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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
Commission file number 0-10786
INSITUFORM TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3032158
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
702 SPIRIT 40 PARK DRIVE
CHESTERFIELD, MISSOURI 63005
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 636-530-8000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which reported
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Class A Common Shares, $.01 par value The Nasdaq Stock Market
Preferred Stock Purchase Rights The Nasdaq Stock Market
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes [X] No [ ]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of June 30, 2003: $374,456,034
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date: Class A common shares, $.01 par
value, as of March 1, 2004................................... 26,472,317 shares
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DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the documents, all or portions of which are incorporated by
reference herein, and the part of the Form 10-K into which the document is
incorporated: Proxy Statement to be filed with respect to the 2004 Annual
Meeting of Stockholders-Part III.
PART I
Item 1. Business
GENERAL
Insituform Technologies, Inc. (the "Company" or "Insituform
Technologies") is a worldwide company specializing in the use of trenchless
technologies to rehabilitate, replace, maintain and install underground pipes.
The Company uses a variety of trenchless technologies. The Insituform(R)
cured-in-place-pipe process (the "Insituform CIPP Process") contributed
approximately 65.5% of the Company's revenues during the Company's most recent
fiscal year.
The Company was incorporated in Delaware in 1980, under the name
Insituform of North America, Inc. The Company was originally formed to act as
the exclusive licensee of the Insituform CIPP Process in most of the United
States. When the Company acquired its licensor in 1992, the name of the Company
was changed to Insituform Technologies, Inc. As a result of its successive
licensee acquisitions, the Company's business model has evolved from licensing
technology and manufacturing materials to performing the entire Insituform CIPP
Process and other trenchless technologies itself.
Effective November 1, 2003, the Company purchased its remaining
interest in Ka-Te Insituform AG ("Ka-Te Insituform") for approximately $2.2
million. Net of related party debt and shared accrued employee liabilities, cash
paid by the Company was $0.8 million. Ka-Te Insituform was the Company's
licensee of the Insituform CIPP Process in Switzerland, Liechtenstein and
Voralberg, Austria. Ka-Te Insituform had approximately $1.8 million of revenues
after the acquisition in 2003.
Effective September 5, 2003, the Company acquired the business and
certain assets of Insituform East, Inc. ("East") for $5.5 million. East was the
final remaining independent licensee of the Insituform CIPP Process and
NuPipe(R) fold and form process (the "NuPipe Process") in North America. Certain
selected assets such as equipment, inventory, backlog, licenses and an option to
purchase certain additional assets were included in the acquisition. The Company
exercised its option to purchase additional assets from East for $0.6 million.
Both the original purchase and the subsequent purchase of assets were paid in
cash. The purchase price has been allocated to assets based on their respective
fair values and resulted in intangible assets of $4.0 million, including
licenses, purchased backlog and customer relationships. The operation of assets
acquired from East generated $2.7 million of revenues after the acquisition in
2003.
In July 2003, the Company purchased the remaining third party minority
interest in Video Injection S.A. ("Video Injection"). The purchase price was
$0.5 million and resulted in $0.3 million of additional goodwill.
In June 2003, the Company completed the acquisition of the business of
Sewer Services, Ltd. ("Sewer Services"). The acquisition, with a price of $0.4
million, resulted in an increase of $0.1 million in goodwill. Sewer Services had
revenues of $2.5 million after the acquisition in 2003.
Effective May 1, 2002, the Company acquired the business and certain
assets and liabilities of Elmore Pipe Jacking, Inc. ("Elmore"), a tunneling and
pipe jacking provider operating primarily in the western United States, for
approximately $12.5 million. The Elmore division, which is part of the tunneling
segment, had approximately $15.2 million in revenues in 2003 and $20.7 million
in revenues after the acquisition in 2002.
In February 2001, the Company acquired Kinsel Industries, Inc.
("Kinsel"), a trans-regional provider of pipebursting and other sewer
rehabilitation services, for approximately $80.0 million. In 2000,
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Kinsel had total revenues of approximately $100 million, which included
approximately $18 million from its wastewater treatment plant operations,
approximately $32 million from trenchless pipe rehabilitation services and some
open-cut pipe construction, and approximately $50 million from highway, bridge,
airport and commercial construction. During 2001, the Company determined that
the Kinsel wastewater treatment plant operations and the Kinsel highway
construction and maintenance operations did not fit the Company's business
strategy, and classified these operations as discontinued. In February 2002
(with a January 2002 effective date), the Company closed the sale of Kinsel's
wastewater treatment plant operations and recorded an immaterial loss on the
sale. The Company closed the sale of Kinsel's highway construction operations in
September 2002 with a pre-tax gain of $1.5 million. In October 2002, the Company
closed the sale of Kinsel's highway maintenance operations with no material gain
or loss recorded on the sale. At December 31, 2003, substantially all
discontinued operations have been completed.
As used in this Annual Report on Form 10-K, the terms "Company" and
"Insituform Technologies" refer to the Company and, unless the context otherwise
requires, its direct and indirect wholly-owned subsidiaries. For certain
information concerning the Company by industry segment and by each geographic
area, see Note 15 of the Notes to the Company's Consolidated Financial
Statements included in response to "Item 15. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K," which is incorporated herein by reference.
The Company's website is www.insituform.com. The Company makes
available on this website under "Investor Relations - SEC," free of charge, its
annual report on Form 10-K, quarterly reports on Form 10-Q and current reports
on Form 8-K (and amendments to those reports) as soon as reasonably practicable
after the Company electronically files such material with, or furnishes it to,
the Securities and Exchange Commission. In addition, the Company's Code of
Ethics for its Chief Executive Officer, Chief Financial Officer and senior
financial employees, its Business Code of Conduct applicable to its officers,
directors and employees, and its Board committee charters are available, free of
charge, on this website. These documents will be made available, free of charge,
to any stockholder requesting them.
TECHNOLOGIES
Pipeline System Rehabilitation
The Insituform CIPP Process for the rehabilitation of sewers,
pipelines and other conduits utilizes a custom-manufactured
tube, or liner, made of a synthetic fiber. After the tube is
saturated (impregnated) with a thermosetting resin mixture, it
is installed in the host pipe by various processes and the
resin is then hardened, usually by heating it by various
means, forming a new rigid pipe within a pipe.
Pipebursting is a trenchless method for replacing deteriorated
or undersized pipelines. A bursting head is propelled through
the existing pipeline, fracturing the host pipe and displacing
the fragments outward, allowing a new pipe to be pulled in to
replace the old line. Pipes can be replaced size-for-size or
upsized.
Microtunneling is a trenchless method of drilling a new tunnel
from surface operated equipment. Microtunneling is typically
used for gravity sewers at depths greater than 15 feet, in
congested areas, where unstable ground conditions exist, where
construction is below the water table, or where contamination
zones are present.
Sliplining is a method used to push or pull a new pipeline
into an old one. With segmented sliplining, short segments of
pipe are joined to form the new pipe. For gravity sewer
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rehabilitation, these short segments can often be joined in a
manhole or access structure, eliminating the need for a large
pulling pit.
The Insituform SP(TM) (Structural Panels) Process uses a
proprietary product to rehabilitate large diameter sanitary or
storm sewers. A proprietary process is used to construct
fiberglass reinforced panels to custom size and thickness. The
panels are individually placed in the sewer and the seams are
sealed.
See "Patents and Licenses" below for information concerning
these technologies and the Company's NuPipe Process and
Thermopipe(R) process (the "Thermopipe Process"), which were
not material to the Company's results of operations during the
year ended December 31, 2003.
Tunneling
Tunneling typically encompasses the construction of man-entry sized
pipelines with access through vertical shafts. From the vertical shaft, a tunnel
is constructed using a steerable, locally-controlled tunnel boring machine. Pipe
is typically installed after the tunnel is constructed.
Tite Liner(R) Process
The Company's Tite Liner(R) process (the "Tite Liner Process") is a
method of lining new and existing pipe with a corrosion and abrasion resistant
polyethylene pipe.
REHABILITATION ACTIVITIES
The Company's rehabilitation activities are conducted principally
through installation and other construction operations performed directly by the
Company or through wholly-owned and, in some cases, majority-owned,
subsidiaries. In those areas of the world in which the Company's management
believes it would not be desirable for the Company to capitalize on its
trenchless processes directly, the Company has granted licenses to unaffiliated
companies. As described under "Ownership Interests in Licensees" below, the
Company has also entered into joint ventures from time to time to capitalize on
its trenchless rehabilitation processes. Under these contractual joint venture
relationships, work is bid by the joint venture entity and subcontracted to the
joint venture partners or to third parties. The joint venture partners are
primarily responsible for their subcontracted work, but both joint venture
partners are liable to the customer for all of the work. Revenue and associated
costs are recorded using percentage-of-completion accounting for the Company's
subcontracted portion of the total contract only.
The Company's principal rehabilitation activities are conducted in
North America directly by the Company or through subsidiaries. The Company holds
the Insituform CIPP Process rights for the United States and Canada. In North
America, the Company practices the Insituform CIPP Process throughout the United
States and in Canada. Significant pipebursting rehabilitation activities have
been conducted in the southeastern and western regions of the United States by
the Company and its subsidiary, Kinsel. The Kinsel pipebursting operations have
been transferred to the Company.
North American rehabilitation operations, including research and
development, engineering, training and financial support systems, are
headquartered in Chesterfield, Missouri. Tube manufacturing and processing
facilities for North America were maintained in eight locations, geographically
dispersed throughout the United States and Canada during 2003. During the first
quarter of 2004, the Company closed its facility in Memphis, Tennessee, and
transferred its operations to the Company's existing facilities in Batesville,
Mississippi.
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Outside of North America, the Company conducts Insituform CIPP Process
rehabilitation operations through subsidiaries in the United Kingdom, France,
Spain, the Netherlands, Switzerland and Belgium. Through one of its French
subsidiaries, Video Injection S.A. ("Video Injection"), acquired in 1998, the
Company utilizes multifunctional robotic devices developed by Video Injection in
connection with the inspection and repair of pipelines.
European operations are headquartered in Rueil Malmaison, France, a
suburb of Paris, with principal regional facilities located in the United
Kingdom, the Netherlands, Spain, Belgium, Switzerland and Mitry Mory, France.
The Company conducts tunneling, microtunneling and a range of pipe
system rehabilitation services throughout the United States directly and through
its wholly-owned subsidiaries, Affholder, Inc. ("Affholder") and Kinsel.
Tite Liner Process operations (which offer corrosion and abrasion
protection work) are conducted in the United States through the Company's United
Pipeline Systems division. Worldwide Tite Liner Process operations are
headquartered in the United States. Outside the United States, Tite Liner
Process installation activities are conducted through various operating
subsidiaries, including activities in Chile and Alberta, Canada.
Most of the Company's installation operations are project-oriented
contracts for governmental entities. The contracts are usually obtained through
competitive bidding or negotiations and require performance at a fixed price.
The profitability of these contracts depends heavily upon the competitive
bidding environment, the Company's ability to estimate costs accurately and the
Company's ability to effectively manage and execute project performance. Project
estimates may prove to be inaccurate due to unforeseen conditions or events. A
substantial portion of the work on any given project may be subcontracted out to
third parties at a significantly lower profitability level to the Company than
work conducted directly by it. Also, proper trenchless installation requires
expertise that is acquired on the job and through training. The Company,
therefore, provides ongoing training and appropriate equipment to its field
installation crews.
The overall profitability of the Company's installation operations is
influenced not only by the profitability of specific project contracts, but also
by the volume and timing of projects so that the installation operations are
able to operate at, or near, capacity.
The Company is required to carry insurance and provide bonding in
connection with certain installation projects and, therefore, maintains
comprehensive insurance policies, including workers' compensation, general and
automobile liability, and property coverage. The Company believes that it
presently maintains adequate insurance coverage for all installation activities.
The Company has also arranged bonding capacity for bid, performance and payment
bonds. Typically, the cost of a performance bond is less than approximately 1%
of the contract value. The Company is required to indemnify surety companies for
any payments the sureties are required to make under the bonds.
The Company generally invoices its customers as work is completed.
Under ordinary circumstances, collection from governmental agencies in the
United States is made within 60 to 90 days of billing. In most cases, 5% to 15%
of the contract value is withheld by the owner pending satisfactory completion
of the project.
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LICENSEES
The Company has granted licenses for the Insituform CIPP Process,
covering exclusive and non-exclusive territories, to licensees who provide
pipeline repair and rehabilitation services throughout their respective licensed
territories. At December 31, 2003, the Insituform CIPP Process was licensed to
11 unaffiliated licensees and 13 unaffiliated sublicensees. The licenses
generally grant to the licensee the right to utilize the know-how and the patent
rights (where they exist) relating to the subject process, and to use the
Company's copyrights and trademarks.
The Company's licensees generally are obligated to pay a royalty at a
specified rate, which in many cases is subject to a minimum royalty payment. An
unaffiliated domestic licensee was obligated to pay specified royalty surcharges
on its sales and contracts outside of its licensed territories. As of and
subsequent to September 5, 2003, there were no unaffiliated domestic licensees.
Any improvements or modifications a licensee may make in the subject process
during the term of the license agreement becomes the property of the Company or
are licensed to the Company. Should a licensee fail to meet its royalty
obligations or other material obligations, the Company may terminate the
license. Many licensees, upon prior notice to the Company, may also terminate
the license for any reason. The Company may vary the agreement used with new
licensees according to prevailing conditions.
The Company acts as licensor under arrangements with approved
installers relating to the use of the Thermopipe Process in the United Kingdom
and elsewhere on a non-exclusive basis.
Prior to September 5, 2003, East held six sub-licenses to the
Insituform CIPP Process to operate in the states of Virginia, Delaware,
Maryland, Pennsylvania, Ohio, a portion of Kentucky, West Virginia and the
District of Columbia under the Company's exclusive license to the Insituform
CIPP Process for the entire United States. (The United States rights to the
Insituform CIPP Process are owned by the Company's subsidiary, Insituform
(Netherlands) B.V.) Effective September 5, 2003, the Company acquired the
business and certain assets, including the licenses, of East. East was the final
remaining independent licensee of the Insituform CIPP Process and the NuPipe
Process in North America.
OWNERSHIP INTERESTS IN OPERATING LICENSEES AND PROJECT JOINT VENTURES
The Company, through its subsidiary, Insituform Holdings (UK) Limited,
holds one-half of the equity interest in Insituform Rohrsanierungstechniken
GmbH, the Company's licensee of the Insituform CIPP Process and the NuPipe
Process in Germany. The remaining interest is held by Per Aarsleff A/G, a Danish
contractor ("Per Aarsleff"). The joint venture partners have
rights-of-first-refusal in the event either party determines to divest its
interest.
The Company, through its subsidiary, INA Acquisition Corp., holds
one-half of the equity interest in Italcontrolli-Insituform S.r.l., the
Company's licensee of the Insituform CIPP Process in Italy. The remaining
interest is held by Per Aarsleff. The joint venture partners have
rights-of-first-refusal in the event either party determines to divest its
interest. The Company and Per Aarsleff are in the process of considering a
reorganization of this joint venture, whereby management and ownership would
potentially transfer to Insituform Rohrsanierungstechniken GmbH.
Prior to November 2003, the Company held a 49% joint venture interest
in Ka-Te Insituform, the Company's licensee of the Insituform CIPP Process in
Switzerland, Liechtenstein and Voralberg, Austria. The remaining interest was
held by Ka-Te Holding, AG, an employee of Ka-Te Holding, and an employee of the
joint venture. In November 2003, the Company acquired the remaining shares of
Ka-Te Insituform.
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The Company has entered into several contractual joint ventures in
order to develop joint bids on contracts for its pipeline rehabilitation
business, and for tunneling operations. Typically, the joint venture entity
holds the contract with the owner and subcontracts portions of the work to the
joint venture partners. As part of the subcontracts, the partners usually
provide bonds to the joint venture. The Company could be required to complete
its joint venture partner's portion of the contract if the partner is unable to
complete its portion and a bond is not available. The Company continues to
investigate opportunities for expanding its business through such arrangements.
MARKETING
The marketing of the Company's rehabilitation technologies is focused
primarily on the municipal wastewater markets worldwide, which the Company
expects to remain the largest part of its business for the foreseeable future.
To help shape decision-making at every step, the Company uses a multi-level
sales force structured around target markets and key accounts, focusing on
engineers, consultants, administrators, technical staff and elected officials.
The Company also produces sales literature and presentations, participates in
trade shows, conducts national advertising and executes other marketing programs
for the Company's own sales force and those of unaffiliated licensees. The
Company's unaffiliated licensees are responsible for marketing and sales
activities in their respective territories. See "Licensees" above for a
description of the Company's licensing operations and for a description of
investments in licensees.
The Company offers its Tite Liner Process worldwide to customers to
line new and existing pipelines.
The Company bids on tunneling projects in selected geographical markets
in the United States.
No customer accounted for more than 10% of the Company's consolidated
revenues during the years ended December 31, 2003, 2002 and 2001, respectively.
BACKLOG
Contract Backlog 2003 2002
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(in millions)
Rehabilitation $ 111.8 $ 112.1
Tunneling 89.3 110.0
Tite Liner 7.0 5.1
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Total $ 208.1 $ 227.2
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Contract backlog is management's expectation of revenues to be
generated from received, signed, uncompleted contracts whose cancellation is not
anticipated at the time of reporting. Contract backlog excludes any term
contract amounts for which there is not specific and determinable work released
and projects where the Company has been advised that it is the low bidder, but
not formally awarded the contract.
PRODUCT DEVELOPMENT
The Company, by utilizing its own laboratories and test facilities as
well as outside consulting organizations and academic institutions, continues to
develop improvements to its proprietary processes, including the materials used
and the methods of manufacturing and installing pipe. During the years ended
December 31, 2003, 2002 and 2001, the Company spent approximately $2.0 million,
$2.0 million and $2.3 million, respectively, on research and development related
activities, including engineering.
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MANUFACTURING AND SUPPLIERS
The Company maintains its North American Insituform CIPP Process liner
manufacturing facility in Batesville, Mississippi. An additional facility
located in Memphis, Tennessee, was shut down in the first quarter of 2004. In
2003, the Company spent $5.8 million in the process of making additions,
modifications, upgrades and revisions to its manufacturing facility in
Batesville. Approximately $3.7 million is expected to be spent in the first half
of 2004 to complete this project. In Europe, Insituform Linings Plc.
("Insituform Linings"), a majority-owned subsidiary, manufactures and sells
Insituform CIPP Process liners from its plant located in Wellingborough, United
Kingdom. The Company holds a 75% interest in Insituform Linings, and Per
Aarsleff holds the remainder. These interests are subject to
rights-of-first-refusal held by the Company and Per Aarsleff in the event of
proposed disposition.
Although raw materials used in the Company's Insituform CIPP Process
products are typically available from multiple sources, the Company's historical
practice has been to purchase materials from a limited number of suppliers. The
Company maintains its own felt manufacturing facility at its Insitutube(R)
manufacturing facility in Batesville. Substantially all of its fiber
requirements are purchased from one source, alternate vendors of which the
Company believes are readily available. Although the Company has worked with one
vendor to develop a uniform and standard resin to source substantially all of
its resin requirements in North America, the Company believes that resins are
also readily available from a number of major companies should there be a need
for alternative resin sourcing. The Company believes that the sources of supply
in connection with its Insituform CIPP Process operations are adequate for its
needs.
The Company has investigated various alternatives, but does not
currently have a manufacturing source for its NuPipe Process thermoplastic pipe.
Because the Company has not recently entered into NuPipe Process installation
contracts and it is not required to supply thermoplastic pipe to its NuPipe
licensees, the Company has not experienced a material adverse effect by not
having a manufacturing source for thermoplastic pipe. If the demand for NuPipe
Process products increases, the Company will need to qualify a new manufacturing
source or manufacture NuPipe Process thermoplastic pipe itself. See further
discussion under "Patents and Licenses" below.
The Company has a third party contractual commitment for the
manufacture and supply of Thermopipe Process products to the Company through
2004.
The Company sells Insituform CIPP Process liners and related products
to certain licensees pursuant to fixed-term supply contracts. Under the
arrangements assumed in connection with the acquisition of the Thermopipe
Process and under subsequent arrangements, the Company also furnishes Thermopipe
Process products to its approved installers.
