of Section 3(35) of ERISA) (hereinafter referred to as the "Defined
Benefit Plans") or, to the best of the knowledge of IMA, Multiemployer Plan has
incurred an "accumulated funding deficiency" (within the meaning of section
412(a) of the Code), whether or not waived, and there are no excise taxes due or
hereafter to become due, based upon current facts and circumstances, under
section 4971 of the Code with respect to the funding of any Benefit Plan;
(ii) No "reportable event" (within the meaning of section 4043 of ERISA)
has occurred with respect to any Defined Benefit Plan or, to the best of the
knowledge of IMA, any Multiemployer Plan; there have been no terminations of any
Defined Benefit Plan or, to the best of the knowledge of IMA, any Multiemployer
Plan or any related trust; no such termination of any of the foregoing
reasonably can be expected to occur, whether as a consequence of the execution
and delivery of this Agreement, the consummation of the transactions
contemplated herein, or otherwise;
(iii) Neither IMA nor any Subsidiary has withdrawn (partially or totally
within the meaning of ERISA) from any Benefit Plan or any Multiemployer Plan;
and neither the execution and delivery of this Agreement nor the consummation of
the transactions contemplated herein will result in the withdrawal (partial or
total within the meaning of ERISA) from any Benefit Plan or Multiemployer Plan,
or in any withdrawal or other liability of any nature to IMA, any Subsidiary, or
ITI under any Benefit Plan or any Multiemployer Plan;
(iv) No "prohibited transaction" (within the meaning of section 406 of
ERISA or section 4975(c) of the Code) has occurred with respect to any Benefit
Plan or, to the best of the knowledge of IMA, any Multiemployer Plan;
(v) There is no excess of the aggregate present value of accrued
benefits on a termination basis over the aggregate value of the assets of the
Defined Benefit Plans, and no withdrawal liability of IMA and the Subsidiaries
with respect to the Multiemployer Plans;
(vi) There are no contributions which are, or hereafter will be,
required to have been made to trusts in connection with "defined contribution
plans" (within the meaning of section 3(34) of ERISA) with respect to services
rendered by employees of IMA or the Subsidiaries prior to the date hereof, and
all PBGC premiums due on or before the date of this Agreement by IMA or any
Subsidiary have been paid in full, including any late fees, interest and
penalties;
(vii) Other than claims in the ordinary course for benefits with respect
to the Benefit Plans or the Multiemployer Plans, there are no actions, suits, or
claims pending with respect to any Benefit Plan or any Multiemployer Plan or any
circumstances known to IMA which might give rise to any such action, suit or
claims; and there are presently no outstanding judgments, decrees or orders of
any court or any government or administrative agency against or affecting any
Benefit Plan, the assets of any Benefit Plan or any Benefit Plan fiduciary; and
(viii) Other than the pension benefits payable under the Benefit Plans
and except as set forth on Schedule 5.16, neither IMA nor any Subsidiary is
under any obligation to provide benefits or coverage under a Benefit Plan to
retirees of IMA or any Subsidiary or other former employees of IMA or any
Subsidiary (or the beneficiaries of such retirees or former employees),
including but not limited to retiree health care coverage (except as may be
mandated by the Consolidated Omnibus Budget Reconciliation Act of 1985).
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5.17 Labor Relations.
There are no controversies pending or threatened between IMA and any
Subsidiary and any of their respective employees which, individually or in the
aggregate, are reasonably likely to result in a Material Adverse Effect, and,
there are no organizational efforts currently being made or threatened involving
any of such employees. IMA has complied with all laws relating to the employment
of labor, including without limitation, any provisions thereof relating to
wages, hours, collective bargaining and the payment of social security and
similar taxes, and is not liable for any arrearage of wages or any taxes or
penalties for failure to comply with any of the foregoing, except for any such
non-compliance or such amounts which, individually or in the aggregate, would
not have a Material Adverse Effect.
5.18 Interests of Insiders.
Except pursuant to an IMA Agreement identified on Schedule 5.14(vi) or
Schedule 5.18, no Insider has, nor does any officer or director of any of the
Subsidiaries have, any interest in any property, real or personal, tangible or
intangible, used in or pertaining to the businesses engaged in by IMA or any
Subsidiary, except for the legal rights of stockholders and except for rights
under existing employee benefit plans described in Section 5.16 hereof. Except
as set forth on Schedule 5.14(vi) or Schedule 5.18, no Insider owns, nor do any
officers of directors of any Subsidiary own, directly or indirectly, any
interest in, or is a director, officer or employee of, any business which is a
competitor or significant supplier of IMA or any Subsidiary.
5.19 Insurance.
As of the date of this Agreement, IMA and its Subsidiaries maintain
insurance policies, and bonding arrangements, covering all of their respective
assets and properties, and in each case the various occurrences which may arise
in connection with the operation of their respective businesses, except those
occurrences which, individually or in the aggregate, would not have a Material
Adverse Effect. Schedule 5.19 attached hereto accurately summarizes the
principal terms of all such policies and bonding arrangements. Such policies and
bonding arrangements are in full force and effect, all premiums and other
amounts due thereon have been paid, and IMA and the Subsidiaries have complied
with the provisions of such policies and bonding arrangements. Such insurance
and such bonding arrangements are of comparable amounts and coverage as that
which companies engaged in similar businesses would maintain in accordance with
good business practice. There are no notices of any pending or threatened
terminations or premium increases with respect to any such policies or bonding
arrangements, and such policies and bonding arrangements will not be modified as
a result of or terminate or lapse by reason of, the transactions contemplated by
this Agreement.
5.20 Intellectual Property.
Other than the rights of IMA and its Subsidiaries, each as licensee, to the
subject matter (herein referred to as the "Insituform Process") under their
respective license agreements with Insituform North America Corp., and the
rights, of IMA and its Subsidiaries, as licensee, to the subject matter (herein
referred to as the "NuPipe Process") under agreements with NuPipe, Inc., set
forth in Schedule 5.20 attached hereto is a list and brief description of all of
IMA's and each Subsidiary's patents, invention disclosures, registered and
common law trademarks, service marks, tradenames, copyrights, licenses and other
similar rights and applications for each of the foregoing (together with those
rights under license relative to the Insituform Process and the NuPipe Process,
hereinafter referred to as the "Intellectual Property"). IMA and its
Subsidiaries, respectively, own all right, and title and interest in and to all
such Intellectual Property, except as set forth in Schedule 5.20(1)(a) free and
clear of all Liens. Neither IMA nor any of its Subsidiaries has, except as set
forth in Schedule 5.20, granted any outstanding licenses or other rights, and
has no obligations to grant licenses or other rights, under any such
Intellectual Property. The Intellectual Property listed in Schedule 5.20,
together with those rights under license relative to the Insituform Process and
the NuPipe Process, respectively, are all such rights necessary to the operation
and the conduct of the business of IMA and its Subsidiaries as currently
conducted; no adverse claims have been made, and no dispute has arisen, with
respect to any of the said Intellectual Property (including without limitation
those under license relative to the Insituform Process and the NuPipe Process,
respectively); and the operations of IMA and each Subsidiary and the use by each
of the Intellectual Property identified on Schedule 5.20 would not involve
infringement or
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claimed infringement of any patent, trademark, servicemark, tradename,
copyright, license or similar right, except for any such infringement which,
individually or in the aggregate, would not have a Material Adverse Effect.
Without limiting the generality of the foregoing or any other provision
contained in this Agreement: the license identified under Schedule 5.20(3)(b) is
in full force and effect; no event has occurred, or is alleged to have occurred,
which constitutes or with lapse of time or giving of notice or both, would
constitute a material default or a basis for a claim of force majeure or other
material claim of excusable delay or non-performance by IMA under such license;
to the best of the knowledge of IMA, no party to such license other than IMA is
in default in any material respect in the performance of any covenant or
condition thereunder or has failed in performance thereunder in any material
respect by reason of a claim of force majeure or other claim of excusable delay
or non-performance thereunder; and the execution and delivery of this Agreement
and the consummation of the Merger will not adversely affect or otherwise impair
the ability of the Surviving Corporation fully to enjoy the benefits of such
license. Except as set forth on Schedule 5.20(3)(a), no license or other right
has in any manner been granted by IMA or any of its Subsidiaries which
constrains IMA or any Subsidiary from utilizing or commercializing any patent,
registered or common law trademark, service name, tradename, copyright, license
or other similar right. To the best of the knowledge of IMA, and except as would
not have a Material Adverse Effect, neither IMA nor any Subsidiary has suffered
any of its trade secrets, know-how or other confidential intellectual or
intangible property rights utilized in connection with the Business to enter
into the public domain.
5.21 Disputes and Litigation.
Except as described in the IMA Form 10-K or as set forth on Schedule 5.21,
there is no action, suit, proceeding, or claim, pending or threatened, and no
investigation by any court or government or governmental agency or
instrumentality, domestic or foreign, pending or threatened, against IMA or any
of its Subsidiaries, before any court, government or governmental agency or
instrumentality, domestic or foreign, nor is there any outstanding order, writ,
judgment, stipulation, injunction, decree, determination, award, or other order
of any court or government or governmental agency or instrumentality, domestic
or foreign, against IMA or any of its Subsidiaries, except for any such matter
which, individually or in the aggregate, would not have a Material Adverse
Effect.
5.22 Licenses; Franchises; Rights.
(a) Each of IMA and its Subsidiaries has (or has made timely application
for) all franchises, licenses, permits and other governmental and
non-governmental approvals necessary to enable it to carry on its business as
currently conducted, and the employees and agents of IMA and its Subsidiaries
also have all such franchises, licenses, permits, governmental and other
approvals required of them in carrying out their duties on behalf of IMA and the
Subsidiaries, except for such franchises, licenses, permits and other approvals
the failure to hold which, individually or in the aggregate, would not have a
Material Adverse Effect. All such franchises, licenses, permits, and
governmental and other approvals are in full force and effect, there has been no
default or breach thereunder, and there is no pending or threatened proceeding
under which any may be revoked, terminated or suspended, except insofar as would
not, individually or in the aggregate, have a Material Adverse Effect. The
execution and delivery of this Agreement, and the consummation of the Merger,
will not adversely affect or otherwise impair the ability of the Surviving
Corporation fully to enjoy the benefits of any such franchises, licenses,
permits or governmental and other approvals. Schedule 5.22 attached hereto
identifies each permit, license and other approval required by any national,
state, commonwealth, or territorial government (but not by any county,
municipality or local authority) to be maintained by IMA or any Subsidiary in
order to conduct its current construction operations. Neither IMA nor any
Subsidiary has violated, or is alleged to have violated, any law, rule,
regulation, judgment, stipulation, injunction, decree, determination, award or
other order of any government, or governmental agency or instrumentality,
domestic or foreign, binding upon IMA or any Subsidiary which violation,
individually or in aggregate, would have a Material Adverse Effect.
(b) Without limiting the generality of the foregoing, neither IMA nor
any Subsidiary: (i) has filed any notice under any Environmental Law (as
hereinafter defined) indicating past or present treatment, storage, or disposal
of a hazardous waste or reporting a spill or release of a hazardous or toxic
waste, substance
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or constituent, or other substance into the environment, or (ii) has any
liability, contingent or otherwise, under any Environmental Law in connection
with any release of any hazardous or toxic waste, substance or constituent, or
other substance on property, now or formerly owned or leased by IMA or any of
its Subsidiaries, which, individually or in the aggregate, would have a Material
Adverse Effect. No hazardous materials and no hazardous substances have been
generated, treated, stored or disposed of or placed in violation of any
Environmental Law on any property owned or leased by IMA or any Subsidiary or on
or into any waste disposal site owned or operated by a third party except for
violations which, individually or in the aggregate, would not have a Material
Adverse Effect.
(c) For purposes hereof, "Environmental Laws" shall mean any and all
federal, state or local laws, statutes, ordinances, rules, regulations, orders,
or determinations of any federal, state or local governmental authority
pertaining to health or the environment, including with limitations, the federal
Clean Air Act, as amended, Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, Water Pollution Control Act, as amended,
Occupational Safety and Health Act of 1970, as amended, Resource Conservation
and Recovery Act of 1976, as amended, Safe Drinking Water Act, as amended, Toxic
Substances Control Act, as amended, Superfund Amendments and Reauthorization Act
of 1986, as amended, Hazardous Materials Transportation Act, as amended, and all
other environmental, conservation or protection laws.
5.23 Brokers and Finders.
Neither IMA, nor any Subsidiary, nor any director, officer, agent or
employee thereof has employed any broker or finder or has incurred or will incur
any broker's, finder's or similar fees, commissions or expenses, in each case in
connection with the transactions contemplated by this Agreement, except for a
fee payable to Wertheim Schroder & Co. pursuant to a financial advisory
agreement with IMA, a copy of which agreement and all amendments thereto has
been furnished to ITI and Acquisition Sub prior to the date of this Agreement.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
OF ITI AND ACQUISITION SUB
ITI and Acquisition Sub hereby, jointly and severally, represent, warrant,
and covenant as follows:
6.1 Incorporation.
Each of ITI and Acquisition Sub is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Delaware and has
full corporate power and authority to own or hold under lease the assets and
properties which it owns or holds under lease, to conduct its businesses as
currently conducted, to perform all its obligations under the agreements to
which it is a party, including, without limitation, this Agreement and to
consummate the Merger. Each is in good standing in each other jurisdiction
wherein the failure so to qualify, individually or in the aggregate, would have
a Material Adverse Effect with respect to ITI.
6.2 Authorization.
The execution and delivery of this Agreement by each, the performance by
each of its covenants and agreements hereunder and the consummation by each of
the transactions contemplated hereby have been duly authorized by all necessary
corporate action of each, other than the approval of the holders of ITI Common
Stock contemplated under Section 7.2 hereof. When executed and delivered by
each, this Agreement, shall constitute their valid and legally binding
obligations, respectively, enforceable against them in accordance with its
terms, except as may be limited by bankruptcy, insolvency, or other laws
affecting generally the enforceability of creditors' rights and by limitations
on the availability of equitable remedies.
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6.3 Conflicts.
Neither the execution and delivery of this Agreement, nor the consummation
of the transactions contemplated herein, will violate any provision of its
certificate of incorporation or of its by-laws, as currently in effect (but
subject to the adoption of the amendments thereto contemplated by this
Agreement), or, subject to approval of this Agreement by the holders of ITI
Common Stock contemplated under Section 7.2 hereof and compliance with the
regulatory requirements hereinafter specified in this Section 6.3, any law,
rule, regulation, writ, judgment, injunction, decree, determination, award, or
other order of any court, government or governmental agency or instrumentality,
domestic or foreign, binding upon ITI or Acquisition Sub, or, except as set
forth on Schedule 6.3 attached hereto and other than any such conflicts,
breaches, creation, imposition or termination which would not have a Material
Adverse Effect with respect to ITI, conflict with or result in any breach of any
of the terms of or constitute a default under or result in the termination of or
the creation or imposition of any mortgage, deed of trust, pledge, lien,
security interest or other charge or encumbrance of any nature pursuant to the
terms of any contract or agreement to which it is a party to or by which it or
any of its assets and properties are bound. Other than the approval of this
Agreement by the holders of ITI Common Stock as contemplated under Section 7.2
hereof and except for compliance with the requirements of the HSR Act, the
Securities Act, with respect to the Registration Statement, the securities and
blue sky laws of the various states, the Exchange Act, with respect to the Proxy
Statement, and except as set forth on Schedule 6.3 and any such consents,
approvals, authorizations, filings or registrations with or notices to any such
person or entity other than any governmental agency or instrumentality the
failure to effectuate which would not have a Material Adverse Effect with
respect to ITI, no consents, approvals or authorizations, or filings or
registrations with, or notices to, any governmental agency or authority or any
other person or entity are required in connection with the execution and
delivery of this Agreement by ITI or Acquisition Sub or the consummation by ITI
or Acquisition Sub of the transactions contemplated hereby.
6.4 Capitalization.
The authorized capital stock of ITI consists of 2,000,000 shares of
preferred stock, $.01 par value (hereinafter referred to as "ITI Preferred
Stock"), none of which are issued and outstanding, and 25,000,000 shares of ITI
Common Stock, of which 14,402,085 shares are issued and outstanding on the date
hereof. The shares of ITI Common Stock to be issued to holders of IMA Common
Stock in the Merger will, at the Effective Time, and the shares of ITI Common
Stock to be issued upon exercise of IMA Options assumed by ITI in accordance
with this Agreement will, upon exercise thereof in accordance with the terms
thereof, be duly authorized, validly issued and fully paid and non-assessable,
issued without violation of the preemptive rights of any person. There are no
subscriptions, warrants, options, calls, commitments by or agreements to which
ITI is bound on the date hereof relating to the issuance, conversion or purchase
of any shares of ITI Common Stock, or any other capital stock of ITI, except as
set forth on Schedule 6.4 attached hereto and except for: (x) options granted by
ITI pursuant to option plans in effect on the date hereof and options granted to
ITI's President, covering an aggregate of 1,167,600 shares of ITI Common Stock
on the date hereof, and (y) warrants to purchase an aggregate of 350,877 shares
of ITI Common Stock issued contemporaneously with ITI's 8.5% Senior Subordinated
Note due July 26, 2002.
6.5 Securities Filings.
ITI and each Subsidiary has made all filings with the SEC that it has been
required to make under the Securities Act and the rules and regulations
promulgated thereunder and the Exchange Act and the rules and regulations
promulgated thereunder. ITI has provided to IMA a complete and correct copy of
all reports, registration statements, final prospectuses, definitive proxy
statements and other filings made by ITI or any Subsidiary with the SEC,
including all exhibits to such filings, since January 1, 1990 (all such
documents that have been filed with the SEC, as amended, hereinafter referred to
as the "ITI SEC Documents"), including, without limitation, ITI's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994, as filed with the SEC
on March 31, 1995 (together with all documents incorporated therein by
reference, hereinafter referred to as the "ITI Form 10-K") and its Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995, as filed with the SEC
on May 15, 1995 (hereinafter referred to as the "ITI Form 10-Q"). The ITI SEC
Documents comply in all material respects with the requirements of the
Securities Act or the Exchange Act,
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as the case may be, and neither the ITI SEC Documents (as of the date of filing
with the SEC), nor any information relating to ITI or any of its subsidiaries
contained in this Agreement or any schedule hereto, contains any untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
6.6 Financial Statements.
(a) The consolidated financial statements (hereinafter referred to,
collectively, as the "ITI Audited Financial Statements") of ITI and its
consolidated subsidiaries contained in the ITI Form 10-K in response to "Item 8.
Consolidated Financial Statements and Supplementary Data" are true and correct
and have been prepared in conformity with generally accepted accounting
principles consistently applied throughout the periods to which such financial
statements relate. The ITI Audited Financial Statements fully and fairly
present, in conformity with such principles as so utilized, the consolidated
financial position and results of operations and cash flows of ITI and its
consolidated subsidiaries, at the dates shown and for the periods therein
specified, except as described therein.
(b) The consolidated financial statements (hereinafter referred to,
collectively, as the "ITI Interim Financial Statements") of ITI and its
consolidated subsidiaries contained in the ITI Form 10-Q in response to "Item 1.
Financial Statements" are true and correct and have been prepared in conformity
with generally accepted accounting principles consistently applied throughout
the periods to which such financial statements relate, except as permitted by
Form 10-Q. The ITI Interim Financial Statements fully and fairly present the
consolidated financial position and results of operations and cash flows of ITI
and its consolidated subsidiaries, at the dates shown and for the periods
therein specified, subject to normal year-end adjustments in accordance with
generally accepted accounting principles and except as described therein.
6.7 Absence of Undisclosed Liabilities.
Except to the extent disclosed in the ITI Form 10-K or the ITI Form 10-Q
(in each case without reference to the exhibits thereto) or incurred after
December 31, 1994 in the ordinary course of business and consistent with past
practice, neither ITI, nor any of its subsidiaries has any liabilities, whether
accrued, absolute, contingent, or otherwise, whether due or to become due and
whether the amount thereof is readily ascertainable or not, other than
liabilities which, individually or in the aggregate, would not have a Material
Adverse Effect, or any unrealized or anticipated losses from any unfavorable
commitments or sales of products, other than those which, individually or in the
aggregate, would not have a Material Adverse Effect with respect to ITI, in each
case under this Section 6.7 except as set forth in Schedule 6.7.
6.8 Absence of Certain Changes.
Except as set forth in Schedule 6.8:(i) subsequent to December 31, 1994 and
except as disclosed in the ITI Form 10-K or the ITI Form 10-Q, neither ITI nor
any subsidiary has suffered any Material Adverse Effect with respect to ITI; and
(ii) since December 31, 1994 and except as disclosed in the ITI Form 10-K or the
ITI Form 10-Q, there has been no condition, development or contingency which, so
far as reasonably may be foreseen, may, individually or in the aggregate, have a
Material Adverse Effect with respect to ITI.
6.9 Pooling.
As of the date hereof, there has not been any action taken by ITI or any
subsidiaries or affiliates under Rule 1-02 of Regulation S-X of the SEC that
would prevent the Merger from being accounted for as a pooling-of-interests.
Contemporaneously with the execution and delivery of this Agreement, ITI has
delivered to IMA an executed letter agreement, substantially in the form of
Exhibit B attached hereto (together with such changes therein as may reasonably
have been requested by IMA or ITI, such reasonableness to be determined in good
faith by BDO Seidman), from each such affiliate.
6.10 Interests of Insiders.
Except as disclosed in the ITI Form 10-K (including the amendments thereto
and Schedule 6.10 attached hereto), as of the date hereof no officer or director
of ITI, nor any stockholder beneficially owning
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(within the meaning of Section 13(d) of the Exchange Act) more than 5% of the
outstanding shares of ITI Common Stock, has, nor does any officer or director of
any of ITI's subsidiaries have, any interest in any property, real or personal,
tangible or intangible, used in or pertaining to the businesses engaged in by
ITI or any subsidiary of ITI, except for the legal rights of stockholders and
except for rights under existing employee benefit plans. As of the date hereof,
no such party owns, directly or indirectly, any interest in, or is a director,
officer or employee of, any business which is a competitor or significant
supplier of ITI or any of its subsidiaries.
6.11 Disputes and Litigation.
Except as described in the ITI Form 10-K or the ITI Form 10-Q or as set
forth in Schedule 6.11, there is no action, suit, proceeding, or claim, pending
or threatened, and no investigation by any court or government or governmental
agency or instrumentality, domestic or foreign, pending or threatened, against
ITI or any of its subsidiaries, before any court, government or governmental
agency or instrumentality, domestic or foreign, nor is there any outstanding
order, writ, judgment, stipulation, injunction, decree, determination, award, or
other order of any court or government or governmental agency or
instrumentality, domestic or foreign, against ITI, except for any such matter
which, individually or in the aggregate, would not have a Material Adverse
Effect with respect to ITI.
6.12 Brokers or Finders.
Neither ITI nor Acquisition Sub, nor any director, officer, agent or
employee thereof, has employed any broker or finder or has incurred or will
incur any broker's, finder's or similar fees, commissions or expenses, in each
case in connection with the transactions contemplated by this Agreement, except
for a fee payable to Merrill Lynch & Co. pursuant to a financial advisory
agreement with ITI, a copy of which agreement and all amendments thereto have
been furnished to IMA prior to the date of this Agreement.