The Company manufactures certain equipment used in its corrosion and
abrasion protection operations.
PATENTS AND LICENSES
As of December 31, 2003, the Company held 62 patents in the United
States relating to the Insituform CIPP Process, the last of which will expire in
2021. As of December 31, 2003, the Company had five patents pending in the
United States that relate to the Insituform CIPP Process.
The Company has obtained patent protection in its principal overseas
markets covering various aspects of the Insituform CIPP Process. 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
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performed and in the climate of the countries in which the work is carried out,
not every licensee uses each patent, and the Company does not necessarily seek
patent protection for all of its inventions in every jurisdiction in which it
does business.
There can be no assurance that the validity of the Company's patents
will not be successfully challenged. The Company's business could be adversely
affected by increased competition upon expiration of the patents or if one or
more of its Insituform CIPP Process patents were adjudicated to be invalid or
inadequate in scope to protect the Company's operations. The Company believes,
however, that, in either case, its long experience with the Insituform CIPP
Process, its continued commitment to support and develop the Insituform CIPP
Process, the strength of its trademarks, and its degree of market penetration,
should enable the Company to continue to compete effectively in the pipeline
rehabilitation market.
The Company holds 12 patents issued in the United States covering
either the NuPipe Process or materials used in connection with the NuPipe
Process. The Company also holds similar NuPipe Process (or related material)
patents in 14 other countries. Due to reduced installation volumes and current
lack of a supplier for NuPipe, the Company reduced the carrying value of its
NuPipe patents and licenses during 2002 in accordance with SFAS 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," which the Company early
adopted in 2001. The NuPipe Process entails the manufacture of a folded
thermoplastic replacement pipe that is heated at the installation site to make
it flexible enough to be inserted into an existing conduit.
The Company holds two patents issued in the United States and nine
patents outside of the United States relating to the Thermopipe Process for
rehabilitating pressurized potable water and other aqueous fluid pipes.
Even though the Company holds a few patents relating to its corrosion
and abrasion protection business, the Company believes that the success of its
Tite Liner Process business, operated through its United Pipeline Systems
division, depends primarily upon its proprietary know-how and its marketing and
sales skills.
The Company held the exclusive rights to use the patents, trademarks
and know-how related to the Paltem-HL system, a process for rehabilitating
pressure pipes, which includes the Paltem-Frepp system, for substantially all of
North America and, on a non-exclusive basis, additional territories in the
eastern hemisphere and Latin America. Under the license, the Company was
required to pay royalties at specified rates on installations and sales of
liners. During the years ended December 31, 2003 and 2002, the Company did not
have any operations under this license. This license is in the process of being
terminated.
The Company's pipebursting operations are performed under a
royalty-bearing, non-exclusive license from Advantica, Inc. The license
terminates upon expiration of the underlying patent, which expires on April 19,
2005. In addition, either party may terminate the license upon six months'
notice and under certain other circumstances. In 2003, the Company paid $1.0
million to Advantica under the license.
COMPETITION
The markets in which the Company operates are highly competitive. Most
of the Company's products, including the Insituform CIPP Process, face direct
competition from competitors offering similar or equivalent products or
services. In addition, customers can select a variety of methods to meet their
pipe installation and rehabilitation needs, including a number of methods the
Company does not offer.
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Most of the Company's installation operations are either
project-oriented or term contracts for governmental entities that are obtained
through competitive bidding or negotiations. Most competitors are local or
regional companies, and may be either specialty trenchless contractors or
general contractors. A few competitors have far greater financial resources than
the Company and, with regard to products other than the cured-in-place pipe
process, may have greater experience than the Company. Therefore, there can be
no assurance as to the success of the Company's trenchless processes in
competition with these companies and alternative technologies for pipeline
rehabilitation.
SEASONALITY
The Company's operations can be affected by severe weather. The effects
of weather are most notable between quarters of any given year. Typically, the
summer months yield the strongest operational results, while the first quarter
is normally weaker due to weather. Unusually severe weather in any area with a
large project, or a significant number of smaller jobs, can cause short-term
anomalies in operational performance. Only the tunneling segment is relatively
immune to weather induced variability in operating results. For the past five
years, seasonal variation in work performed has not had a material effect on the
Company's consolidated results of operations.
EMPLOYEES
As of December 31, 2003, the Company had 2,176 employees. Certain of
the Company's contracting operations are parties to collective bargaining
agreements covering an aggregate of 386 employees. The Company generally
considers its relations with its employees to be good.
GOVERNMENT REGULATION
The Company is required to comply with all applicable United States
federal, state and local, and all foreign, statutes, regulations and ordinances.
In addition, the Company's installation and other operations have to comply with
various relevant occupational safety and health regulations, transportation
regulations, code specifications, permit requirements, and bonding and insurance
requirements, as well as with fire regulations relating to the storage, handling
and transporting of flammable materials. The Company's manufacturing facilities,
as well as its installation operations, are subject to state and national
environmental protection regulations, none of which presently have any material
effect on the Company's capital expenditures, earnings or competitive position
in connection with the Company's present business. However, although the
Company's installation operations have established monitoring programs and
safety procedures relating to its installation activities and to the use of
solvents, further restrictions could be imposed on the manner in which
installation activities are conducted, on equipment used in installation
activities and on the use of solvents or the thermosetting resins used in the
Insituform CIPP Process. The Company believes that it is in material compliance
with environmental and safety laws and regulations applicable to it.
The use of both thermoplastics and thermosetting resin materials in
contact with drinking water is strictly regulated in most countries. In the
United States, a consortium led by NSF International ("NSF"), under arrangements
with the United States Environmental Protection Agency (the "EPA"), establishes
minimum requirements for the control of potential human health effects from
substances added indirectly to water via contact with treatment, storage,
transmission and distribution system components, by defining the maximum
permissible concentration of materials which may be leached from such components
into drinking water, and methods for testing them. In February 1996, the
Paltem-HL and Frepp processes were certified by the NSF for use in drinking
water systems. In April 1997, the Insituform PPL(R) liner was certified by the
NSF for use in drinking water systems, followed in April 1999 by NSF
certification of the Insituform RPP(R) liner for such use. The Thermopipe
product also has NSF approval. The NSF assumes
9
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. Dedicated equipment is needed in connection with use of these
products in drinking water applications. The Company does not expect material
revenues from its proprietary products for drinking water pipe rehabilitation at
least through 2004.
EXECUTIVE OFFICERS
The executive officers of the Company, and their respective ages and
positions with the Company, are as follows:
Age at
Name March 1, 2004 Position with the Company
- ---- ------------- -------------------------
Thomas S. Rooney, Jr. 44 President and Chief Executive Officer
Robert W. Affholder 68 Senior Executive Vice President
Christian G. Farman 45 Vice President - Chief Financial Officer
Thomas A. A. Cook 39 Vice President - General Counsel
Thomas S. Rooney, Jr. has been President of the Company since April
2003, and Chief Executive Officer of the Company since July 2003. From April
2003 to July 2003, Mr. Rooney was the Company's Chief Operating Officer. From
2000 until he joined the Company, Mr. Rooney was Senior Vice President and
Regional Manager for Gilbane Building Company ("Gilbane"). From before 1998
until 2000, Mr. Rooney was Vice President and Regional Manager of Business
Development at Gilbane.
Robert W. Affholder has been Senior Executive Vice President of the
Company since before 1998.
Christian G. Farman has been Vice President and Chief Financial Officer
of the Company since December 2003. From February 2003 to April 2003, Mr. Farman
served as Chief Operating Officer of the National Audubon Society. From prior to
1998 until 1999, Mr. Farman was Vice President and Chief Financial Officer, and
from 1999 to 2001, Executive Vice President and Chief Financial Officer, of
Vivendi North America (previously Anjou International). Mr. Farman joined
Vivendi North America in 1989 as Controller, and was promoted to Vice President
in 1992, Chief Financial Officer in 1995, and Executive Vice President in 1999.
From 1979 to 1989, Mr. Farman was an auditor with Price Waterhouse (now known as
PricewaterhouseCoopers LLP) in New York. Mr. Farman is a certified public
accountant.
Thomas A. A. Cook has been Vice President and General Counsel of the
Company since 2000 and Secretary of the Company since 2001. Prior to joining the
Company, Mr. Cook was a partner in the Corporate/Securities Department at the
law firm of Blackwell Sanders Peper Martin LLP, and before June 1998, was with a
predecessor firm (Peper Martin Jensen Maichel and Hetlage) in the
Corporate/Securities Department.
Item 2. Properties
The Company's executive offices are located in Chesterfield, Missouri,
a suburb of St. Louis, at 702 Spirit 40 Park Drive. The executive offices are
leased from an unaffiliated party through May 31, 2006. The Company owns its
research and development facility and its training facility in Chesterfield.
The Company owns a liner fabrication facility and a contiguous felt
manufacturing facility in Batesville, Mississippi. The Company's recently closed
manufacturing facility in Memphis, Tennessee, is located on land sub-leased from
an unaffiliated entity for an initial term of 40 years expiring on December 31,
2020. The Company is evaluating its options with respect to this property.
Insituform Linings (a
10
majority-owned subsidiary) owns certain premises in Wellingborough, United
Kingdom, where its liner manufacturing facility is located.
The Company owns or leases various operational facilities in the United
States, Canada, Europe and Latin America.
The foregoing facilities are regarded by management as adequate for the
current requirements of the Company's business.
Item 3. Legal Proceedings
In the third quarter of 2002, a Company crew had an accident on an
Insituform CIPP Process project in Des Moines, Iowa. Two workers died and five
workers were injured in the accident. The Company fully cooperated with Iowa's
state OSHA in the investigation of the accident. Iowa OSHA issued a Citation and
Notification of Penalty in connection with the accident, including several
willful citations. Iowa OSHA proposed penalties of $808,250. The Company
challenged Iowa OSHA's findings, and in the fourth quarter of 2003, an
administrative law judge found in favor of Iowa OSHA on some citations, found in
favor of the Company on some citations and combined a number of citations for
purposes of assessing penalties. The administrative law judge reduced the
penalties to $158,000. The Company is vigorously opposing the citations, and
both the Company and Iowa OSHA have appealed the decision to the Iowa Department
of Inspections and Appeals. In 2002, Iowa OSHA referred this matter to the local
county attorney's office for potential criminal investigation. The local county
attorney referred the matter to the State of Iowa Department of Criminal
Investigation.
The Company is involved in certain litigation incidental to the conduct
of its business and affairs. Management does not believe that the outcome of any
such litigation will have a material adverse effect on the financial condition,
results of operations or liquidity of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) The Company's class A common shares, $.01 par value ("Common
Stock"), is traded in the over-the-counter market under the symbol "INSU." The
following table sets forth the range of quarterly high and low sales prices
commencing after December 31, 2001, as reported on The Nasdaq Stock Market.
Quotations represent prices between dealers and do not include retail mark-ups,
mark-downs or commissions.
Period High Low
- -------------------------------------------
2003
First Quarter $ 17.43 $ 12.11
Second Quarter 18.00 12.73
Third Quarter 19.00 14.76
Fourth Quarter 18.34 13.53
11
Period High Low
- -------------------------------------------
2002
First Quarter $ 26.93 $ 19.60
Second Quarter 28.80 17.75
Third Quarter 21.81 13.28
Fourth Quarter 20.18 12.67
As of March 1, 2004, the number of record holders of the Company's
Common Stock was 900.
Holders of Common Stock are entitled to receive dividends as and when
they may be declared by the Company's Board of Directors. The Company has never
paid a cash dividend on the Common Stock. The Company's present policy is to
retain earnings to provide for the operation and expansion of its business.
However, the Company's Board of Directors will review the Company's dividend
policy from time to time and will consider the Company's earnings, financial
condition, cash flows, financing agreements and other relevant factors in making
determinations regarding future dividends, if any. Under the terms of certain
debt arrangements to which the Company is a party, the Company is subject to
certain limitations in paying dividends.
(b) Not applicable.
Item 6. Selected Financial Data
The selected financial data set forth below have been derived from the
Company's consolidated financial statements referred to under "Item 15.
Exhibits, Financial Statement Schedules, and Reports on Form 8-K" of this Annual
Report on Form 10-K, and previously published historical financial statements
not included in this Annual Report on Form 10-K. The selected financial data set
forth below should be read in connection with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements, including the footnotes.
Unaudited
Year Ended December 31,
---------------------------------------------------------------------------
2003(1,4) 2002(1,2,3) 2001(1,2) 2000(1) 1999(1)
---------------------------------------------------------------------------
(in thousands, except per share amounts)
INCOME STATEMENT DATA:
Revenues $ 487,272 $ 480,358 $ 445,310 $ 409,434 $ 339,883
Operating income 21,591 50,183 46,765 62,966 50,669
Income from continuing operations 4,628 28,560 24,940 34,906 25,983
Loss from discontinued operations (1,103) (5,869) (72) - -
Net income 3,525 22,691 24,868 34,906 25,983
Basic earnings per share:
Income from continuing operations 0.17 1.08 0.94 1.41 1.02
Loss from discontinued operations (0.04) (0.22) - - -
Net income 0.13 0.86 0.94 1.41 1.02
Dilutive earnings per share:
Income from continuing operations 0.17 1.07 0.93 1.37 1.00
Loss from discontinued operations (0.04) (0.22) - - -
Net income 0.13 0.85 0.92 1.37 1.00
BALANCE SHEET DATA:
Cash and cash equivalents $ 99,991 $ 75,386 $ 74,649 $ 64,107 $ 68,183
Working capital, net of cash 67,409 48,844 64,070 50,361 51,997
Current assets 277,273 252,651 259,767 201,008 174,372
Property, plant and equipment 75,667 71,579 68,547 70,226 54,188
Total assets 508,360 473,013 463,622 354,974 311,625
12
Unaudited
Year Ended December 31,
---------------------------------------------------------------------------
2003(1,4) 2002(1,2,3) 2001(1,2) 2000(1) 1999(1)
---------------------------------------------------------------------------
(in thousands, except per share amounts)
Current maturities of long-term debt
and line of credit 16,938 49,360 35,218 18,023 3,188
Long-term debt, less current
maturities 114,323 67,014 88,853 98,217 114,954
Total liabilities 227,726 198,965 211,940 187,327 170,314
Total stockholders' equity 279,169 272,618 250,127 165,290 138,603
- --------------------------
(1) The Company has completed various acquisitions that have been accounted for
under the purchase method of accounting, including Insituform
Rioolrenovatietechnieken in 1999, Insituform Metropolitan, Inc. in 2000,
Insituform Belgium N.V. in 2000, Kinsel in 2001, Elmore in 2002, Sewer Services,
Ltd. in 2003, Video Injection (remaining third party interest) in 2003, East in
2003, and Ka-Te Insituform (remaining interest) in 2003.
(2) Results include a pre-tax intangible asset impairment charge of $3.5 million
in 2002 and pre-tax restructuring charges of $2.5 million and $4.1 million in
2002 and 2001, respectively.
(3) Effective January 1, 2002, the Company adopted SFAS 142, "Goodwill and Other
Intangible Assets," and ceased amortizing purchased goodwill.
(4) See Management's Discussion and Analysis of Financial Condition and Results
of Operations - Fourth Quarter and Year-End 2003 Issues.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
EXECUTIVE SUMMARY
Insituform Technologies is a worldwide company specializing in
trenchless technologies to rehabilitate, replace, maintain and install
underground pipes. The Company has three principal operating segments:
rehabilitation, tunneling and Tite Liner. These segments have been determined
based on the types of products sold by each segment, and each is regularly
viewed and evaluated separately. While the Company uses a variety of trenchless
technologies, the Insituform(R) cured-in-place-pipe process (the "Insituform
CIPP Process") contributed 65.5% of its revenues in 2003. This percentage has
been trending downward slightly over the last few years as the Company has
pursued diversification from the addition of complementary businesses,
technologies and techniques. The tunneling segment has grown through organic
growth, combined with the acquisition of Elmore in 2002. In 2003, the tunneling
segment's revenue growth was 16%, and it has grown by 104% over the last two
years.
Revenues are generated by the Company and its subsidiaries operating
principally in the United States, Canada, the United Kingdom, the Netherlands,
France, Belgium, Spain, Switzerland, and Chile, and include product sales and
royalties from several joint ventures in Europe, and unaffiliated licensees and
sub-licensees throughout the world. The United States remains the Company's
single largest market, representing 82.3% of total revenue in 2003. See Note 15
to the Consolidated Financial Statements for additional segment information and
disclosures.
The Company believes the broad underground pipe infrastructure market
is growing and poised for even greater growth, after minimal growth over the
last three years. The Company's existing and new trenchless products serve that
market well. The Company's market presence and penetration are unmatched in the
industry and give the Company strong advantages. Nevertheless, the Company
expects the near-term sales environment to remain challenging with regard to
bidding and pricing. World economic conditions could potentially disrupt and
further soften the market for municipal contracts.
The Company's financial strength also has provided a competitive
advantage, and despite the recent financial results, the Company's balance sheet
and cash flow remain strong. Management has and continues to hold cash
generation by the Company's business units as a primary measure of performance
and success. Strong cash flow is of critical importance as the Company rebuilds
and grows, and
13
management believes that it provides insight for the investors into the
Company's real performance over time.
The Company's financial performance has been challenging for three
years due in part to poor economic conditions and increased competition. There
were also two underperforming acquisitions, Kinsel and Elmore, which impacted
the performance of the Company. In response to all of these factors, the Company
took a series of cost-cutting measures, many of which were necessary and
beneficial, but some of which had unintended adverse consequences, most notably
significant reductions in the sales force and training. In 2003, the retirement
of Anthony W. Hooper as Chief Executive Officer afforded the Board of Directors
an opportunity for a change in the Company's strategic direction, as well as
leadership. In the second quarter of 2003, Thomas S. Rooney, Jr. was appointed
President of the Company to provide a fresh look at how to run the business. In
the third quarter of 2003, Mr. Rooney assumed the role of Chief Executive
Officer as well. In the fourth quarter, Christian G. Farman assumed the role of
Vice President and Chief Financial Officer.
Management has a renewed focus on excellence in all aspects of the
business, and has begun a long-term plan to improve the operations and
profitability of the Company. Management is rebuilding the Company's operations
to develop a strong, reliable platform that increases the predictability of the
Company's business by letting the Company anticipate market trends and avoid
surprises with costs. This platform will improve visibility into the operations
and markets by giving management a better understanding of the various
operational units and cost drivers.
The Company has identified several initiatives that management believes
will reposition the Company to maintain its prominent status in its industry. In
order to accomplish these initiatives, the Company will strategically invest
money over the next two years. These initiatives are designed to accomplish cost
reduction, product innovation, and business growth for the long term.
Specifically, the Company will spend money on enhancing quality control and
safety programs, training, logistics management and sales programs, which will
impact all aspects of the business. In addition, there will be strategic
investments in the areas of product innovation, particularly seeking methods to
drive costs out of the business, to gain competitiveness. Some of the
initiatives are already in the implementation phase, and the Company will
continue to make planned investments to accomplish its goals. All of these
investments will be tempered by the fact that the Company's most recent
financial performance resulted in new debt covenants that place additional
temporary restrictions on the use of cash, which are described more fully later.
The Company expects the implementation of these initiatives to benefit the
financial results in the first quarter of 2005, with the majority of the
benefits becoming apparent later in 2005.
Certain internal control deficiencies and financial statement
adjustments became apparent as the Company closed out 2003. Management extended
its internal reporting timetable in order to address the matters. Management has
also taken the initiative to improve the necessary management and internal
controls to further ensure that timely, quality financial information is
produced. Some of the adjustments recorded at year-end 2003 are one-time items,
and others indicate that there is an increased run rate that the Company needs
to manage, such as periodic insurance costs. These adjustments are described in
further detail below.
The Company's balance sheet is sound and is improving. Debt covenants
have been modified to give some temporary relief for the next five quarters. The
Company's cash generating ability remains strong, and management is confident
that the number of opportunities to improve stockholder value and create a
stronger company are ever increasing.
14
FOURTH QUARTER AND YEAR-END 2003 ISSUES
Key financial data for the fourth quarter of 2003 is as follows ($ in
thousands):
Gross Operating
Gross Profit Operating Income (Loss)
Segment Revenues Profit Margin Income (Loss) Percentage
- ---------------------------------------------------------------------------------------------
Rehabilitation $ 90,983 $ 13,736 15.1% $ (8,028) -8.8%
Tunneling 25,439 2,221 8.7 (337) -1.3
Tite Liner 5,364 1,746 32.6 714 13.3
- ----------------------------------------------------------------------------------------
Total $ 121,786 $ 17,703 14.5% $ (7,651) -6.3%
The following items represent significant adjustments that impacted the
results of operations for the fourth quarter and fiscal year ended December 31,
2003 (in thousands):
Description Pre-Tax After Tax
- ---------------------------------------------------------------------------------------------------
Increase in casualty insurance and healthcare reserves $ (3,650) $ (1,591)
Increase in reserve for potentially uncollectible accounts and claims (1,354) (590)
Write-downs and reserves against certain assets and discontinued
operations (2,569) (1,128)
Tax provision and charges (649) (2,279)
Other charges (800) (349)
------------------------
Total $ (9,022) $ (5,937)
========================
The Company has analyzed the effects of the adjustments detailed above
and determined that the impacts on prior periods were immaterial. While some
adjustments did result from certain conditions evolving over time, they are not
practically attributable to a prior period.
Operational Issues
The fourth quarter of 2003 was a challenging period operationally for
the Company. Coupled with the $5.1 million loss on a single project performed in
Boston, Massachusetts, described below, there were sharp declines in activity
and gross margin in North American rehabilitation from the prior year. Due to
lower market activity with heightening competition, two regions in North
American rehabilitation experienced a gross profit decline of $7.7 million. In
addition, lower activity and depressed margins in the pipebursting and
microtunneling business in the southeast and western United States led to a
decline of $2.8 million in gross profit from fourth quarter 2002. European
rehabilitation improved in terms of gross profit in the fourth quarter of 2003
by over $2.8 million which somewhat offset the other declines in the
rehabilitation segment. The tunneling segment also experienced a decline of
gross profit during the fourth quarter of 2003 of almost $4.0 million. Despite
revenue increasing slightly over fourth quarter 2002, costs were significantly
higher due to lower-margin projects in the current period, along with increases
in insurance costs. In the prior year's fourth quarter, the tunneling segment
benefited by favorable project closeouts. Tite Liner gross profit increased $0.4
million in the fourth quarter of 2003 due primarily to a revenue increase.
Boston Insituform CIPP Process Project
In the fourth quarter of 2003, the Company recorded $5.1 million
(pre-tax) in estimated costs associated with removing and re-installing
approximately 4,500 feet of Insituform CIPP Process liner in Boston,
Massachusetts. The recorded costs are net of $750,000 of insurance recovery
proceeds that are probable of receipt during 2004.
15
In August 2003, the Company began an Insituform CIPP Process
installation in Boston. The $1 million project required the Company to line
5,400 feet of a 109-year-old 36 to 41-inch diameter unusually-shaped hand-laid
rough brick pipe. Many aspects of this project were atypical of the Company's
normal CIPP Process installations. The owner rejected approximately 4,500 feet
of the liner and all proposed repair methods. All rejected liner has been
removed. Approximately 425 feet of liner has been re-installed and appears
acceptable to the owner. The Company is continuing to re-install the remaining
liner portions, which is expected to be completed in April or May 2004.
The Company has a "Contractor Rework" special endorsement to its
primary comprehensive general liability insurance policy. The Company has filed
a claim with its primary insurance carrier, who has informally advised the
Company that it will indemnify the Company under the special endorsement. The
primary coverage is $1 million, less a $250,000 deductible. Because $750,000 of
insurance recovery proceeds from the primary insurance carrier are expected to
be received promptly, they were offset against the total estimated costs
associated with the liner removal and re-installation.
The Company has excess comprehensive general liability insurance
coverage. The excess insurance coverage is in an amount far greater than the
estimated costs associated with the liner removal and re-installation. The
Company believes the "Contractor Rework" special endorsement applies to the
excess insurance coverage, it has already incurred costs in excess of the
primary coverage and it has put its excess carrier on notice. The excess
insurance carrier denied coverage in writing without referencing the "Contractor
Rework" special endorsement, and subsequently indicated that it does not believe
that the "Contractor Rework" special endorsement applies to the excess insurance
coverage.
On March 10, 2004, the Company filed a lawsuit in Massachusetts against
its excess insurance carrier for its failure to acknowledge coverage and to
indemnify the Company for the entire loss in excess of the primary coverage.
Because of the uncertainties in litigation and although the Company is
vigorously pursuing a full recovery of the loss, the Company does not believe
that it is prudent at December 31, 2003 to offset all or any part of the
potential excess carrier insurance recovery proceeds, if any, against the
estimated costs associated with the liner removal and re-installation.
Casualty Insurance and Healthcare Reserves
The $3.7 million pre-tax adjustment to casualty insurance and
healthcare reserves included an adjustment to the insurance deductible claims
reserve of $3.0 million and a $0.7 million adjustment to the health benefits
accrual. The Company increased its insurance deductible claims reserve after
receiving updated actuarial analyses as of December 31, 2003 from the Company's
insurance consultants. The Company initiated a large-deductible plan on its
liability and casualty insurance policies in 2001 and has continued to adjust
its accruals as longer self-insurance history yields better actuarial estimates
of the total liability. The Company believes it was necessary to reserve an
amount sufficient to cover any unreported casualty losses for which the Company
will be liable for the deductible. The latest actuarial estimates received by
the Company indicated an increase in the Company's loss experience in the second
half of 2003. The Company is also self-insured for health benefits for its
employees and reserves an amount to cover unsubmitted claims. During 2003, the
Company experienced rising healthcare costs. Management determined that a higher
reserve was indicated to sufficiently cover unsubmitted claims based on
actuarial data received from one of the Company's insurance consultants in the
fourth quarter of 2003 and increased its healthcare reserves by $0.7 million.
16
Reserve for Potentially Uncollectible Accounts and Claims
The Company recorded $1.4 million in bad debt expense during the fourth
quarter of 2003, of which approximately $0.6 million related to the
rehabilitation segment and $0.8 million related to the tunneling segment. The
accounts receivable aging in the rehabilitation segment continued to deteriorate
in the fourth quarter of 2003. The Company performed a rigorous analysis of
specific accounts receivable by region. This analysis involved both corporate
financial and regional rehabilitation management. Specific identified accounts
whose collectibility was deemed doubtful were reserved, although the Company
will continue to actively pursue collection. The tunneling segment's $0.8
million reserve related to several previously recorded customer claims (from
2002 and early 2003) for which collection at originally expected amounts was no
longer considered probable. Write-downs and Reserves Against Certain Assets and
Discontinued Operations
The Company wrote down certain assets by $2.6 million during the fourth
quarter of 2003. The write-down consisted of $0.8 million in fixed assets, $0.3
million in computer software, and $1.5 million in certain assets related to
discontinued operations.
The Company performed a review of its fixed assets and computer
software. The fixed asset review was conducted on all individual pieces of
machinery and equipment over $50,000 in original value, which covered 85% of the
overall net book value of the Company's machinery and equipment. A
reconciliation of these fixed assets recorded on the general ledger to
supporting detail records and fixed assets on hand resulted in a $0.8 million
reduction in the carrying value of such fixed assets. The Company is planning to
take a complete physical inventory of its fixed assets in 2004, which will
include a review of items below $50,000, representing the remaining 15% of net
book value of machinery and equipment as of December 31, 2003. In addition, the
Company concluded that a component of software was rarely used, was impaired and
should be written off in the amount of $0.3 million.
The $1.5 million reserve against certain assets related to discontinued
operations included approximately $1.1 million of notes receivable received in
the prior year as part of the sale of certain of the Company's discontinued
operations. Given the weakening financial position of the issuer of the notes,
collection of the notes is doubtful. The $1.1 million charge has been reflected
in continuing operations. The Company also recorded an additional charge to
discontinued operations of $0.4 million to adjust the carrying values of
remaining discontinued assets.
Tax Provision and Charges
Certain adjustments were recorded to the Company's income and other tax
reserves at December 31, 2003. Due to continuing losses in the Company's
operations in France and Belgium, it was determined that a full valuation
allowance was necessary primarily relative to the realization of net operating
loss carryforwards, thereby increasing income tax expense by $0.8 million.
In analyzing its tax return to tax provision differences, the Company
determined that additional taxes were required to be provided relative to the
Company's meals and entertainment tax deductions, increasing income tax expense
by $1.0 million. In addition, the Company also determined that increased
accruals were necessary for use tax and fuels tax in certain state
jurisdictions, increasing cost of revenues by $0.6 million and tax expense by
$0.2 million, respectively.
17
Other Charges
Other charges include write-downs of the Company's investment in a
foreign joint venture by $0.8 million due to continuing losses of its
operations and adjustments to the Company's prepaid expense accounts and other
smaller adjustments to reserves and the uninvoiced vouchers accrual which in
the aggregate were offsetting.
Also in the third and fourth quarter of 2003, the Company replaced its
Chief Executive Officer and Chief Financial Officer, respectively. The Vice
President - North America also left the Company during the third quarter of
2003. Severance charges for these positions were $1.6 million, and recruitment
fees for the present Chief Executive Officer and Chief Financial Officer were
$0.3 million. Approximately $0.3 million was incurred in the fourth quarter in
severance and recruiting costs.
Debt Restructuring
The negative results of the fourth quarter of 2003 caused the Company
to be out of compliance with various financial covenants under its debt
agreements which have since been amended so that the Company is in compliance.
See the Liquidity and Capital Resources section for discussion of the amended
debt agreements.
RESULTS OF OPERATIONS
Consolidated
($ IN THOUSANDS) 2003 2002 2001
----------------------------------------------
Revenues $ 487,272 $ 480,358 $ 445,310
Gross Profit 102,658 125,622 124,848
Gross Profit Margin 21.1% 26.2% 28.0%
Selling, General and Administrative 79,733 68,049 66,955
Amortization Expense 1,595 1,433 7,001
Restructuring Charge (261) 2,458 4,127
Impairment Charge - 3,499 -
Operating Income 21,591 50,183 46,765
Operating Income Percentage 4.4% 10.4% 10.5%
2003 Compared to 2002
Consolidated revenues from continuing operations increased 1.4% to
$487.3 million for 2003 compared to 2002 revenues of $480.4 million. Tunneling
revenues increased 15.9% or $13.7 million in 2003, and Tite Liner revenues
increased 25.5% or $4.2 million, but 2003 rehabilitation revenues declined 2.9%
or $11.0 million, compared to 2002. The effects of 2003 and 2002 acquisitions
added $22.2 million of revenues in 2003. Gross profit decreased $23.0 million to
$102.7 million. Gross profit margins decreased from 26.2% to 21.1% in 2003
versus 2002. There were two major North American rehabilitation regions which
performed significantly below historical levels due to heightening competition
and lower pricing along with lower market activity. Revenues and gross profit
fell by $18.8 million and $17.4 million, respectively, from 2002 in these
regions. In addition, as stated earlier, the Company recorded $5.1 million
(pre-tax) in estimated costs associated with removing and reinstalling an
Insituform CIPP Process liner in Boston, Massachusetts. The Company's
pipebursting activities in the southeast United States declined in 2003 due
primarily to the loss of unreleased term contract backlog. The gross profit
decline in this activity was $11.4 million. The tunneling segment's gross profit
declined $6.3 million due primarily to performance issues in projects acquired
from Elmore which carried over from 2002.
18
These projects were completed early in 2003 and did not affect profitability in
the second half of 2003. Growth in the western United States region of $5.4
million contributed positively to gross profit due to improved revenue and
productivity. The European operations also improved in terms of gross profit in
the amount of $4.3 million due to positive contributions from acquisitions in
the United Kingdom and Switzerland, coupled with market improvements and strong
European currency translation effects.
Selling, general and administrative expenses increased 17.2% to $79.7
million in 2003 compared to $68.0 million in 2002. Several factors contributed
to the increase in selling, general and administrative expenses. In the Elmore
division of Affholder, selling, general and administrative expenses increased
$0.9 million primarily due to the reserve of $0.8 million in claims for certain
change orders that were considered uncollectible at the end of 2003. The base
operations of the tunneling business also increased selling, general and
administrative expenses by $0.8 million in 2003 as a result of adding critical
project management personnel to support revenue growth. Corporate expenses in
2003 included $1.6 million in severance recorded for changes in executive
management. Bad debt expense increased by $1.5 million and adjustments to the
Company's insurance reserves based on deteriorating experience and updated
actuarial information added $3.7 million in expense. Various acquisitions during
the year added $1.3 million of expenses, which consisted primarily of
compensation.
2002 Compared to 2001
Consolidated revenues of $480.4 million in 2002 represented a 7.9%
increase compared to 2001 revenues of $445.3 million due primarily to growth in
the tunneling segment with additional contributions from rehabilitation.
Increases in rehabilitation and tunneling revenues were partially offset by a
$10.7 million decline in Tite Liner revenues. The acquisition of Elmore added
$20.7 million to 2002 revenues. Gross profit increased by 0.6% to $125.6
million. Gross profit margin decreased from 28.0% to 26.2% in 2002 versus 2001
due to decreased gross profit margins in the rehabilitation segment.
Selling, general and administrative expenses were $68.0 million, an
increase of 1.6% compared to $67.0 million in selling, general and
administrative expenses in 2001. This reflects the operation of the Kinsel
business for two more months in 2002 than in 2001 and the May 2002 purchase of
the Elmore operations, the combined impact being a $2.7 million increase. The
elimination of amortization expense related to goodwill beginning in 2002
positively impacted operating income. Goodwill amortization pre-tax was $6.2
million in 2001. After restructuring and intangible asset impairment charges of
$2.5 million and $3.5 million, respectively, in 2002, operating income was $50.2
million in 2002, representing an increase of 7.3% over 2001 operating income,
which included a $4.1 million restructuring charge.
Rehabilitation Segment
($ IN THOUSANDS) 2003 2002 2001
----------------------------------------------
Revenues $ 366,690 $ 377,674 $ 369,219
Gross Profit 84,215 101,766 107,809
Gross Profit Margin 23.0% 26.9% 29.2%
Selling, General and Administrative 69,313 59,871 60,800
Amortization Expense 698 731 6,691
Restructuring Charge (261) 2,458 4,127
Impairment Charge - 3,499 -
Operating Income 14,465 35,208 36,191
Operating Income Percentage 3.9% 9.3% 9.8%
Rehabilitation revenues decreased $11.0 million to $366.7 million in
2003 from $377.7 million in 2002. The decline in revenue is due primarily to
reduced activity of approximately $18.8 million in two
19
major regions in North American rehabilitation that resulted from lower backlog
due to less market activity, and reduced pricing derived from increased
competition and lower municipal spending. The pipebursting and other
rehabilitation operations of Kinsel suffered a $4.5 million, or 8.3%, decline in
2003 primarily due to the loss of unreleased term contract backlog on a major
contract and lower demand. North American rehabilitation revenues were boosted
by the acquisition of East, which contributed $2.7 million to 2003 revenue. The
decline in North American rehabilitation revenues was partially offset by an
$11.6 million, or 24.3%, increase in rehabilitation revenues in the Company's
European rehabilitation business. The Company's June 2003 acquisition of certain
assets of Sewer Services, Ltd. added $2.5 million to Europe's 2003 revenues. The
November 2003 acquisition of the Company's remaining interest in Ka-Te
Insituform added $1.8 million in revenues. One large job in the Netherlands and
stronger activity in other European regions in the second half of 2003 added
approximately $7.5 million in revenues in 2003.
Rehabilitation revenues increased 2.3% to $377.7 million in 2002
compared to 2001 rehabilitation revenues of $369.2 million due to growth in
North American rehabilitation. North American rehabilitation revenues increased
approximately 3.7% over 2001 due primarily to the impact of an additional two
months of revenue from Kinsel in 2002 compared to 2001. European revenues were
relatively flat in 2002 compared to 2001, falling 1.1% to $47.9 million on weak
demand and poor project pricing, primarily in France.
Rehabilitation gross profit in 2003 decreased $17.6 million, or 17.2%,
to $84.2 million, from $101.8 million in 2002. Gross profit margins decreased to
23.0% in 2003 from 26.9% in 2002. Gross profit was adversely affected by the
lower activity in two major regions in North American rehabilitation. The total
decline from 2002 of gross profit in these regions exceeded $17.4 million. As
noted earlier, the Company also experienced a loss of $5.1 million related to
the removal and reinstallation of an Insituform CIPP Process liner in Boston,
Massachusetts. The Company's pipebursting and other rehabilitation operations of
Kinsel also suffered gross profit declines in 2003 of $11.4 million related to
lower volume from reduced backlog. These decreases were partially offset by
increases in the western region of the United States which contributed $5.4
million in additional gross profit over 2002. The Company also experienced
higher costs related to casualty, workers compensation and healthcare insurance
caused by increased claims and cost of premiums in 2003 of approximately 25%.
Gross profits in Europe increased 36.8%, or $4.3 million, in 2003 compared to
2002 due to a slight increase in gross profit margin percentage coupled with
volume growth in substantially all operations in the United Kingdom and
Switzerland.
Gross profit for rehabilitation decreased 5.6% to $101.8 million in
2002 from $107.8 million in 2001. Gross profit margins also decreased to 26.9%
from 29.2% over the same time period. Rehabilitation margins in both North
America and Europe drove the decrease, with gross profit dollars eroding 1.6%
and 25.7% in each region, respectively. Aggressive pricing in the northeastern
United States combined with increased use of subcontractors was the primary
cause for the North American decline while pricing pressure and a weak market,
primarily in France, resulted in inefficient crew utilization and tighter
margins in the European operations.
In 2003, selling, general and administrative expenses in the
rehabilitation segment increased $9.4 million, or 15.8%, to $69.3 million,
compared to $59.9 million in 2002. In 2003, the Company recorded $1.6 million in
severance costs recognized after changes in the Company's senior management. The
Company increased its insurance reserves due to higher premiums and recent
actuarial analyses performed by consultants which indicated increased claims.
The Company recorded an additional $1.5 million in bad debt expense, as
previously noted. Acquisitions during the year added $1.3 million of expenses,
consisting primarily of compensation.
Selling, general and administrative expenses in the rehabilitation
segment were $59.9 million in 2002, a 1.5% decrease compared to 2001 selling,
general and administrative expenses of $60.8 million.
20
Although the decrease appeared minor, selling, general and administrative
expenses for 2002 are inclusive of incentive compensation accruals not
recognized in 2001 due to performance. Significant improvements were achieved in
Europe in 2002 where initiatives to cut overhead intensified. Kinsel operations
also experienced a decrease in selling, general and administrative expenses in
spite of two additional months of expense as they became more integrated into
the overall cost structure of the Company.
Amortization expense remained relatively stable during 2003. Some
intangible assets were written off during 2002, causing lower amortization
during 2003. This was offset by the amortization of intangible assets associated
with the acquisition of the business and certain assets of East in September
2003, which added $0.2 million.
Amortization expense decreased to $0.7 million in 2002 from $6.7
million in 2001 due to the elimination of goodwill amortization.
Rehabilitation operating income decreased 58.9% to $14.5 million in
2003, compared to $35.2 million in 2002 based on the various factors discussed
above.
Rehabilitation operating income was $35.2 million in 2002, a 2.7%
decrease compared to 2001 operating income of $36.2 million. Operating income
includes $3.5 million of asset impairment charges and $2.5 million of
restructuring charges in 2002, and $4.1 million of restructuring charges in
2001. The decrease is due primarily to the 2.3 percentage point drop in gross
margin percentage that the cessation of goodwill amortization in 2002 and
improvements in administrative overhead costs could not fully offset.