ARTICLE VII
CERTAIN COVENANTS
7.1 IMA Stockholders' Meeting.
IMA, acting through its Board of Directors, shall take all action necessary
in accordance with applicable law and its certificate of incorporation and
by-laws, to convene as promptly as practicable a special meeting of the holders
of shares of IMA Common Stock, to vote upon this Agreement, the Merger and the
transactions contemplated hereby, and shall include in the Joint Proxy Statement
the recommendation (subject to the fiduciary duty of the Board of Directors
under applicable law) of its Board of Directors that the holders of the shares
of IMA Common Stock vote in favor of the adoption and approval of this
Agreement, the Merger and the transactions contemplated hereby. IMA shall use
its best efforts to solicit from such stockholders proxies in favor of such
adoption and approval and shall take all other action necessary or, in the
reasonable opinion of ITI, helpful to secure a favorable vote for the purpose of
voting on and approving this Agreement, the Merger and the transactions
contemplated hereby. IMA shall adjourn such stockholders' meeting to a later
date, at the reasonable request of ITI, if (i) the requisite vote of holders of
the shares of IMA Common Stock has not been obtained; or (ii) ITI shall
otherwise request an adjournment in order to attempt to increase the percentage
of the vote in favor of the foregoing.
7.2 ITI Stockholders' Meeting.
ITI, acting through its Board of Directors, shall take all action
necessary, in accordance with applicable law and its certificate of
incorporation and by-laws, to convene as promptly as practicable an annual or
special meeting of the holders of shares of ITI Common Stock, to vote upon this
Agreement, the issuance of ITI Common Stock in the Merger and the transactions
contemplated hereby, including, without limitation, an amendment to its
certificate of incorporation so as to increase the authorized number of shares
of ITI Class A Common Stock, and to modify provisions relating to its board of
directors, as set forth under Section 9.3 hereof, and shall include in the Joint
Proxy Statement the recommendation (subject to the fiduciary duty of the Board
of Directors under applicable law) of its Board of Directors that the holders of
ITI Common Stock
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vote in favor of such Agreement, issuance and transactions. ITI shall use its
best efforts to solicit from such stockholders proxies in favor of such matters
and shall take all other action necessary to secure a favorable vote.
7.3 ITI Board of Directors.
ITI shall take such action as may be necessary so that the ITI Board of
Directors will be expanded as of the Effective Time and pursuant to ITI's
certificate of incorporation, amended as contemplated under Section 9.3 hereof,
and ITI's by-laws, amended as contemplated by Section 9.4 hereof, to include the
following persons: William Gorham, Alvin J. Siteman, Silas Spengler and Sheldon
Weinig, for a one-year term expiring in 1996 (hereinafter referred to as "Class
I Directors"); Robert W. Affholder, Paul A. Biddelman, Douglas K. Chick and
Steven Roth, for a two-year term expiring in 1997 (hereinafter referred to as
"Class II Directors"); and Brian Chandler, Jerome Kalishman, James D. Krugman,
Jean-Paul Richard and Russell B. Wight, Jr., for a three-year term expiring in
1998 (hereinafter referred to as "Class III Directors"). Other than Mr. Richard,
the directors shall be grouped as follows: (i) Messrs. Biddelman, Chandler,
Chick, Krugman and Spengler shall be referred to as the "INA Group"; (ii)
Messrs. Gorham, Roth, Weinig and Wight shall be referred to as the "IGL Group";
and Messrs. Affholder, Kalishman and Siteman shall be referred to as the "IMA
Group" (each of the INA Group, the IGL Group and the IMA Group, hereinafter
referred to as a "Group"). During the period from the Effective Time until
December 9, 1998 (hereinafter referred to as the "Term"), ITI shall nominate and
recommend for re-election to the ITI Board of Directors, upon expiration of
their terms, the Class I Directors, the Class II Directors and the Class III
Directors. If during the Term any director resigns or is unable to serve for any
reason, such vacancy shall be filled with a designee chosen by the remaining
members of that director's Group and thereafter ITI shall nominate and recommend
such designee for election to the ITI Board of Directors as provided in the
previous sentence. The provisions of this paragraph (a) shall be deemed to
restate and amend, and supersede, the provisions of Section 7.3 of the Agreement
dated as of July 3, 1992 among ITI, INA Acquisition Corp. and Insituform Group
Limited.
7.4 ITI Officers.
ITI shall take such action as may be necessary so that Jerome Kalishman
shall be appointed to the office of Vice Chairman of the Board of ITI at the
Effective Time in accordance with and subject to the provisions of the by-laws
of ITI, amended as contemplated under Section 9.4 hereof.
7.5 Registration Statement; Proxy Statement.
(a) ITI shall (i) prepare and file with the SEC as soon as reasonably
practicable a Registration Statement on Form S-4 (or another appropriate form)
under the Securities Act (herein referred to as the "Registration Statement"),
and preliminary joint proxy materials which comply as to form with the
requirements of the Exchange Act, with respect to the transactions contemplated
by this Agreement, (ii) use its best efforts to have the Registration Statement
declared effective by the SEC under the Securities Act and the preliminary joint
proxy materials cleared by the SEC under the Exchange Act as promptly as
practicable, and (iii) take all such action as may be required under state blue
sky or securities laws in connection with the transactions contemplated by this
Agreement. IMA will promptly furnish ITI with all information (and shall update
such information) concerning IMA and its Subsidiaries, and their respective
businesses and affairs and IMA's designees to the ITI Board of Directors,
including, without limitation, financial statements, financial statement
schedules, and pro forma financial statements and information, which, in the
reasonable judgment of ITI or its counsel, may be required or appropriate for
inclusion in the Registration Statement, and shall cooperate with and assist ITI
in the preparation of all such materials.
(b) Promptly after the Registration Statement (including the definitive
joint proxy material contained therein (herein referred to as the "Joint Proxy
Statement")) becomes effective, IMA and ITI shall cause the Joint Proxy
Statement to be mailed to their respective stockholders and, if necessary, after
the Joint Proxy Statement shall have been so mailed, promptly circulate amended,
supplemental or supplemented proxy material and, if required in connection
therewith, resolicit proxies. Neither IMA nor ITI shall use any proxy material
in connection with the meetings of their respective stockholders hereinabove
referred without the prior approval of the other parties hereto, which approval
shall not be unreasonably withheld.
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(c) IMA and ITI each represents and warrants to the other that at the
time the Registration Statement and any post-effective amendment thereto becomes
effective, and the Joint Proxy Statement and any other related proxy soliciting
material filed with the SEC is cleared, and at all times subsequent thereto up
to and including the Effective Time, none of the information set forth therein
with respect to (in the case of IMA), IMA, its directors, officers, stockholders
or any Subsidiary or (in the case of ITI) ITI, its directors, officers,
stockholders or any of its subsidiaries will contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading.
(d) IMA shall cause to be delivered to ITI (i) a letter of KPMG Peat
Marwick LLP, IMA's independent auditors, and (ii) a letter of Deloitte & Touche,
Enviroq's independent auditors, each dated within two business days before the
date as of which the Registration Statement becomes effective and addressed to
ITI, in form and substance reasonably satisfactory to ITI, to the effect set
forth on, respectively, Exhibit C-1 and Exhibit C-2 hereto.
(e) ITI shall cause to be delivered to IMA a letter of BDO Seidman,
ITI's independent auditors, dated within two business days before the date as of
which the Registration Statement becomes effective and addressed to IMA, in form
and substance reasonably satisfactory to IMA, to the effect set forth on Exhibit
D hereto.
7.6 HSR Act; Other Governmental and Judicial Filings.
As soon as practicable after the date hereof, IMA, ITI and Acquisition Sub
will cooperate in the preparation and filing of all materials necessary or
desirable to obtain the approval of the transactions contemplated hereby or the
disclaimer of jurisdiction with respect thereto by any regulatory body or other
governmental or judicial authority that has jurisdiction over the transactions
contemplated hereby, including, without limitation, all filings, with the
Federal Trade Commission and the U.S. Department of Justice required under the
HSR Act.
7.7 Conduct of Business of IMA.
IMA covenants and agrees that, except as consented to in writing by ITI,
from and after the date of this Agreement and until the Effective Time, IMA and
each Subsidiary shall:
(a) Make no purchase, sale, or lease in respect of, nor introduce any
method of management or operation in respect of, its business or its assets and
properties, except in a manner consistent with prior practice and as set forth
in IMA's capital expenditure budget previously provided to ITI and except as set
forth in Schedule 7.7(1).
(b) Maintain, preserve, and in no way further encumber its assets and
properties other than in the ordinary course of business consistent with past
practice after the date hereof, and not enter into any agreement to effectuate
the foregoing after the Effective Time.
(c) Use its best efforts: (i) to preserve its present business
organization intact, (ii) to keep available the services of the present
employees assigned to it, and (iii) to preserve its present relationships with
entities or persons having business dealings with IMA or any of the
Subsidiaries, in each case except insofar as would not have a Material Adverse
Effect.
(d) Maintain its books and records in accordance with good business
practices, on a basis consistent with prior practice.
(e) Comply in all material respects with all laws, rules, regulations,
writs, statutes, ordinance, judgments, injunctions, decrees, determinations,
awards, and other orders of every court, government and governmental agency and
instrumentality, domestic or foreign, applicable to it and to the conduct of its
business and perform in all material respects all its obligations without
default.
(f) Not incur, or agree to incur, any indebtedness for money borrowed,
except in the ordinary course of business under its line of credit dated
February 14, 1995 among IMA, The Boatmen's National Bank of St. Louis and Mark
Twain Bank, subtracting therefrom the amount of $8.6 million set forth on the
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foregoing budget and intended for use in the development referenced in
Paragraph (q) of this Section 7.7, but adding thereto amounts utilized for such
development to the extent permitted by said Paragraph (q); or issue any bond,
debenture, note, or similar obligation, or any guarantee any obligation of any
person or entity, except for guarantees of construction performance bonds in the
ordinary course of business.
(g) Not mortgage, pledge, or subject to Lien any of its assets and
properties, other than encumbrances in existence on the date hereof.
(h) Not make any loans, advances or contributions to, or investments
in, or guarantees of, any other person (other than a wholly-owned subsidiary and
other than short-term investments in the ordinary course of business in
obligations of the United States of America for which the full faith and credit
of the United States of America is pledged to provide for the payment of
principal and interest, or certificates of deposit issued by a commercial bank
or banks having at least $100,000,000 in individual capital and surplus, and
other than foreign currency hedging transactions in the ordinary course of
business consistent with past practice); and without limiting the generality of
the foregoing, not acquire any shares of ITI Common Stock.
(i) Maintain and pay all premiums with respect to all policies of
insurance relating to its business, and its assets and properties, as are
presently held in its name and timely renew all such policies or substitute
substantially similar coverage therefor.
(j) Not make any change adverse to it in any material respect in the
terms of any IMA Agreement (nor, without the prior review thereof and consent
thereto of ITI, which consent shall not unreasonably be withheld, enter into
definitive arrangements implementing the matters described under Item (5) of
Schedule 5.5), nor approve, amend or modify any IMA Agreement to which an
Insider is a party.
(k) Not make any capital expenditure (including, without limitation
expenditures for property, plant and equipment) or appropriations or commitments
with respect thereto, except (subject to the provisions of Paragraph (q) of this
Section 7.7) to the extent of the total dollar amount and, to the extent
indicated therein, at the times set forth in IMA's capital expenditure budget
which has been previously furnished to ITI.
(l) Not acquire or agree to acquire by merging or consolidating with,
or by purchasing a substantial equity interest in or substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership,
joint venture, association or other business organization or division thereof or
otherwise acquire or agree to acquire any assets outside the ordinary course of
business consistent with past practice; or consummate or implement the
transactions contemplated by Items (2)(b) and (c) of Schedule 5.5, or by Items
(ix)(3) and (4) of Schedule 5.14, in each case without prior review and approval
of the terms thereof by ITI, which approval shall not unreasonably be withheld.
(m) Not take any action described in Section 5.9(d) hereof except as
set forth in Schedule 7.7(2), nor amend, modify, supplement, or in any way
change in any material respect any plan or arrangement established for the
benefit of its employees.
(n) Not enter into any license or sublicense agreement or other
arrangement conferring any rights to utilize any Intellectual Property the
rights to which are held by IMA or any Subsidiary.
(o) Not settle or compromise any litigation involving the payment of,
or an agreement to pay over time an amount in cash, notes, or other property,
except that IMA may in good faith obtain the release of any and all claims and
potential claims described under Item (3) of Schedule 5.21 in exchange for a
settlement not in excess of $400,000 without the consent of ITI, and, if in
excess of such amount, with the consent of ITI, which consent shall not
unreasonably be withheld; and except that IMA may in good faith obtain the
release of any and all claims and potential claims described under Item (5) of
Schedule 5.21 in exchange for a settlement not in excess of $750,000 without the
consent of ITI, and, if in excess of such amount with the consent of ITI, which
consent shall not unreasonably be withheld.
(p) Not pay, discharge or satisfy claims, liabilities or obligations
(absolute, accrued, contingent or otherwise and whether due or to become due)
which involve payments or commitments to make payments exceeding $100,000 in the
aggregate, other than (A) liabilities or obligations incurred in the ordinary
course of
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business and consistent with past practice, and (B) scheduled repayments
of current portions of and interest on long term indebtedness or repayments
under existing revolving credit agreements.
(q) Notwithstanding any other provision contained in this Agreement, or
the schedules hereto, to the contrary, not take any action in furtherance of the
utilization for commercial purposes of the development contemplated by Item (1)
of Schedule 5.8 (and Items (e)(2) of Schedule 5.9 and (i)(10) of Schedule 5.14),
nor acquire nor install any equipment or machinery on any such property, nor
take any action in furtherance of any loan arrangements contemplated by said
schedules, without the prior consent of ITI in each case; it being understood
and agreed that, without the consent of ITI: (i) IMA shall be permitted to
complete construction of such facility in accordance with the plans contemplated
by the capital expenditure budget referenced in Section 7.7(f) without the
contemplated tower and manufacturing equipment (and subject to the provisions
regarding financing hereinabove set forth); and (ii) IMA shall be permitted to
acquire (but not install) manufacturing equipment which it has ordered prior to
the date hereof.
(r) Take any action or fail to take any action which would result in
any breach of any of its representations, warranties or covenants contained
herein.
7.8 IMA Capitalization.
Except as consented to in writing by ITI, from and after the date of this
Agreement and until the Effective Time:
(a) No change shall be made or proposed in the certificate of
incorporation or by-laws, or (subject to Section 7.7(l)) partnership or joint
venture agreement, or any other organic instrument of IMA or of any Subsidiary.
(b) Neither IMA nor any Subsidiary shall: (i) issue, grant, sell or
encumber any shares of its capital stock, (ii) issue, grant, sell or encumber
any security, option, warrant, put, call, subscription or other right of any
kind, fixed or contingent, that directly or indirectly calls for the
acquisition, issuance, sale, pledge or other disposition of any shares of
capital stock or other equity interests of IMA or any Subsidiary (other than
pursuant to the arrangements described under Item (5) of Schedule 5.5 or under
item (1) of Schedule 7.8), (iii) enter into any agreement, commitment or
understanding calling for any transaction referred to in clause (i) or (ii) of
this Paragraph (b), or (iv) make any other changes in its equity capital
structure except, in all such cases under this Paragraph (b), for the issuance
of shares of IMA Common Stock upon exercise of the IMA Options, and conversion
of shares of IMA Class B Common Stock, which are outstanding prior to the
execution and delivery of this Agreement and pursuant to the present terms
thereof and except for the issuance by a Subsidiary of shares to IMA or to a
wholly-owned Subsidiary.
(c) Neither IMA nor any Subsidiary shall split, combine or reclassify
any shares of its capital stock, or (other than as set forth under item (2) of
Schedule 7.8) declare, set aside or pay any dividend or other distribution
(whether in cash, stock, securities, indebtedness, rights or property or any
combination thereof) in respect of any shares of its capital stock or other
equity interests, or redeem or otherwise acquire any shares of the capital stock
or other equity interests.
7.9 Interim Financial Statements; Audited Enviroq Statements.
(a) IMA shall deliver to ITI all regularly prepared audited and
unaudited consolidated and consolidating financial statements of IMA and its
Subsidiaries, respectively, prepared after the date of this Agreement, in the
format historically published or utilized internally, as the case may be, and
any financial statements prepared for filing with the SEC, as soon as each is
available. Without limiting the provisions of Section 7.7(l), the financial
statements delivered by IMA to ITI shall include pro forma financial statements
or information prepared to illustrate any merger or acquisition occurring
subsequent to the most recent financial statement delivered before the Effective
Time.
(b) To the extent not furnished pursuant to Paragraph (a) immediately
preceding, within 30 days after the end of each calendar month after the date of
this Agreement, IMA will deliver to ITI unaudited consolidated statements of
income for such calendar month and the corresponding calendar month of the
preceding fiscal year. All such financial statements shall be true and correct
and prepared in accordance with
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generally accepted accounting principles consistently applied and shall
fully and fairly present, in conformity with such principles as so utilized, the
consolidated financial position, results of operations and cash flows of IMA and
its consolidated subsidiaries as at the date or for the periods indicated (and
shall be accompanied by a certificate of the chief financial or accounting
officer of IMA to such effect), except as otherwise indicated in such statements
and subject to normal and recurring year-end audit adjustments which would not,
individually or in the aggregate, have a Material Adverse Effect. All unaudited
financial statements delivered pursuant to this Paragraph (b) shall be prepared
on a basis consistent with the IMA Interim Financial Statements.
(c) IMA shall prepare or cause the preparation of the consolidated
financial statements and financial statement schedules of Enviroq and its
subsidiaries as of March 25, 1995 and March 26, 1994 and for the years ended,
respectively, March 25, 1995, March 26, 1994 and March 27, 1993, as required to
be filed by IMA pursuant to Form 8-K promulgated by the SEC in connection with
the consummation of the transactions under the agreement dated November 2, 1994
entered into by IMA and Enviroq among other parties. Such financial statements
and schedules shall be true and correct and prepared in accordance with
generally accepted accounting principles consistently applied and shall fully
and fairly present, in conformity with such principles as so utilized, the
consolidated financial position, results of operations and cash flows of Enviroq
and its consolidated subsidiaries as of the dates and for the periods indicated.
As promptly as practicable after the date hereof, IMA shall deliver to ITI such
financial statements and related financial statement schedules, together with
the audit reports of Deloitte & Touche with respect thereto. IMA shall furnish
ITI with access to all computations, calculations and determinations made in
preparing such financial statements and schedules and shall consult with ITI and
its auditors in the completion of such financial statements and schedules.
7.10 Conduct of Business of ITI; ITI Capitalization.
(a) ITI covenants and agrees that, except as set forth on Schedule 7.10
attached hereto or consented to in writing by IMA, from and after the date of
this Agreement and until the Effective Time, ITI and each subsidiary shall:
(i) Make no purchase, sale, or lease in respect of, nor
introduce any method of management or operation in respect of, its business
or its assets and properties, except in a manner in all material respects
consistent with prior practice.
(ii) Use its best efforts: (x) to preserve its present business
organization intact, and (y) to preserve its present relationships with
entities or persons having business dealings with ITI or any of its
subsidiaries, in each case except insofar as would not have a Material
Adverse Effect with respect to ITI.
(iii) Maintain its books and records in accordance with good
business practices, on a basis consistent with prior practice.
(iv) Maintain in all material respects the current character of
the business of ITI and its subsidiaries, taken as a whole, other than as
contemplated under this Agreement and not enter into any agreement to
effectuate the foregoing after the Effective Time.
(b) ITI shall not other than as set forth on Schedule 7.10, (i) issue,
grant, sell or encumber any shares of its capital stock, (ii) issue, grant, sell
or encumber any security, option, warrant, put, call, subscription or other
right of any kind, fixed or contingent, that directly or indirectly calls for
the acquisition, issuance, sale, pledge or other disposition of any shares of
capital stock of ITI, (iii) enter into any agreement, commitment or
understanding calling for any transaction referred to in clause (i) or (ii) of
this Paragraph (b) or (iv) make any other changes in its equity capital
structure, except, in all such cases under this Paragraph (b), for (1) issuances
or grants of options to purchase shares of ITI Common Stock pursuant to any
option plan of ITI in effect on the date of this Agreement or pursuant to any
options or warrants outstanding on the date of this Agreement or set forth on
Schedule 7.10, and (2) any transaction or transactions relating directly or
indirectly (through issuance, grant or sale of rights, warrants, options or
otherwise) to the issuance of up to an aggregate number of shares of ITI Common
Stock which would not, without reference to any transaction or transactions, or
issuance, prior to the date of this Agreement, or any transaction or
transactions described
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under clause (1) immediately preceding, require the filing of a Report
on Form 10-C under the rules of the SEC.
(c) Except as consented to in writing by IMA or as set forth on
Schedule 7.10, ITI shall not split, combine or reclassify any shares of its
capital stock, declare, set aside or pay any dividend or other distribution
(whether in case, stock, securities, indebtedness, rights or property or any
combination thereof) in respect of any shares of its capital stock or other
equity interests, or redeem or otherwise acquire any shares of its capital stock
or other equity interests.
(d) ITI shall deliver prior communication to IMA of any agreement
proposed to be entered into after the date hereof with any beneficial owner (as
defined pursuant to Section 13(d) of the Exchange Act) of more than 5% of the
outstanding shares of ITI Common Stock, in each case other than the matters set
forth on Schedule 7.10.
7.11 Due Diligence; SEC Filings.
(a) IMA shall afford ITI and its officers, employees, accountants,
counsel and other authorized representatives reasonable access, during ordinary
business hours, to its plants, properties, books and records, and those of its
Subsidiaries, and shall use its best efforts to cause its representatives to,
furnish to ITI such additional financial and operating data and other
information as to its and its Subsidiaries' respective businesses and properties
as ITI may from time to time reasonably request. IMA shall furnish ITI with
copies of all filings with the SEC by it or any Subsidiary subsequent to the
date hereof, which shall be prepared in all material respects in accordance with
the rules and regulations promulgated by the SEC if any such filings are made
prior to the Effective Time.
(b) ITI shall provide IMA and its officers, employees, accountants,
counsel and other authorized representatives such information concerning ITI and
its subsidiaries as may be reasonably necessary for IMA to ascertain the
accuracy and completeness of the information furnished by ITI for inclusion in
the Registration Statement and to verify the warranties and covenants of ITI
herein contained. ITI shall furnish IMA with copies of all filings with the SEC
subsequent to the date hereof, which shall be prepared in all material respects
in accordance with the rules and regulations promulgated by the SEC if any such
filings are made prior to the Effective Time.
(c) All information provided to ITI or its representatives by or on
behalf of IMA or any Subsidiary, or to IMA or its representatives by or on
behalf of ITI or any subsidiary of ITI, before or after the date of this
Agreement in connection with the transactions contemplated by this Agreement
shall, notwithstanding the absence of any other specific reference thereto, be
governed by the Confidentiality Agreement dated June 30, 1994, as amended
(hereinafter referred to as the "Confidentiality Agreement") executed by ITI and
IMA.
7.12 Notification of Certain Matters.
(a) Between the date hereof and the Effective Time, each party will
give prompt notice in writing to the other parties, of: (i) the occurrence, or
failure to occur, of any event, which occurrence or failure would be likely to
cause any of its representations or warranties contained in this Agreement to be
untrue or inaccurate in any material respect from the date hereof to the
Effective Time, (ii) any notice or other communication from any person alleging
that the consent of such person is or may be required in connection with the
transactions contemplated by this Agreement, (iii) any notice or other
communication from any governmental or regulatory agency or authority in
connection with the transactions contemplated by this Agreement, (iv) any
actions, suits, claims, investigations or proceedings commenced or, to the best
of its knowledge, threatened against the notifying party or any subsidiary or
relating to or involving or otherwise affecting the notifying party or which
relate to the consummation of the transactions contemplated by this Agreement,
and (v) any material failure of the notifying party or any officer, director,
employee or agent thereof to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder.
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(b) IMA will (i) confer on a regular and frequent basis with one or
more designated representatives of ITI to report operational matters and to
report the general status of ongoing operations, and (ii) notify ITI of any
emergency or other change in the normal course of business or in the operation
of the properties of IMA or any Subsidiary and of any governmental complaints,
investigations or hearings (or communications indicating that the same may be
contemplated) or adjudicatory proceedings involving any property of IMA or any
Subsidiary, and will keep ITI fully informed of such events and permit ITI's
representatives access to all materials prepared in connection therewith. ITI
will notify IMA of any emergency or other change in the normal course of
business, or in the operation of the properties of ITI or any subsidiary, and of
any governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated) or adjudicatory proceedings
involving any property of ITI or any subsidiary, in each case if such event
would, individually or in the aggregate, have a Material Adverse Effect with
respect to ITI, and will keep IMA fully informed of such events.
(c) The giving of any such notice under this Section 7.12 shall in no
way change or modify the representations and warranties or the conditions to any
party's obligations contained herein or otherwise affect the remedies available
to any party hereunder.
7.13 Accounting and Tax Treatment.
Each of the parties undertakes and agrees to use its best efforts to cause
the transactions contemplated by this Agreement and the Merger to qualify for
pooling-of-interests accounting treatment under generally accepted accounting
principles. None of the parties will take a position on their respective tax
returns or elsewhere, nor take any action or fail to take any action, that is or
would be inconsistent with the treatment of the transactions contemplated by
this Agreement and the Merger as a reorganization within the meaning of Sections
368(a)(1)(A) and 368(a)(2)(E) of the Code unless counsel to the party taking the
inconsistent position shall have advised such party that there is no basis for
the party to do otherwise.
7.14 Forbearance.
IMA agrees that, from and after the date hereof and until the Effective
Time, it shall not, and shall not permit any Subsidiary, or any officers,
directors, employees, agents or representatives of IMA or of any Subsidiary to,
directly or indirectly, initiate, solicit or encourage discussions, inquiries or
proposals, or participate in any negotiation or discussion for the purpose or
with the intention of leading to any proposal, concerning any merger,
consolidation or other business combination involving IMA or any Subsidiary or
any acquisition of any equity interest in IMA or any Subsidiary, or a material
portion of the assets of, IMA and its Subsidiaries, taken as a whole, or any
similar transaction, or effectuate any such transaction, in each case, except
for the Merger. Notwithstanding the foregoing, IMA may furnish information
concerning its business, properties or assets, and may engage in negotiations
and discussions in connection with such a transaction, if the Board of Directors
of IMA, based on the written opinion of counsel reasonably satisfactory to IMA,
determines that the exercise of its fiduciary responsibilities requires that
such information be furnished or such negotiations be commenced. IMA shall
notify ITI immediately of any such inquiry (including the terms thereof and the
person making such inquiry) which it may receive in respect of any possible such
transaction.
7.15 Restructuring Transactions.
Following the receipt of the approvals by IMA and ITI stockholders
contemplated by Sections 7.1 and 7.2, respectively, IMA shall effect
restructurings of IMA's Subsidiaries and transfers of the assets and liabilities
of IMA and its Subsidiaries that are requested by ITI; provided that, if so
requested by IMA in connection with any particular transaction, ITI shall agree,
on a basis reasonably satisfactory to IMA, to indemnify IMA and its Subsidiaries
against any out-of-pocket costs and tax liabilities, arising out of such
transaction if the transactions contemplated by this Agreement are not
consummated. No such restructuring or other transfer of assets or liabilities
shall be undertaken if such restructuring or transfer would, in the reasonable
judgment of Messrs. Thompson & Mitchell (as reasonably concurred with by Messrs.
Krugman, Chapnick & Grimshaw), impede in any material respect Messrs. Thompson &
Mitchell's ability to render the tax opinion described in Section 9.9.
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7.16 Indemnification.
From and after the Effective Time, ITI and the Surviving Corporation shall,
to the extent permitted by the GCL and other law, honor all obligations of IMA
pursuant to Section 8(b) of IMA's certificate of incorporation, Article IX of
its by-laws, and those indemnification agreements with directors set forth on
Schedule 5.14, in each case in effect on the date hereof, which provide for
indemnification of officers and directors of IMA with respect to events
occurring prior to the Effective Time; it being acknowledged and agreed that no
such provisions shall obligate ITI to procure or maintain any insurance
coverage.
7.17 Registration Rights.
(a) Prior to the mailing of the Joint Proxy Statement, ITI will use its
best efforts to enter into a registration rights agreement (hereinafter referred
to as the "Registration Rights Agreement") with each person who signs an
Affiliate Agreement (as hereinafter defined), other than those who, immediately
following the consummation of the Merger, would own less than 1% of the
outstanding shares of ITI Common Stock (hereinafter referred to, individually,
as a "Stockholder" and, collectively, as the "Stockholders").
(b) The Registration Rights Agreement will provide for the following
registration rights and other provisions substantially similar to those
provisions contained in the Registration Rights Agreement dated October 19, 1992
(hereinafter referred to as the "Prior Registration Rights Agreement") among
ITI, Interstate Properties and the Ringwood Group named therein, and will become
effective on the date of the first publication of the operating results of ITI
covering at least a 30-day period after the Merger has been consummated:
(i) Demand Registration. A Stockholder may make a written
request for registration under the Securities Act (hereinafter referred to
as a "Demand Registration") of all or part of the shares of ITI Common
Stock that it or its Affiliates beneficially own (hereinafter referred to
as the "Registrable Securities"); provided, that ITI shall not be obligated
(i) to effect more than one Demand Registration for each Stockholder and
its Affiliates unless ITI qualifies and is entitled to use a Registration
Statement on Form S-3 (in which case such Stockholder shall be entitled to
a total of three Demand Registrations), (ii) to effect a Demand
Registration for less than 500,000 shares of ITI Common Stock, (iii) to
effect a Demand Registration if such written request is given after the
sixth anniversary of the consummation of the Merger, (iv) to effect a
Demand Registration for any Registrable Securities if, in the written
opinion of counsel to ITI, such Registrable Securities could, within three
months of the date of a Stockholder's request but based on the facts and
circumstances known at the date of such request, be publicly offered and
sold without registration under the Securities Act (and such Stockholder
shall provide such information as counsel to ITI shall reasonably request
in connection with such opinion) or (v) to effect a Demand Registration in
any other circumstances exempted from such requirement pursuant to the
Prior Registration Rights Agreement. Such request will specify the number
of shares of Registrable Securities proposed to be sold and will also
specify the intended method of disposition thereof. A registration will not
count as a Demand Registration until it has become effective.
(ii) Incidental Registration. If ITI proposes to file a
registration statement under the Securities Act (other than a Registration
Statement on Form S-4 of Form S-8) relating to an underwritten public
offering of shares of ITI Common Stock to be offered for its own account or
the account of others at any time prior to the sixth anniversary of the
consummation of the Merger, and if the managing underwriter for such
proposed offering advises ITI that the inclusion of some or all of the
Registrable Securities in such registration statement would not interfere
with the successful marketing of ITI Common Stock, ITI shall (i) provide
written notice of the proposed offering to the Stockholders, setting forth
a description of the intended method of distribution, and (ii) use its best
efforts to register pursuant to such registration statement (hereinafter
referred to as an "Incidental Registration") such number of Registrable
Securities as shall be specified in a written request by each Stockholder
made within 20 days after such written notice from ITI, subject to such
limits as may have been set by ITI's Board of Directors or the managing
underwriter on the number of Registrable Securities which may be included
in the proposed offering; provided, however, that, for purposes of this
sentence, the use by ITI of its "best efforts" shall not require any
reduction in the amount or sale price of the securities it proposes to
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distribute for its own account. ITI shall not be obligated to effect an
Incidental Registration for any Registrable Securities (x) if in the
written opinion of counsel to ITI, such Registrable Securities could,
within three months of the date of a Stockholder's request but based on the
facts and circumstances known at the date of such request, be publicly
offered and sold without registration under the Securities Act (and the
Stockholder shall provide such information as counsel to ITI shall
reasonably request in connection with such opinion) or (y) in any other
circumstances exempted from such requirement pursuant to the Prior
Registration Rights Agreement.
7.18 Additional Agreements.
Subject to the terms and conditions of this Agreement, each of the parties
hereto shall cooperate with one another and use its best efforts to complete in
a timely manner the transactions contemplated by this Agreement, including (i)
using its best efforts to comply with any and all applicable rules and
regulations, and to send all notices to, make all declarations, filings and
registrations with, and obtain all consents, authorizations, approvals and
waivers from third parties and governmental and regulatory bodies required to
consummate the transactions contemplated hereby or comply with any and all
applicable rules and regulations governing such transactions, and (ii)
furnishing the other parties with all information necessary or advisable for the
matters referred to in Sections 7.5 and 7.6 hereof and any other statements or
applications made by or on behalf of any party to any governmental or regulatory
body in connection with the transactions contemplated by this Agreement.
ARTICLE VIII
PUBLICITY
8.1 Publicity.
None of the parties hereto shall, nor shall any such party cause or allow
any affiliate, directly or indirectly, to issue any press release or otherwise
make any public announcement or statement with respect to the matters
contemplated hereby without the prior approval of all parties (which consent
shall not be unreasonably withheld); provided that nothing herein shall prohibit
any party hereto or any of their affiliates from making any announcement or
disclosure required to be made by it or them under applicable law if it or its
affiliates determines in good faith that it is appropriate to do so and, if
practicable, gives prior notice to the other parties hereto of such
determination.
ARTICLE IX
CONDITIONS TO OBLIGATIONS
OF EACH PARTY
The obligations of each of ITI, Acquisition Sub and IMA to consummate the
Merger and the Closing are subject to the following conditions precedent, any or
all of which may be waived by such party at its sole discretion:
9.1 Hart-Scott-Rodino Antitrust Improvements Act.
The waiting period (and any extensions thereof) applicable to the
consummation of the transactions contemplated hereby required under the HSR Act
shall have expired or been terminated.
9.2 Merger Approval.
This Agreement, the Merger and the transactions contemplated hereby shall
have been duly approved and adopted by the requisite vote of the respective
stockholders of ITI and IMA in accordance with applicable law and the rules
promulgated by the National Association of Securities Dealers, Inc.
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9.3 Amendments to ITI's Certificate of Incorporation.
The amendments to ITI's certificate of incorporation which are contemplated
by Section 7.2, in the respective forms thereof attached hereto as Exhibit E-1
and Exhibit E-2 shall have been approved by the requisite vote of ITI
stockholders entitled to vote thereon and duly filed in accordance with the
requirements of the GCL.
9.4 Amendments to ITI's By-Laws.
The amendments to ITI's by-laws in the form thereof attached hereto as
Exhibit F shall have been adopted by the Board of Directors of ITI.
9.5 Effectiveness of Registration Statement.
Prior to the first date on which the Joint Proxy Statement is mailed to
stockholders, the SEC shall have declared the Registration Statement effective
and, at or prior to the time required, any required approvals of state
securities administrators shall have been obtained. At the Closing and the
Effective Time, the Registration Statement shall be effective and no stop order
suspending the effectiveness of the Registration Statement or similar
restraining order shall have been threatened or initiated by the SEC or any
state or foreign securities administrator.
9.6 Pooling-of-Interests.
ITI shall have received an opinion from BDO Seidman, dated the Closing
Date, in form and substance reasonably satisfactory to ITI and to IMA, to the
effect that the transactions contemplated by this Agreement and the Merger will
qualify for pooling-of-interests accounting treatment under generally accepted
accounting principles.
9.7 Conversion of IMA Class B Common Stock.
At or prior to the Effective Time, all of the shares of IMA Class B Common
Stock issued and outstanding immediately prior to the Effective Time shall have
been converted into shares of IMA Class A Common Stock on a share for share
basis in accordance with IMA's certificate of incorporation, as currently in
effect; and, in furtherance thereof, each holder of shares of IMA Class B Common
Stock shall have executed and delivered to ITI and IMA a letter in the form of
Exhibit G attached hereto (together with such changes therein as may reasonably
be requested by ITI).
9.8 No Prohibition on Consummation.
No order, stay, judgment, injunction or decree shall have been issued and
be in effect by any court restraining or prohibiting the consummation of the
transactions contemplated hereby. No statute, rule or regulation shall have been
promulgated or enacted by any foreign or United States federal or state
government, governmental authority or governmental agency, which would prevent
or make illegal the consummation of the transactions contemplated hereby,
including the Merger.
9.9 Tax Opinion.
IMA shall have received from Messrs. Thompson & Mitchell, an opinion, dated
the Closing Date, in form and substance reasonably satisfactory to IMA and to
ITI and its counsel, to the effect that the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Sections
368(a)(1)(A) and 368(a)(2)(E) of the Code, and that ITI, Acquisition Sub and IMA
will each be a party to that reorganization within the meaning of Section 368(b)
of the Code.
9.10 ITI Board; Officers.
ITI's Board of Directors and its offices shall have been expanded and
filled, respectively, as set forth under Sections 7.3 and 7.4 hereof.
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ARTICLE X
CONDITIONS TO OBLIGATIONS OF IMA
The obligation of IMA to consummate the Merger and the Closing is subject
to the following additional conditions precedent, any or all of which may be
waived by IMA at its sole discretion:
10.1 Opinion of Counsel for ITI and Acquisition Sub.
IMA shall have received an opinion of Messrs. Krugman, Chapnick & Grimshaw,
counsel for ITI and Acquisition Sub, dated the Closing Date, in form and
substance reasonably satisfactory to IMA and its counsel, to the effect set
forth in Exhibit H.
10.2 Representations; Warranties; Covenants.
The representations and warranties of ITI and Acquisition Sub contained in
this Agreement shall be true and correct in all material respects at and as of
the Closing Date with the same effect as though all such representations and
warranties were made at and as of the Closing Date (except for representations
and warranties which are as of a specific date or which relate to a specific
period other than or not including the Closing Date, as the case may be, and
except for changes therein contemplated or permitted by this Agreement and
provided, however, that if any such representation or warranty is already
qualified by materiality, for purposes of determining whether this condition has
been satisfied, such representation or warranty must be true and correct in all
respects); and ITI and Acquisition Sub shall have complied with their respective
covenants contained under this Agreement in all material respects; and ITI and
Acquisition Sub shall have delivered to IMA a certificate to that effect, dated
the Closing Date, signed by its Chairman of the Board, its President and Chief
Executive Officer or one of its Vice Presidents.
10.3 Certified Resolutions.
IMA shall have received a certificate of the Secretary or an Assistant
Secretary of each of ITI and Acquisition Sub, in form and substance satisfactory
to IMA, with respect to the authorization by their respective boards of
directors and stockholders of the execution and delivery of this Agreement and
the consummation of the transactions contemplated herein, the number of
authorized shares of the capital stock of ITI as of the Closing Date and the
number of issued and outstanding shares of the capital stock of ITI, and the
number of shares subject to outstanding options and warrants, convertible
securities or similar obligations to issue capital stock, as of such date.
10.4 Kalishman and Affholder Agreements.
ITI shall have executed and delivered to Robert W. Affholder the agreement
in the form attached hereto as Exhibit K, and shall have executed and delivered
to Jerome Kalishman the agreements in the respective forms attached hereto in
Exhibit L, in each case dated the Closing Date.
10.5 Fairness Opinion.
IMA shall have received from Wertheim Schroder & Co. Incorporated on or
prior to the date of mailing of the Joint Proxy Statement its opinion that the
terms of the Merger are fair to the holders of IMA Common Stock from a financial
point of view, and such opinion shall not have been withdrawn between the date
of its delivery and the Effective Time.
10.6 Letter of ITI's Accountants.
IMA shall have received a letter of BDO Seidman, ITI's independent
auditors, dated the Closing Date, addressed to IMA, in form and substance
reasonably satisfactory to IMA and counsel for IMA, making the statements
required by Paragraph (e) of Section 7.5 on the basis of procedures set forth
therein carried out by them not more than three business days prior to the
Closing Date.
10.7 Director Indemnification Agreements.
ITI shall have executed to Jerome Kalishman, Robert W. Affholder and Alvin
J. Siteman its customary form of director indemnification agreement, in each
case dated the Closing Date.
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10.8 Litigation.
No action, suit or proceeding against any current director of IMA relating
to the consummation of any of the transactions contemplated in this Agreement,
and seeking material damages in connection therewith, shall be pending or
threatened which IMA, in good faith and with the advice of Messrs. Thompson &
Mitchell, reasonably believes makes it undesirable to proceed with the
consummation of the transactions contemplated hereby.
10.9 Other Certificates.
IMA shall have received such additional certificates, instruments and other
documents, in form and substance satisfactory to IMA and counsel for IMA, as IMA
shall have reasonably requested in connection with compliance with the
conditions set forth in this Article X.
ARTICLE XI
CONDITIONS TO OBLIGATIONS OF ITI AND ACQUISITION SUB
The obligations of each of ITI and Acquisition Sub to consummate the Merger
and the Closing are subject to the following conditions precedent, any or all of
which may be waived by such party at its sole discretion:
11.1 Opinion of Counsel for IMA.
ITI shall have received an opinion of Messrs. Thompson & Mitchell, counsel
for IMA, dated the Closing Date, in form and substance reasonably satisfactory
to ITI and its counsel to the effect set forth in Exhibit I.
11.2 Representations; Warranties; Covenants.
The representations and warranties of IMA contained in this Agreement shall
be true and correct in all material respects at and as of the Closing Date with
the same effect as through all such representations and warranties were made at
and as of the Closing Date (except for representations and warranties which are
as of a specific date or which relate to a specific period other than or not
including the Closing Date, as the case may be, and except for changes therein
contemplated or permitted by this Agreement, and provided, however, that if any
such representation or warranty is already qualified by materiality, for
purposes of determining whether this condition has been satisfied, such
representation or warranty must be true and correct in all respects); and IMA
shall have complied with all of its covenants contained in this Agreement in all
material respects; and IMA shall have delivered to ITI a certificate to that
effect, dated the Closing Date, signed by its Chairman of the Board, its
President or one of its Vice Presidents.
11.3 Certified Resolutions; Capitalization.
(a) ITI shall have received a certificate of the Secretary or an
Assistant Secretary of IMA in form and substance satisfactory to ITI, with
respect to the authorization by the board of directors and the stockholders of
IMA of the execution and delivery of this Agreement and the consummation of the
transactions contemplated herein, the number of authorized shares of the capital
stock of IMA as of the Closing Date and the number of issued and outstanding,
fully paid and non-assessable shares of the capital stock of IMA as of such date
(which shall not include any shares other than the shares of IMA Class A Common
Stock outstanding on the date hereof, the shares of IMA Class A Common Stock
issued upon conversion of shares of IMA Class B Common Stock outstanding on the
date hereof, and any shares of IMA Class A Common Stock issued upon exercise of
IMA Options outstanding on the date hereof and exercisable prior to the
Effective Time).
(b) ITI shall have received assurances, reasonably satisfactory to it,
that at and after the Effective Time, there shall not exist any security,
option, warrant, right, put, call, subscription, agreement, commitment,
understanding or claim of any kind, fixed or contingent (including the IMA
Options), that directly or indirectly calls for IMA or (except as identified
under Item (5) of Schedule 5.5) any of its Subsidiaries to acquire, issue,
deliver or sell, or to cause to be acquired, issued, delivered or sold, any
shares of the capital
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stock of or equity interest in IMA or any Subsidiary or obligating IMA
or any Subsidiary to grant, extend or enter into any of the foregoing.
11.4 Affiliate Undertakings.
(a) ITI shall have received an agreement, in form and substance
reasonably satisfactory to it (herein referred to as an "Affiliate Agreement"),
executed and delivered by each officer and director of IMA and each other holder
of securities of IMA who, in the opinion of counsel for ITI, after review of
opinions of counsel for IMA, is or may be an "affiliate" of IMA within the
meaning of Rule 145 under the Securities Act, to the effect set forth in Exhibit
J, stating that:
(i) no disposition shall be made by such "affiliate" of shares
of ITI Common Stock, except in accordance with the applicable provisions of
the Securities Act and the rules and regulations thereunder; and
(ii) the certificates evidencing such shares received pursuant to
the Merger shall bear a legend setting forth such restrictions in a form
satisfactory to ITI.
(b) ITI shall also have received from IMA or from the stockholders of
IMA, as the case may be, representations with respect to such other matters as
ITI reasonably may require in order to be assured that the Merger will
constitute a tax-free reorganization under Section 368 of the Code.
11.5 Kalishman and Affholder Agreements.
Robert W. Affholder shall have executed and delivered to ITI an agreement
in the form thereof contained in Exhibit K attached hereto, dated the Closing
Date, and Jerome Kalishman shall have executed and delivered to ITI the
agreements in the respective forms thereof attached hereto as Exhibit L attached
hereto, in each case dated the Closing Date.
11.6 Dissenters' Rights.
The holders of not more than 5% of the outstanding shares of IMA Common
Stock shall, at the Closing Date, be entitled to demand payment of the fair
value of their shares as dissenting shareholders.
11.7 Third Party Consents.
All notices to, and declarations, filings and registrations with, and
consents, authorizations, approvals and waivers from, governmental and
regulatory bodies required to consummate the transactions contemplated hereby
shall have been made or obtained, and all other notices, consents or waivers
with respect to the transactions contemplated by this Agreement shall have been
made or obtained.
11.8 Resignations.
ITI shall have received the resignations of all such officers and directors
of IMA and each Subsidiary requested by it.
11.9 Fairness Opinion.
ITI shall have received from Merrill Lynch & Co. on or prior to the date of
mailing of the Joint Proxy Statement its opinion that the terms of the Merger
are fair to the holders of ITI Common Stock from a financial point of view, and
such opinion shall not have been withdrawn between the date of its delivery and
the Effective Time.
11.10 Letter of Accountants for IMA and Enviroq.
ITI shall have received a letter of KPMG Peat Marwick LLP, IMA's
independent auditors, and Deloitte & Touche, L.L.P., Enviroq's independent
auditors, each dated the Closing Date, addressed to ITI, in form and substance
reasonably satisfactory to ITI and counsel for ITI, making the statements
required by Paragraph (d) of Section 7.5, on the basis of procedures set forth
therein carried out by them, respectively, not more than three business days
prior to the Closing Date.
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11.11 A-Y-K-E Equipment.
IMA or Affholder, Inc. shall have entered into arrangements, reasonably
satisfactory to ITI, with respect to: (x) the purchase, at fair market value
determined by an independent appraiser qualified in such matters and reasonably
satisfactory to ITI, or (y) the long-term lease, at fair market rental rates
determined by an appraiser as aforesaid, which at the option of ITI may be on a
non-exclusive basis and from time to time, and terminable by IMA on the same or
substantially similar basis as is contained in the arrangements currently in
effect, or (z) the modification of the arrangements currently in effect pursuant
to terms reasonably satisfactory to ITI, in each case under clauses (x), (y) and
(z) immediately preceding with respect to such equipment covered by the
Equipment Lease dated October 10, 1989, as from time to time supplemented,
between Affholder, Inc. and A-Y-K-E Partnership and such other equipment, tools,
machinery, supplies and other properties owned or controlled by said partnership
and used, useable or useful in the business of IMA or any Subsidiary thereof, as
shall in each case be identified by ITI.
11.12 Litigation.
No action, suit or proceeding against any party hereto relating to the
consummation of any of the transactions contemplated in this Agreement or any
governmental action seeking to delay or enjoin any such transactions shall be
pending or threatened and no investigation by any governmental or regulatory
body shall have been commenced (and be pending), seeking to restrain or prohibit
(or questioning the validity or legality of) the consummation of the
transactions contemplated by this Agreement, including the Merger, or seeking
material damages in connection therewith which ITI, in good faith and with the
advice of Messrs. Krugman, Chapnick & Grimshaw, reasonably believes makes it
undesirable to proceed with the consummation of the transactions contemplated
hereby.