Tunneling Segment
($ IN THOUSANDS) 2003 2002 2001
---------------------------------------------
Revenues $ 100,020 $ 86,297 $ 49,019
Gross Profit 11,946 18,260 8,880
Gross Profit Margin 11.9% 21.2% 18.1%
Selling, General and Administrative 7,402 5,703 3,125
Amortization Expense 588 392 -
Operating Income 3,956 12,165 5,754
Operating Income Percentage 4.0% 14.1% 11.7%
Tunneling revenues increased 15.9% to $100.0 million compared to $86.3
million in 2002. High productivity on jobs in Dallas, Chicago and St. Louis
contributed significantly to tunneling revenues during 2003. Revenues in the
Elmore division declined $5.6 million due to a focus in the first two quarters
of 2003 on completing the projects acquired with Elmore in 2002. As a result,
the Elmore division experienced low backlog, and therefore lower revenues for
the first two quarters of 2003.
Tunneling revenues increased 76.0% to $86.3 million in 2002 compared to
$49.0 million in 2001. Elmore operations, newly acquired in 2002, contributed
$20.7 million or approximately half of the total increase. The remaining
increase was a result of the Company's strategic focus on further penetrating
the tunneling market based on market opportunities recognized in 2001 and
continuing in 2002.
Gross profit decreased 34.6% to $11.9 million in 2003, compared to
$18.3 million in 2002. Gross profit margins decreased to 11.9% from 21.2% in
2002. The decrease in gross profit and gross profit margin was due primarily to
performance issues in projects acquired with Elmore that carried over from 2002.
Early in the second quarter of 2003, new management was put into place for
Elmore, and the operations became more integrated into Affholder. The focus of
the new management team was to complete the jobs acquired with Elmore in 2002.
These jobs were substantially completed by the end of
21
the third quarter of 2003. During the third quarter of 2003, management's focus
shifted to building profitable backlog.
Gross profit in 2002 was $18.3 million, a 105.6% increase compared to
2001 gross profit of $8.9 million. Elmore's contribution to gross profit was
less significant than its revenue contributions. Gross profit margin increased
to 21.2% in 2002 compared to 18.1% in 2001. The margin percentage increase is
primarily a result of positive adjustments at the close out of some large jobs.
Selling, general and administrative expenses increased $1.7 million or
29.8% to $7.4 million in 2003 compared to $5.7 million in 2002. Selling, general
and administrative expenses in the Elmore division of tunneling increased $0.9
million primarily due to the reserve of $0.8 million in claims for certain
change orders that were considered uncollectible at the end of 2003. The base
operations of the tunneling business also increased selling, general and
administrative expenses by $0.8 million as a result of adding critical project
management personnel to support revenue growth.
Selling, general and administrative expenses increased 82.5% to $5.7
million in 2002 compared to $3.1 million in 2001. Most of the increase was due
to the acquisition of Elmore, with the remainder from additional incentive
compensation and support costs for segment growth. Selling, general and
administrative expenses as a percentage of revenue increased to 6.6% in 2002
compared to 6.4% in 2001.
Amortization expense was $0.6 million in 2003 compared to $0.4 million
in 2002. This reflected a full year of amortization of covenants not to compete
acquired as part of the Elmore acquisition compared to eight months in 2002.
Tunneling had no amortization expense prior to the Elmore purchase.
Operating income decreased $8.2 million to $4.0 million in 2003
compared to $12.2 million in 2002 as a result of the factors discussed above.
Operating income was $12.2 million in 2002, a 111.4% increase over 2001
operating income of $5.8 million as a result of the factors discussed above.
All of the contracts acquired from Elmore were completed during 2003.
The problems experienced by Elmore are not expected to continue into 2004, and
tunneling segment performance is expected to more closely mirror the performance
experienced by Affholder. In the market, there is more work available than the
entire industry's capacity. Therefore, we expect to see continued growth in
backlog. However, due to the time lag between an order and revenue recognition,
growth in revenues, gross profit margin and operating income may not follow
until the fourth quarter of 2004 or later.
Tite Liner Segment
($ IN THOUSANDS) 2003 2002 2001
---------------------------------------------
Revenues $ 20,562 $ 16,387 $ 27,072
Gross Profit 6,498 5,596 8,159
Gross Profit Margin 31.6% 34.1% 30.1%
Selling, General and Administrative 3,018 2,476 3,030
Amortization Expense 310 310 310
Operating Income 3,170 2,810 4,820
Operating Income Percentage 15.4% 17.1% 17.8%
Tite Liner revenues increased 25.5%, or $4.2 million, to $20.6 million
in 2003 compared to $16.4 million in 2002. Tite Liner revenues responded to
higher oil prices in 2003, which created greater demand for Tite Liner and
caused the increase in revenues in 2003 compared to 2002.
22
Tite Liner revenues in 2002 were $16.4 million, a 39.5% decrease from
2001 revenues due primarily to continued decreases in demand from mining
services.
Gross profit increased $0.9 million to $6.5 million in 2003 compared to
$5.6 million in 2002. However, gross profit margin slipped to 31.6% in 2003 from
34.1% in 2002. Gross profit was higher in 2003 due to higher volume. Gross
profit margin was lower due to the completion of a significant project in South
America in 2002, resulting in a higher gross margin in 2002. In addition, a
larger project with a lower margin began in 2003 and contributed to the
segment's lower gross profit margin.
Gross profit was $5.6 million in 2002, a decrease of 31.4% compared to
$8.2 million in gross profit in 2001. The decrease is almost solely based on the
lower revenues in 2002 versus 2001. Gross profit margin increased, however, in
2002 to 34.1% due primarily to the favorable impact from closing out the large
project in South America.
Selling, general and administrative expenses were $3.0 million in 2003
compared to $2.5 million in 2002 due to higher corporate overhead costs
allocated to Tite Liner in 2003. Selling, general and administrative expenses as
a percentage of revenue remained relatively stable at 14.7% in 2003 compared to
15.1% in 2002.
Selling, general and administrative expenses were $2.5 million for Tite
Liner in 2002, representing a 18.3% reduction compared to 2001 selling, general
and administrative expenses of $3.0 million. Much of this improvement was the
result of the scaling back of Tite Liner operational costs as well as a smaller
allocation of corporate overhead to the business unit given the reduction in
segment revenues. Selling, general and administrative expenses as a percentage
of revenue increased to 15.1% in 2002 from 11.2% in 2001 due to lower revenues
in 2002.
Operating income increased $0.4 million to $3.2 million in 2003,
compared to $2.8 million in 2002 as a result of the factors discussed above.
Operating income for the Tite Liner business unit decreased 41.7% to
$2.8 million in 2002, compared to $4.8 million in 2001 as a result of the
factors discussed above.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
During the third quarter of 2003, the Company reversed $0.3 million in
reserves recorded during the third quarter of 2002 and the fourth quarter of
2001. These reserves are described in the following paragraphs. Nearly all of
the reversal came from the reserve recorded in the third quarter of 2002.
The Company recorded two special charges in the third quarter of 2002.
The first was a pre-tax charge of $2.5 million related to restructuring efforts.
Of this amount, $1.3 million related to the elimination of 75 positions,
primarily in sales and administrative functions. An additional $1.2 million
related to the write-down of information technology assets, lease cancellations,
and disposal of certain identifiable fixed assets, primarily at the corporate
level. As of December 31, 2002, the remaining liability related to the
restructuring charge was $1.1 million, $0.8 million of which related to expected
future severance costs.
The Company also took a charge in the third quarter of 2002 related to
a write-down of intangible assets. The pre-tax charge totaled $3.5 million and
related primarily to patents, trademarks, license and non-compete intellectual
property assets that the Company deemed to be impaired based on recent business
decisions and other circumstances. The asset write-down has reduced amortization
expense by
23
approximately $0.5 million annually before tax. The impairment analysis was
conducted in accordance with SFAS 144, "Accounting for the Disposal of
Long-Lived Assets," which the Company early adopted in 2001. See Note 6 to the
Consolidated Financial Statements regarding intangible asset impairment.
In the fourth quarter of 2001, the Company recorded a pre-tax
restructuring charge of $4.1 million, $0.9 million of which related to the
elimination of 112 company-wide positions specifically identified as of December
31, 2001. An additional $3.2 million of the charge related to asset write-downs,
lease cancellations and other costs associated with the closure and
consolidation of eight facilities in the United States and the disposal of the
associated assets. See Note 5 to the Consolidated Financial Statements regarding
restructuring costs.
OTHER INCOME/EXPENSE
Interest expense increased $0.3 million to $8.2 million in 2003
compared to $7.9 million in 2002. This was due primarily to the placement of
$65.0 million of Senior Notes, Series 2003-A, on April 24, 2003 at a rate of
5.29% per annum.
Interest expense was $7.9 million in 2002, a 15.3% decrease compared to
2001 interest expense of $9.3 million. The decrease was primarily a result of a
reduction in borrowing levels in 2002 and lower variable interest rates attached
to short-term borrowings.
Other expense was $1.3 million in 2003 compared to other income of $3.1
million in 2002. Other income in 2002 included a $1.2 million gain on the sale
of a real estate investment, while 2003 included losses of $1.4 million on sales
and disposals of certain assets and the previously noted $1.1 million reserve
for certain notes receivable related to the prior year sale of discontinued
operations and recorded in continuing operations in the fourth quarter of 2003.
Interest income decreased to $1.5 million in 2003 compared to $1.9 million in
2002 due to lower interest rates in 2003.
Other income increased 32.3% to $3.1 million in 2002 versus 2001
primarily due to the $1.2 million gain on the sale of a real estate investment
acquired with Kinsel. This represented a $0.7 million increase over other income
of $2.3 million in 2001. Interest income decreased $0.3 million in 2002 on lower
interest rates on cash. Other income decreased 38.1%, or $1.4 million, to $2.3
million during 2001. This was primarily due to a decline of four percentage
points in market rates of return on the Company's short-term investments.
INCOME TAXES
The Company's effective tax rate (including discontinued operations)
for 2003 was 59.4% compared to 38.5% in 2002. The Company has several permanent
adjustments to book income which require a fixed provision for income taxes
regardless of the level of income for financial reporting purposes. Since the
effective rate is a ratio of income tax to income before taxes, the significant
drop in income before taxes in 2003 compared to 2002 greatly contributed to the
increase in the effective rate.
As previously discussed, there were two permanent items in 2003 that
significantly contributed to the rate increase. In the fourth quarter of 2003,
the Company determined that some net operating losses carried on the books as
deferred tax assets may not be realizable under the guidelines of SFAS 109.
Therefore, the Company incurred additional tax expense in 2003 by recording a
valuation allowance of approximately $0.8 million on these assets. These net
operating losses mainly related to losses incurred in France and Belgium. In
addition, in analyzing provision to return matters, the Company determined in
the fourth quarter of 2003 that additional taxes were required to be provided
for meals and entertainment expense deducted for financial reporting purposes
but which are non-deductible for tax.
24
The Company's effective tax rate for 2002 decreased to 38.5% compared
to 39.4% in 2001. This was primarily due to the Company's adoption of SFAS 142
as detailed in Note 8 to the Consolidated Financial Statements. This statement
provides that goodwill should not be amortized but be tested for impairment
annually, or more frequently, if circumstances indicate potential impairment.
Management determined that there was no impairment to goodwill as of December
31, 2002 and therefore, no expense for goodwill through amortization or
otherwise was recorded in 2002 for financial reporting purposes. The favorable
effect on the rate as a result of the adoption of SFAS 142 was offset by some
degree by a potential non-deductible OSHA penalty in relation to an Iowa job
site accident.
See Note 12 to the Consolidated Financial Statements regarding taxes on
income.
MINORITY INTEREST AND EQUITY IN EARNINGS OF AFFILIATED COMPANIES
Minority interest in net income was $0.2 million in 2003 and 2002. On
July 31, 2003, the Company purchased the remaining third party minority interest
in Video Injection, a France-based company specializing in robotic pipe
inspection. In 2003, equity in earnings of affiliates was a $0.4 million loss
due principally to increased losses in the Company's joint venture in Italy,
coupled with a reduction as a result of the acquisition of the remaining shares
in the Company's joint venture in Switzerland, Ka-Te Insituform, in November
2003.
Minority interest in net income was $0.2 million in 2002, a 45.1%
decrease from 2001 minority interest in net income of $0.3 million. The decrease
was due to lower profitability in Insituform Linings and Video Injection, both
majority-owned European operations. Equity in earnings of affiliated companies
decreased 26.3% to $0.8 million in 2002 compared to $1.1 million in 2001. The
decrease primarily resulted from the discontinued affiliation with a joint
venture partner in the third quarter of 2002.
DISCONTINUED OPERATIONS
During the fourth quarter of 2001, the Company made the decision to
sell certain operations related to the Kinsel acquisition. Accordingly, the
Company classified as discontinued the wastewater treatment plant, commercial
construction and highway operations acquired as part of the Kinsel acquisition.
These operations were not consistent with the Company's operating strategy of
providing differentiated trenchless rehabilitation and tunneling services. The
Company completed the sale of the wastewater treatment plant construction
operations effective January 1, 2002. The Company received $1.5 million in cash
and a $2.0 million note for a total sale price of $3.5 million, resulting in an
immaterial loss on the sale. During the third quarter of 2002, the Company sold
the heavy highway operations for $2.6 million in cash and $1.5 million in notes,
resulting in a pre-tax gain of $1.5 million, or $0.9 million after-tax. In
addition, the Company completed the sale of certain contracts and assets of the
highway maintenance operations during the fourth quarter of 2002 for certain
assumed liabilities, $1.4 million in cash and a $1.5 million subordinated note,
with no material gain or loss on the sale. Pursuant to the terms of the sale
agreements described above, the Company retained responsibility for some
uncompleted jobs, which has resulted in the absorption of additional trailing
costs. The Company substantially completed these jobs in the second quarter of
2003. This completes the disposition of all material assets classified as
discontinued pursuant to the acquisition of Kinsel.
The Company negotiated settlements, without litigation, during the
first quarter of 2003 between the Company and the former Kinsel owners, and the
Company and the purchasers of the wastewater treatment plant operations acquired
from Kinsel. The Company made various claims against the former shareholders of
Kinsel, arising out of the February 2001 acquisition of Kinsel and Tracks. Those
claims were settled in March 2003 without litigation. Under the terms of the
settlement, 18,891 shares of
25
Company common stock and all of the promissory notes, totaling $5.4 million in
principal (together with all accrued and unpaid interest), issued to former
Kinsel shareholders in connection with the acquisition, were returned to the
Company from the claim collateral escrow account established at the time of
acquisition. The remaining 56,672 shares of Company common stock held in the
escrow account were distributed to the former Kinsel shareholders. The
settlement of the escrow account primarily related to matters associated with
Kinsel operations that have been sold and presented as discontinued operations.
In January 2003, the Company received notice of multiple claims, totaling more
than $3.5 million, from the buyer of the former Kinsel wastewater treatment
division. The claims arose out of the January 2002 sale of the Kinsel wastewater
treatment division and alleged the valuation of the assets sold was overstated.
These settlements resulted in a $1.0 million pre-tax non-operating gain recorded
in the results of continuing operations and a net pre-tax $1.1 million gain in
discontinued operations for the quarter ended March 31, 2003.
Revenues from discontinued operations were $2.6 million in 2003,
compared to $22.6 million in 2002. Loss from discontinued operations was $1.1
million compared to a loss of $5.9 million in 2002. The lower activity in
discontinued operations in 2003 is due to the winding down of discontinued
operations.
NET INCOME/EARNINGS PER SHARE
Net income decreased by 84.6% in 2003 to $3.5 million compared to $22.7
million in 2002. Return on revenue has declined in each of the last three years
from 0.7% in 2003, 4.7% in 2002, and 5.6% in 2001. Return on average
shareholders equity was 1.3% in 2003, 8.7% in 2002 and 12.0% in 2001. These
results include losses from discontinued operations of $1.1 million, $5.9
million and $0.1 million in 2003, 2002 and 2001, respectively. Also included was
an intangible asset impairment charge of $3.5 million and a restructuring charge
of $2.5 million in 2002, and a restructuring charge of $4.1 million in 2001. In
2003, weaker operating results in the rehabilitation and tunneling segments,
expenses related to the removal and reinstallation of an Insituform CIPP Process
liner in Boston, increases in bad debt expense, other adjustments to insurance
reserves based on recent cost experience and updated actuarial data, tax
reserves and various other smaller asset write-offs affected 2003 results.
Net income declined by 8.8% in 2002 to $22.7 million from $24.9 million
in 2001. Net income in 2001 had decreased 28.8% from 2000 net income of $34.9
million. The results included $5.9 million and $0.1 million in losses from
discontinued operations in 2002 and 2001, respectively. These results also
included the impact of a $2.5 million restructuring charge and $3.5 million
intangible asset write-down in 2002 and a $4.1 million restructuring charge in
2001, all amounts before tax.
Diluted earnings per share were $0.13 for 2003, down 84.7% from diluted
earnings per share of $0.85 in 2002. Discontinued operations, which had a $0.22
adverse impact on diluted earnings per share in 2002, had an adverse impact of
$0.04 on 2003 diluted earnings per share.
Diluted earnings per share were $0.85 for 2002, down 7.6% compared to
2001 diluted earnings per share of $0.92. Discontinued operations adversely
impacted diluted earnings per share in 2002 by $0.22 per share.
CRITICAL ACCOUNTING POLICIES
Discussion and analysis of the Company's financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amount of assets and liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities at the
26
financial statements date. Actual results may differ from these estimates under
different assumptions or conditions.
Some accounting policies require the application of significant
judgment by management in selecting the appropriate assumptions for calculating
financial estimates. By their nature, these judgments are subject to an inherent
degree of uncertainty. The Company believes that its critical accounting
policies are limited to those described below. For a detailed discussion on the
application of these and other accounting policies, see Note 2 to the
Consolidated Financial Statements.
REVENUE RECOGNITION - PERCENTAGE-OF-COMPLETION METHOD
The Company recognizes revenues and costs as construction and
installation contracts progress using the percentage-of-completion method of
accounting, which relies on total expected contract revenues and estimated total
costs. Under this method, estimated contract revenues and resulting gross profit
margin are recognized based on actual costs incurred to date as a percentage of
total estimated costs. The Company follows this method since reasonably
dependable estimates of the revenues and costs applicable to various elements of
a contract can be made. Since the financial reporting of these contracts depends
on estimates, which are assessed continually during the term of these contracts,
recognized revenues and gross profit are subject to revisions as the contract
progresses to completion. Total estimated costs, and thus contract gross profit,
are impacted by changes in productivity, scheduling, and the unit cost of labor,
subcontracts, materials and equipment. Additionally, external factors such as
weather, customer needs, customer delays in providing approvals, labor
availability, governmental regulation and politics may also affect the progress
and estimated cost of a project's completion and thus the timing of revenue
recognition and gross profit. Revisions in profit estimates are reflected in the
period in which the facts that give rise to the revision become known. When
current estimates of total contract costs indicate that the contract will result
in a loss, the projected loss is recognized in full in the period in which the
loss becomes evident. Revenues from change orders, extra work, variations in the
scope of work and claims are recognized when realization is reasonably assured,
and at estimated recoverable amounts.
Many of the Company's contracts provide for termination of the contract
at the convenience of the customer. If a contract were terminated prior to
completion, the Company would typically be compensated for progress up to the
time of termination and any termination costs. In addition, many contracts are
subject to certain completion schedule requirements with liquidated damages in
the event schedules are not met as the result of circumstances that are within
the Company's control. Losses on terminated contracts and liquidated damages
have historically not been significant.
RETAINAGE
Many of the contracts under which the Company performs work contain
retainage provisions. Retainage refers to that portion of revenue earned and
billed by the Company but held for payment by the customer pending satisfactory
completion of the project. Unless reserved, the Company assumes that all amounts
retained by customers under such provisions are fully collectible. Retainage on
active contracts is classified as a current asset regardless of the term of the
contract. See Note 2 to the Consolidated Financial Statements regarding
classification of current assets and current liabilities.
GOODWILL IMPAIRMENT
Under Statement of Financial Accounting Standards 142, "Goodwill and
Other Intangible Assets" (SFAS 142), the Company assesses recoverability of
goodwill on an annual basis or when events or changes in circumstances indicate
that the carrying amount of goodwill may not be recoverable. Factors that could
potentially trigger an impairment review include (but are not limited to):
27
- significant underperformance of a segment or division relative to
expected historical or projected future operating results;
- significant negative industry or economic trends; and
- significant changes in the strategy for a segment or division.
In accordance with the provisions of SFAS 142, the Company calculates
the fair value of its reporting units and compares such fair value to the
carrying value of the reporting unit to determine if there is any indication of
goodwill impairment. The Company's reporting units consist of North American
rehabilitation, European rehabilitation, tunneling, and Tite Liner. To calculate
reporting unit fair value, the Company utilizes a discounted cash flow analysis
based upon, among other things, certain assumptions about expected future
operating performance. The Company typically engages a third party valuation
expert to assist in estimating reporting unit fair value. Estimates of
discounted cash flows may differ from actual cash flows due to, among other
things, changes in economic conditions, changes to business models, changes in
the Company's weighted average cost of capital, or changes in operating
performance. An impairment charge will be recognized to the extent that the
implied fair value of the goodwill balances for each reporting unit is less than
the related carrying value.
DEFERRED INCOME TAX ASSETS
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, in accordance with the
Statement of Financial Accounting Standards 109, "Accounting for Income Taxes"
("SFAS 109"). SFAS 109 also requires that a valuation allowance be recorded
against any deferred tax assets that are not likely to be realized in the
future. The determination is based on the ability of the Company to generate
future taxable income and, at times, is dependent on management's ability to
implement strategic tax initiatives to ensure full utilization of recorded
deferred tax assets. Should management not be able to implement the necessary
tax strategies, the Company may need to record valuation allowances for certain
deferred tax assets, including those related to foreign income tax benefits.
Significant management judgment is required in determining the provision for
income taxes, deferred tax assets and liabilities and any valuation allowances
recorded against net deferred tax assets.
LONG-LIVED ASSETS
Property, plant and equipment, goodwill and other identified
intangibles (primarily licenses, covenants not to compete and patents) are
recorded at cost and are amortized on a straight-line basis over their estimated
useful lives. Changes in circumstances such as technological advances, changes
to the Company's business model or changes in the Company's capital strategy can
result in the actual useful lives differing from the Company's estimates. If the
Company determines that the useful life of property, plant and equipment or its
identified intangible assets should be shortened, the Company would depreciate
or amortize the net book value in excess of the salvage value over its revised
remaining useful life, thereby increasing depreciation or amortization expense.
Long-lived assets, including property, plant and equipment, and other
intangibles, are reviewed by the Company for impairment annually or whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Factors the Company considers important which could
trigger an impairment review include:
- significant underperformance in a region relative to expected
historical or projected future operating results;
- significant changes in the use of the assets of a region or the
strategy for the region;
28
- significant negative industry or economic trends;
- significant decline in the Company's stock price for a sustained
period; and
- market capitalization is significantly less than net book value.
Such impairment tests are based on a comparison of undiscounted cash
flows to the recorded value of the asset. The estimate of cash flow is based
upon, among other things, assumptions about expected future operating
performance. The Company's estimates of undiscounted cash flow may differ from
actual cash flow due to, among other things, technological changes, economic
conditions, changes to its business model or changes in its operating
performance. If the sum of the undiscounted cash flows (excluding interest) is
less than the carrying value, the Company recognizes an impairment loss,
measured as the amount by which the carrying value exceeds the fair value of the
asset.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Management makes estimates of the uncollectibility of the Company's
accounts receivable. Management evaluates specific accounts where the Company
has information that the customer may be unwilling or unable to pay the
receivable in full. In these cases, the Company uses its judgment, based on the
best available facts and circumstances, and records a specific reserve for that
customer against amounts due in order to reduce the receivable to the amount
that is expected to be collected. The specific reserves are reevaluated and
adjusted as additional information is received that impacts the amount reserved.
After all reasonable attempts to collect the receivable have been explored, the
receivable is written off against the reserve. Based on the information
available, the Company believes that the allowance for doubtful accounts as of
December 31, 2003 is adequate. However, no assurances can be given that actual
write-offs will not exceed the recorded reserve.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $24.6 million, or 32.6%, to $100.0
million at December 31, 2003 compared to $75.4 million in cash and cash
equivalents at December 31, 2002. As of December 31, 2003, the Company had $6.1
million in restricted cash balances, $4.6 million of which related to deposits
as collateral for general liability and workers compensation insurance policies.
The remaining $1.5 million related to deposits made as escrow for release of
retention on specific projects being performed for certain municipalities and
state agencies. Continuing operations contributed $29.4 million in operating
cash flow to the Company. Operating cash flow comprised the most significant
portion of the Company's total cash flow in the year ended December 31, 2003.
Discontinued operations generated an additional $5.2 million in operating cash
flow for overall operating cash flow of $34.6 million, up 31.9% from $26.2
million in operating cash flow for the year ended December 31, 2002. Working
capital was $167.4 million at December 31, 2003, up 34.8% from the $124.2
million in working capital at December 31, 2002. This increase came primarily as
a result of an increase in cash and cash equivalents of $24.6 million resulting
from the positive operating cash flow in 2003 and the issuance of additional
notes. Operating cash flow has historically been the most significant
contributor to net cash flow and the Company expects this trend to continue into
the foreseeable future.
Cash and cash equivalents increased $0.7 million, or 1.0%, to $75.4
million at December 31, 2002 compared to $74.6 million in cash and cash
equivalents at December 31, 2001. The cash balance at the end of 2002 included
$4.0 million of cash and cash equivalents restricted in various escrow accounts.
Continuing operations contributed $25.3 million in operating cash flow to the
Company. Discontinued operations generated an additional $0.9 million in
operating cash flow for overall operating cash flow of $26.2 million, down 24.8%
from $34.8 million in operating cash flow for the year ended December 31, 2001.
Operating cash flow comprised the most significant portion of the Company's cash
flow in the year
29
ended December 31, 2002. Working capital was $124.2 million at December 31,
2002, down 10.4% from the $138.7 million in working capital at December 31,
2001.
The Company used $26.3 million on investing activities in 2003 compared
to $13.3 million in 2002. In 2003, the Company used $5.5 million on the purchase
of the business of East, $0.6 million for the purchase of additional assets from
East, approximately $0.4 million for the purchase of specifically identified
assets of Sewer Services, $0.8 million for the purchase of the remaining
interest in Ka-Te Insituform, and $0.5 million for the remaining interest in
Video Injection. Capital expenditures in 2003 were $19.9 million, the largest of
which was $5.8 million for expansion of its Batesville, Mississippi,
manufacturing facility. The Company received $1.4 million in proceeds from the
sale of assets, but had no sales of investments or businesses during 2003.
The Company used $13.3 million on investing activities in 2002 compared
to $11.6 million in 2001. The Company engaged in several acquisition and
disposal activities that had significant effects on cash flow. Total capital
expenditures used $21.8 million in cash during 2002, a 30.9% increase when
compared to $16.6 million in capital expenditures during 2001. Capital
expenditures were primarily to sustain the equipment in the rehabilitation
segment, and additional expenditures necessary to fuel growth in the tunneling
segment. The Company expended $8.5 million, net of cash acquired, for the
purchase of Elmore and received $5.4 million in cash from the sale of
discontinued operations. Additionally, the Company received $1.9 million in cash
for the sale of a real estate investment that it owned.
Financing activities provided $12.9 million in cash for the year ended
December 31, 2003, compared to $13.4 million used for financing activities for
the year ended December 31, 2002. The Company received proceeds of $65.0 million
from the placement of Senior Notes, Series 2003-A, in April 2003. The most
significant use of cash during the year ended December 31, 2003 was $50.2
million for the repayment of long-term debt and notes payable. This includes
repayment of $26.0 million on the Company's line of credit and notes payable and
the regular annual payment of $15.7 million on the Company's Senior Notes,
Series A. In addition, the Company repaid approximately $8.5 million related to
other notes and capital lease obligations. The Company received $0.4 million in
cash for the issuance of 39,231 shares of Company stock related to option
exercises. In 1998, the Company authorized the repurchase of up to 2,700,000
shares of the Company's common stock to be made from time to time over five
years in open market transactions. The amount and timing of purchases are
dependent upon a number of factors, including the price and availability of the
Company's shares, general market conditions and competing alternative uses of
funds, and may be discontinued at any time. In October 1999, the Company
increased the original authorization by an additional 2,000,000 shares of common
stock. In April 2003, the Company indefinitely extended its repurchase program,
which was due to expire in June 2003. The Company expended $1.6 million to
purchase 120,300 shares of treasury stock during 2003. As of December 31, 2003,
the Company had purchased 3,948,806 shares of treasury stock for a cumulative
purchase price of $74.5 million under the stock buyback plan. See discussion
below regarding the amended debt agreements and the related restriction on
future stock buybacks.
Financing activities used $13.4 million in cash for the year ended
December 31, 2002, an increase of 13.4% over $11.8 million in cash used for
financing activities for the year ended December 31, 2001. The most significant
use of cash was $20.9 million for the repayment of long-term debt, a majority of
which was the regular annual payment of $15.7 million on the Company's Senior
Notes, as well as the payoff of several capital leases related to operations at
Kinsel. The Company received $2.5 million in cash for the issuance of 205,280
shares of Company stock related to option exercises. The Company expended $5.2
million to purchase 249,500 shares of treasury stock during 2002. As of December
31, 2002, the Company had purchased 3,809,615 shares of treasury stock for a
cumulative purchase price of $72.6 million under the stock buyback plan.
30
Trade receivables and retainage totaled $115.7 million at December 31,
2003, up 8.4% from December 31, 2002 trade receivables and retainage of $106.7
million. The increase was primarily a result of the movement of unbilled
receivables to trade receivables in the tunneling segment based on the
production cycle. Based on the percentage-of-completion method of revenue
recognition, work is typically started on large tunneling jobs and substantial
costs are incurred and revenue recognized before billings can be issued, as was
the case on three large tunneling jobs in Dallas, Chicago and St. Louis in late
2002. As production continues, these revenues are generated and the receivable
is moved into trade receivables when billed. The tunneling segment has also seen
accelerated collection of much of these receivables. This is evident in the fact
that costs and estimated earnings in excess of billings in the tunneling segment
decreased 52.2% from December 31, 2002 to $10.3 million at December 31, 2003. On
a consolidated basis, the Company's costs and estimated earnings in excess of
billings were down 24.1% from $36.7 million at December 31, 2002 to $27.9
million at December 31, 2003.
The Company has entered into several contractual joint ventures in
order to develop joint bids on contracts for its installation business, and for
tunneling operations. In these cases, the Company could be required to complete
the partner's portion of the contract if the partner is unable to complete its
portion. The Company is at risk for any amounts for which the Company itself
could not complete the work and for which a third party contractor could not be
located to complete the work for the amount awarded in the contract. The Company
continues to investigate opportunities for expanding its business through such
structures. The Company has not experienced material adverse results from such
arrangements.
Effective March 12, 2004, the Company entered into an amended and
restated bank revolving credit facility (the "Amended Credit Facility") that
replaces its existing $75 million bank credit facility (the "Old Credit
Facility"). The Amended Credit Facility provides a borrowing capacity of $25
million, any portion of which may be used for the issuance of standby letters of
credit. The Company believed that the covenants contained in the Old Credit
Facility unduly limited the Company in the operation of its business. In light
of the Company's being out of compliance with certain debt covenants at December
31, 2003 and based on the determination that it did not anticipate using more
than $25 million of its bank credit in the foreseeable future (primarily for
standby letters of credit), the Company decided to amend the Old Credit Facility
and consummate the Amended Credit Facility which subjects the Company to less
restrictive covenants. The Amended Credit Facility matures on September 12,
2005.
Under the Amended Credit Facility, the Company has paid a $25,000
closing fee and will pay a commitment fee equal to 0.4% per annum on the
unborrowed balance at the end of each fiscal quarter. The Company will also pay
a letter of credit fee of 2.25% per annum on the aggregate stated amount for
each letter of credit that is issued and outstanding at the end of each fiscal
quarter. Any loan under the Amended Credit Facility will bear interest at the
rate equal to the Bank of America prime rate (currently set at 4.0% per annum).
The Amended Credit Facility contains cross-default provisions to the Company's
amended Senior Notes as summarized below.
At December 31, 2003, the Company had an unborrowed balance under the
Old Credit Facility of $69.8 million, and the commitment fee was 0.3%. The
remaining $5.2 million was being utilized at year end for non-interest bearing
letters of credit, the majority of which were collateral for insurance. The
letters of credit under the Old Credit Facility will be transferred to the
Amended Credit Facility and remain outstanding. The Company issued $4.2 million
in additional letters of credit under the Amended Credit Facility relating to
collateral for the benefit of its insurance carrier, bringing the total amount
of letters of credit issued to $9.2 million at March 12, 2004. Since there were
no interest-bearing borrowings under the Old Credit Facility at December 31,
2003, there had been no applicable interest rate determined under the facility.
31
On March 12, 2004, the Company, with the requisite approval of the
holders of the Company's Senior Notes, Series A, due February 14, 2007, and the
Company's Senior Notes, Series 2003-A, due April 24, 2013, amended certain of
the terms and conditions of the Senior Notes. In connection with the amendment,
the Company paid the noteholders an amendment fee of 0.25%, or $0.3 million, of
the outstanding principal balance of each series of Senior Notes. In addition,
the interest rate on each series of Senior Notes increases by 0.75% per annum at
closing, reducing by 0.25% per annum beginning on April 1, 2005 and by an
additional 0.5% per annum beginning on April 1, 2006.
Prior to the amendment, the Senior Notes, Series A, bore interest,
payable semi-annually, at 7.88% per annum. At December 31, 2003, the outstanding
principal amount under the Senior Notes, Series A, was $62.9 million. Each year
through maturity the Company is required to make principal payments under the
Senior Notes, Series A, of $15.7 million. Upon specified change in control
events, each holder of the Senior Notes, Series A, has the right to require the
Company to purchase its notes, without premium.
Prior to the amendment, the Senior Notes, Series 2003-A, bore interest,
payable semi-annually, at a rate of 5.29% per annum. At December 31, 2003, the
outstanding principal amount under the Senior Notes, Series 2003-A, was $65.0
million. The principal amount of the Senior Notes, Series 2003-A, is due in a
single payment on April 24, 2013. Upon specified change in control events, each
holder of the Senior Notes, Series 2003-A, has the right to require the Company
to purchase its notes, without premium. The proceeds of the Senior Notes, Series
2003-A, were used by the Company to pay off balances on the Old Credit Facility
and to provide liquidity to the Company for general corporate purposes.
The amended note purchase agreements of the Senior Notes, Series A, and
the Senior Notes, Series 2003-A, and the Amended Credit Facility obligate the
Company to comply with certain amended financial ratios and restrictive
covenants through the end of the first quarter of 2005. These covenants, among
other things, place limitations on operations, stock repurchases, dividends,
capital expenditures, acquisitions and sales of assets by the Company and/or its
subsidiaries and limit the ability of the Company and its subsidiaries to incur
further indebtedness. On April 1, 2005, the financial covenants will revert to
original covenants prior to the March 12, 2004 amendment.
At December 31, 2003, the Company was out of compliance with certain of
the debt covenants under the note purchase agreements, the Old Credit Facility
and an insurance collateral agreement, but with the recent amendments, are now
in compliance with all newly amended covenants. The Company believes it will be
in compliance with the amended covenants in 2004 and beyond.
As a result of the issuance of the $4.2 million in additional letters
of credit under the Amended Credit Facility referenced above, the insurance
collateral agreement was canceled, as it was no longer necessary and the related
amount of restricted cash posted as insurance collateral will be released.
In connection with the refinancing/amendments of its debt agreements as
described above, the Company expects to record a charge to interest expense in
the quarter ending March 31, 2004 of approximately $0.6 million relative to
costs incurred for the refinancing/amendments, including the write-off of a
portion of deferred financing fees.
The Company's Euro Note, due July 7, 2006, bears interest, payable
quarterly in January, April, July, and October of each year, at the rate per
annum of 5.5%. Each year until maturity, the Company will be required to make
principal payments of $1.0 million for which currency fluctuations will have an
effect on the U.S. dollar payment amount. On December 31, 2003, the principal
amount of the Euro Note outstanding was (euro)2.4 million, or $3.1 million.
32
The Company believes it has adequate resources and liquidity to fund
future cash requirements and debt repayments with cash generated from
operations, existing cash balances, additional short- and long-term borrowing
and the sale of assets.
In November 2003, the Company acquired the remaining interest of Ka-Te
Insituform for approximately $2.2 million. Net of related party debt and shared
accrued employee liabilities, cash paid by the Company was approximately $0.8
million.
In September 2003, the Company acquired the business and certain assets
of East for $5.5 million. East was the final remaining independent licensee of
the Insituform CIPP Process and the NuPipe Process in North America. Certain
selected assets such as equipment, inventory, backlog, licenses and an option to
purchase certain additional assets were included in the acquisition. The Company
exercised its option to purchase additional assets from East for $0.6 million.
The purchase price for both the original purchase and the subsequent purchase of
additional assets was paid entirely in cash. The purchase price has been
allocated to assets acquired based on their respective fair values at the date
of acquisition and resulted in intangible assets of $4.0 million, including
licenses, purchased backlog and customer relationships.
In July 2003, the Company purchased the remaining third party minority
interest in Video Injection. The purchase price was $0.5 million and resulted in
$0.3 million of additional goodwill.
In June 2003, the Company completed the acquisition of the business of
Sewer Services. The acquisition, with a price of $0.4 million, resulted in an
increase of $0.1 million in goodwill.
In May 2002, the Company acquired the business and certain assets and
liabilities of Elmore for approximately $12.5 million. The acquisition was
funded primarily through $8.5 million in cash, the settlement of debt owed by
Elmore to the Company, and the assumption of additional liabilities.
In February 2001, the Company acquired Kinsel for approximately $80.0
million. The acquisition was funded primarily through issuance of 1,847,165
shares of the Company's common stock from treasury, cash and the issuance of a
$5.4 million note to the sellers.
See Note 3 to the Consolidated Financial Statements for further
discussion of business acquisitions.
DISCLOSURE OF FINANCIAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The Company has entered into various financial obligations and
commitments in the course of its ongoing operations and financing strategies.
Financial obligations are considered to represent known future cash payments
that the Company is required to make under existing contractual arrangements,
such as debt and lease agreements. These obligations may result from both
general financing activities as well as from commercial arrangements that are
directly supported by related revenue-producing activities. Commercial
commitments represent contingent obligations of the Company, which become
payable only if certain pre-defined events were to occur, such as funding
financial guarantees.
The following table provides a summary of the Company's financial
obligations and commercial commitments as of December 31, 2003 (in thousands).
This table includes cash obligations related to principal outstanding under
existing debt arrangements and operating leases.
33
Payments Due by Period
Cash Obligations(1) Total 2004 2005 2006 2007 2008 Thereafter
- ----------------------------------------------------------------------------------------------------------------------------------
Long-term debt $ 131,261 $ 16,938 $ 16,881 $ 16,732 $ 15,710 $ - $ 65,000
Line of credit - - - - - - -
facility(2)
Operating leases 37,461 11,139 7,455 5,565 4,634 3,675 4,993
------------------------------------------------------------------------------------------------------
Total contractual cash
obligations $ 168,722 $ 28,077 $ 24,336 $ 22,297 $ 20,344 $ 3,675 $ 69,993
======================================================================================================
(1) Cash obligations herein are not discounted and do not include related
interest. See Notes 9 and 14 to the Consolidated Financial Statements regarding
long-term debt and commitments and contingencies, respectively.
(2) As of December 31, 2003, there was no borrowing balance on the credit
facility and therefore there is no applicable interest rate as the rates are
determined on the borrowing date. The available balance was $69.8 million, and
the commitment fee was 0.30%. The remaining $5.2 million was used for
non-interest bearing letters of credit, the majority of which were collateral
for insurance. The Company generally uses the credit facility for short-term
borrowings and discloses amounts outstanding as a current liability. See Note 16
to the Consolidated Financial Statements regarding refinancing of the line of
credit facility.
MARKET RISK
The Company is exposed to the effect of interest rate changes and
foreign currency fluctuations. Due to the immateriality of potential impacts
from changes in these rates, the Company does not use derivative contracts to
manage these risks.
INTEREST RATE RISK
The fair value of the Company's cash and short-term investment
portfolio at December 31, 2003 approximated carrying value. Given the short-term
nature of these instruments, market risk, as measured by the change in fair
value resulting from a hypothetical 10% change in interest rates, is not
material.