11.13 Other Certificates.
ITI shall have received such additional certificates, instruments and other
documents, in form and substance satisfactory to ITI and counsel for ITI, as it
shall have reasonably requested in connection with the transactions contemplated
hereunder.
ARTICLE XII
TERMINATION
12.1 Termination.
This Agreement may be terminated and the Merger abandoned at any time prior
to the Effective Time, whether prior to or after approval by the stockholders of
either IMA or ITI, by the consent of all parties hereto, or by either IMA or ITI
if: (i) the other party shall have breached in any material respect any of its
representations or warranties contained in this Agreement; (ii) any such
representation or warranty shall not be correct or accurate in all material
respects at and as of the Closing Date with the same effect as if made at such
time (with such exceptions as are permitted by Sections 10.2 and 11.2,
respectively); (iii) the other party shall have failed to comply in all material
respects with any of its covenants or agreements contained in this Agreement to
be complied with or performed by it at or prior to the Closing; (iv) at the
stockholders meeting (including any adjournment or postponement thereof) of the
other party called pursuant to Section 7.1 or 7.2, as the case may be, or any
successor meeting called for the same purpose, the requisite affirmative
approval of the stockholders of the other party shall not have been obtained;
(v) if a permanent injunction is entered, enforced or deemed applicable to this
Agreement, or the Plan of Merger, which prohibits the consummation of the
transactions contemplated hereby and thereby and all appeals of such injunction
shall have been taken and shall have been unsuccessful; (vi) if any governmental
entity, the consent of which is a condition to the obligation of such party to
consummate the transactions contemplated hereby, shall have determined not to
grant its consent and all appeal of such determination shall have been taken and
shall have been unsuccessful; or (vii) the Closing shall not have occurred on or
prior to January 31, 1996.
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12.2 Effect of Termination.
In the event of termination of this Agreement pursuant to Section 12.1
hereof, all rights of all parties hereto shall cease and terminate, except for
such rights as any party may otherwise have for breach of contract (other than
breaches which are not willful), including, without limitation, rights for any
such breaches of any representations, warranties or covenants contained herein,
and, provided that the provisions of this Section 12.2 and Sections 7.11(c),
13.3, 13.7 and 13.8 shall survive any such termination.
ARTICLE XIII
MISCELLANEOUS
13.1 Notices.
All notices, requests or instruction hereunder shall be in writing and
delivered personally or sent by registered or certified mail, postage prepaid or
by telecopy (or like transmission), as follows:
(1) if to IMA:
17988 Edison Avenue
Chesterfield, Missouri 63005-3700
Attention: Chairman
Fax: (314) 537-1214
with a copy to:
Thomas A. Litz, Esq.
Thompson & Mitchell
One Mercantile Center
St. Louis, Missouri 63101
Fax: (314) 342-1717
(2) if to ITI or Acquisition Sub:
1770 Kirby Parkway
Suite 300
Memphis, Tennessee 38138
Attention: President and Chief Executive
Officer
Fax: (901) 759-7513
with a copy to:
Howard Kailes, Esq.
Krugman, Chapnick & Grimshaw
Park 80 West -- Plaza Two
Saddle Brook, New Jersey 07663
Fax: (201) 845-9627
Any of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices and other communications given
to any party hereto in accordance with the provisions hereof shall be deemed to
have been given on the date of receipt, provided that any notice or other
communication that is received other than during regular business hours of the
recipient shall be deemed to have been given at the opening of business on the
next business day of the recipient.
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13.2 Survival of Representations.
The respective representations and warranties of the parties contained in
this Agreement shall not be deemed waived or otherwise affected by any
investigation of any party. The representations, warranties, covenants and
agreements of the parties hereto herein contained in Articles I, II and III and
Sections 7.3, 7.16 and 7.17 of this Agreement shall survive the Effective Time.
All other representations, warranties, covenants and agreements in and pursuant
to this Agreement shall not survive the Effective Time.
13.3 Cooperation Agreement.
The parties acknowledge and agree, on behalf of themselves and their
subsidiaries, respectively, that: (x) ITI, IMA and Enviroq have entered into an
Amended and Restated Cooperation Agreement dated April 28, 1995 (hereinafter
referred to as the "Cooperation Agreement"); (y) the Cooperation Agreement shall
extend in full force and effect through the Effective Time or such earlier date
as shall occur upon the termination of this Agreement; and (z) without limiting
any provision contained in the Cooperation Agreement, neither the execution and
delivery of this Agreement, nor the performance hereof, shall operate as a
waiver of any right, power or privilege subject to the Cooperation Agreement,
and none of such execution, performance nor delivery shall prejudice the rights
of any party hereto with respect to the subject matter of the Cooperation
Agreement.
13.4 Entire Agreement.
This Agreement and the documents referred to herein (including, without
limitation, the Confidentiality Agreement and the Cooperation Agreement),
together with the letter dated this date with respect to the Cooperation
Agreement, contain the entire agreement between the parties hereto with respect
to the transactions contemplated hereby, and supersede all prior understandings,
arrangements and agreements with respect to the subject matter hereof. No
modification hereof shall be effective unless in writing and signed by the party
against which it is sought to be enforced.
13.5 Modification.
At any time prior to the Effective Time, the parties hereto may, by written
agreement, make any modification or amendment of this Agreement approved by
their respective Boards of Directors; provided however, that the per share
number of shares of ITI Common Stock to be received by holders of the IMA Common
Stock in the Merger, as set forth in Article II hereof, shall not be amended or
modified without the approval of such holders at any time after such holders
have approved this Agreement, and any and all such modifications and amendments
shall conform to the requirements of the GCL.
13.6 Further Action.
Each of the parties hereto shall use such party's reasonable best efforts
to take such actions as may be necessary or reasonably requested by the other
parties hereto to carry out and consummate the transactions contemplated by this
Agreement.
13.7 Expenses.
Each of the parties hereto shall bear such party's own expenses in
connection with this Agreement and the transactions contemplated hereby.
13.8 Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware applicable in the case of agreements made and to
be performed entirely within such State.
13.9 Captions.
The captions appearing herein are for the convenience of the parties only
and shall not be construed to affect the meaning of the provisions of this
Agreement.
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13.10 Accounting Terms.
All accounting terms used herein which are not expressly defined in this
Agreement shall have the respective meanings given to them in accordance with
generally accepted accounting principles on the date hereof.
13.11 Specific Performance.
ITI, Acquisition Sub and IMA recognize that any breach of the terms of this
Agreement may give rise to irreparable harm for which money damages would not be
an adequate remedy, and accordingly agree that, in addition to other remedies,
any nonbreaching party shall be entitled to an injunction or injunctions to
prevent breaches of the provisions of this Agreement and to enforce the terms
and provisions of this Agreement and the Plan of Merger by a decree of specific
performance in any action instituted in any court of the United States or any
state hereof having jurisdiction without the necessity of proving the inadequacy
as a remedy of money damages.
13.12 Assignment.
This Agreement and all of the provisions hereof shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns, but neither this Agreement nor any of the rights, interests,
or obligations hereunder may be assigned by any of the parties hereto without
the prior written consent of the other parties and any such attempted assignment
without consent shall be void.
13.13 No Third Party Beneficiary.
This Agreement is not intended, and shall not be construed, to confer any
rights or remedies hereunder upon any party other than the parties hereto and
those parties designated as directors pursuant to Section 7.3 and those parties
entitled to indemnification under Section 7.16, which parties shall be entitled
to enforce their rights under such provisions to which they are entitled to
benefits.
13.14 Partial Invalidity.
Any term or provision of this Agreement that is invalid or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and provisions of this Agreement, or any such terms in any
other jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, such provision shall be interpreted to be only so broad as is
enforceable.
13.15 Counterparts.
This Agreement may be executed in counterparts, each of which shall be
deemed an original, but all of which taken together shall constitute one and the
same instrument.
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IN WITNESS WHEREOF, this Agreement has duly executed by the parties hereto
as of the date first above written.
<TABLE>
<S> <C>
ATTEST: INSITUFORM MID-AMERICA, INC.
/s/ JOSEPH A. OLSON By /s/ JEROME KALISHMAN
--------------------------------------------- ------------------------------------------
Vice President-Finance and Administration Chairman
ATTEST: INSITUFORM TECHNOLOGIES,INC.
/s/ HOWARD KAILES By /s/ JEAN-PAUL RICHARD
--------------------------------------------- ------------------------------------------
Secretary President
ATTEST: ITI ACQUISITION CORP.
/s/ HOWARD KAILES By /s/ JEAN-PAUL RICHARD
--------------------------------------------- ------------------------------------------
Assistant Secretary President
</TABLE>
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EXHIBIT A
AGREEMENT OF MERGER
This Agreement of Merger dated as of , 1995 (hereinafter referred
to as the "Plan of Merger"), pursuant to Section 251 of the Delaware General
Corporation Law, as amended (hereinafter referred to as the "GCL"), is entered
into by and among INSITUFORM MID-AMERICA, INC., a corporation organized and
existing under the laws of the State of Delaware (hereinafter referred to as
"IMA"); ITI Acquisition Corp., a corporation organized and existing under the
laws of the State of Delaware (hereinafter referred to as "Acquisition Sub"; IMA
and Acquisition Sub being hereinafter sometimes collectively referred to as the
"Constituent Corporations"); and INSITUFORM TECHNOLOGIES, INC., a corporation
organized and existing under the laws of the State of Delaware, as a third party
hereto (hereinafter referred to as "ITI").
WITNESSETH:
WHEREAS, Acquisition Sub is a corporation duly organized and existing under
the laws of the State of Delaware, having been incorporated on March 16, 1995,
and having an authorized capital stock of 10,000 shares of common stock, $.01
par value (the "Acquisition Sub Common Stock"), of which 1,000 shares are issued
and outstanding and held by ITI; and
WHEREAS, IMA is a corporation duly organized and existing under the laws of
the State of Delaware, having been incorporated on December 22, 1983, and having
an authorized capital stock consisting of 500,000 shares of preferred stock,
$.01 par value, none of which are presently issued and outstanding; 10,000
shares of convertible preferred stock, $100 per value, none of which are
presently issued and outstanding; 500 shares of class A convertible preferred
stock, $1,000 per value, none of which are presently issued and outstanding;
10,000,000 shares of class A common stock, $.01 par value (hereinafter referred
to as the "IMA Class A Common Stock"), of which shares are presently
issued and outstanding; and 6,000,000 shares of class B common stock, $.01 par
value, none of which are presently issued and outstanding; and
WHEREAS, the respective Boards of Directors of the parties deem it
advisable and in the best interests of said corporations that Acquisition Sub be
merged (hereinafter referred to as the "Merger") with and into IMA as authorized
by the State of Delaware, under and pursuant to the terms and conditions
hereinafter set forth, as a result of which IMA will become a wholly-owned
subsidiary of ITI; and
WHEREAS, the respective Boards of Directors of Acquisition Sub and IMA
have, by resolutions duly adopted, approved and adopted this Plan of Merger; and
WHEREAS, the respective Boards of Directors of Acquisition Sub and IMA have
directed that this Plan of Merger be submitted to a vote of their respective
stockholders, and the respective stockholders of Acquisition Sub and IMA have,
by resolutions duly adopted, approved and adopted this Plan of Merger;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, and for the purpose of setting forth the terms
and conditions of said merger, the mode of carrying the same into effect, the
manner and basis of converting the shares of Acquisition Sub into shares of the
Surviving Corporation (as hereinafter defined), and the shares of IMA into
shares of the class A common stock, $.01 par value (hereinafter referred to as
the "ITI Common Stock"), of ITI, and such other details and provisions as are
deemed necessary or advisable, the parties hereto have agreed and do hereby
agree, subject to the conditions hereinafter set forth, as follows:
ARTICLE I
MERGER AND NAME OF SURVIVING CORPORATION
At the Effective Time (as defined in Article VII hereof), in accordance
with the terms and provisions of this Agreement and in accordance with the GCL,
Acquisition Sub shall be merged into and with IMA. As a result of the Merger,
the separate corporate existence of Acquisition Sub shall cease and IMA shall
continue
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as the surviving corporation, governed by the laws of the State of Delaware,
under the corporate name it possesses immediately prior to the Effective Time.
IMA, from and after the Effective Time, is hereinafter sometimes referred to as
the "Surviving Corporation".
ARTICLE II
TERMS AND CONDITIONS OF MERGER
The terms and conditions of the Merger are (in addition to those set forth
elsewhere in this Plan of Merger) as follows:
(a) At the Effective Time, the Surviving Corporation shall possess all
the rights, privileges, powers and franchises, as well as of a public or of a
private nature, of the Constituent Corporations. All of the rights, privileges,
powers and franchises, and all property, real and personal, and all debts due on
whatever account to each of the Constituent Corporations, shall be taken and
deemed to be transferred to and vested in the Surviving Corporation without
further act or deed; and all of the property, rights, privileges, powers,
franchises and all and every other interest of each of the Constituent
Corporations thereafter shall be vested as effectively and fully in the
Surviving Corporation as they were in each of the Constituent Corporations.
(b) The Surviving Corporation shall be responsible and liable for all
of the liabilities, obligations and penalties of each of the Constituent
Corporations; provided, however, that the liabilities, obligations and penalties
of the Constituent Corporations shall not be affected by the Merger, and that
the rights of the creditors of the Constituent Corporations, or any liens upon
the property of the Constituent Corporations shall not be impaired by the
Merger, and any claim existing or action or proceeding, civil or criminal,
pending by or against the Constituent Corporations may be prosecuted to judgment
as if the Merger had not taken place, or the Surviving Corporation may be
proceeded against or substituted in the place of the Constituent Corporations.
(c) At the Effective Time and until their successors have been duly
elected and have qualified, the Board of Directors of the Surviving Corporation
shall consist of James D. Krugman, Jean-Paul Richard and William A. Martin; and,
at the Effective Time and until their successors have been duly elected and have
qualified, the officers of the Surviving Corporation shall be as follows:
<TABLE>
<CAPTION>
NAME OFFICE
---------------------------------------------------- -----------------
<S> <C>
Jean-Paul Richard................................... President
William A. Martin................................... Vice President
William A. Martin................................... Secretary
</TABLE>
ARTICLE III
CONVERSION OF SHARES
The manner and basis of converting in the Merger the outstanding shares of
IMA Class A Common Stock and Acquisition Sub Common Stock into shares of the
capital stock of the Surviving Corporation are as follows:
(a) Each share of the Acquisition Sub Common Stock issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action by the holder thereof, be deemed cancelled and
converted into and shall represent and be exchanged for the right to receive one
validly issued, fully-paid and non-assessable share of the class A common stock,
$.01 par value (hereinafter referred to as the "Surviving Common Stock"), of the
Surviving Corporation.
(b) Each share of the IMA Class A Common Stock issued and outstanding
immediately prior to the Effective Time (other than Dissenting Shares [as
defined and to the extent provided in Paragraph (a) of Article IV hereof], if
any) shall, by virtue of the Merger and without any action by the holder
thereof, be
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deemed cancelled and converted into and shall represent the right to
receive 1.15 shares of ITI Common Stock.
(c) Solely to avoid the expense and inconvenience to ITI and
Acquisition Sub, and not as separately bargained for consideration, no
fractional shares of ITI Common Stock shall be issued in the Merger and no
dividend, stock split or interest shall relate to any such fractional shares,
and such fractional shares shall not entitle the owner thereof to any rights of
a security holder. In lieu of issuing certificates for fractional shares of ITI
Common Stock, the Exchange Agent (as hereinafter defined) shall, on behalf of
all holders of such fractional shares, on or before the tenth day following the
Effective Time, aggregate all such fractional shares and sell the resulting
shares of ITI Common Stock for the accounts of holders of such respective
fractional shares, and such holders shall thereafter be entitled to receive on a
pro rata basis the net proceeds of the sale thereof, without interest thereon,
upon the surrender of all of such holder's certificates for exchange pursuant to
the provisions hereinafter set forth.
(d) All options (hereinafter referred to as the "IMA Options") to
acquire IMA Class A Common Stock outstanding, whether or not exercisable at the
Effective Time, under the Insituform Mid-America, Inc. Stock Option Plan
(hereinafter referred to as the "IMA Option Plan"), shall remain outstanding
following the Effective Time. At the Effective Time, the IMA Options shall, by
virtue of the Merger and without any further action on the part of IMA or the
holder thereof, be assumed by ITI in such manner that ITI: (i) is a corporation
"assuming a stock option in a transaction to which Section 424(a) applies"
within the meaning of Section 424 of the United States Internal Revenue Code of
1986, as amended; or (ii) to the extent that Section 424 of the Code does not
apply to any such IMA Options, would be such a corporation were Section 424 of
the Code applicable to such IMA Options. From and after the Effective Time, all
references to IMA in the IMA Stock Option Plan and the applicable stock option
agreements issued thereunder shall be deemed to refer to ITI, except that each
reference to the name of such plan therein shall be deemed a reference to the
"Insituform Mid-America, Inc. Stock Option Plan", and provided that each
reference to the "Stock Option Committee" or "Committee" therein shall be deemed
a reference to ITI's Compensation Committee. Each IMA Option assumed by ITI
shall be exercisable upon the same terms and conditions as under the IMA Stock
Option Plan and the applicable option agreement issued thereunder, except that:
(A) each such IMA Option shall be exercisable for that whole
number of shares of ITI Common Stock (rounded to the nearest whole
share) into which the number of shares of IMA Class A Common Stock
subject to such IMA Option immediately prior to the Effective Time would
be convertible under this Article III if such shares were outstanding at
the Effective Time; and
(B) the option price per share of ITI Common Stock shall be an
amount equal to the quotient obtained by dividing (x) the product
obtained by multiplying the exercise price per share of IMA Class A
Common Stock subject to such IMA Option in effect immediately prior to
the Effective Time by the number of shares of IMA Class A Common Stock
subject to such option immediately prior to the Effective Time, by (y)
the number of shares of ITI Common Stock covered by the option as so
assumed (the option price as so determined being rounded upward to the
nearest full cent).
No payment or adjustment shall be made for fractional shares which otherwise
would be issuable upon exercise of any IMA Option assumed as aforesaid.
(e) The Merger shall effect no change in any shares of ITI Common Stock
issued by ITI prior to the Effective Time.
ARTICLE IV
DISSENTING SHARES;
EXCHANGE OF CERTIFICATES
(a) Notwithstanding anything in this Plan of Merger to the contrary,
shares of IMA Common Stock which are issued and outstanding immediately prior to
the Effective Time and which are held by
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stockholders who have not voted such shares in favor of the Merger and, if
entitled to elect to demand the appraisal of such shares pursuant to Section 262
of the GCL, shall have delivered a written demand for payment of the fair value
of such shares within the time and in the manner provided in Section 262 of the
GCL (herein referred to as "Dissenting Shares") shall not be converted into or
be exchangeable for the right to receive the consideration provided in Article
III of this Plan of Merger, unless and until such holder shall have failed to
perfect or shall have effectively withdrawn or lost his right to appraisal and
payment under the GCL. If any such holder shall have so failed to perfect or
shall have effectively withdrawn or lost such right, such holder's shares of IMA
Common Stock shall thereupon be deemed to have been converted into and to have
become exchangeable for, at the Effective Time, the right to receive the
consideration therefor specified under Article III hereof, without any interest
thereon.
(b) Prior to the Effective Time, Acquisition Sub shall designate
American Stock Transfer & Trust Company, or, at its election, a bank or trust
company or similar entity, reasonably satisfactory to IMA, which is authorized
to exercise corporate trust or stock powers, to act as the exchange agent
(hereinafter referred to as the "Exchange Agent") in the Merger. Promptly after
the Effective Time, ITI shall cause the delivery to the Exchange Agent of
certificates evidencing the shares of ITI Common Stock contemplated to be issued
by Article III hereof.
(c) As soon as practicable after the Effective Time, but in no event
later than 15 business days after the Effective Time, the Exchange Agent shall
send a notice and transmittal form to each holder of a certificate theretofore
evidencing shares of IMA Class A Common Stock, advising such holders of the
terms of the exchange effected by the Merger and the procedure for surrendering
to the Exchange Agent (who may appoint forwarding agents with the approval of
ITI) such record holder's certificate(s) evidencing IMA Class A Common Stock for
exchange for certificates evidencing shares of ITI Common Stock. Each holder of
a certificate theretofore evidencing shares of IMA Class A Common Stock, upon
surrender of the same to the Exchange Agent in accordance with such transmittal
form, shall be entitled to receive, in exchange for such certificate, a
certificate evidencing the number of full shares of ITI Common Stock for which
the shares of IMA Class A Common Stock theretofore represented by the
certificate so surrendered shall have been exchanged pursuant to Article III
hereof and the cash in lieu of fractional shares hereinabove contemplated, and
the certificate so surrendered shall forthwith be cancelled.
(d) If any certificate evidencing shares of ITI Common Stock is to be
issued in a name other than that in which the certificate surrendered in
exchange therefor is registered, or if any payment of cash is to be made to a
person other than the person in whose name such certificate is registered, it
shall be a condition of the issuance thereof or such payment, as the case may
be, that the certificate so surrendered shall be properly endorsed and otherwise
in proper form for transfer and that the person requesting such exchange (i) pay
to the Exchange Agent any transfer or other taxes required by reason of the
issuance of a certificate for shares of ITI Common Stock in any name other than
that of, and payment of cash to a person other than, the registered holder of
the certificate surrendered or (ii) establish to the satisfaction of the
Exchange Agent that such transfer or other taxes have been paid or are not
applicable. Certificates representing shares of ITI Common Stock issued to IMA
"affiliates", within the meaning of Rule 145 under the Securities Act of 1933,
as amended, shall bear a legend to the effect that no disposition shall be made
by such "affiliate" of shares of ITI Common Stock, except in accordance with the
applicable provisions of said Act and the rules and regulations thereunder.
(e) In the event any certificate representing any shares of IMA Class A
Common Stock shall have been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the person claiming such certificate to be lost,
stolen or destroyed, the Exchange Agent shall issue in exchange for such lost,
stolen or destroyed certificate the consideration payable in exchange therefor
pursuant to Article III. The Exchange Agent or the Surviving Corporation may, in
its discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate to give the Exchange Agent a
bond in such reasonable sum as it may direct as indemnity against any claim that
may be made against the Surviving Corporation with respect to the certificate
alleged to have been lost, stolen or destroyed.
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<PAGE> 307
(f) No dividends or other distributions to holders of ITI Common Stock
as of any date subsequent to the Effective Time shall be paid to the holders of
outstanding certificates formerly representing shares of IMA Class A Common
Stock until such certificates are so surrendered. Subject to the effect, if any,
of applicable law upon surrender of certificates evidencing shares of IMA Class
A Common Stock, there shall be paid to the record holders of ITI Common Stock
issued in exchange therefor (i) the amount of dividends or other distributions
with a record date for payment after the Effective Time that have theretofore
been paid with respect to full shares of ITI Common Stock as of any date
subsequent to the Effective Time which have not yet been paid to a public
official pursuant to abandoned property laws and (ii) at the appropriate payment
date, the amount of dividends or other distributions with a record date after
the Effective Time but prior to surrender and a payment date subsequent to
surrender. No interest shall be payable with respect to the payment of such
dividends or other distributions on surrender of outstanding certificates.
Notwithstanding the foregoing, neither ITI, Acquisition Sub, the Exchange Agent
nor any other party hereto shall be responsible or liable to any holder of
shares of IMA Class A Common Stock for any ITI Common Stock, or dividends or
distributions thereon or cash, including cash in lieu of fractional share
interests, delivered to any public official pursuant to applicable escheat laws.