The Company's objectives in managing exposure to interest rate changes
are to limit the impact of interest rate changes on earnings and cash flows and
to lower overall borrowing costs. To achieve these objectives, the Company
maintains fixed rate debt as a percentage of its net debt in a percentage range
set by policy. The fair value of the Company's long-term debt, including current
maturities and the amount outstanding on the line of credit facility,
approximated its carrying value at December 31, 2003. Market risk was estimated
to be $3.5 million as the potential increase in fair value resulting from a
hypothetical 10% decrease in the Company's debt specific borrowing rates at
December 31, 2003.
FOREIGN EXCHANGE RISK
The Company operates subsidiaries, and is associated with licensees and
affiliates operating solely in countries outside of the United States, and in
currencies other than the U.S. dollar. Consequently, these operations are
inherently exposed to risks associated with fluctuation in the value of the
local currencies of these countries compared to the U.S. dollar. At December 31,
2003, approximately $3.2 million of financial instruments, primarily long-term
debt, were denominated principally in Euros. The effect of a hypothetical change
of 10% in year-end exchange rates would be immaterial.
OFF-BALANCE SHEET ARRANGEMENTS
The Company uses various structures for the financing of operating
equipment, including borrowing, operating and capital leases, and sale-leaseback
arrangements. All debt, including the discounted value of future minimum lease
payments under capital lease arrangements, is presented in the balance sheet.
The Company's commitments under operating lease arrangements were $37.4 million
at
34
December 31, 2003. The Company also has exposure under performance guarantees by
contractual joint ventures and indemnification of its bonding agent and
licensees. However, the Company has never experienced any material adverse
effects to financial position, results of operations or cash flows relative to
these arrangements. All foreign joint ventures are accounted for using the
equity method. The Company has no other off-balance sheet financing arrangements
or commitments. See Note 14 in the Notes to Consolidated Financial Statements
regarding commitments and contingencies.
EFFECTS OF TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES
Affholder, the Company's wholly-owned subsidiary that comprises the
tunneling segment, owns, or leases under long-term operating leases with
third-party leasing companies, several pieces of tunneling equipment, including
cranes and tunnel boring machines. From time to time for specific projects,
Affholder will lease additional equipment from a variety of sources. During
2003, Affholder leased four cranes and one tunnel boring machine from A-Y-K-E
Partnership. A-Y-K-E is a partnership that is controlled by Robert W. Affholder,
the Company's Senior Executive Vice President and a member of the Company's
board of directors. During the year ended December 31, 2003, Affholder paid
A-Y-K-E $510,000 pursuant to equipment leases. This amount represents 7.5% of
all lease payments made by Affholder during 2003 and 2.9% of all lease payments
made by the Company in 2003. The cranes and tunnel boring machine that are
currently under lease are leased under separate lease agreements on terms that
are substantially similar to, or better than, those otherwise available to
Affholder in the market. The leases are terminable upon 30 days' prior notice by
either party. During 2003, A-Y-K-E leased equipment only to Affholder. At
Affholder's discretion, Affholder may sublease the equipment to third parties
and retain any profit generated from the sublease.
NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new accounting pronouncements, see Note 2 to the
Consolidated Financial Statements.
MANAGEMENT CHANGES
Effective April 1, 2003, Thomas S. Rooney, Jr. was named President and
Chief Operating Officer, reporting to Anthony W. Hooper, who remained Chairman
of the Board and Chief Executive Officer. Effective July 22, 2003, Anthony W.
Hooper resigned as Chairman of the Board and Chief Executive Officer. Effective
on that same date, the Company's board of directors named Thomas S. Rooney, Jr.
as Chief Executive Officer. Mr. Rooney retained the responsibilities of his
previous position and was elected as a new member to the board of directors.
Also effective July 22, 2003, Alfred L. Woods, an independent member of
the Company's board of directors since 1997, was elected non-executive Chairman
of the Board. Mr. Woods has served as chair of the Corporate Governance &
Nominating Committee and as a member of the Compensation Committee. He is
president of Woods Group, a management consulting company based in Williamsburg,
Virginia.
Effective July 31, 2003, Carroll W. Slusher resigned his position as
the Company's Vice President-North America.
Effective December 4, 2003, the Company appointed Christian G. Farman
as Vice President and Chief Financial Officer. He replaced Joseph A. White, who
resigned effective on that same date.
35
FORWARD-LOOKING INFORMATION
This Annual Report contains various forward-looking statements that are
based on information currently available to management and on management's
beliefs and assumptions. When used in this document, the words "anticipate,"
"estimate," "believes," "plans," and similar expressions are intended to
identify forward-looking statements, but are not the exclusive means of
identifying such statements. Such statements are subject to risks and
uncertainties. The Company's actual results may vary materially from those
anticipated, estimated or projected due to a number of factors, such as the
competitive environment for the Company's products and services, the
geographical distribution and mix of the Company's work, the timely award or
cancellation of projects, political circumstances impeding the progress of work
and other factors set forth in reports and other documents filed by the Company
with the Securities and Exchange Commission from time to time. The Company does
not assume a duty to update forward-looking statements. Please use caution and
do not place reliance on forward-looking statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
For information concerning this item, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations-Market
Risk," which information is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
For information concerning this item, see "Item 15. Exhibits, Financial
Statement Schedules, and Reports on Form 8-K," which information is incorporated
herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer
carried out an evaluation of the effectiveness of the Company's disclosure
controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e)
and 15d-15(e)) as of the end of the period covered by this report.
As part of the evaluation, the Chief Executive Officer and Chief
Financial Officer took into account that the Company's auditors did not identify
any material weaknesses or reportable conditions with respect to internal
controls, but did note that certain deficiencies, including the need for more
detailed account reconciliations and enhanced management review of certain
financial statement balances, may potentially rise to the level of significant
deficiencies as defined by proposed rules of the Public Company Accounting
Oversight Board. As a result of the identified deficiencies, the Chief Executive
Officer and Chief Financial Officer implemented improvements in various areas
since December 31, 2003, including more detailed rigorous account
reconciliations in certain areas, and enhanced management review over certain
financial statement balances. Based on their evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were generally effective as of December 31, 2003,
despite the deficiencies described above and that, as of the date of filing this
Annual Report on Form 10-K, the Company's disclosure controls and procedures
were effective at the reasonable assurance level.
36
There were no changes in the Company's internal controls over financial
reporting that occurred during the Company's fiscal year ended December 31, 2003
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
The Company has started to take the following steps to enhance its
internal accounting controls over financial reporting:
- appointing a Corporate Controller;
- instituting enhanced detailed senior and regional management
reviews of financial accounts of regional operations;
- enhancing regional management's and controllers' ownership and
accountability over financial accounts and reporting;
- enhancing detailed reviews of collectibility of accounts
receivable;
- enhancing detailed reviews of fixed asset accounts and
reconciliations to the Company's general ledger;
- increasing supervisory and management reviews of procedures,
reconciliation activities and financial reporting; and
- improving information technology system integrity management and
enhancement of systems controls.
The Company is also evaluating and has implemented other improvements
to the system of internal controls, as it prepares for the implementation of new
rules required under Section 404 of the Sarbanes-Oxley Act.
PART III
Item 10. Directors and Executive Officers of the Registrant
For information concerning this item, see "Item 1. Business-Executive
Officers" and the proxy statement to be filed with respect to the 2004 Annual
Meeting of Stockholders (the "2004 Proxy Statement"), which information is
incorporated herein by reference.
Item 11. Executive Compensation
For information concerning this item, see the 2004 Proxy Statement,
which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
For information concerning this item, see the 2004 Proxy Statement,
which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
For information concerning this item, see the 2004 Proxy Statement,
which information is incorporated herein by reference.
37
Item 14. Principal Accounting Fees and Services
For information concerning this item, see the 2004 Proxy Statement,
which information is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements:
The consolidated financial statements filed in this Annual Report on
Form 10-K are listed in the attached Index to Consolidated Financial Statements.
2. Financial Statement Schedules:
No financial statement schedules are included herein because they are
not required or are not applicable or the required information is contained in
the consolidated financial statements or notes thereto.
3. Exhibits:
The exhibits required to be filed as part of this Annual Report on Form
10-K are listed in the attached Index to Exhibits.
(b) Current Reports on Form 8-K:
On November 4, 2003, the Company filed a Current Report on Form 8-K,
under Item 12, to provide the Company's earnings release, dated October 30,
2003, announcing its financial results for the fiscal quarter ended September
30, 2003, and to provide a transcript of the Company's October 31, 2003
conference call held to announce and discuss its financial results for the
fiscal quarter ended September 30, 2003.
On December 1, 2003, the Company filed a Current Report on Form 8-K,
under Item 5 regarding the date of the Company's 2004 annual meeting of
stockholders and stockholder proposal procedures, and under Item 9 to provide
the Company's press release, dated December 1, 2003 announcing the amendment of
its bank credit facility debt covenants.
The Company also filed a Current Report on Form 8-K on December 4,
2003, under Item 9, to provide the Company's press release, dated December 4,
2003, announcing the appointment of Christian G. Farman as its Vice President
and Chief Financial Officer.
On January 22, 2004, following the end of the period covered by this
report, the Company filed a Current Report on Form 8-K, under Item 12, to
provide the Company's press release dated January 22, 2004, announcing that it
will report its 2003 fourth-quarter and full-year results by March 15, with the
filing of its 10-K.
38
POWER OF ATTORNEY
The registrant and each person whose signature appears below hereby
appoint Thomas S. Rooney, Jr. and Christian G. Farman as attorneys-in-fact with
full power of substitution, severally, to execute in the name and on behalf of
the registrant and each such person, individually and in each capacity stated
below, one or more amendments to the annual report which amendments may make
such changes in the report as the attorney-in-fact acting deems appropriate and
to file any such amendment to the report with the Securities and Exchange
Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 15, 2004 INSITUFORM TECHNOLOGIES, INC.
By: /s/ Christian G. Farman
------------------------------------------
Christian G. Farman
Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Thomas S. Rooney, Jr. Principal Executive Officer and March 15, 2004
- ------------------------------------ Director
Thomas S. Rooney, Jr.
/s/ Christian G. Farman Principal Financial and March 15, 2004
- ------------------------------------ Accounting Officer
Christian G. Farman
/s/ Alfred L. Woods Director March 15, 2004
- ------------------------------------
Alfred L. Woods
/s/ Robert W. Affholder Director March 15, 2004
- ------------------------------------
Robert W. Affholder
/s/ Paul A. Biddelman Director March 15, 2004
- ------------------------------------
Paul A. Biddelman
/s/ Stephen P. Cortinovis Director March 15, 2004
- ------------------------------------
Stephen P. Cortinovis
39
/s/ John P. Dubinsky Director March 15, 2004
- ------------------------------------
John P. Dubinsky
/s/ Juanita H. Hinshaw Director March 15, 2004
- ------------------------------------
Juanita H. Hinshaw
/s/ Thomas Kalishman Director March 15, 2004
- ------------------------------------
Thomas Kalishman
/s/ Sheldon Weinig Director March 15, 2004
- ------------------------------------
Sheldon Weinig
40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Auditors................................................. F-2
Consolidated Statements of Income for the Years
ended December 31, 2003, 2002 and 2001..................................... F-4
Consolidated Balance Sheets, December 31, 2003 and 2002 ........................ F-5
Consolidated Statements of Stockholders' Equity for the Years
ended December 31, 2003, 2002 and 2001..................................... F-6
Consolidated Statements of Cash Flows for the Years
ended December 31, 2003, 2002 and 2001..................................... F-7
Notes to Consolidated Financial Statements...................................... F-8
No Financial Statement Schedules are included herein because they are not
required or not applicable or the required information is contained in the
consolidated financial statements or notes thereto.
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
and Shareholders of
Insituform Technologies, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Insituform
Technologies, Inc. and its subsidiaries at December 31, 2003 and 2002 and the
results of their operations and their cash flows for the years ended December
31, 2003 and 2002, in conformity with accounting principles generally accepted
in the United States of America. 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 of these statements in accordance with auditing standards generally
accepted in the United States of America, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion. The
consolidated financial statements of Insituform Technologies, Inc. as of and for
the year ended December 31, 2001, were audited by other independent accountants
who have ceased operations. Those independent accountants expressed an
unqualified opinion on those financial statements dated February 1, 2002, before
the revision described in Note 8.
As discussed above, the consolidated financial statements of Insituform
Technologies, Inc. as of and for the year ended December 31, 2001, were audited
by other independent accountants who have ceased operations. As described in
Note 8, these financial statements have been revised to include the transitional
disclosures required by Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets", which was adopted by the Company as of January 1,
2002. We audited the transitional disclosures described in Note 8. In our
opinion, the transitional disclosures for 2001 in Note 8 are appropriate.
However, we were not engaged to audit, review, or apply any procedures to the
2001 financial statements of the Company other than with respect to such
disclosures and, accordingly, we do not express an opinion or any other form of
assurance on the 2001 consolidated financial statements taken as a whole.
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 12, 2004
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The following report is a copy of a report previously issued by Arthur Andersen
LLP and has not been reissued by Arthur Andersen LLP.
To the Board of Directors and the Shareholders of
Insituform Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Insituform
Technologies, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Insituform Technologies, Inc.
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 1, 2002
F-3
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In thousands, except per share amounts)
2003 2002 2001
--------------------------------------------
REVENUES $ 487,272 $ 480,358 $ 445,310
COST OF REVENUES 384,614 354,736 320,462
--------------------------------------------
GROSS PROFIT 102,658 125,622 124,848
SELLING, GENERAL AND ADMINISTRATIVE 79,733 68,049 66,955
AMORTIZATION EXPENSE 1,595 1,433 7,001
RESTRUCTURING CHARGES (Note 5) (261) 2,458 4,127
IMPAIRMENT CHARGE (Note 6) - 3,499 -
--------------------------------------------
OPERATING INCOME 21,591 50,183 46,765
--------------------------------------------
OTHER (EXPENSE) INCOME:
Interest expense (8,235) (7,911) (9,339)
Other (Note 11) (1,274) 3,055 2,309
--------------------------------------------
TOTAL OTHER EXPENSE (9,509) (4,856) (7,030)
--------------------------------------------
INCOME BEFORE TAXES ON INCOME 12,082 45,327 39,735
TAXES ON INCOME (Note 12) 6,809 17,451 15,653
--------------------------------------------
INCOME BEFORE MINORITY INTERESTS, EQUITY IN EARNINGS (LOSSES) AND
DISCONTINUED OPERATIONS 5,273 27,876 24,082
MINORITY INTERESTS (211) (150) (273)
EQUITY IN EARNINGS (LOSSES) OF AFFILIATED COMPANIES (434) 834 1,131
--------------------------------------------
INCOME FROM CONTINUING OPERATIONS 4,628 28,560 24,940
LOSS FROM DISCONTINUED OPERATIONS, net of tax benefits of
$702, $3,674 and $47, respectively (Note 4) (1,103) (5,869) (72)
--------------------------------------------
NET INCOME $ 3,525 $ 22,691 $ 24,868
============================================
EARNINGS PER SHARE:
Basic:
Income from continuing operations $ 0.17 $ 1.08 $ 0.94
Loss from discontinued operations (0.04) (0.22) -
--------------------------------------------
Net income $ 0.13 $ 0.86 $ 0.94
============================================
Diluted:
Income from continuing operations $ 0.17 $ 1.07 $ 0.93
Loss from discontinued operations (0.04) (0.22) -
--------------------------------------------
Net income $ 0.13 $ 0.85 $ 0.92
============================================
The accompanying notes are an integral part of the financial statements.
F-4
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - AS OF DECEMBER 31, 2003 AND 2002
(In thousands, except share information)
2003 2002
----------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including restricted cash of $6,126 and $3,985, $ 99,991 $ 75,386
respectively
Receivables, net 90,814 82,962
Retainage 24,902 23,726
Costs and estimated earnings in excess of billings 27,853 36,680
Inventories 12,935 12,402
Prepaid expenses and other assets 19,515 13,586
Assets held related to discontinued operations 1,263 7,909
----------------------------
Total current assets 277,273 252,651
----------------------------
PROPERTY, PLANT AND EQUIPMENT, less accumulated depreciation 75,667 71,579
----------------------------
OTHER ASSETS:
Goodwill 131,613 131,032
Other assets 23,807 17,751
----------------------------
Total other assets 155,420 148,783
----------------------------
Total assets $ 508,360 $ 473,013
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt and line of credit $ 16,938 $ 49,360
Accounts payable and accrued expenses 82,670 69,776
Billings in excess of costs and estimated earnings 8,495 5,992
Liabilities related to discontinued operations 1,770 3,293
----------------------------
Total current liabilities 109,873 128,421
LONG-TERM DEBT, less current maturities 114,323 67,014
OTHER LIABILITIES 3,530 3,530
----------------------------
Total liabilities 227,726 198,965
----------------------------
MINORITY INTERESTS 1,465 1,430
----------------------------
COMMITMENTS AND CONTINGENCIES (Note 14)
STOCKHOLDERS' EQUITY:
Preferred stock, undesignated, $.10 par - shares authorized 2,000,000; none outstanding - -
Common stock, $.01 par - shares authorized 60,000,000; shares issued 28,815,669 and
28,776,438; shares outstanding 26,458,205 and 26,558,165 288 288
Unearned restricted stock (412) -
Additional paid-in capital 133,794 132,820
Retained earnings 198,328 194,803
Treasury stock - 2,357,464 and 2,218,273 shares (51,596) (49,745)
Accumulated other comprehensive loss (1,233) (5,548)
----------------------------
Total stockholders' equity 279,169 272,618
----------------------------
Total liabilities and stockholders' equity $ 508,360 $ 473,013
============================
The accompanying notes are an integral part of the financial statements.
F-5
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In thousands, except number of shares)
Unearned
Common Stock Restricted Additional
--------------------------- Stock Paid-In Retained
Shares Amount Compensation Capital Earnings
--------------------------------------------------------------------------
BALANCE, December 31, 2000 28,152,570 $ 282 - $ 81,934 $ 147,244
Net income - - - - 24,868
Issuance of common stock
upon exercise of options,
including income tax
benefit of $2,209 418,588 4 - 8,257 -
Issuance of common stock
pursuant to acquisition - - - 39,460 -
Common stock repurchased - - - - -
Foreign currency
translation adjustment - - - - -
Total comprehensive income - - - - -
--------------------------------------------------------------------------
BALANCE, December 31, 2001 28,571,158 $ 286 - $ 129,651 $ 172,112
Net income - - - - 22,691
Issuance of common stock
upon exercise of options,
including income tax
benefit of $654 205,280 2 - 3,169 -
Common stock repurchased - - - - -
Foreign currency translation
adjustment - - - - -
Total comprehensive income - - - - -
--------------------------------------------------------------------------
BALANCE, December 31, 2002 28,776,438 $ 288 - $ 132,820 $ 194,803
Net income - - - - 3,525
Issuance of common stock
upon exercise of options,
including income tax
benefit of $42 39,231 - - 472 -
Restricted stock issued in
connection with LTIP - - $ (993) 993 -
Amortization and forfeitures
of restricted stock - - 581 (491) -
Common stock repurchased - - - - -
Foreign currency translation
adjustment - - - - -
Total comprehensive income - - - - -
--------------------------------------------------------------------------
BALANCE, December 31, 2003 28,815,669 $ 288 $ (412) $ 133,794 $ 198,328
==========================================================================
Accumulated
Other Total
Treasury Comprehensive Stockholders' Comprehensive
Stock Loss Equity Income
-------------------------------------------------------------
BALANCE, December 31, 2000 $ (58,478) $ (5,692) $ 165,290
Net income - - 24,868 $ 24,868
Issuance of common stock
upon exercise of options,
including income tax
benefit of $2,209 - - 8,261 -
Issuance of common stock
pursuant to acquisition 26,133 - 65,593 -
Common stock repurchased (12,218) - (12,218) -
Foreign currency
translation adjustment - (1,667) (1,667) (1,667)
------------
Total comprehensive income - - - $ 23,201
-------------------------------------------- ============
BALANCE, December 31, 2001 $ (44,563) $ (7,359) $ 250,127
Net income - - 22,691 $ 22,691
Issuance of common stock
upon exercise of options,
including income tax
benefit of $654 - - 3,171 -
Common stock repurchased (5,182) - (5,182) -
Foreign currency translation
adjustment - 1,811 1,811 1,811
------------
Total comprehensive income - - - $ 24,502
-------------------------------------------- ============
BALANCE, December 31, 2002 $ (49,745) $ (5,548) $ 272,618
Net income - - 3,525 $ 3,525
Issuance of common stock
upon exercise of options,
including income tax
benefit of $42 - - 472 -
Restricted stock issued in
connection with LTIP - - - -
Amortization and forfeitures
of restricted stock - - 90 -
Common stock repurchased (1,851) - (1,851) -
Foreign currency translation
adjustment - 4,315 4,315 $ 4,315
------------
Total comprehensive income - - - $ 7,840
-------------------------------------------- ============
BALANCE, December 31, 2003 $ (51,596) $ (1,233) $ 279,169
============================================
The accompanying notes are an integral part of the financial statements.