(g) At the Effective Time, it shall be deemed that the stock transfer
books of IMA are closed, and no transfer of IMA Class A Common Stock on the
books of IMA shall thereafter be made or consummated. Until surrendered and
exchanged in accordance with the provisions hereinabove set forth, the
outstanding certificates evidencing shares of IMA Class A Common Stock
immediately prior to the Effective Time shall, from and after the Effective
Time, be deemed for all corporate purposes to evidence the right to receive the
number of shares of ITI Common Stock, together with cash in lieu of fractional
shares, into which the shares of IMA Class A Common Stock theretofore evidenced
by such certificate or certificates shall have been so converted, together with
any dividends or other distributions thereon pursuant to paragraph (f)
immediately preceding, as though such surrender and exchange had taken place.
(h) Any portion of the shares of ITI Common Stock or cash in lieu of
fractional shares, which remains undistributed to the holders of IMA Class A
Common Stock for one year after the Effective Time shall be delivered to ITI,
upon demand, and any holders of IMA Class A Common Stock who have not
theretofore complied with the provisions herein set forth shall thereafter look
only to ITI for the shares of ITI Common Stock, any cash in lieu of fractional
shares of ITI Common Stock to which they are entitled pursuant to Article III
hereof and any dividends or other distributions with respect to ITI Common Stock
to which they are entitled pursuant to paragraph (f) immediately preceding. Any
portion of such remaining shares or cash unclaimed by holders of IMA Class A
Common Stock as of a date which is immediately prior to such time as such shares
or amounts would otherwise escheat to or become property of any governmental
entity shall, to the extent permitted by applicable law, become the property of
ITI free and clear of any claims or interest of any person previously entitled
thereto.
ARTICLE V
CERTIFICATE OF INCORPORATION AND BYLAWS
(a) The certificate of incorporation of IMA as in effect immediately
prior to the Effective Time shall, at the Effective Time, be and constitute the
certificate of incorporation of the Surviving Corporation until thereafter
amended in accordance with the provisions thereof and applicable law.
(b) The By-laws of IMA as in effect immediately prior to the Effective
Time shall, at the Effective Time, be and constitute the By-laws of the
Surviving Corporation until thereafter amended in accordance with the provisions
thereof or applicable law.
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ARTICLE VI
OTHER PROVISIONS WITH RESPECT TO MERGER
(a) For the convenience of the parties and to facilitate the filing and
recording of the Merger Agreement, any number of counterparts hereof may be
executed, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
(b) The Merger Agreement and the legal relations between the parties
hereto shall be governed by and construed in accordance with the laws of the
State of Delaware.
(c) From time to time, as and when required by the Surviving
Corporation or by its successors or assigns, there shall be executed and
delivered on behalf of Acquisition Sub such deeds and other instruments, and
there shall be taken or caused to be taken by it all such further and other
action, as shall be appropriate, advisable or necessary in order to vest,
perfect or confirm, of record or otherwise, in the Surviving Corporation the
title to and possession of all property, interests, assets, rights, privileges,
immunities, powers, franchises and authority of Acquisition Sub and otherwise to
carry out the purposes of this Merger Agreement, and the officers and directors
of the Surviving Corporation are fully authorized in the name and on behalf of
Acquisition Sub or otherwise, to take any and all such action and to execute and
deliver any and all such deeds and other instruments.
ARTICLE VII
EFFECTIVE TIME
The Merger shall become effective at the time of filing of a Certificate of
Merger with respect to the Merger, setting forth the information required, in
the office of the Secretary of State of the State of Delaware, as required by
the GCL. Such time is herein referred to as the "Effective Time."
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<PAGE> 309
IN WITNESS WHEREOF, Acquisition Sub and IMA, ITI (as a third party), have
caused this Merger Agreement to be executed and delivered as of the date first
above written.
INSITUFORM MID-AMERICA, INC.,
a Delaware corporation
By
--------------------------------------
Chairman
--------------------------------------
Secretary
ITI ACQUISITION CORP.,
a Delaware corporation
By
--------------------------------------
President
--------------------------------------
Secretary
INSITUFORM TECHNOLOGIES, INC.,
a Delaware corporation
By
--------------------------------------
President
--------------------------------------
Secretary
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EXHIBIT B
___________ 1995
Insituform Technologies, Inc.
1770 Kirby Parkway
Suite 300
Memphis, Tennessee 38138
Insituform Mid-America, Inc.
17988 Edison Avenue
Chesterfield, Missouri 63005
Gentlemen:
In furtherance of the Agreement and Plan of Merger dated May 23, 1995 (the
"Agreement") among Insituform Technologies, Inc., a Delaware corporation (the
"Company"), ITI Acquisition Corp., a Delaware corporation ("ITI Sub"), and
Insituform Mid-America, Inc., a Delaware corporation ("IMA"), the undersigned
hereby agrees that he or it will not sell, transfer, pledge, hypothecate or
otherwise convey or dispose of or enter into any contract or arrangement for the
sale, transfer, pledge, hypothecation, conveyance or other disposition of any
shares of Class A Common Stock, $.01 par value ("IMA Class A Common Stock"), of
IMA, any shares of Class B Common Stock $.01 par value ("IMA Class B Common
Stock"), of IMA, or any shares of Class A Common Stock, $.01 par value (the "ITI
Common Stock"), of the Company, owned by the undersigned from the date hereof
until the earlier of (i) the termination of the Agreement or (ii) the date of
the first publication of the operating results of the Company covering at least
a 30-day period after the merger of IMA and ITI Sub has been consummated,
without the prior written consent of the Company, except that the undersigned
may convert any shares of IMA Class B Common Stock into shares of IMA Class A
Common Stock prior to the consummation of the transactions contemplated by the
Agreement.
In order to enable you to enforce the aforesaid covenant, the undersigned
hereby consents to placing stop-transfer orders with the transfer agents,
respectively, of the IMA Class A Common Stock, with respect to any of the IMA
Class A Common Stock registered in the name of the undersigned or beneficially
owned by the undersigned, and with the transfer agent of the IMA Class B Common
Stock, with respect to any of the IMA Class B Common Stock registered in the
name of the undersigned or beneficially owned by the undersigned, and with the
transfer agent of the ITI Common Stock, with respect to any of the ITI Common
Stock registered in the name of the undersigned or beneficially owned by the
undersigned.
--------------------------------------
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EXHIBIT C-1
The letter to be delivered to ITI from IMA's independent auditors referred
to in Section 7.5(d) of the Agreement shall be in form and substance reasonably
satisfactory to ITI and contain statements by such auditors to the effect that:
(1) They are independent certified public accountants with respect to IMA
within the meaning of the Securities Act and the applicable published rules and
regulations thereunder.
(2) In their opinion, the consolidated financial statements and financial
statement schedules audited by them and included or incorporated by reference in
the Registration Statement comply as to form in all material respects with the
applicable accounting requirements of the Securities Act and the Exchange Act
and the related published rules and regulations.
(3) They have read the minutes of meetings of the stockholders and the
boards of directors of IMA and its subsidiaries for the period from the date of
the most recent financial statements of IMA included or incorporated by
reference in the Registration Statement to such date not more than five business
days prior to the date when the Registration Statement becomes effective; they
have carried out other procedures to a specified date not more than five
business days prior to the date as of when the Registration Statement becomes
effective, which do not constitute an audit in accordance with generally
accepted accounting principles, as follows:
(a) With respect to the periods covered by the unaudited financial
statements of IMA and its consolidated subsidiaries included or
incorporated by reference in the Registration Statement, they have (i)
performed the procedures specified by the American Institute of Certified
Public Accountants for a review of interim financial information as
described in SAS No. 71, "Interim Financial Information," on the most
recent unaudited condensed consolidated balance sheet, the unaudited
condensed consolidated statements of income and cash flows, and the most
recent unaudited condensed consolidated statement of stockholders' equity
included or incorporated by reference in the Registration Statement; and
(ii) inquired of certain officials of IMA who have responsibility for
financial and accounting matters whether the unaudited condensed
consolidated financial statements referred to in 3(a)(i) comply as to form
in all material respects with the applicable accounting requirements of the
Securities Act and the Exchange Act and the related published rules and
regulations.
(b) With respect to the period from the date of the most recent
financial statements of IMA and its consolidated subsidiaries included or
incorporated by reference in the Registration Statement to the end of the
next to last month prior to the calendar month in which the Registration
Statement becomes effective, they have (i) read the unaudited consolidated
financial statements of IMA and subsidiaries for each month of both (x) the
current year for which available and (y) the corresponding month of the
prior year, furnished to us by IMA, officials of IMA having advised them
that no such financial statements as of any date or for any subsequent
period were available; and (ii) inquired of certain officials of IMA who
have responsibility for financial and accounting matters whether the
unaudited consolidated financial statements referred to in 3(b)(i) are
stated on a basis substantially consistent with that of the audited
consolidated financial statements included or incorporated by reference in
the Registration Statement.
(4) Nothing came to their attention as a result of the foregoing
procedures that caused them to believe that:
(a) (i) any material modifications should be made to the unaudited
condensed consolidated financial statements described in 3(a)(i), included
or incorporated by reference in the Registration Statement, for them to be
in conformity with generally accepted accounting principles; or (ii) the
unaudited condensed consolidated financial statements described in 3(a)(i)
do not comply as to form in all material respects with the applicable
accounting requirements of the Securities Act and the Exchange Act and the
related published rules and regulations.
(b) (i) as of the end of the next to last month prior to the calendar
month in which the Registration Statement becomes effective, there was,
except as set forth in such letter, any change in the
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<PAGE> 312
capital stock, increase in long-term debt, or decrease in consolidated net
current assets or stockholders' equity of the consolidated companies as
compared with amounts shown in the most recent unaudited condensed
consolidated balance sheet of IMA included or incorporated by reference in
the Registration Statement, or (ii) for the period from the date of the
most recent balance sheet of IMA included or incorporated by reference in
the Registration Statement to the end of the month immediately preceding
the date when the Registration Statement becomes effective, unless the
Registration Statement becomes effective within the first 15 calendar days
of a month, in which case the end of the next to last month prior to the
calendar month in which the Registration Statement becomes effective, there
were, except as set forth in such letter, any decreases, as compared to the
corresponding period in the preceding year, in consolidated net contract
revenues or in the total or per-share amounts of income before
extraordinary items or of net income, except in all instances for changes,
increases, or decreases that the Registration Statement discloses have
occurred or may occur.
(5) They have inquired of certain officials of IMA who have responsibility
for financial and accounting matters whether (a) at a date not more than five
business days prior to the date as of when the Registration Statement becomes
effective, there was any change in the capital stock, increase in long-term debt
or any decreases in consolidated net current assets or stockholders' equity of
the consolidated companies as compared with amounts shown on most recent balance
sheet of IMA included or incorporated by reference in the Registration
Statement, or (b) for the period from the date of the most recent consolidated
balance sheet of IMA included or incorporated by reference in the Registration
Statement to a date not more than five business days prior to the date as of
when the Registration Statement becomes effective, there was any decrease, as
compared with the corresponding period in the preceding year, in consolidated
net contract revenues or in the total or per-share amounts of income before
extraordinary items or of net income; and, on the basis of these inquiries and
their reading of the minutes as described in (3), nothing came to their
attention that caused them to believe that there was, except as set forth in
such letter, any such change, increase, or decrease except in all instances for
changes, increased, or decreases that the Registration Statement discloses have
occurred or may occur.
(6) They have: (a) read the unaudited pro forma condensed consolidated
balance sheet, and the unaudited pro forma condensed consolidated statements of
income included in the Registration Statement, and (b) inquired of certain
officials of IMA and of ITI who have responsibility for financial and accounting
matters about (i) the basis for their determination of the pro forma
adjustments, and (ii) whether the unaudited pro forma condensed consolidated
financial statements comply as to form in all material respects with the
applicable accounting requirements of Rule 11-02 of Regulation S-X; and (c)
proved the arithmetic accuracy of the application of the pro forma adjustments
to the historical amounts in the unaudited pro forma condensed consolidated
financial statements; and nothing, except as set forth in such letter, came to
their attention as a result of the procedures specified in this paragraph (6)
that caused them to believe that the unaudited pro forma condensed consolidated
financial statements included in the Registration Statement do not comply as to
form in all material respects with the applicable accounting requirements of
Rule 11-02 of Regulation S-X and that the pro forma adjustments have not been
properly applied to the historical amounts in the compilation of those
statements.
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<PAGE> 313
EXHIBIT C-2
The letter to be delivered to ITI from Enviroq's independent auditors
referred to in Section 7.5(d) of the Agreement shall be in form and substance
reasonably satisfactory to ITI and contain statements by such auditors to the
effect that:
(1) They are independent certified public accountants with respect to
Enviroq within the meaning of the Securities Act and the published rules and
regulations thereunder.
(2) In their opinion, the consolidated financial statements and financial
statement schedules audited by them and included or incorporated by reference in
the Registration Statement comply as to form in all material respects with the
applicable accounting requirements of the Securities Act and the Exchange Act
and the related published rules and regulations.
(3) They have read the minutes of meetings of the stockholders and the
boards of directors of Enviroq and its subsidiaries for the period from the date
of the most recent financial statements of Enviroq included or incorporated by
reference in the Registration Statement to such date not more than five business
days prior to the date when the Registration Statement becomes effective; they
have carried out other procedures to a specified date not more than five
business days prior to the date as of when the Registration Statement becomes
effective, which do not constitute an audit in accordance with generally
accepted accounting principles, as follows:
(a) With respect to the periods covered by the unaudited financial
statements of Enviroq and its consolidated subsidiaries included or
incorporated by reference in the Registration Statement, they have (i)
performed the procedures specified by the American Institute of Certified
Public Accountants for a review of interim financial information as
described in SAS No. 71, "Interim Financial Information," on the most
recent unaudited condensed consolidated balance sheet, the unaudited
condensed consolidated statements of income and cash flows, and the most
recent unaudited condensed consolidated statement of stockholders' equity
included or incorporated by reference in the Registration Statement; and
(ii) inquired of certain officials of Enviroq who have responsibility for
financial and accounting matters whether the unaudited condensed
consolidated financial statements referred to in 3(a)(i) comply as to form
in all material respects with the applicable accounting requirements of the
Securities Act and the Exchange Act and the related published rules and
regulations.
(b) With respect to the period from the date of the most recent
financial statements of Enviroq and its consolidated subsidiaries included
or incorporated by reference in the Registration Statement to the end of
the period immediately preceding the date of the acquisition of Enviroq by
IMA, they have (i) read the unaudited consolidated financial statements of
Enviroq and subsidiaries for each month of both (x) the current year for
which available and (y) the corresponding month of the prior year,
furnished to us by Enviroq, officials of Enviroq having advised them that
no such financial statements as of any date or for any subsequent period
were available; and (ii) inquired of certain officials of Enviroq who have
responsibility for financial and accounting matters whether the unaudited
consolidated financial statements referred to in 3(b)(i) are stated on a
basis substantially consistent with that of the audited consolidated
financial statements included or incorporated by reference in the
Registration Statement.
(4) Nothing came to their attention as a result of the foregoing
procedures that caused them to believe that:
(a) (i) any material modifications should be made to the unaudited
condensed consolidated financial statements described in 3(a)(i), included
or incorporated by reference in the Registration Statement, for them to be
in conformity with generally accepted accounting principles; or (ii) the
unaudited condensed consolidated financial statements described in 3(a)(i)
do not comply as to form in all material respects with the applicable
accounting requirements of the Securities Act and the Exchange Act and the
related published rules and regulations.
(b) (i) as of the end of the period immediately preceding the
acquisition of Enviroq by IMA, there was, except as set forth in such
letter, any change in the capital stock, increase in long-term debt, or
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decrease in consolidated net current assets or stockholders' equity of the
consolidated companies as compared with amounts shown in the most recent
unaudited condensed consolidated balance sheet of Enviroq included or
incorporated by reference in the Registration Statement, or (ii) for the
period from the date of the most recent balance sheet of Enviroq included
or incorporated by reference in the Registration Statement to the end of
the month immediately preceding the acquisition of Enviroq by IMA, there
were, except as set forth in such letter, any decreases, as compared to the
corresponding period in the preceding year, in consolidated net contract
revenues or in the total or per-share amounts of income before
extraordinary items or of net income, except in all instances for changes,
increases, or decreases that the Registration Statement discloses have
occurred.
(5) They have: (a) read the unaudited pro forma condensed consolidated
balance sheet, and the unaudited pro forma condensed consolidated statements of
income included in the Registration Statement, and (b) inquired of certain
officials of Enviroq, IMA and of ITI who have responsibility for financial and
accounting matters about (i) the basis for their determination of the pro forma
adjustments, and (ii) whether the unaudited pro forma condensed consolidated
financial statements comply as to form in all material respects with the
applicable accounting requirements of Rule 11-02 of Regulation S-X; and (c)
proved the arithmetic accuracy of the application of the pro forma adjustments
to the historical amounts in the unaudited pro forma condensed consolidated
financial statements; and nothing, except as set forth in such letter, came to
their attention as a result of the procedures specified in this paragraph (5)
that caused them to believe that the unaudited pro forma condensed consolidated
financial statements included in the Registration Statement do not comply as to
form in all material respects with the applicable accounting requirements of
Rule 11-02 of Regulation S-X and that the pro forma adjustments have not been
properly applied to the historical amounts in the compilation of those
statements.
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EXHIBIT D
The letter to be delivered to IMA from ITI's independent auditors referred
to in Section 7.5(e) of the Agreement shall be in form and substance reasonably
satisfactory to IMA and contain statements by such auditors to the effect that:
(1) They are independent certified public accountants with respect to ITI
within the meaning of the Securities Act and the applicable published rules and
regulations thereunder.
(2) In their opinion, the consolidated financial statements audited by
them and included or incorporated by reference in the Registration Statement
comply as to form in all material respects with the applicable accounting
requirements of the Securities Act and the Exchange Act and the related
published rules and regulations.
(3) They have read the minutes of meetings of the stockholders and the
boards of directors of ITI and its subsidiaries for the period from the date of
the most recent financial statements of ITI included or incorporated by
reference in the Registration Statement to such date not more than five business
days prior to the date when the Registration Statement becomes effective; they
have carried out other procedures to a specified date not more than five
business days prior to the date as of when the Registration Statement becomes
effective, which do not constitute an audit in accordance with generally
accepted accounting principles, as follows:
(a) With respect to the periods covered by the unaudited financial
statements of ITI and its consolidated subsidiaries included or
incorporated by reference in the Registration Statement, they have (i)
performed the procedures specified by the American Institute of Certified
Public Accountants for a review of interim financial information as
described in SAS No. 71, "Interim Financial Information," on the most
recent unaudited condensed consolidated balance sheet, the unaudited
condensed consolidated statements of income and cash flows, and the most
recent unaudited condensed consolidated statement of stockholders' equity
included or incorporated by reference in the Registration Statement; and
(ii) inquired of certain officials of ITI who have responsibility for
financial and accounting matters whether the unaudited condensed
consolidated financial statements referred to in 3(a)(i) comply as to form
in all material respects with the applicable accounting requirements of the
Securities Act and the Exchange Act and the related published rules and
regulations.
(b) With respect to the period from the date of the most recent
financial statements of ITI and its consolidated subsidiaries included or
incorporated by reference in the Registration Statement to the end of the
next to last month prior to the calendar month in which the Registration
Statement becomes effective, they have (i) read the unaudited consolidated
financial statements of ITI and subsidiaries for each month of both (x) the
current year for which available and (y) the corresponding month of the
prior year, furnished to them by ITI, officials of ITI having advised them
that no such financial statements as of any date or for any subsequent
period were available; and (ii) inquired of certain officials of ITI who
have responsibility for financial and accounting matters whether the
unaudited consolidated financial statements referred to in 3(b)(i) are
stated on a basis substantially consistent with that of the audited
consolidated financial statements included or incorporated by reference in
the Registration Statement.
(4) Nothing came to their attention as a result of the foregoing
procedures that caused them to believe that:
(a) (i) any material modifications should be made to the unaudited
condensed consolidated financial statements described in 3(a)(i), included
or incorporated by reference in the Registration Statement, for them to be
in conformity with generally accepted accounting principles; or (ii) the
unaudited condensed consolidated financial statements described in 3(a)(i)
do not comply as to form in all material respects with the applicable
accounting requirements of the Securities Act and the Exchange Act and the
related published rules and regulations.
(b) (i) as of the end of the next to last month prior to the calendar
month in which the Registration Statement becomes effective, there was,
except as set forth in such letter, any change in the
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capital stock, increase in long-term debt, or decrease in consolidated net
current assets or stockholders' equity of the consolidated companies as
compared with amounts shown in the most recent unaudited condensed
consolidated balance sheet of ITI included or incorporated by reference in
the Registration Statement, or (ii) for the period from the date of the
most recent balance sheet of ITI included or incorporated by reference in
the Registration Statement to the end of the next to last month prior to
the calendar month in which the Registration Statement becomes effective,
there were, except as set forth in such letter, any decreases, as compared
to the corresponding period in the preceding year, in consolidated net
sales or in the total or per-share amounts of income before extraordinary
items or of net income, except in all instances for changes, increases, or
decreases that the Registration Statement discloses have occurred or may
occur.
(5) They have inquired of certain officials of ITI who have responsibility
for financial and accounting matters whether (a) at a date not more than five
business days prior to the date as of when the Registration Statement becomes
effective, there was any change in the capital stock, increase in long-term debt
or any decreases in consolidated net current assets or stockholders' equity of
the consolidated companies as compared with amounts shown on most recent balance
sheet of ITI included or incorporated by reference in the Registration
Statement, or (b) for the period from the date of the most recent balance sheet
of ITI included or incorporated by reference in the Registration Statement to a
date not more than five business days prior to the date as of when the
Registration Statement becomes effective, there was any decrease, as compared
with the corresponding period in the preceding year, in consolidated net sales
or in the total or per-share amounts of income before extraordinary items or of
net income; and, on the basis of these inquiries and their reading of the
minutes as described in (3), nothing came to their attention that caused them to
believe that there was, except as set forth in such letter, any such change,
increase, or decrease except in all instances for changes, increased, or
decreases that the Registration Statement discloses have occurred or may occur.
(6) They have: (a) read the unaudited pro forma condensed consolidated
balance sheet, and the unaudited pro forma condensed consolidated statements of
income included in the Registration Statement, and (b) inquired of certain
officials of ITI and of IMA who have responsibility for financial and accounting
matters about (i) the basis for their determination of the pro forma
adjustments, and (ii) whether the unaudited pro forma condensed consolidated
financial statements comply as to form in all material respects with the
applicable accounting requirements of Rule 11-02 of Regulation S-X; and (c)
proved the arithmetic accuracy of the application of the pro forma adjustments
to the historical amounts in the unaudited pro forma condensed consolidated
financial statements; and nothing, except as set forth in such letter, came to
their attention as a result of the procedures specified in this paragraph (6)
that caused them to believe that the unaudited pro forma condensed consolidated
financial statements included in the Registration Statement do not comply as to
form in all material respects with the applicable accounting requirements of
Rule 11-02 of Regulation S-X and that the pro forma adjustments have not been
properly applied to the historical amounts in the compilation of those
statements.
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EXHIBIT E-1
AMENDMENT TO ARTICLE FOURTH
OF ITI'S
CERTIFICATE OF INCORPORATION
The first paragraph of Article FOURTH of ITI's certificate of incorporation
shall be amended as follows:
FOURTH: The corporation shall be authorized to issue forty-two million
(42,000,000) shares consisting of forty million (40,000,000) Class A common
shares, par value one cent ($.01) per share; and two million (2,000,000)
Preferred shares, par value ten cents ($.10) per share ("Preferred Stock").