F-6
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In thousands)
2003 2002 2001
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,525 $ 22,691 $ 24,868
Loss from discontinued operations 1,103 5,869 72
--------------------------------------------
Income from continuing operations 4,628 28,560 24,940
Adjustments to reconcile net income to net cash provided by operating
activities, excluding the effects of acquisitions -
Depreciation 15,521 14,397 14,382
Amortization 1,595 1,433 7,001
(Gain) loss on sale of assets/investment 1,375 (1,225) -
Reserve for notes receivable 1,090 - -
Other 1,912 227 1,425
Asset impairment charge - 3,499 -
Restructuring charges (261) 2,458 4,127
Deferred income taxes (1,624) (4,364) 891
Changes in operating assets and liabilities, net of purchased businesses
(Note 13) 5,157 (19,657) (8,051)
--------------------------------------------
Net cash provided by operating activities of continuing operations 29,393 25,328 44,715
Net cash provided (used) by operating activities of discontinued
operations 5,192 853 (9,879)
--------------------------------------------
Net cash provided by operating activities 34,585 26,181 34,836
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (19,929) (21,782) (16,638)
Proceeds from sale of fixed assets 1,365 10,503 9,048
Proceeds from sale of investment - 1,920 -
Net proceeds from sale of businesses (discontinued operations) - 5,430 -
Purchases of businesses, net of cash acquired (7,776) (8,459) (1,878)
Other investing activities - (960) (2,147)
--------------------------------------------
Net cash used by investing activities (26,340) (13,348) (11,615)
--------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 430 2,517 6,052
Purchases of treasury stock (1,597) (5,182) (12,218)
Proceeds from long-term debt 65,112 - -
Principal payments on long-term debt (24,224) (20,938) (20,611)
Principal (payments) borrowings on line of credit, net (26,000) 10,246 14,995
Deferred financing charges (867) - -
--------------------------------------------
Net cash provided by/(used in) financing activities 12,854 (13,357) (11,782)
--------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 3,506 1,261 (897)
--------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 24,605 737 10,542
CASH AND CASH EQUIVALENTS, beginning of year 75,386 74,649 64,107
--------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 99,991 $ 75,386 $ 74,649
============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for-
Interest $ 7,696 $ 7,828 $ 9,652
Income taxes 10,307 17,591 15,121
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock pursuant to acquisition $ - $ - $ 65,593
Issuance of note payable pursuant to acquisition $ - $ - $ 5,350
Notes receivable on sale of discontinued operations $ - $ 5,000 $ -
Note payable recovered in Kinsel settlement $ (5,350) $ - $ -
Accrued interest recovered in Kinsel settlement $ 557 $ - $ -
Treasury stock recovered in Kinsel settlement $ 254 $ - $ -
The accompanying notes are an integral part of the financial statements.
F-7
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Insituform Technologies, Inc. (a Delaware corporation) and subsidiaries
(collectively, the "Company") is a worldwide provider of proprietary trenchless
technologies for the rehabilitation and improvement of sewer, water, gas and
industrial pipes. The Company's primary technology is the Insituform(R) process,
a proprietary cured-in-place pipeline rehabilitation process (the "Insituform
CIPP Process"). Pipebursting is a non-proprietary trenchless method of dilating
and replacing an old pipeline with a new high-density polyethylene pipe. The
microtunneling process is a non-proprietary method of drilling a new tunnel from
surface operated equipment. Sliplining is a non-proprietary method used to push
or pull a new pipeline into an old one. The Company's Tite Liner(R) ("Tite
Liner") process is a proprietary method of lining new and existing pipe with a
corrosion and abrasion resistant polyethylene pipe. The Company also engages in
tunneling used in the installation of new underground services.
2. SUMMARY OF ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries, the most significant of which is a 75%-owned
United Kingdom subsidiary, Insituform Linings Plc. For contractual joint
ventures, the Company recognizes revenue, costs and profits on its portion of
the contract. All significant intercompany transactions and balances have been
eliminated.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock-Based Compensation
At December 31, 2003, the Company had two active stock-based compensation plans,
which are described in Note 10. The Company applies the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for those plans. The Company recorded stock-based compensation
expense of $0.5 million related to restricted stock and deferred stock units
(See Note 10) in 2003. There was no stock-based compensation expense in 2002 or
2001 net income as all options granted during those years had an exercise price
equal to the market value of the underlying common stock on the date of the
grant. The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
123, "Accounting for Stock-Based Compensation," to stock-based compensation (in
thousands, except share data):
2003 2002 2001
--------------------------------------------
Net income - as reported $ 3,525 $ 22,691 $ 24,868
Add: Total stock-based compensation expense included
in net income, net of related tax effects 223 - -
--------------------------------------------
Deduct: Total stock-based compensation expense
determined under fair value method for all awards,
net of related tax effects (3,259) (6,080) (5,710)
--------------------------------------------
Pro forma net income $ 489 $ 16,611 $ 19,158
============================================
F-8
Basic earnings per share:
As reported $ 0.13 $ 0.86 $ 0.94
Pro forma 0.02 0.63 0.72
Diluted earnings per share:
As reported 0.13 0.85 0.92
Pro forma 0.02 0.62 0.71
For SFAS 123 disclosure purposes, the weighted average fair value of stock
options is required to be based on a theoretical option-pricing model such as
the Black-Scholes method. In actuality, because the Company's stock options are
not traded on an exchange and are subject to vesting periods, the disclosed fair
value represents only an approximation of option value based solely on
historical performance. Beginning in 2000, the Company decided to increase the
alignment of key employee goals and shareholder objectives by increasing the
relative value of variable compensation.
For SFAS 148 disclosure purposes, the stock-based compensation expense recorded
in the determination of reported net income is disclosed in the above table. The
pro forma stock-based compensation expense includes the recorded expense and
expense related to stock options that was determined using the fair value
method.
Revenues
Revenues include construction and installation revenues that are recognized
using the percentage-of-completion method of accounting in the ratio of costs
incurred to estimated final costs. 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. Since the financial
reporting of these contracts depends on estimates, which are assessed
continually during the term of these contracts, recognized revenues and profit
are subject to revisions as the contract progresses to completion. Revisions in
profit estimates are reflected in the period in which the facts that give rise
to the revision become known. When estimates indicate that a loss will be
incurred on a contract on completion, a provision for the expected loss is
recorded in the period in which the loss becomes evident. At December 31, 2003,
the Company had provided $4.7 million for expected losses on contracts,
including a loss provision of $4.1 million for additional costs related to the
removal and reinstallation of an Insituform CIPP Process liner in Boston,
Massachusetts. There were no significant loss provisions at December 31, 2002.
Revenues from change orders, extra work, variations in the scope of work and
claims are recognized when realization is reasonably assured, and at estimated
recoverable amounts.
Research and Development
The Company expenses research and development costs as incurred. Research and
development costs of $2.0 million, $2.0 million and $2.3 million for the years
ended December 31, 2003, 2002 and 2001, respectively, are included in selling,
general and administrative expenses in the accompanying consolidated statements
of income.
Taxes on Income
The Company provides for estimated income taxes payable or refundable on current
year income tax returns as well as the estimated future tax effects attributable
to temporary differences and carryforwards, based upon enacted tax laws and tax
rates, and in accordance with Statement of Financial Accounting Standards 109,
"Accounting for Income Taxes" (SFAS 109). SFAS 109 also requires that a
valuation allowance be recorded against any deferred tax assets that are not
likely to be realized in the future.
F-9
Earnings Per Share
Earnings per share have been calculated using the following share information:
2003 2002 2001
------------------------------------------
Weighted average number of common shares used for basic EPS 26,470,587 26,533,541 26,427,276
Effect of dilutive stock options, warrants, restricted stock
and deferred stock units (Note 10) 150,105 198,221 495,996
------------------------------------------
Weighted average number of common shares and dilutive
potential common stock used in diluted EPS 26,620,692 26,731,762 26,923,272
==========================================
Classification of Current Assets and Current Liabilities
The Company includes in current assets and current liabilities certain amounts
realizable and payable under construction contracts which may extend beyond one
year. The construction periods on projects undertaken by the Company generally
range from 1 to 24 months.
Cash and Cash Equivalents
The Company classifies highly liquid investments with original maturities of 90
days or less as cash equivalents. Recorded book values are reasonable estimates
of fair value for cash and cash equivalents. Restricted cash consists of
payments from certain customers placed in escrow in lieu of retention in case of
potential issues regarding future job performance by the Company. Restricted
cash is similar to retainage and is therefore classified as a current asset,
consistent with the Company's policy on retainage.
Retainage
Many of the contracts under which the Company performs work contain retainage
provisions. Retainage refers to that portion of revenue earned by the Company
but held for payment by the customer pending satisfactory completion of the
project. Unless reserved, the Company assumes that all amounts retained by
customers under such provisions are fully collectible. Retainage on active
contracts is classified as a current asset regardless of the term of the
contract. Retainage is generally collected within one year of the completion of
a contract, although collection can take up to two years in Europe. Retainage
due after one year was approximately $1.1 million at December 31, 2003.
Allowance for Doubtful Accounts
Management makes estimates of the uncollectibility of accounts receivable and
retainage. The Company records a reserve for the greater of historical
percentages applied against aged balances, or specific accounts to reduce
receivables, including retainage, to the amount that is expected to be
collected. The specific reserves are reevaluated and adjusted as additional
information is received. After all reasonable attempts to collect the receivable
or retainage have been explored, the account is written off against the reserve.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Actual cost is used to value raw materials and supplies. Standard cost, which
approximates actual cost, is used to value work-in-process, finished goods and
construction materials. Standard cost includes direct labor, raw materials, and
manufacturing overhead based on normal capacity.
F-10
Long-Lived Assets
Property, plant and equipment, and other intangibles are recorded at cost and
are amortized on a straight-line basis over their estimated useful lives.
Intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable based on estimated undiscounted future cash flows. If impairment is
indicated, the asset is written down to its fair value. See Notes 4 and 6
regarding discontinued operations and intangible asset impairment.
Goodwill
Prior to 2002, the Company amortized goodwill over periods of 15 to 25 years on
the straight-line basis. SFAS 142, which was adopted by the Company on January
1, 2002, provides that goodwill should not be amortized, but shall be tested for
impairment annually, or more frequently if circumstances indicate potential
impairment. The Company recognized no amortization expense in 2003 and 2002, nor
was any goodwill identified as being impaired based on management's impairment
analyses performed during 2003 and 2002. Amortization expense related to
goodwill for the year ended December 31, 2001 was $6.2 million pre-tax. See Note
8 regarding acquired intangible assets and goodwill.
Treasury Stock
Treasury stock is accounted for at acquisition cost.
Foreign Currency Translation
Results of operations for foreign entities are translated using the average
exchange rates during the period. Current 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.
New Accounting Pronouncements
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Instruments with
Characteristics of Both Liabilities and Equity," which establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 requires that an issuer
classify a financial instrument that is within its scope, which may have
previously been reported as equity, as a liability (or an asset in some
circumstances). This statement was effective for financial instruments entered
into or modified after May 31, 2003, and otherwise was effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS 150 did not have a material impact on the Company's financial
position or results of operations.
In January 2003 (as revised December 2003), the FASB issued Interpretation No.
46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," for certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 requires that variable
interest entities, as defined, should be consolidated by the primary
beneficiary, which is defined as the entity that is expected to absorb the
majority of the expected losses, receive the majority of the gains or both. FIN
46 requires that companies disclose certain information about a variable
interest entity created prior to February 1, 2003. The application of FIN 46,
which was previously required on July 1, 2003 for entities created prior to
February 1, 2003 and immediately for any variable interest entities created
after January 31, 2003, has been deferred until years ending after December 31,
2003. The Company will be required to adopt FIN 46 in the first quarter of 2004.
The Company is evaluating the
F-11
provision of FIN 46 related to its foreign joint ventures and certain leasing
arrangements, but does not anticipate a material impact upon adoption.
In November 2002, FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued
along with expanded disclosures of warranty reserves. It also requires that a
guarantor recognize a liability for the fair value of the obligation undertaken
in issuing the guarantee at the inception of the guarantee. This interpretation
incorporates the guidance in FIN 34, "Disclosure of Indirect Guarantees of
Indebtedness of Others," which is being superseded. The initial recognition and
initial measurement provisions of FIN 45 are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end and the disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. Adoption of FIN 45 did not have a material impact on the consolidated
financial statements. See Note 14 regarding contractual guarantees.
In June 2002, FASB issued SFAS 146, "Accounting for Costs Associated with Exit
or Disposal Activities." SFAS 146 requires an entity to recognize, and measure
at fair value, a liability for costs associated with an exit or disposal
activity in the period in which the liability is incurred. SFAS 146 supercedes
Emerging Issues Task Force Issue ("EITF") No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)." SFAS 146 is effective
for exit or disposal activities that are initiated after December 31, 2002. The
Company adopted the provisions of SFAS 146 effective January 1, 2003. There was
no material impact upon adoption.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections." SFAS 4
and 44 relate to the treatment of early debt extinguishments and their
classification on an entity's financial statements. SFAS 145 recognizes that
early debt extinguishments have become more commonplace as a risk management
strategy, and thus fail to meet the "unusual and infrequent" criteria of an
extraordinary item. SFAS 64 was issued to establish accounting requirements for
the effects of transition to the provisions of the Motor Carrier Act of 1980.
Those transitions are completed, and therefore SFAS 64 is no longer necessary.
SFAS 13, "Accounting for Leases," is amended to require sale-leaseback
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This statement was effective for the
Company in fiscal year 2002 and had no material impact on adoption.
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 143 ("SFAS 143"), "Accounting for
Asset Retirement Obligations," which was adopted by the Company as of January 1,
2003. SFAS 143 did not have a material impact on the consolidated financial
statements upon adoption.
3. BUSINESS ACQUISITIONS:
In November 2003, the Company acquired the remaining interest in Ka-Te
Insituform AG ("Ka-Te Insituform") for approximately $2.2 million. Net of
related party debt and shared accrued employee liabilities, the cash paid by the
Company was approximately $0.8 million. Consolidation of Ka-Te Insituform's
financial information from November 2003 forward did not materially impact the
Company's consolidated financial statements.
Effective September 5, 2003, the Company acquired the business and certain
assets of Insituform East, Inc. ("East") for $5.5 million. East was the final
remaining independent licensee of the Insituform CIPP Process and the NuPipe
Process in North America. Certain selected assets such as equipment, inventory,
backlog, licenses and an option to purchase certain additional assets were
included in the acquisition. The
F-12
Company exercised its option to purchase additional assets from East for $0.6
million. The purchase price for both the original purchase and the subsequent
purchase of assets was paid entirely in cash. The purchase price has been
allocated to assets acquired based on their respective fair values at the date
of acquisition. The Company's results reflect the operations of East's former
assets from the date of acquisition and included $4.0 million allocated to
intangible assets, recorded as licenses, purchased backlog and customer
relationships. The East acquisition added $2.7 million in revenues and $0.1
million of operating income in the rehabilitation segment from September 5, 2003
through December 31, 2003.
In July 2003, the Company purchased the remaining third party minority interest
in Video Injection S.A. ("Video Injection"). The purchase price was $0.5 million
and resulted in $0.3 million of additional goodwill.
In June 2003, the Company completed the acquisition of the business of Sewer
Services. The acquisition, with a price of $0.4 million, resulted in an increase
of $0.1 million in goodwill. Sewer Services had revenues of $2.5 million after
the acquisition.
The 2003 acquisitions are not considered material in the aggregate, and pro
forma information has not been presented.
Effective May 1, 2002, the Company acquired the business and certain assets and
liabilities of Elmore Pipe Jacking, Inc. ("Elmore") for approximately $12.5
million. Elmore was a regional provider of trenchless tunneling, microtunneling,
segmented lining and pipe jacking services in the western United States. The
purchase price included $8.5 million in cash, settlement of $2.3 million of debt
owed by Elmore to the Company, and the assumption of an additional $1.7 million
of liabilities, of which $0.2 million was interest-bearing and the remainder,
including covenants not to compete, owed to the former owners of the Elmore
assets. The purchase price was allocated to assets acquired and liabilities
assumed based on their respective fair values at the date of acquisition and
resulted in goodwill of $8.9 million. The Company's results reflect the
operation of Elmore's former assets from the date of acquisition. The Elmore
acquisition added $15.2 million of revenues and $6.7 million of operating loss
in the tunneling segment for the year ended December 31, 2003. These operating
losses were primarily due to the completion of acquired projects which incurred
substantial cost overruns. For the period May 1 to December 31, 2002, Elmore
accounted for $20.7 million of revenue and $1.0 million of operating income. Pro
forma information is immaterial and has not been presented relative to the
Elmore acquisition.
On February 28, 2001, the Company acquired 100% of the stock of Kinsel
Industries, Inc. ("Kinsel") and an affiliated company, Tracks of Texas, Inc.
("Tracks"). Kinsel had operations in pipebursting, microtunneling, wastewater
treatment plant construction, commercial construction and highway construction
and maintenance. Tracks was a real estate and construction equipment leasing
company that primarily leased equipment to Kinsel. The purchase price was
approximately $80 million, paid in a combination of cash, a $5.4 million note to
the seller and 1,847,165 shares of the Company's common stock valued at $35.51
per share. The transaction was accounted for by the purchase method of
accounting, and accordingly, their results are included in the Company's
consolidated income statement from the date of acquisition. The purchase price
was allocated to assets acquired and liabilities assumed based on their
respective fair value at the date of acquisition and resulted in goodwill of
$61.2 million. There were no contingent payments, options, or commitments in
connection with the acquisition. The Company subsequently decided to sell off
portions of Kinsel that did not fit the Company's overall business strategy. In
March 2003, the Company settled various claims against the former shareholders
of Kinsel primarily impacting discontinued operations. See Note 4 regarding
discontinued operations.
4. DISCONTINUED OPERATIONS:
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The Company elected to early adopt the
provisions of SFAS 144 for the year ended December 31,
F-13
2001. SFAS 144 supersedes SFAS 121 "Accounting for the Impairment of Long-Lived
Assets to be Disposed Of" and provides a single accounting model for long-lived
assets to be disposed of by sale. SFAS 144 clarifies certain provisions related
to SFAS 121 and expands the use of discontinued operations to all components of
a business for which separate results of operations can be identified.
During the fourth quarter of 2001, the Company made the decision to sell certain
operations related to the Kinsel acquisition. Accordingly, the Company
classified as discontinued the wastewater treatment plant, commercial
construction and highway operations acquired as part of the Kinsel acquisition.
These operations were not consistent with the Company's operating strategy of
providing differentiated trenchless rehabilitation and tunneling services. The
Company completed the sale of the wastewater treatment plant construction
operations effective January 1, 2002. The Company received $1.5 million in cash
and a $2.0 million note for a total sale price of $3.5 million, resulting in a
slight loss on the sale. During the third quarter of 2002, the Company sold the
heavy highway operations for $2.6 million in cash and $1.5 million in notes,
resulting in a pre-tax gain of $1.5 million, or $0.9 million after-tax. In
addition, the Company completed the sale of certain contracts and assets of the
highway maintenance operations during the fourth quarter of 2002 for certain
assumed liabilities, $1.4 million in cash and a $1.5 million subordinated note,
with no material gain or loss on the sale. Pursuant to the terms of the sale
agreements described above, the Company retained responsibility for some
uncompleted jobs, which has resulted in the absorption of additional trailing
costs. The Company substantially completed these jobs in the second quarter of
2003. This completes the disposition of all material assets classified as
discontinued pursuant to the acquisition of Kinsel. At December 31, 2003,
substantially all discontinued operations have been completed, and the Company
expects little or no discontinued operations activity in 2004.