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EXHIBIT E-2
AMENDMENT TO ARTICLE SIXTH OF
ITI'S CERTIFICATE OF INCORPORATION
The sixth sentence of paragraph (2) of Article SIXTH of ITI's certificate
of incorporation shall be amended as follows:
"Vacancies, created from an increase in the size of the Board of
Directors, shall be filled by the affirmative vote of a majority
of the Board of Directors then in office, or such greater
affirmative vote of directors as may be specified from time to
time in the By-laws of the corporation, provided that a quorum
is present, and any other vacancy occurring in the Board of
Directors may be filled by a majority of the directors then in
office, which appointments shall be made in accordance with
Section 7.3 of the Agreement and Plan of Merger dated as of May
23, 1995 among the corporation, ITI Acquisition Corp. and
Insituform Mid-America, Inc."
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EXHIBIT F
AMENDMENTS TO ITI BY-LAWS
(i) The first sentence of Section 2 of Article III shall be amended to
read as follows:
"The board of directors shall consist of thirteen directors."
(ii) The first sentence of Section 1 of Article IV shall be deleted and
the following inserted in lieu thereof:
"The officers of the corporation shall be a chairman of the
board, a vice chairman of the board, a president, one or more
senior vice presidents, one or more vice presidents, a secretary
and a treasurer, each of whom shall be elected by the
directors."
(iii) Sections 4A and 5 of Article IV shall be deleted and the following
inserted in lieu thereof:
4A. CHAIRMAN OF THE BOARD.
The Chairman of the Board shall preside, when present, at
all meetings of the Board of Directors and at all meetings of
the stockholders and will perform such other duties as may be
prescribed from time to time by the Board or these By-laws.
4B. VICE CHAIRMAN OF THE BOARD.
In the absence of the Chairman of the Board or in the event
of his death, inability or refusal to act, the Vice Chairman of
the Board shall perform the duties of the Chairman of the Board
and, when so acting, shall have all the powers of and be subject
to all the restrictions on the Chairman of the Board. The Vice
Chairman of the Board shall perform such other duties as may be
prescribed from time to time by the Board or these by-laws.
5. PRESIDENT.
The President shall be the chief executive officer of the
corporation and, subject to the control of the Board of
Directors, shall have general and active management of the
business of the corporation, and shall see that all orders and
resolutions of the Board and stockholders are carried into
effect. He shall have the general authority to execute bonds,
deeds and contracts, in the name of the corporation and affix
the corporate seal thereto; to sign stock certificates; to cause
the employment or appointment of such employees and agents of
the corporation as the proper conduct of operations may require,
and to fix their compensation, subject to the provisions of
these By-laws; to remove or suspend any employee or agent who
shall have been employed or appointed under his authority or
under authority of an officer subordinate to him; and, in
general, to exercise all the powers and authority usually
appertaining to the chief executive officer of a corporation.
(iv) Each reference to "chief executive officer" contained in Section 2 of
Article 1, Section 4 of Article 1, and Section 1 of Article VI shall be deleted.
(v) The proviso contained in Article XI shall be amended to read as
follows:
"provided, further, however, that the size of the Board of
Directors, as set forth in Section 2 of Article III, may only be
amended by a vote of at least 80% of the members of the Board of
Directors or by a vote of the stockholders, representing a
majority of the shares issued and outstanding, at any annual
stockholders' meeting or at any special stockholders' meeting."
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EXHIBIT G
__________ , 1995
Insituform Technologies, Inc.
1770 Kirby Parkway
Suite 300
Memphis, Tennessee 38138
Insituform Mid-America, Inc.
17988 Edison Avenue
Chesterfield, Missouri 63005
Gentlemen:
In connection with the transactions contemplated by the Agreement and Plan
of Merger dated May 23, 1995 (the "Agreement") among Insituform Technologies,
Inc., a Delaware corporation (the "Company"), ITI Acquisition Corp., a Delaware
corporation ("ITI Sub"), and Insituform Mid-America, Inc., a Delaware
corporation ("IMA"), the undersigned hereby agrees to convert or to cause the
conversion of, immediately prior to the consummation of the transactions
contemplated by the Agreement, each outstanding share of Class B Common Stock,
$.01 par value ("Class B Common Stock"), of IMA, that may be beneficially owned
by the undersigned into one share of Class A Common Stock, $.01 par value, of
IMA in accordance with the terms of IMA's certificate of incorporation, as
currently in effect.
The undersigned represents and warrants to the Company that the undersigned
is the record and beneficial owner of shares of Class B Common Stock. The
undersigned is not the record or beneficial owner of any other shares of Class B
Common Stock.
In the event that the merger of IMA and ITI Sub contemplated by the
Agreement is terminated this Agreement shall be null and void.
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EXHIBIT H
The opinion to be delivered to IMA from counsel to ITI and Acquisition Sub
referred to in Section 10.1 of the Agreement shall be in form and substance
reasonably satisfactory to IMA and its counsel to the effect that:
(i) Each of ITI and Acquisition Sub is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and has full corporate power and authority to perform all its obligations under
the Agreement and, in the case of Acquisition Sub, to consummate the Merger.
(ii) The Agreement has been duly authorized, executed and delivered by ITI
and Acquisition Sub, and the consummation of the Merger has been duly approved
by Acquisition Sub, and the Agreement constitutes the valid and legally binding
obligation of ITI and Acquisition Sub enforceable against each in accordance
with its terms, except as enforceability may be limited by bankruptcy,
insolvency, or other laws affecting generally the enforceability of creditors'
rights and by limitations on the availability of equitable remedies.
(iii) The authorized capital stock of ITI consists of 2,000,000 shares of
ITI Preferred Stock and 40,000,000 shares of ITI Common Stock. When (a) the
applicable provisions of the Securities Act and such "blue sky laws" or other
state or foreign jurisdiction securities laws as may be applicable shall have
been complied with, (b) the ITI Common Stock shall have been issued and
delivered in accordance with the Agreement, and (c) the provisions of the GCL
requiring the filing of the Certificate of Merger shall have been complied with,
the shares of ITI Common Stock to be issued to holders of IMA Common Stock in
the Merger will, at the Effective Time, be duly authorized, validly issued and
fully-paid and non-assessable, issued without violation of the preemptive rights
of any person.
(iv) Upon the filing of the Certificate of Merger in the offices of the
Secretary of State of the State of Delaware, all filings required to made by ITI
or Acquisition Sub with, and all consents required to be obtained by ITI or
Acquisition Sub from, any governmental and regulatory authorities in order for
the Merger to become effective in accordance with this Agreement and the GCL
will have been made or obtained.
(v) Except for the matters set forth in such opinion and in the documents
theretofore delivered to IMA by ITI identified in such opinion, such counsel
knows of no action, suit or proceeding which, individually or in the aggregate,
materially would impair the ability of ITI or Acquisition Sub to fulfill its
obligations under the Agreement.
The opinion referred to in Section 10.1 may, if in the opinion of counsel
for ITI and Acquisition Sub it is reasonable to rely thereon, be given in
reliance upon opinions of counsel of jurisdictions other than the States of New
Jersey and New York and the District of Columbia.
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EXHIBIT I
The opinion to be delivered to ITI from counsel to IMA referred to in
Section 11.1 of the Agreement shall be in form and substance reasonably
satisfactory to ITI and its counsel to the effect that:
(i) IMA is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and has full corporate power
and authority to perform all its obligations under this Agreement and to
consummate the Merger.
(ii) The Agreement has been duly authorized, executed and delivered, and
the consummation of the Merger has been duly approved, by IMA, and the Agreement
constitutes the valid and legally binding obligation of IMA enforceable against
IMA in accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, or other laws affecting generally the enforceability of
creditors' rights and by limitations on the availability of equitable remedies.
(iii) The authorized capital stock of IMA consists of 500,000 shares of
IMA Preferred Stock, 10,000 shares of IMA Convertible Preferred Stock, 500
shares of IMA Class A Convertible Preferred Stock, 13,000,000 shares of IMA
Class A Common Stock and 6,000,000 shares of IMA Class B Common Stock. All of
the outstanding shares of IMA Class A Common Stock outstanding immediately prior
to the Merger are duly authorized, validly issued and fully-paid and
non-assessable, and were issued without violation of the preemptive rights of
any person
(iv) Upon the filing of the Certificate of Merger in the offices of the
Secretary of State of the State of Delaware, all filings required to made by IMA
with, and all consents required to be obtained by IMA from, any governmental and
regulatory authorities in order for the Merger to become effective in accordance
with the Agreement and the GCL will have been made or obtained.
(v) Except for the matters set forth in such opinion and in the documents
theretofore delivered to ITI by IMA identified in such opinion, such counsel
knows of no action, suit or proceeding which, individually or in the aggregate,
materially would impair the ability of IMA to fulfill its obligations under the
Agreement.
The opinion referred to in Section 11.1 may, if in the opinion of counsel
for IMA it is reasonable to rely thereon, be given in reliance upon opinions of
counsel of jurisdictions other than the States of Illinois and Missouri and the
District of Columbia.
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EXHIBIT J
,1995
Insituform Technologies, Inc.
1770 Kirby Parkway
Suite 300
Memphis, Tennessee 38138
Gentlemen:
In connection with the transactions contemplated by the Agreement and Plan
of Merger dated as of May 23, 1995 (the "Agreement") among Insituform
Technologies, Inc., a Delaware corporation (the "Company"), ITI Acquisition
Corp., a Delaware corporation, and Insituform Mid-America, Inc., a Delaware
corporation, the undersigned agrees that (i) the undersigned shall make no
disposition of any shares of Class A Common Stock, $.01 par value ("Company
Common Stock"), of the Company, that it receives pursuant to the Merger (as
defined in the Agreement), except in accordance with the applicable provisions
of the Securities Act of 1933, as amended, and the rules and regulations
thereunder; and (ii) the certificates evidencing such shares received pursuant
to the Merger shall bear a customary legend setting forth such restrictions.
The undersigned represents that it has no present plan, intention, or
arrangement to sell, transfer or otherwise dispose of any shares of Company
Common Stock received pursuant to the Merger, and shall not change such
intention or enter into any such arrangement, prior to the Effective Time (as
defined in the Agreement).
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EXHIBIT K
EMPLOYMENT AGREEMENT
AGREEMENT made this day of , 1995 between Robert W.
Affholder, residing at (hereinafter referred to as the
"Employee"), and Insituform Technologies, Inc., a corporation organized and
existing under the laws of the State of Delaware (hereinafter referred to as the
"Corporation").
W I T N E S S E T H:
WHEREAS, the Corporation has entered into an Agreement and Plan of Merger
dated as of May 23, 1995 (hereinafter referred to as the "Merger Agreement")
with Insituform Mid-America, Inc., a Delaware corporation (hereinafter referred
to as "IMA"), and ITI Acquisition Corp., a Delaware corporation and wholly-owned
subsidiary of the Corporation (hereinafter referred to as "Acquisition Sub"),
pursuant to the terms and subject to the conditions of which the Corporation has
agreed to the merger of Acquisition Sub into IMA, as a result of which IMA will
become a wholly-owned subsidiary of the Corporation; and
WHEREAS, it is a condition to the closing under the Merger Agreement that
the parties hereto execute and deliver this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein set forth, the Employee hereby agrees with the Corporation as follows:
SECTION I
A. The Corporation hereby agrees to employ the Employee, and the Employee
hereby agrees to be employed by the Corporation, for the Employment Term (as
hereinafter defined) and upon the other terms and conditions set forth herein.
B. The Employee hereby agrees to serve the Corporation faithfully,
diligently and to the best of his ability, under the direction of the board of
directors and of the President of the Corporation, initially as principal
operating officer for North American contracting operations of the Corporation,
and thereafter in such other executive staff position as shall be designated by
the President of the Corporation. The Employee shall render such services as the
Corporation may from time to time require of him, and shall devote all of his
business time to the performance thereof; provided that, it shall not be a
violation of this Paragraph B for the Employee to (i) serve on corporate, civic,
political or charitable boards or committees, or (ii) manage personal
investments, so long as such activities do not significantly interfere with the
performance of the Employee's responsibilities as an employee of the Corporation
in accordance with this Agreement or violate the Corporation's conflict of
interest policy as in effect from time to time. The precise services and duties
which the Employee is obligated to perform hereunder may from time to time be
changed, amended, extended or curtailed by the President of the Corporation.
C. The Employee shall render his services and perform his duties hereunder
at the principal offices of the Corporation or any Affiliate (as hereinafter
defined), as determined by the Corporation, in the metropolitan St. Louis area;
provided, however, that the Corporation may require the Employee to travel in
the regular business of the Corporation and its Affiliates for such purposes and
periods as may be reasonable considering the duties and responsibilities of the
Employee.
SECTION II
A. Subject to the provisions of this Agreement hereinafter contained, for
purposes of this Agreement the period (herein referred to as the "Employment
Term") of the Employee's obligations under Section I hereof shall commence on
the date hereof and shall continue for a period of three years thereafter.
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B. If the Employee shall, during the Employment Term fail to perform his
duties under this Agreement owing to illness or other incapacity which shall
continue for a period of more than six months, the Corporation shall have the
right to terminate the Employment Term as of a date to be specified in a notice
to that effect, whereupon the Employee shall continue to receive his salary at
the rate provided in Section III up to the last day of the Corporation's regular
payroll accounting period in which such termination shall take effect.
C. The Employment Term may further be terminated, at the option of the
Corporation, upon ten days prior written notice, for "cause" (as hereinafter
defined).
D. In the event of the Employee's death during the Employment Term, the
Employment Term shall terminate immediately and the Employee's legal
representatives shall be entitled to receive his salary at the rate provided in
Section III up to the last day of the Corporation's regular payroll accounting
period in which his death shall occur.
SECTION III
A. The Corporation hereby agrees to pay, and the Employee hereby agrees to
accept, as full compensation for the services to be rendered by him under
Section I hereunder, an annual salary of $250,000, payable in equal installments
at the end of such regular payroll accounting periods as are established by the
Corporation, or in such other installments upon which the parties hereto shall
mutually agree.
B. The Corporation shall reimburse the Employee for reasonable and
necessary expenses incurred by him on behalf of the Corporation in the
performance of his duties hereunder during the Employment Term, provided that
such expenses are adequately documented in accordance with the Corporation's
then customary policies.
C. During the Employment Term, the Employee shall be entitled to
participate in all medical and other employee benefit plans, including vacation,
sick leave, and other fringe benefits, offered or provided by the Corporation to
employees similarly situated. Such benefits shall include, but not be limited
to, the use of the automobile heretofore provided to him by IMA, for his
activities hereunder (and with a reasonably similar replacement vehicle at the
expiration of the lease therefor). During the Employment Term, the Corporation
shall furnish to the Employee office facilities appropriate to his performance
hereunder and secretarial assistance in connection therewith.
SECTION IV
A. The Employee shall hold in absolute secrecy and treat confidentially
all Confidential Material (as hereinafter defined), and not disclose, reproduce,
publish, distribute or by any other means disseminate, in whole or in part, any
Confidential Material, except as shall be authorized by the Disclosing Party (as
hereinafter defined). The Employee shall not in any manner use for his benefit
or for the benefit of others any Confidential Material, except as shall be
authorized by the Disclosing Party.
B. Subsequent to the date hereof and for a period (hereinafter referred to
as the "Covenant Term") expiring at the later of (x) two years after the
termination or expiration of all service rendered by the Employee to the
Corporation or any of its Affiliates, whether as employee, consultant, director
or otherwise, unless any such termination shall be effectuated by the
Corporation or any Affiliate without "cause", or (y) five years after the date
of this Agreement, the Employee shall not engage, directly or indirectly,
whether as principal, agent, distributor, representative, stockholder or
otherwise, in any activities which are in any way competitive with the business
conducted by the Corporation or any Affiliate thereof, within any territory in
which the Corporation or any Affiliate, directly or indirectly, conducts such
business.
C. The Employee hereby assigns to the Corporation the entire right, title
and interest in and to any and all inventions, trade secrets, improvements,
plans and specifications: (i) which he alone, or in conjunction with others, may
make, conceive or develop; and (ii) which relate to or derive from any subject
matter or problem with respect to which the Employee shall have become informed
by reason of his relations with the
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Corporation or any Affiliate, or to any product or process involved in the
business of the Corporation or any Affiliate.
D. The Employee further agrees that he will promptly disclose fully to the
Corporation the aforesaid inventions, trade secrets, improvements, plans and
specifications and will at any time render to the Corporation such reasonable
cooperation and assistance (excluding financial assistance) as the Corporation
may deem to be advisable in order to obtain copyrights or patents, as the case
may be, on or otherwise perfect or defend the Corporation's rights in each such
invention, trade secret, improvement, plan or specification, including, but not
limited to, the execution of any and all applications for copyrights or patents,
assignments of copyrights or patents and other instruments in writing which the
Corporation, its officers or attorneys may reasonably deem necessary or
desirable, and the aforesaid obligation shall be binding on the assigns,
executors, administrators and other legal representatives of the Receiving
Party.
E. For purposes of this Agreement: (i) "Confidential Material" shall mean
any and all information furnished to the Employee, whether before or after the
date hereof, by the Corporation, any Affiliate, or any of their respective
licensees, or any of their respective employees, directors, agents or
representatives (each herein referred to as a "Disclosing Party"), or acquired,
received, developed or learned by the Employee in the course of his relations
with any Disclosing Party or relating to the business and affairs of the
Corporation or any Affiliate, or any licensee thereof, or to any product or
process involved in the business of the Corporation or any Affiliate, or the
proprietary plans, policies, business or affairs of any Disclosing Party;
provided, however, that the term "Confidential Material" shall not include
information which:
(x) becomes or has become generally available to the public other
than as a result of a disclosure by the Employee;
(y) was available to the Employee on a non-confidential basis prior
to its disclosure to the Employee by the Disclosing Party; or
(z) becomes available to the Employee on a non-confidential basis
from a source other than the Disclosing Party, provided that such source is
not bound by a confidentiality agreement with the Disclosing Party;
(ii) "Affiliate" shall mean any person or entity directly or indirectly
controlled by the Corporation; and (iii) "cause" shall mean the Employee's
neglect of duties, breach of his employment or other relationship with the
Corporation , conflict of interest, or refusal to follow directives of the
Corporation , in each case (if such matter is susceptible of correction) if not
corrected within ten days after written notice thereof by the Corporation , to
the Employee (or if such correction may not reasonably be completed within such
period, if diligent efforts to effectuate such correction shall not have been
initiated within such period and continued through and completed within 30 days
of such notice); or conviction of a crime.
F. In view of the irreparable harm and damage which would be incurred by
the Corporation or any Affiliate, or any other Disclosing Party, in the event of
any violation by the Employee of any of the provisions hereof, the Employee
hereby consents and agrees that, if he violates any such provisions, the
Corporation or any Affiliate, or (with respect to such secrecy or non-use
obligations) such other Disclosing Party, shall be entitled to an injunction or
similar equitable relief to be issued by any court of competent jurisdiction
restraining the undersigned from committing or continuing any such violation.
SECTION V
The Employee hereby represents, warrants and covenants that:
A. He is duly authorized to execute and deliver this Agreement and to
perform his covenants and agreements hereunder. When executed and delivered by
him, this Agreement shall constitute his valid and legally binding agreement
enforceable against him in accordance with the terms hereof, except as may be
limited by bankruptcy, insolvency or other laws affecting generally the
enforceability of creditors' rights and by limitations on the availability of
equitable remedies.
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B. Neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated herein, will violate any law,
rule, regulation, writ, judgment, injunction, decree, determination, award, or
order of any court or governmental agency or instrumentality, domestic or
foreign, or conflict with or result in any breach of any of the terms of or
constitute a default under or result in the termination or for the creation of
any mortgage, deed of trust, pledge, lien security interest or other charge or
encumbrance of any nature pursuant to the terms of any contract or agreement to
which he is a party or by which he or any of his assets or properties is bound.
SECTION VI
A. All notices, requests, instructions or documents hereunder shall be in
writing and delivered personally or sent by registered or express mail, postage
prepaid, as follows:
(i) if to the Employee:
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with a copy to:
Thomas Litz, Esq.
Thompson & Mitchell
One Mercantile Center
St. Louis, Missouri 63101
(ii) to the Corporation:
1770 Kirby Parkway
Suite 300
Memphis, Tennessee 38138
with a copy to:
Howard Kailes, Esq.
Krugman, Chapman & Grimshaw
Park 80 West -- Plaza Two
Saddle Brook, New Jersey 07663
or to such other address as either party may designate by written notice to the
other party. If delivered personally, the date on which such notice, request,
instruction or document is delivered shall be the date on which such delivery is
made, and if delivered by mail, the date on which deposited in the mail. Each
notice, request, instruction or document shall bear the date on which it is
delivered.
B. This Agreement is personal as to the Employee and shall not be
assignable by the Employee. Subject to the foregoing, all of the terms and
provisions of this Agreement shall be binding upon and shall inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and assigns and legal representatives and (with respect to any
secrecy or non-use obligations) any other Disclosing Party.
C. This Agreement constitutes the complete understanding between the
parties hereto with respect to the transactions contemplated herein, no
statement, representation, warranty or covenant has been made by either party
hereto except as expressly set forth herein and therein, and no modification
hereof shall be effective unless in writing and signed by a party against which
it is sought to be enforced.
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D. This Agreement shall be governed by and construed in accordance with
the laws of the State of Tennessee applicable in the case of agreements made and
to be performed entirely within such State.
E. It is the intention of the Employee and the Corporation that the
provisions of this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies of each jurisdiction in which enforcement is
sought, but that the unenforceability of any provisions of this Agreement shall
not render unenforceable, or impair, the remainder of this Agreement.
Accordingly, if any provision hereof is determined to be invalid or
unenforceable, either in whole or in part, this Agreement shall be deemed
amended to delete or modify, as necessary, the offending provision and to alter
the remainder of this Agreement in order to render it valid and enforceable.
F. This Agreement may be executed in counterparts, each of which shall be
deemed an original, but all of which, taken together, shall constitute one and
the same instrument.
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of the date first above written.
INSITUFORM TECHNOLOGIES, INC.
By
--------------------------------------
EMPLOYEE:
--------------------------------------
Robert W. Affholder
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EXHIBIT L-1
AGREEMENT
AGREEMENT made this day of , 1995 between Jerome
Kalishman residing at (hereinafter referred to as the "Vice
Chairman"), and Insituform Technologies, Inc., a corporation organized and
existing under the laws of the State of Delaware (hereinafter referred to as the
"Corporation").
WITNESSETH:
WHEREAS, the Corporation has entered into an Agreement and Plan of Merger
dated as of May 23, 1995 (hereinafter referred to as the "Merger Agreement")
with Insituform Mid-America, Inc., a Delaware corporation (hereinafter referred
to as "IMA"), and ITI Acquisition Corp., a Delaware corporation and wholly-owned
subsidiary of the Corporation (hereinafter referred to as "Acquisition Sub"),
pursuant to the terms and subject to the conditions of which the Corporation has
agreed to the merger of Acquisition Sub into IMA, as a result of which IMA will
become a wholly-owned subsidiary of the Corporation; and
WHEREAS, it is a condition to the closing under the Merger Agreement that
the parties hereto execute and deliver this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein set forth, the Vice Chairman hereby agrees with the Corporation as
follows:
SECTION I
During the Term (as hereinafter defined), ITI shall engage and the Vice
Chairman shall serve as Vice Chairman of the Board of Directors of the
Corporation. The Corporation acknowledges that the duties to be performed by the
Vice Chairman under this Agreement do not require him to serve on a full-time
basis and that the Vice Chairman will not be available to serve on a full-time
basis.
SECTION II
A. Subject to the provisions of this Agreement hereinafter contained, for
purposes of this Agreement the period (herein referred to as the "Term") of the
Vice Chairman's obligations under Section I hereof shall commence on the date
hereof and shall continue for a period expiring on December 9, 1998, or until
such other date prior thereto on which the Vice Chairman's engagement terminates
pursuant hereto.
B. If the Vice Chairman shall, during the Term fail to perform his duties
under this Agreement owing to illness or other incapacity which shall continue
for a period of more than six months, the Corporation shall have the right to
terminate the Term as of a date to be specified in a notice to that effect,
whereupon the Vice Chairman shall continue to receive his retainer at the rate
provided in Section III up to the last day of the Corporation's regular payroll
accounting period in which such termination shall take effect.
C. The Term may further be terminated, at the option of the Corporation,
upon ten days' prior written notice, for "cause" (as hereinafter defined).
D. In the event of the Vice Chairman's death during the Term, the Term
shall terminate immediately and the Vice Chairman's legal representatives shall
be entitled to receive his retainer at the rate provided in Section III up to
the last day of the Corporation's regular payroll accounting period in which his
death shall occur.
E. The Vice Chairman shall have the right, upon at least 60 days' written
notice delivered to the Corporation, to terminate the Term.
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SECTION III
A. The Corporation hereby agrees to pay, and the Vice Chairman hereby
agrees to accept, as full compensation for the services to be rendered by him
under Section I hereunder, an annual fee of $100,000, payable in equal
installments at the end of such regular payroll accounting periods as are
established by the Corporation, or in such other installments upon which the
parties hereto shall mutually agree.
B. The Corporation shall reimburse the Vice Chairman for reasonable and
necessary expenses incurred by him on behalf of the Corporation in the
performance of his duties hereunder during the Term, provided that such expenses
are adequately documented in accordance with the Corporation's then customary
policies. During the Term, the Vice Chairman shall, to the extent such plans
permit coverage of the Vice Chairman thereunder in accordance with the terms
thereof generally applicable, be entitled to participate at the Corporation's
expense in the Corporation's group medical, life and accident insurance plans
or, if not so eligible, the Vice Chairman shall receive from the Corporation, at
its expense, coverage substantially similar thereto. The Vice Chairman shall
receive the use of the automobile heretofore provided to him by IMA, for his
activities hereunder (and with a reasonably similar replacement vehicle at the
expiration of the lease therefor). During the Term, the Corporation shall
furnish to the Vice Chairman office facilities appropriate to his performance
hereunder and secretarial assistance in connection therewith.
SECTION IV
A. The Vice Chairman shall hold in absolute secrecy and treat
confidentially all Confidential Material (as hereinafter defined), and not
disclose, reproduce, publish, distribute or by any other means disseminate, in
whole or in part, any Confidential Material, except as shall be authorized by
the Disclosing Party (as hereinafter defined). The Vice Chairman shall not in
any manner use for his benefit or for the benefit of others any Confidential
Material, except as shall be authorized by the Disclosing Party.
B. Subsequent to the date hereof and for a period (hereinafter referred to
as the "Covenant Term") expiring at the later of (x) two years after the
termination or expiration of all service rendered by the Vice Chairman to the
Corporation or any of its Affiliates (as hereinafter defined), whether as
employee, consultant, director or otherwise, unless any such termination shall
be effectuated by the Corporation or any Affiliate without "cause" (as
hereinafter defined), or (y) five years after the date of this Agreement, the
Vice Chairman shall not engage, directly or indirectly, whether as principal,
agent, distributor, representative, stockholder or otherwise, in any activities
which are in any way competitive with the business conducted by the Corporation
or any Affiliate thereof, within any territory in which the Corporation or any
Affiliate, directly or indirectly, conducts such business.
C. The Vice Chairman hereby assigns to the Corporation the entire right,
title and interest in and to any and all inventions, trade secrets,
improvements, plans and specifications: (i) which he alone, or in conjunction
with others, may make, conceive or develop; and (ii) which relate to or derive
from any subject matter or problem with respect to which the Vice Chairman shall
have become informed by reason of his relations with the Corporation or any
Affiliate, or to any product or process involved in the business of the
Corporation or any Affiliate.
D. The Vice Chairman further agrees that he will promptly disclose fully
to the Corporation the aforesaid inventions, trade secrets, improvements, plans
and specifications and will at any time render to the Corporation such
reasonable cooperation and assistance (excluding financial assistance) as the
Corporation may deem to be advisable in order to obtain copyrights or patents,
as the case may be, on or otherwise perfect or defend the Corporation's rights
in each such invention, trade secret, improvement, plan or specification,
including, but not limited to, the execution of any and all applications for
copyrights or patents, assignments of copyrights or patents and other
instruments in writing which the Corporation, its officers or attorneys may
reasonably deem necessary or desirable, and the aforesaid obligation shall be
binding on the assigns, executors, administrators and other legal
representatives of the Receiving Party.
E. For purposes of this Agreement: (i) "Confidential Material" shall mean
any and all information furnished to the Vice Chairman, whether before or after
the date hereof, by the Corporation, any Affiliate, or
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<PAGE> 331
any of their respective licensees, or any of their respective employees,
directors, agents or representatives (each herein referred to as a "Disclosing
Party"), or acquired, received, developed or learned by the Vice Chairman in the
course of his relations with any Disclosing Party or relating to the business
and affairs of the Corporation or any Affiliate, or any licensee thereof, or to
any product or process involved in the business of the Corporation or any
Affiliate, or the proprietary plans, policies, business or affairs of any
Disclosing Party; provided, however, that the term "Confidential Material" shall
not include information which:
(x) becomes or has become generally available to the public other
than as a result of a disclosure by the Vice Chairman;
(y) was available to the Vice Chairman on a non-confidential basis
prior to its disclosure to the Vice Chairman by the Disclosing Party; or
(z) becomes available to the Vice Chairman on a non-confidential
basis from a source other than the Disclosing Party, provided that such
source is not bound by a confidentiality agreement with the Disclosing
Party;
(ii) "Affiliate" shall mean any person or entity directly or indirectly
controlled by the Corporation; and (iii) "cause" shall mean the Vice Chairman's
neglect of duties, breach of his engagement with the Corporation , conflict of
interest, or refusal to follow directives of the Board of Directors of the
Corporation, in each case (if such matter is susceptible of correction) if not
corrected within ten days after written notice thereof by the Corporation to the
Vice Chairman (or if such correction may not reasonably be completed within such
period, if diligent efforts to effectuate such correction shall not have been
initiated within such period and continued through and completed within 30 days
of such notice); or conviction of a crime.
F. In view of the irreparable harm and damage which would be incurred by
the Corporation or any Affiliate, or any other Disclosing Party, in the event of
any violation by the Vice Chairman of any of the provisions hereof, the Vice
Chairman hereby consents and agrees that, if he violates any such provisions,
the Corporation or any Affiliate, or (with respect to such secrecy or non-use
obligations) such other Disclosing Party, shall be entitled to an injunction or
similar equitable relief to be issued by any court of competent jurisdiction
restraining the undersigned from committing or continuing any such violation.
SECTION V
The Vice Chairman hereby represents, warrants and covenants that:
A. He is duly authorized to execute and deliver this Agreement and to
perform his covenants and agreements hereunder. When executed and delivered by
him, this Agreement shall constitute his valid and legally binding agreement
enforceable against him in accordance with the terms hereof, except as may be
limited by bankruptcy, insolvency or other laws affecting generally the
enforceability of creditors' rights and by limitations on the availability of
equitable remedies.
B. Neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated herein, will violate any law,
rule, regulation, writ, judgment, injunction, decree, determination, award, or
order of any court or governmental agency or instrumentality, domestic or
foreign, or conflict with or result in any breach of any of the terms of or
constitute a default under or result in the termination or for the creation of
any mortgage, deed of trust, pledge, lien security interest or other charge or
encumbrance of any nature pursuant to the terms of any contract or agreement to
which he is a party or by which he or any of his assets or properties is bound.
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SECTION VI
A. All notices, requests, instructions or documents hereunder shall be in
writing and delivered personally or sent by registered or express mail, postage
prepaid, as follows:
(i) if to the Vice Chairman:
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
with a copy to:
Thomas Litz, Esq.
Thompson & Mitchell
One Mercantile Center
St. Louis, Missouri 63101
(ii) to the Corporation:
1770 Kirby Parkway
Suite 300
Memphis, Tennessee 38138
with a copy to:
Howard Kailes, Esq.
Krugman, Chapman & Grimshaw
Park 80 West -- Plaza Two
Saddle Brook, New Jersey 07663
or to such other address as either party may designate by written notice to the
other party. If delivered personally, the date on which such notice, request,
instruction or document is delivered shall be the date on which such delivery is
made, and if delivered by mail, the date on which deposited in the mail. Each
notice, request, instruction or document shall bear the date on which it is
delivered.
B. This Agreement is personal as to the Vice Chairman and shall not be
assignable by the Vice Chairman. Subject to the foregoing, all of the terms and
provisions of this Agreement shall be binding upon and shall inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and assigns and legal representatives and (with respect to any
secrecy or non-use obligations) any other Disclosing Party.
C. This Agreement constitutes the complete understanding between the
parties hereto with respect to the transactions contemplated herein, no
statement, representation, warranty or covenant has been made by either party
hereto except as expressly set forth herein and therein, and no modification
hereof shall be effective unless in writing and signed by a party against which
it is sought to be enforced.
D. This Agreement shall be governed by and construed in accordance with
the laws of the State of Tennessee applicable in the case of agreements made and
to be performed entirely within such State.
E. It is the intention of the Vice Chairman and the Corporation that the
provisions of this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies of each jurisdiction in which enforcement is
sought, but that the unenforceability of any provisions of this Agreement shall
not render unenforceable, or impair, the remainder of this Agreement.
Accordingly, if any provision hereof is determined to be invalid or
unenforceable, either in whole or in part, this Agreement shall be deemed
4
<PAGE> 333
amended to delete or modify, as necessary, the offending provision and to alter
the remainder of this Agreement in order to render it valid and enforceable.
F. This Agreement may be executed in counterparts, each of which shall be
deemed an original, but all of which, taken together, shall constitute one and
the same instrument.
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of the date first above written.
INSITUFORM TECHNOLOGIES, INC.
By
--------------------------------------
VICE CHAIRMAN:
--------------------------------------
Jerome Kalishman
5
<PAGE> 334
EXHIBIT L-2
CONSULTING AGREEMENT
AGREEMENT made this day of , 1995 between Jerome Kalishman
residing at (hereinafter referred to as the "Consultant"), and
Insituform Technologies, Inc., a corporation organized and existing under the
laws of the State of Delaware (hereinafter referred to as the "Corporation").
W I T N E S S E T H:
WHEREAS, the Corporation has entered into an Agreement and Plan of Merger
dated as of May 23, 1995 (hereinafter referred to as the "Merger Agreement")
with Insituform Mid-America, Inc., a Delaware corporation (hereinafter referred
to as "IMA"), and ITI Acquisition Corp., a Delaware corporation and wholly-owned
subsidiary of the Corporation (hereinafter referred to as "Acquisition Sub"),
pursuant to the terms and subject to the conditions of which the Corporation has
agreed to the merger of Acquisition Sub into IMA, as a result of which IMA will
become a wholly-owned subsidiary of the Corporation; and
WHEREAS, it is a condition to the closing under the Merger Agreement that
the parties hereto execute and deliver this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein set forth, the Consultant hereby agrees with the Corporation as follows:
SECTION I
A. The Corporation hereby retains the Consultant to act as a consultant
and advisor to the Corporation in connection with its business, and the
Consultant hereby agrees to act in such capacity, for the Consulting Term (as
hereinafter defined) and upon the other terms and conditions set forth herein.
B. The Consultant hereby agrees to serve the Corporation faithfully,
diligently and to the best of his ability under the direction of the board of
directors and of the President of the Corporation. In connection with his duties
hereunder, the Consultant shall hold himself available, upon reasonable prior
notice from the Corporation, to provide the Corporation with such services as
the Corporation may from time to time reasonably require of him.
SECTION II
A. Subject to the provisions of this Agreement hereinafter contained, for
purposes of this Agreement the period (herein referred to as the "Consulting
Term") of the Consultant's obligations under Section I hereof shall commence on
the date hereof and shall continue for a period of two years thereafter.
B. If the Consultant shall, during the Consulting Term fail to perform his
duties under this Agreement owing to illness or other incapacity which shall
continue for a period of more than six months, the Corporation shall have the
right to terminate the Consulting Term as of a date to be specified in a notice
to that effect, whereupon the Consultant shall continue to receive his retainer
at the rate provided in Section III up to the last day of the month in which
such termination shall take effect.
C. The Consulting Term may further be terminated, at the option of the
Corporation, upon ten days' prior written notice, for "cause" (as hereinafter
defined).
D. In the event of the Consultant's death during the Consulting Term, the
Consulting Term shall terminate immediately and the Consultant's legal
representatives shall be entitled to receive his retainer at the rate provided
in Section III up to the last day of the month in which his death shall occur.
E. The Consultant shall have the right, upon at least 60 days' written
notice delivered to the Corporation, to terminate the Consulting Term.
1
<PAGE> 335
SECTION III
A. The Corporation hereby agrees to pay, and the Consultant hereby agrees
to accept, as full compensation for the services to be rendered by him under
Section I hereunder, an annual fee of $150,000, payable in substantially equal
monthly installments in arrears, or in such other installments upon which the
parties hereto shall mutually agree.
B. The Corporation shall reimburse the Consultant for reasonable and
necessary expenses incurred by him on behalf of the Corporation in the
performance of his duties hereunder during the Consulting Term, provided that
such expenses are adequately documented in accordance with the Corporation's
then customary policies. The Consultant shall receive the use of the automobile
heretofore provided to him by IMA, for his activities hereunder (and with a
reasonably similar replacement vehicle at the expiration of the lease therefor).
During the Consulting Term, the Corporation shall furnish to the Consultant
office facilities appropriate to his performance hereunder and secretarial
assistance in connection therewith.
SECTION IV
A. The Consultant shall hold in absolute secrecy and treat confidentially
all Confidential Material (as hereinafter defined), and not disclose, reproduce,
publish, distribute or by any other means disseminate, in whole or in part, any
Confidential Material, except as shall be authorized by the Disclosing Party (as
hereinafter defined). The Consultant shall not in any manner use for his benefit
or for the benefit of others any Confidential Material, except as shall be
authorized by the Disclosing Party.
B. Subsequent to the date hereof and for a period (hereinafter referred to
as the "Covenant Term") expiring at the later of (x) two years after the
termination or expiration of all service rendered by the Consultant to the
Corporation or any of its Affiliates (as hereinafter defined), whether as
employee, consultant, director or otherwise, unless any such termination shall
be effectuated by the Corporation or any Affiliate without "cause" (as
hereinafter defined), or (y) five years after the date of this Agreement, the
Consultant shall not engage, directly or indirectly, whether as principal,
agent, distributor, representative, stockholder or otherwise, in any activities
which are in any way competitive with the business conducted by the Corporation
or any Affiliate thereof, within any territory in which the Corporation or any
Affiliate, directly or indirectly, conducts such business.
C. The Consultant hereby assigns to the Corporation the entire right,
title and interest in and to any and all inventions, trade secrets,
improvements, plans and specifications: (i) which he alone, or in conjunction
with others, may make, conceive or develop; and (ii) which relate to or derive
from any subject matter or problem with respect to which the Consultant shall
have become informed by reason of his relations with the Corporation or any
Affiliate, or to any product or process involved in the business of the
Corporation or any Affiliate.
D. The Consultant further agrees that he will promptly disclose fully to
the Corporation the aforesaid inventions, trade secrets, improvements, plans and
specifications and will at any time render to the Corporation such reasonable
cooperation and assistance (excluding financial assistance) as the Corporation
may deem to be advisable in order to obtain copyrights or patents, as the case
may be, on or otherwise perfect or defend the Corporation's rights in each such
invention, trade secret, improvement, plan or specification, including, but not
limited to, the execution of any and all applications for copyrights or patents,
assignments of copyrights or patents and other instruments in writing which the
Corporation, its officers or attorneys may reasonably deem necessary or
desirable, and the aforesaid obligation shall be binding on the assigns,
executors, administrators and other legal representatives of the Receiving
Party.
E. For purposes of this Agreement: (i) "Confidential Material" shall mean
any and all information furnished to the Consultant, whether before or after the
date hereof, by the Corporation, any Affiliate, or any of their respective
licensees, or any of their respective employees, directors, agents or
representatives (each herein referred to as a "Disclosing Party"), or acquired,
received, developed or learned by the Consultant in the course of his relations
with any Disclosing Party or relating to the business and affairs of the
Corporation or any Affiliate, or any licensee thereof, or to any product or
process involved in the business of the
2
<PAGE> 336
Corporation or any Affiliate, or the proprietary plans, policies, business or
affairs of any Disclosing Party; provided, however, that the term "Confidential
Material" shall not include information which:
(x) becomes or has become generally available to the public other
than as a result of a disclosure by the Consultant;
(y) was available to the Consultant on a non-confidential basis prior
to its disclosure to the Consultant by the Disclosing Party; or
(z) becomes available to the Consultant on a non-confidential basis
from a source other than the Disclosing Party, provided that such source is
not bound by a confidentiality agreement with the Disclosing Party;
(ii) "Affiliate" shall mean any person or entity directly or indirectly
controlled by the Corporation; and (iii) "cause" shall mean the Consultant's
neglect of duties, breach of his consulting or other relationship with the
Corporation , conflict of interest, or refusal to follow directives of the
Corporation, in each case (if such matter is susceptible of correction) if not
corrected within ten days after written notice thereof by the Corporation to the
Consultant (or if such correction may not reasonably be completed within such
period, if diligent efforts to effectuate such correction shall not have been
initiated within such period and continued through and completed within 30 days
of such notice); or conviction of a crime.
F. In view of the irreparable harm and damage which would be incurred by
the Corporation or any Affiliate, or any other Disclosing Party, in the event of
any violation by the Consultant of any of the provisions hereof, the Consultant
hereby consents and agrees that, if he violates any such provisions, the
Corporation or any Affiliate, or (with respect to such secrecy or non-use
obligations) such other Disclosing Party, shall be entitled to an injunction or
similar equitable relief to be issued by any court of competent jurisdiction
restraining the undersigned from committing or continuing any such violation.
SECTION V
The Consultant hereby represents, warrants and covenants that:
A. He is duly authorized to execute and deliver this Agreement and to
perform his covenants and agreements hereunder. When executed and delivered by
him, this Agreement shall constitute his valid and legally binding agreement
enforceable against him in accordance with the terms hereof, except as may be
limited by bankruptcy, insolvency or other laws affecting generally the
enforceability of creditors' rights and by limitations on the availability of
equitable remedies.
B. Neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated herein, will violate any law,
rule, regulation, writ, judgment, injunction, decree, determination, award, or
order of any court or governmental agency or instrumentality, domestic or
foreign, or conflict with or result in any breach of any of the terms of or
constitute a default under or result in the termination or for the creation of
any mortgage, deed of trust, pledge, lien security interest or other charge or
encumbrance of any nature pursuant to the terms of any contract or agreement to
which he is a party or by which he or any of his assets or properties is bound.
3
<PAGE> 337
SECTION VI
A. All notices, requests, instructions or documents hereunder shall be in
writing and delivered personally or sent by registered or express mail, postage
prepaid, as follows:
(i) if to the Consultant:
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
with a copy to:
Thomas Litz, Esq.
Thompson & Mitchell
One Mercantile Center
St. Louis, Missouri 63101
(ii) to the Corporation:
1770 Kirby Parkway
Suite 300
Memphis, Tennessee 38138
with a copy to:
Howard Kailes, Esq.
Krugman, Chapman & Grimshaw
Park 80 West -- Plaza Two
Saddle Brook, New Jersey 07663
or to such other address as either party may designate by written notice to the
other party. If delivered personally, the date on which such notice, request,
instruction or document is delivered shall be the date on which such delivery is
made, and if delivered by mail, the date on which deposited in the mail. Each
notice, request, instruction or document shall bear the date on which it is
delivered.
B. This Agreement is personal as to the Consultant and shall not be
assignable by the Consultant. Subject to the foregoing, all of the terms and
provisions of this Agreement shall be binding upon and shall inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and assigns and legal representatives and (with respect to any
secrecy or non-use obligations) any other Disclosing Party.
C. This Agreement constitutes the complete understanding between the
parties hereto with respect to the transactions contemplated herein, no
statement, representation, warranty or covenant has been made by either party
hereto except as expressly set forth herein and therein, and no modification
hereof shall be effective unless in writing and signed by a party against which
it is sought to be enforced.
D. This Agreement shall be governed by and construed in accordance with
the laws of the State of Tennessee applicable in the case of agreements made and
to be performed entirely within such State.
E. It is the intention of the Consultant and the Corporation that the
provisions of this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies of each jurisdiction in which enforcement is
sought, but that the unenforceability of any provisions of this Agreement shall
not render unenforceable, or impair, the remainder of this Agreement.
Accordingly, if any provision hereof is determined to be invalid or
unenforceable, either in whole or in part, this Agreement shall be deemed
amended to delete or modify, as necessary, the offending provision and to alter
the remainder of this Agreement in order to render it valid and enforceable.
4
<PAGE> 338
F. This Agreement may be executed in counterparts, each of which shall be
deemed an original, but all of which, taken together, shall constitute one and
the same instrument.
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of the date first above written.
INSITUFORM TECHNOLOGIES, INC.
By
CONSULTANT:
Jerome Kalishman
5
<PAGE> 339
ANNEX B
Investment Banking Group
World Financial Center
North Tower
New York, New York 10281-1330
212 449-1000
MERRILL LYNCH
September 15, 1995
Board of Directors
Insituform Technologies, Inc.
1770 Kirby Parkway -- Suite 300
Memphis, Tennessee 38138
Gentlemen:
Insituform Technologies, Inc. (the "Company"), ITI Acquisition Corp., a
wholly-owned subsidiary of the Company (the "ITI Sub"), and Insituform
Mid-America, Inc. (the "Subject Company") have entered into an Agreement and
Plan of Merger dated as of May 23, 1995 (the "Agreement") pursuant to which the
Subject Company will be merged with ITI Sub in a transaction (the "Merger") in
which each share of the Subject Company's class A common stock, par value $0.01
per share (the "Shares"), will be converted into the right to receive 1.15
shares of the class A common stock of the Company, par value $0.01 per share
(the "Company Shares") subsequent to the conversion into Shares of all of the
outstanding shares of the Subject Company's class B common stock, par value
$0.01 per share. The Merger is subject, among other things, to approval by the
shareholders of the Company.
You have asked us whether, in our opinion, the proposed consideration to be
paid by the Company pursuant to the Merger is fair to the Company from a
financial point of view.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed the Subject Company's Annual Reports, Forms 10-K and
related financial information for the five fiscal years ended September 30,
1994 and the Subject Company's Forms 10-Q and the related unaudited
financial information for the quarterly periods ending December 31, 1994,
March 31, 1995 and June 30, 1995;
(2) Reviewed the Company's Annual Reports, Forms 10-K and related
financial information for the five fiscal years ended December 31, 1994,
and the Company's Form 10-Q and the related unaudited financial information
for the quarterly periods ended March 31, 1995 and June 30, 1995;
(3) Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets and prospects of the
Subject Company and the Company, furnished to us by the Subject Company and
the Company, respectively.
(4) Conducted discussions with members of senior management of the
Subject Company and the Company concerning their respective businesses and
prospects;
(5) Reviewed certain information furnished to us by the Company and
conducted discussions with members of senior management of the Subject
Company and the Company concerning potential synergies to be realized as a
result of the Merger;
(6) Reviewed the historical market prices and trading activity for the
Shares and the Company Shares;
1
<PAGE> 340
(7) Considered the pro forma effect of the merger on the Company's
capitalization ratios and earnings, cash flow and book value per share;
(8) Reviewed the Agreement; and
(9) Reviewed such other financial studies and analyses and performed
such other investigations and took into account such other matters as we
deemed necessary including our assessment of general economic, market and
monetary conditions.
In preparing our opinion, we have relied on the accuracy and completeness
of all information supplied or otherwise made available to us by the Subject
Company and the Company, and we have not independently verified such information
or undertaken an independent appraisal or evaluation of the assets or
liabilities of the Subject Company or the Company. With respect to the financial
forecasts and estimates of operating efficiencies and potential synergies
expected to result from the Merger furnished by the Subject Company and the
Company, we have assumed that they have been reasonably prepared and reflect the
best currently available estimates and judgment of the Subject Company's or the
Company's management as to the expected future financial performance of the
Subject Company or the Company, as the case may be.
On the basis of, and subject to the foregoing, we are of the opinion that
the proposed consideration to be paid by the Company pursuant to the Merger is
fair to the Company from a financial point of view.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
2
<PAGE> 341
ANNEX C
SCHRODER WERTHEIM & CO. INCORPORATED
September 15, 1995
The Board of Directors
Insituform Mid-America, Inc.
17988 Edison Avenue
Chesterfield, MO 63005-3700
Members of the Board:
We understand that, pursuant to the terms and conditions set forth in the
Agreement and Plan of Merger, dated as of May 23, 1995, among Insituform
Technologies, Inc. ("ITT"), ITI Acquisition Corp. and Insituform Mid-America,
Inc. ("IMA" or the "Company") (the "Merger Agreement"), IMA is contemplating a
merger with ITI (the "Transaction"). Upon consummation of the Transaction, IMA
will become a wholly-owned subsidiary of ITI.
The terms of the Merger Agreement provide, among other things, that IMA's Class
A and Class B Common Stockholders (collectively "IMA's Common Stockholders")
would receive 1.15 shares of ITI Common Stock (the "Exchange Ratio") for each of
the 8,330,303 and 2,472,985 currently outstanding shares of IMA Class A and
Class B Common Stock, respectively.
You have requested that Schroder Wertheim & Co. Incorporated ("Schroder
Wertheim") render an opinion (the "Opinion"), as investment bankers, as to the
fairness, from a financial point of view, of the Exchange Ratio to be received
by IMA's Common Stockholders. It is understood that (i) the Opinion shall be
used by the Company solely in connection with its consideration of the
Transaction and (ii) the Company will not furnish the Opinion or any other
material prepared by Schroder Wertheim (including this letter) to any other
person or persons or use or refer to the Opinion or this letter for any other
purposes without Schroder Wertheim's prior written approval; provided, however,
that the Company may publish the Opinion in its entirety in any proxy statement
or similar documents distributed to its stockholders in connection with the
Transaction.
Schroder Wertheim, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. Schroder Wertheim acted as financial advisor to
IMA regarding the Company's negotiations with ITI.
In connection with the Opinion set forth herein, we have, among other things:
(i) reviewed the Agreement and Plan of Merger among ITI, ITI Acquisition Corp.
and IMA dated as of May 23, 1995;
(ii) reviewed the audited financial statements of the following entities: (a)
IMA for fiscal years ended September 30, 1990 through 1994, and (b) ITI
for fiscal years ended December 31, 1990 through 1994;
(iii) reviewed the Form 10-Q for IMA for the three month period ended December
31, 1994 and 1993, the Form 10-Q for IMA for the three month period ended
March 31, 1995 and 1994 and the Form 10-Q for IMA for the three month
period ended June 30, 1995 and 1994;
(iv) reviewed the Form 10-Q for ITI for the three month period ended March 31,
1995 and 1994 and the Form 10-Q for ITI for the three month period ended
June 30, 1995 and 1994;
(v) reviewed the Form 8-K for IMA and ITI for the period January 1, 1994 to
September 6, 1995;
1
<PAGE> 342
(vi) reviewed and discussed, with the management of IMA, certain financial
information prepared by management, including the historical results for
fiscal years 1990 through 1994, the results for the nine months ended June
30, 1995, IMA's projections for 1995 to 1999 and the current financial
condition, earnings, assets and business prospects of IMA;
(vii) reviewed and discussed, with the management of ITI, certain financial
information prepared by management, including the historical results for
fiscal years 1990 through 1994, the results for the six months ended June
30, 1995, ITI's projections for 1995 to 1999 and the current financial
condition, earnings, assets and business prospects of ITI;
(viii) performed a relative contribution analysis;
(ix) performed various valuation analyses, as deemed appropriate, of IMA using
generally accepted analytical methodologies, including: (i) the
application of the public trading multiples of comparable companies to the
financial results of IMA, (ii) the application of the multiples reflected
in recent mergers and acquisitions for comparable businesses to the
financial results of IMA and (iii) a discounted cash flow analysis of
IMA's financial forecasts;
(x) reviewed IMA's and ITI's stock price performance and trading volume;
(xi) reviewed research reports and news articles concerning IMA and ITI; and
(xii) performed such other financial studies, analyses, inquiries and
investigations as we deemed appropriate.
In rendering the Opinion, we have relied upon the accuracy and completeness of
all information supplied or otherwise made available to us by IMA or ITI or
obtained by us from other sources, and we have not assumed any responsibility
for independently verifying such information, undertaken an independent
appraisal of the assets or liabilities (contingent or otherwise) of IMA or ITI,
or been furnished with any such appraisals. With respect to financial forecasts
for IMA and ITI, we have been advised by both IMA and ITI, respectively, and we
have assumed, without independent investigation, that they have been reasonably
prepared and reflect the best currently available estimates and judgment as to
the expected future financial performance of each company.
Our opinion, as set forth herein, relates to the relative values of IMA and ITI.
We are not expressing any opinion as to what the value of the ITI common stock
actually will be when issued to IMA stockholders pursuant to the Transaction or
the price at which ITI common stock will trade or otherwise be transferable
subsequent to the Transaction.
The Opinion is necessarily based upon financial, economic, market and other
conditions as they exist, and the information made available to us, as of the
date hereof. We disclaim any undertaking or obligation to advise any person of
any change in any fact or matter affecting the Opinion which may come or be
brought to our attention after the date of the Opinion.
Our opinion is directed to the Board of Directors of IMA and does not constitute
a recommendation to any IMA Common Stockholder as to how such stockholder should
vote regarding the Transaction. The Opinion relates solely to the question of
the fairness, from a financial point of view, to IMA's Common Stockholders of
the Exchange Ratio. Further, we express no opinion herein as to the structure,
terms or effect of any other aspect of the Transaction, including, without
limitation, any effects resulting from any pending or threatened environmental
regulatory action and/or litigation affecting ITI.
Based upon and subject to all the foregoing, we are of the opinion, as
investment bankers, that as of the date hereof, the Exchange Ratio is fair, from
a financial point of view, to IMA's Common Stockholders.
Very truly yours,
SCHRODER WERTHEIM & CO. INCORPORATED
2
<PAGE> 343
ANNEX D
AMENDED AND RESTATED
ARTICLE FOURTH
OF ITI CHARTER
"FOURTH: The corporation shall be authorized to issue forty-two million
(42,000,000) shares, consisting of forty million (40,000,000) Class A Common
shares, par value one cent ($0.01) per share; and two million (2,000,000)
Preferred shares, par value ten cents ($0.10) per share ("Preferred Stock").
The shares of Preferred Stock shall be issued in one or more series
designated by the Board of Directors without further shareholder action and
shall bear such terms and designation as the Board of Directors may fix,
including dividend rates, redemption rights, conversion rights, liquidation
preferences, voting rights (provided that the Board of Directors may designate
that the holders of one or more series of Preferred Stock shall be entitled as a
series to elect one director and the Board of Directors may at its discretion
grant the holders of one or more series of the corporation's shares of Preferred
Stock the right to elect additional directors in the event that dividends on
such series shall be in arrears) and such other terms as the Board of Directors
shall determine. Any shares of Preferred Stock reacquired by the corporation may
be reissued without further shareholder approval."
1
<PAGE> 344
ANNEX E
AMENDED AND RESTATED
ARTICLE SIXTH
OF ITI CHARTER
"SIXTH: The following provisions are inserted for the management of the
business and for the conduct of the affairs of the corporation, and for further
definition, limitation and regulation of the powers of the corporation and of
its directors and shareholders:
(1) The number of directors of the corporation shall be such as from
time to time shall be fixed by, or in the manner provided in, the by-laws;
provided, however, that the number of directors of the corporation shall
not be less than six (6) nor shall the number of directors of the
corporation exceed fifteen (15). Election of directors need not be by
ballot unless the by-laws so provide.
(2) Effective as of the Effective Date (as such term is defined in
that certain Agreement, dated July 3, 1992, among the corporation, INA
Acquisition Corp. and Insituform Group Limited), as it may be amended from
time to time (the "Acquisition Agreement"), the Board of Directors shall be
divided into three classes, designated Class I, Class II and Class III, as
nearly equal in number as possible. Members of all three classes will be
appointed on the Effective Date by the Board of Directors in accordance
with the terms of the Acquisition Agreement. The initial term of office of
directors of Class I shall expire at the annual meeting of shareholders in
1993; that of Class II shall expire at the annual meeting of shareholders
in 1994; and that of Class III shall expire at the annual meeting of
shareholders in 1995. At each succeeding annual meeting of shareholders
beginning in 1993, successors to the class of directors whose term expires
at that annual meeting shall be elected for a three-year term. Additional
directorships resulting form an increase in number of directors shall be
appointed among the classes as equally as possible. Vacancies, created from
an increase in the size of the Board of Directors, shall be filled by the
affirmative vote of a majority of the Board of Directors then in office, or
such greater affirmative vote of directors as may be specified from time to
time in the By-laws of the corporation, provided that a quorum is present,
and any other vacancy occurring in the Board of Directors may be filled by
a majority of the directors then in office, which appointments shall be
made in accordance with Section 7.3 of the Agreement and Plan of Merger
dated as of May 23, 1995 among the corporation, ITI Acquisition Corp. and
Insituform Mid-America, Inc. Any additional director of any class elected
to fill a vacancy resulting from an increase in such class shall hold
office for a term that shall coincide with the remaining term of that
class, but in no case will a decrease in the number of directors shorten
the term of any incumbent director. A director shall hold office until the
annual meeting for the year in which his term expires and until his
successor shall be elected and shall qualify, subject, however, to prior
death, resignation, retirement, disqualification or removal from office.
Any director elected to fill a vacancy not resulting from an increase in
the number of directors shall have the same remaining term as that of his
predecessor.
Notwithstanding any provision of this Article SIXTH, whenever the
holders of any one or more series of Preferred Stock issued by the
corporation shall have the right, voting separately by class or series, to
elect directors at an annual or special meeting of shareholders or any
class or series, the election, term of office, filling of vacancies and
other features of such directorships shall be governed by the terms of this
Certificate of Incorporation or the resolution or resolutions adopted by
the Board of Directors pursuant to Article FOURTH hereof applicable
thereto, and such directors so elected shall not be divided into classes
pursuant to this Article SIXTH unless expressly provided by such terms.
(3) The Board of Directors shall have power without the assent or vote
of the shareholders:
(a) to make, alter, amend, change, add to or repeal the by-laws of
the corporation; to fix and vary the amount to be reserved for any
proper purpose; to authorize and cause to be executed mortgages and
liens upon all or any part of the property of the corporation; to
determine the use and
1
<PAGE> 345
disposition of any surplus or net profits; and to fix the times for the
declaration and payment of dividends.
(b) to determine from time to time whether, and to what extent, and
at what times and places, and under what conditions the accounts and
books of the corporation (other than the stock ledger) or any of them,
shall be open to the inspection of the shareholders.
(4) The directors at their discretion may submit any contract or act
for approval or ratification at any annual meeting of shareholders or at
any meeting of the shareholders called for the purpose of considering any
such act or contract, and any contract or act that shall be approved or be
ratified by the vote of the holders of a majority of the stock of the
corporation which is represented in person or by proxy at such meeting and
entitled to vote thereat (provided that a lawful quorum of shareholders be
there represented in person or by proxy) shall be as valid and as binding
upon the corporation and upon all the shareholders as though it had been
approved or ratified by every shareholder of the corporation, whether or
not the contract or act would otherwise be open to legal attack because of
directors' interest, or for any other reason.
(5) In addition to the powers and authorities hereinbefore or by
statute expressly conferred upon them, the directors are hereby empowered
to exercise all such powers and do all such acts and things as may be
exercised or done by the corporation; subject, nevertheless, to the
provisions of the statutes of Delaware, of this certificate, and to any
by-laws from time to time made by the shareholders; provided, however, that
no by-laws so made shall invalidate any prior act of the directors which
would have been valid if such by-law had not been made."
2
<PAGE> 346
INSITUFORM TECHNOLOGIES, INC.
CLASS A COMMON STOCK
The undersigned hereby (1) acknowledges receipt of the notice of the
Annual Meeting of Stockholders of Insituform Technologies, Inc. (the
"Company") to be held at The Hilton-Memphis
P East, 5069 Sanderlin Avenue, Memphis, Tennessee on Thursday, October 12,
R 1995 at 10:00 A.M., local time, and the Joint Proxy Statement/Prospectus in
O connection therewith and (2) appoints James D. Krugman, William Gorham and
X Jean-Paul Richard and each of them his proxies with full power of
Y substitution, for and in the name, place and stead of the undersigned, to
vote and act with respect to all of the shares of Class A Common Stock, $.01
par value, of the Company standing in the name of the undersigned or with
respect to which the undersigned is entitled to vote and act, at the meeting
and at any adjournment thereof, and the undersigned directs that this proxy
be voted as follows:
(a) Proposal to approve an Agreement and Plan of Merger dated as of May 23,
1995 (the "Merger Agreement") among the Company, ITI Acquisition Corp.,
a Delaware corporation and wholly-owned subsidiary of the Company
("ITI Sub"), and Insituform Mid-America, Inc., a Delaware
corporation ("IMA"), and the transactions contemplated thereby,
providing for, among other things, the merger (the "Merger")
into IMA of ITI Sub, as a result of which IMA would become a
wholly-owned subsidiary of the Company, and the consummation of the
transactions contemplated by the Merger Agreement, including the
conversion of each share of Class A Common Stock, $.01 par value, of IMA
into the right to receive 1.15 shares of Common Stock, $.01 par value,
of the Company subsequent to conversion into IMA Class A Common Stock,
in accordance with its terms, of all outstanding shares of Class B
Common Stock, $.01 par value, of IMA.
/ / FOR / / AGAINST / / ABSTAIN
(b) Proposal to approve an amendment of the Certificate of Incorporation of
the Company, effective contemporaneously with the consummation of the
Merger, to increase the number of authorized shares of Common Stock of
the Company from 25,000,000 shares to 40,000,000 shares.
/ / FOR / / AGAINST / / ABSTAIN
(c) Proposal to approve an amendment of the Certificate of Incorporation of
the Company, effective contemporaneously with the consummation of the
Merger, to provide for the filling of vacancies on the Company's Board
of Directors as contemplated by Section 7.3 of the Merger Agreement.
/ / FOR / / AGAINST / / ABSTAIN
(d) Election of Class III Directors:
<TABLE>
<S> <C>
/ / FOR all Class III nominees listed below (except as marked to the contrary below). / / WITHHOLD AUTHORITY to vote for all
nominees listed below.
</TABLE>
BRIAN CHANDLER, JAMES D. KRUGMAN, JEAN-PAUL RICHARD AND
RUSSELL B. WIGHT, JR.
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE AS
A CLASS III DIRECTOR, WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED
BELOW.)
----------------------------------------------------------------------------
(e) Proposal to authorize the Board of Directors of the Company to adjourn
the Annual Meeting of Stockholders to permit the further solicitation of
proxies, if necessary.
/ / FOR / / AGAINST / / ABSTAIN
(Continued and to be signed on reverse side)
(Continued from other side)
(f) In the discretion of the proxies on any other matter that may properly
come before the meeting or any adjournment thereof.
THIS PROXY WILL BE VOTED AS SPECIFIED ON THE REVERSE SIDE. IF NO
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR THE MATTERS SPECIFICALLY
REFERRED TO ON THE REVERSE SIDE.
If more than one of the proxies named above shall be present in person or by
substitute at the meeting or any adjournment thereof, all of the proxies so
present and voting, either in person or by substitute, shall exercise all of the
proxies hereby given.
The undersigned hereby revokes any proxy or proxies heretofore given to vote
upon or act with respect to such stock and hereby ratifies and confirms all that
the proxies so present and voting, their substitutes or any of them, may
lawfully do by virtue hereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY
Dated:
--------------------------------
--------------------------------
Please date this proxy and sign
your name EXACTLY as it appears
herein. Where there is more than
one owner, each should sign.
When signing as an attorney,
administrator, executor,
guardian or trustee, please add
your title as such. If executed
by a corporation, the proxy
should be signed by a duly
authorized officer.
NO POSTAGE IS REQUIRED.
<PAGE> 347
INSITUFORM MID-AMERICA, INC.
CLASS A COMMON STOCK
P The undersigned hereby (1) acknowledges receipt of the notice of the
Special Meeting of Stockholders of Insituform Mid-America, Inc. (the
"Company") to be held at the Sheraton West Port Plaza Hotel, 900 West Port
R Plaza, St. Louis, Missouri on Thursday, October 12, 1995 at 10:00 A.M.,
local time, and the Joint Proxy Statement/Prospectus in connection
therewith and (2) appoints Jerome Kalishman, Robert W. Affholder and Joseph
O F. Olson and each of them his proxies with full power of substitution, for
and in the name, place and stead of the undersigned, to vote and act with
respect to all of the shares of Class A Common Stock, $.01 par value, of
X the Company standing in the name of the undersigned or with respect to
which the undersigned is entitled to vote and act, at the meeting and at
any adjournment thereof, and the undersigned directs that this proxy be
Y voted as follows:
(a) Proposal to approve an Agreement and Plan of Merger dated as of May 23,
1995 (the "Merger Agreement") among the Company, Insituform
Technologies, Inc., a Delaware company ("ITI"), and ITI Acquisition
Corp., a Delaware corporation and wholly-owned subsidiary of ITI ("ITI
Sub"), and the transactions contemplated thereby, providing for, among
other things, the merger (the "Merger") into the Company of ITI Sub, as
a result of which the Company would become a wholly-owned subsidiary of
ITI, and the consummation of the transactions contemplated by the
Merger Agreement, including the conversion of each share of Class A
Common Stock, $.01 par value, of the Company into the right to receive
1.15 shares of Common Stock, $.01 par value, of ITI subsequent to
conversion into Class A Common Stock of the Company, in accordance with
its terms, of all outstanding shares of Class B Common Stock, $.01 par
value, of the Company.
/ / FOR / / AGAINST / / ABSTAIN
(b) Proposal to authorize the Board of Directors of the Company to adjourn
the Special Meeting of Stockholders to permit the further solicitation
of proxies, if necessary.
/ / FOR / / AGAINST / / ABSTAIN
---------------------------------------------------------------------------
(c) In the discretion of the proxies on any other matter that may properly
come before the meeting or any adjournment thereof.
(Continued and to be signed on reverse side)
(Continued from other side)
THIS PROXY WILL BE VOTED AS SPECIFIED ON THE REVERSE SIDE. IF NO
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR THE MATTERS SPECIFICALLY
REFERRED TO ON THE REVERSE SIDE.
If more than one of the proxies named above shall be present in person or by
substitute at the meeting or any adjournment thereof, all of the proxies so
present and voting, either in person or by substitute, shall exercise all of the
proxies hereby given.
The undersigned hereby revokes any proxy or proxies heretofore given to vote
upon or act with respect to such stock and hereby ratifies and confirms all that
the proxies so present and voting, their substitutes or any of them, may
lawfully do by virtue hereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY
Dated:
--------------------------------
--------------------------------
--------------------------------
Please date this proxy and sign
your name EXACTLY as it appears
herein. Where there is more than
one owner, each should sign.
When signing as an attorney,
administrator, executor,
guardian or trustee, please add
your title as such. If executed
by a corporation, the proxy
should be signed by a duly
authorized officer.
NO POSTAGE IS REQUIRED.
<PAGE> 348
INSITUFORM MID-AMERICA, INC.
CLASS B COMMON STOCK
P The undersigned hereby (1) acknowledges receipt of the notice of the
Special Meeting of Stockholders of Insituform Mid-America, Inc. (the
"Company") to be held at the Sheraton West Port Plaza Hotel, 900 West Port
R Plaza, St. Louis, Missouri on Thursday, October 12, 1995 at 10:00 A.M.,
local time, and the Joint Proxy Statement/Prospectus in connection
therewith and (2) appoints Jerome Kalishman, Robert W. Affholder and
O Joseph F. Olson and each of them his proxies with full power of
substitution, for and in the name, place and stead of the undersigned, to
vote and act with respect to all of the shares of Class B Common Stock,
X $.01 par value, of the Company standing in the name of the undersigned or
with respect to which the undersigned is entitled to vote and act, at the
meeting and at any adjournment thereof, and the undersigned directs that
Y this proxy be voted as follows:
(a) Proposal to approve an Agreement and Plan of Merger dated as of May 23,
1995 (the "Merger Agreement") among the Company, Insituform
Technologies, Inc., a Delaware company ("ITI"), and ITI Acquisition
Corp., a Delaware corporation and wholly-owned subsidiary of ITI ("ITI
Sub"), and the transactions contemplated thereby, providing for, among
other things, the merger (the "Merger") into the Company of ITI Sub, as
a result of which the Company would become a wholly-owned subsidiary of
ITI, and the consummation of the transactions contemplated by the
Merger Agreement, including the conversion of each share of Class B
Common Stock, $.01 par value, of the Company into the right to receive
1.15 shares of Common Stock, $.01 par value, of ITI subsequent to
conversion into Class B Common Stock of the Company, in accordance with
its terms, of all outstanding shares of Class B Common Stock, $.01 par
value, of the Company.
/ / FOR / / AGAINST / / ABSTAIN
(b) Proposal to authorize the Board of Directors of the Company to adjourn
the Special Meeting of Stockholders to permit the further solicitation
of proxies, if necessary.
/ / FOR / / AGAINST / / ABSTAIN
---------------------------------------------------------------------------
(c) In the discretion of the proxies on any other matter that may properly
come before the meeting or any adjournment thereof.
(Continued and to be signed on reverse side)
(Continued from other side)
THIS PROXY WILL BE VOTED AS SPECIFIED ON THE REVERSE SIDE. IF NO
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR THE MATTERS SPECIFICALLY
REFERRED TO ON THE REVERSE SIDE.
If more than one of the proxies named above shall be present in person or by
substitute at the meeting or any adjournment thereof, all of the proxies so
present and voting, either in person or by substitute, shall exercise all of the
proxies hereby given.
The undersigned hereby revokes any proxy or proxies heretofore given to vote
upon or act with respect to such stock and hereby ratifies and confirms all that
the proxies so present and voting, their substitutes or any of them, may
lawfully do by virtue hereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY
Dated:
--------------------------------
--------------------------------
--------------------------------
Please date this proxy and sign
your name EXACTLY as it appears
herein. Where there is more than
one owner, each should sign.
When signing as an attorney,
administrator, executor,
guardian or trustee, please add
your title as such. If executed
by a corporation, the proxy
should be signed by a duly
authorized officer.
NO POSTAGE IS REQUIRED.