The Company negotiated settlements, without litigation, during the first quarter
of 2003 between the Company and the former Kinsel owners, and the Company and
the purchasers of the wastewater treatment plant operations acquired from
Kinsel. The Company made various claims against the former shareholders of
Kinsel, arising out of the February 2001 acquisition of Kinsel and Tracks. Those
claims were settled in March 2003 without litigation. Under the terms of the
settlement, 18,891 shares of Company common stock valued at $254,084 based on
the settlement date closing stock price of $13.45 per share, and all of the
promissory notes, totaling $5,350,000 in principal (together with all accrued
and unpaid interest), issued to former Kinsel shareholders in connection with
the acquisition, were returned to the Company from the claim collateral escrow
account established at the time of acquisition. The remaining 56,672 shares of
Company common stock held in the escrow account were distributed to the former
Kinsel shareholders. The settlement of the escrow account primarily related to
matters associated with Kinsel operations that have been sold and presented as
discontinued operations. In January 2003, the Company received notice of
multiple claims, totaling more than $3.5 million, from the buyer of the former
Kinsel wastewater treatment division. The claims arose out of the January 2002
sale of the Kinsel wastewater treatment division and alleged the valuation of
the assets sold was overstated. These settlements resulted in a $1.0 million
pre-tax non-operating gain in the results of continuing operations and a net
pre-tax $1.1 million gain in discontinued operations.
As of December 31, 2003 and December 31, 2002, assets related to discontinued
operations totaled $1.3 million and $7.9 million, respectively, and included
$0.1 million and $0.7 million of unbilled receivables, respectively. Assets
related to discontinued operations also included $0.6 million in retainage
receivables, $0.2 million of trade receivables, and $0.4 million of fixed assets
at December 31, 2003. Liabilities related to discontinued operations totaled
$1.8 million and $3.3 million at December 31, 2003 and December 31, 2002,
respectively. The results of discontinued operations are as follows (in
thousands):
2003 2002
------------------------
REVENUES:
Wastewater Treatment Plant $ (7) $ 37
Commercial Construction and Highway Operations 2,619 22,524
------------------------
$ 2,612 $ 22,561
========================
F-14
2003 2002
------------------------
LOSS FROM DISCONTINUED OPERATIONS:
Wastewater Treatment Plant, net of tax benefit of $90
and $1,153, respectively $ (141) $ (1,842)
Commercial Construction and Highway Operations, net of tax
benefit of $612 and $2,521, respectively (962) (4,027)
------------------------
$ (1,103) $ (5,869)
========================
5. RESTRUCTURING:
In the third quarter of 2002, the Company recorded a pre-tax restructuring
charge of $2.5 million ($1.5 million after-tax), $1.3 million of which was
severance costs associated with the elimination of 75 salaried positions,
primarily related to administrative and other overhead functions. An additional
$1.2 million involved related decisions for information technology asset
write-downs, lease cancellations, and disposal of certain identifiable fixed
assets primarily at the corporate level. The remaining unused portion of this
reserve, approximating $0.2 million, was reversed to income in the third quarter
of 2003. As of December 31, 2003, there was no remaining liability related to
this restructuring.
In the fourth quarter of 2001, the Company recorded a pre-tax restructuring
charge of $4.1 million ($2.5 million after-tax), $0.9 million of which was
severance costs associated with the elimination of 112 company-wide positions
specifically identified as of December 31, 2001. An additional $3.2 million of
the charge related to asset write-downs, lease cancellations and other costs
associated with the closure of eight facilities in the United States and the
disposal of the associated assets. The remaining portion of this reserve,
approximating $27,000, was reversed to income in the third quarter of 2003. As
of December 31, 2003, there was no remaining liability related to this
restructuring.
The following table illustrates each of the restructuring reserve components and
the related balances at December 31, 2003 (in thousands):
Balance at Balance at
December 31, 2002 Charged During Charged During December 31,
2001 Reserve 2002 2003 Reversed 2003
-------------------------------------------------------------------------------------------------
Cash Non-Cash Cash Non-Cash
------------------ ------------------
2001 Reserve
Severance $ 844 $ (844) $ - $ - $ - $ - $ -
Equipment 616 (122) (237) (104) (153) - -
Facility 1,702 (1,171) (302) (202) - (27) -
---------------------------------------------------------------------------------------------
Total $ 3,162 $ (2,137) $ (539) $ (306) $ (153) $ (27) $ -
=============================================================================================
2002 Reserve
Severance $ - $ 1,258 $ (465) $ - $ (559) $ - $ (234) $ -
Equipment - 1,200 (852) - - (348) - -
---------------------------------------------------------------------------------------------
Total $ - $ 2,458 $ (1,317) $ - $ (559) $ (348) $ (234) $ -
=============================================================================================
6. INTANGIBLE ASSET IMPAIRMENT:
During the third quarter of 2002, the Company determined that certain patent,
trademark, license and non-compete assets had become impaired due to business
decisions and other circumstances. No further bidding or work was performed
during 2002 and 2003 that related to any of the intangible assets determined to
be impaired. The impairment analysis was conducted in accordance with SFAS 144,
which the Company early adopted in 2001, and included an assessment of future
undiscounted cash flows expected to be generated from the intangible assets. The
impact of the impairment charge was $3.5 million ($2.2 million after tax).
F-15
7. SUPPLEMENTAL BALANCE SHEET INFORMATION:
Allowance for Doubtful Accounts
Activity in the allowance for doubtful accounts is summarized as follows for the
years ended December 31 (in thousands):
2003 2002 2001
--------------------------------------------
Balance, at beginning of year $ 2,175 $ 2,208 $ 2,067
Charged to expense 2,027 503 537
Write-offs and adjustments (1,194) (536) (396)
--------------------------------------------
Balance, at end of year $ 3,008 $ 2,175 $ 2,208
============================================
In the fourth quarter of 2003, the Company increased its allowance for doubtful
accounts by $0.6 million in accordance with the Company's bad debt policy.
Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts consist of the following
at December 31 (in thousands):
2003 2002
----------------------------
Costs incurred on uncompleted contracts $ 360,897 $ 269,968
Estimated earnings 89,078 73,351
----------------------------
449,975 343,319
Less- Billings to date (430,617) (312,631)
----------------------------
$ 19,358 $ 30,688
============================
Included in the accompanying balance sheets:
Costs and estimated earnings in excess of billings $ 27,853 $ 36,680
Billings in excess of costs and estimated earnings (8,495) (5,992)
----------------------------
$ 19,358 $ 30,688
============================
Costs and estimated earnings in excess of billings represent work performed
which either due to contract stipulations or lacking contractual documentation
needed, could not be billed. Substantially all unbilled amounts are expected to
be billed and collected within one year.
Inventories
Inventories are summarized as follows at December 31 (in thousands):
2003 2002
---------------------------
Raw materials and supplies $ 1,392 $ 908
Work-in-process 3,246 3,665
Finished products 1,932 1,049
Construction materials 6,365 6,780
---------------------------
$ 12,935 $ 12,402
===========================
F-16
Property, Plant and Equipment
Property, plant and equipment consists of the following at December 31 (in
thousands):
Estimated Useful
Lives (Years) 2003 2002
---------------------------------------------
Land and land improvements $ 9,822 $ 9,681
Buildings and improvements 5 - 40 24,807 25,768
Machinery and equipment 4 - 10 114,628 109,337
Furniture and fixtures 3 - 10 12,106 13,429
Autos and trucks 3 - 10 5,203 5,126
Construction in progress 7,761 2,561
----------------------------
174,327 165,902
Less- Accumulated depreciation and amortization of
leasehold improvements (98,660) (94,323)
----------------------------
$ 75,667 $ 71,579
============================
In the fourth quarter of 2003, the Company reduced the carrying value of its
fixed assets by approximately $0.8 million as determined by its impairment
analyses and related assessments.
Other Assets
Other assets are summarized as follows at December 31 (in thousands):
2003 2002
---------------------------
License agreements $ 2,721 $ 1,387
Patents and trademarks 1,660 2,046
Investment in licensees, affiliates, and subsidiaries 5,498 6,412
Deferred income taxes 5,251 1,734
Non-compete agreements 2,069 2,615
Purchased backlog 388 -
Customer relationships 1,767 -
Other 4,453 3,557
---------------------------
$ 23,807 $ 17,751
===========================
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following at December 31
(in thousands):
2003 2002
---------------------------
Accounts payable - trade $ 49,047 $ 45,858
Compensation and bonus 6,246 6,431
Interest 2,523 2,777
Warranty 989 590
Job costs 8,592 9,650
Job loss reserves 4,653 499
Estimated casualty and healthcare liabilities 10,620 3,971
---------------------------
$ 82,670 $ 69,776
===========================
In the fourth quarter of 2003, the Company increased its reserves for
self-insurance and healthcare costs by $3.7 million to reflect recent Company
experience regarding increasing claim costs and updated actuarial information.
F-17
In the fourth quarter of 2003, the Company recorded a loss job provision of $4.1
million to remove and reinstall an Insituform CIPP Process liner in Boston,
Massachusetts.
8. ACQUIRED INTANGIBLE ASSETS AND GOODWILL:
In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets,"
which requires that an intangible asset that is acquired shall be initially
recognized and measured based on its fair value. This statement also provides
that certain intangible assets deemed to have an indefinite useful life, such as
goodwill, should not be amortized, but be tested for impairment annually, or
more frequently if circumstances indicate potential impairment, through a
comparison of fair value to its carrying amount. SFAS 142 was effective for
fiscal periods beginning after December 15, 2001. The Company adopted SFAS 142
on January 1, 2002, at which time amortization of goodwill ceased and a
transitional impairment test was performed. The annual impairment test for
goodwill was performed in the fourth quarter of 2003 and 2002, respectively.
Management retained an independent party to perform a valuation of the Company's
reporting units, which consist of North American rehabilitation, European
rehabilitation, tunneling and Tite Liner, and determined that no impairment of
goodwill existed.
Changes in the carrying amount of goodwill for the year ended December 31, 2003
were as follows (in thousands):
Rehabilitation Tunneling Total
---------------------------------------------
Balance as of December 31, 2002 $ 122,140 $ 8,892 $ 131,032
Addition - Sewer Services, Ltd. 143 - 143
Addition - Video Injection, Inc. 285 - 285
Other 125 28 153
---------------------------------------------
Balance as of December 31, 2003 $ 122,693 $ 8,920 $ 131,613
=============================================
Intangible assets are as follows (in thousands):
As of December 31, 2003
Gross Carrying Accumulated
Amount Amortization
----------------------------
Amortized intangible assets:
Patents and trademarks $ 13,943 $ (12,283)
License agreements 4,803 (2,082)
Non-compete agreements 4,730 (2,661)
Purchased backlog 582 (194)
Customer relationships 1,797 (30)
---------------------------
Total $ 25,855 $ (17,250)
---------------------------
Aggregate amortization expense:
For twelve months ended December 31, 2003 $ 1,595
Estimated amortization expense:
For year ending December 31, 2004 $ 1,580
For year ending December 31, 2005 850
For year ending December 31, 2006 845
For year ending December 31, 2007 452
For year ending December 31, 2008 438
The effect of the adoption of SFAS 142 on reported net income was as follows (in
thousands, except per share information):
F-18
Twelve Months
Ended December 31,
2003 2002 2001
--------------------------------------------
Reported income from continuing operations $ 4,628 $ 28,560 $ 24,940
Add: Goodwill amortization related to continuing operations, net
of tax - - 3,794
--------------------------------------------
Adjusted income from continuing operations $ 4,628 $ 28,560 $ 28,734
Reported net loss from discontinued operations (1,103) (5,869) (72)
Add: Goodwill amortization related to discontinued operations, net
of tax - - 126
--------------------------------------------
Adjusted net income $ 3,525 $ 22,691 $ 28,788
============================================
Basic earnings per share:
Reported income from continuing operations $ 0.17 $ 1.08 $ 0.94
Add: Goodwill amortization related to continuing operations,
net of tax - - 0.14
Adjusted income from continuing operations $ 0.17 $ 1.08 $ 1.09
Reported net loss from discontinued operations (0.04) (0.22) -
Add: Goodwill amortization related to discontinued operations,
net of tax - - -
--------------------------------------------
Adjusted net income $ 0.13 $ 0.86 $ 1.09
============================================
Diluted earnings per share:
Reported income from continuing operations $ 0.17 $ 1.07 $ 0.93
Add: Goodwill amortization related to continuing operations,
net of tax - - 0.14
Adjusted income from continuing operations $ 0.17 $ 1.07 $ 1.07
Reported net loss from discontinued operations (0.04) (0.22) -
Add: Goodwill amortization related to discontinued operations,
net of tax - - -
--------------------------------------------
Adjusted net income $ 0.13 $ 0.85 $ 1.07
============================================
9. LONG-TERM DEBT AND LINE OF CREDIT FACILITY:
Long-term debt and line of credit consisted of the following at December 31 (in
thousands):
2003 2002
----------------------------
7.88% Senior Notes, Series A, payable in $15,715 annual installments
beginning February 2001 through 2007, with interest payable semiannually $ 62,855 $ 78,570
5.29% Senior Notes, Series 2003-A, due April 24, 2013 65,000 -
Line of credit facility - 26,000
5.5% bank term loan, EUR5.7 million, payable in seven equal annual
installments through July 2006, with interest payable quarterly 3,052 3,398
Other notes, including capital leases, interest rates from 5.0% to 10.5% 354 8,406
----------------------------
131,261 116,374
Less- Current maturities (16,938) (49,360)
----------------------------
$ 114,323 $ 67,014
============================
Principal payments required to be made for each of the next five years and
thereafter are summarized as follows (in thousands):
Year Amount
- ---------------------------
2004 $ 16,938
2005 16,881
2006 16,732
F-19
2007 15,710
2008 -
Thereafter 65,000
----------
Total $ 131,261
----------
At December 31, 2003 and 2002, the estimated fair value of the Company's
long-term debt was approximately $131.3 million and $118.2 million,
respectively. Fair value was estimated using discounted market rates for debt of
similar risk and maturity.
Senior Notes
The 7.88% Senior Notes, Series A, may be prepaid at the Company's option, in
whole or in part, at any time, together with a make-whole premium, and upon
specified change in control events each holder has the right to require the
Company to purchase its Senior Notes without any premium. On April 24, 2003, the
Company placed $65.0 million of Senior Notes, Series 2003-A, due April 24, 2013
and bearing interest, payable semi-annually in April and October of each year,
at a rate of 5.29% per annum, with certain institutional investors through a
private offering. The principal amount is due in a single payment on April 24,
2013. The Senior Notes, Series 2003-A, may be prepaid at the Company's option,
in whole or in part, at any time, together with a make-whole premium. Upon
specified change in control events each holder has the right to require the
Company to purchase its Senior Notes, Series 2003-A, without any premium.
These agreements obligate the Company to comply with certain financial ratios
and restrictive covenants that, among other things, place limitations on
operations and sales of assets by the Company or its subsidiaries, and limit the
ability of the Company to incur secured indebtedness and liens. Such agreements
also obligate the Company's subsidiaries to provide guarantees to the holders of
the Senior Notes if guarantees are given by them to certain other lenders. The
Company was not in compliance with all debt covenants at December 31, 2003. See
Note 16 for amendments obtained related to covenant violations.
Line of Credit Facility
Effective March 27, 2003, the Company entered into a new three-year bank
revolving credit facility to replace its expiring bank credit facility. The
facility provided the Company with borrowing capacity of up to $75.0 million.
The quarterly commitment fee ranged from 0.2% to 0.3% per annum on the
unborrowed balance depending on the leverage ratio determined as of the last day
of the Company's preceding fiscal quarter. At the Company's option, the interest
rates were either (i) the LIBOR plus an additional percentage that varies from
0.75% to 1.5% depending on the leverage ratio or (ii) the higher of (a) the
prime rate or (b) the federal funds rate plus 0.50%. As of December 31, 2003,
there was no borrowing balance on the credit facility and therefore there is no
applicable interest rate as the rates are determined on the borrowing date. The
available balance was $69.8 million, and the commitment fee was 0.30%. The
remaining $5.2 million was used for non-interest bearing letters of credit, the
majority of which was collateral for insurance. The Company generally uses the
credit facility for short-term borrowings and discloses amounts outstanding as a
current liability. See Note 16 for refinancing of the line of credit facility.
10. STOCKHOLDERS' EQUITY:
Stock Option Plans
The 2001 Employee Equity Incentive Plan (the "Employee Incentive Plan") provides
for the granting to employees of stock-based awards, including (a) stock
appreciation rights, (b) restricted shares of common stock, (c) performance
awards, (d) stock options and (e) stock units. The maximum number of shares of
common stock which currently may be issued under the Employee Incentive Plan is
2,000,000. The
F-20
Employee Incentive Plan is administered by the Compensation Committee of the
Board of Directors, which determines the eligibility, timing, pricing, amount,
vesting and other terms and conditions of awards, including stock option awards.
The Company accounts for options granted under this plan in accordance with APB
25. The exercise price of each option issued under the 2001 Employee Incentive
Plan equals the closing market price of the Company's stock on the date of grant
and, therefore, the Company makes no charge to earnings with respect to these
options. Stock options, issued under the 2001 Employee Incentive Plan, generally
vest over three years (with 25% vesting upon grant) and have an expiration date
of up to five to ten years after the date of grant.
The 2001 Non-Employee Director Equity Incentive Plan (the "Non-Employee Director
Incentive Plan") provides for the granting of stock options and deferred stock
units to non-employee directors. The total number of shares of common stock
available for issuance under the Non-Employee Director Incentive Plan is
200,000. The Non-Employee Director Incentive Plan is administered by the Board
of Directors. Under the terms of the Non-Employee Director Incentive Plan, each
non-employee director receives a stock option to purchase shares of common stock
and/or deferred stock units each year on the date of the Annual Meeting of
Stockholders (or promptly thereafter, as determined by the Board), provided that
such director continues to be a non-employee director following such Annual
Meeting. The purchase price per share of common stock for which each option is
exercisable is the fair market value per share of common stock on the date the
option is granted. Each option granted under the Non-Employee Director Incentive
Plan is fully vested and exercisable immediately, and expires not later than ten
years from the date of the grant. Deferred stock units represent the obligation
of the Company to transfer common stock to the non-employee director at a future
date.
Under the 1992 Employee Stock Option Plan (the "Employee Plan") and Director
Stock Option Plan (the "Director Plan"), the Company was authorized to grant
options to its employees and directors not to exceed 2,850,000 and 1,500,000
shares of common stock, respectively. No options are to be granted under the
Employee Plan or the Director Plan since the adoption of the Employee Incentive
Plan and the Non-Employee Director Incentive Plan. The plans were administered
by the Board of Directors, which determined the timing of awards, individuals
granted awards, the number of options awarded and the price, vesting schedule
and other conditions of the options. The exercise price of each option equaled
the closing market price of the Company's stock on the date of grant and,
therefore, the Company made no charge to earnings with respect to these options.
Options generally vest over three years (with 25% vesting upon grant) and have
an expiration date of up to five to ten years after the date of grant.
In accordance with SFAS 123, the Company has estimated the fair value of each
option grant using the Black-Scholes option-pricing model and has included in
Note 2 a table illustrating the effect on net income and earnings per share had
the Company applied the fair value recognition provisions. The following
weighted average assumptions were used for the grants in 2003, 2002, and 2001,
respectively: expected volatility of 61%, 64% and 75%; risk-free interest rates
of 3.0%, 3.8% and 4.8%; expected lives of six, six and seven years and no
dividends.
The following tables summarize information about options outstanding at December
31, 2003:
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
- -------------------------------------------------------------------------------------
$4.00 to $10.00 118,745 4.6 years $ 8.76 119,445 $ 8.76
$10.00 to $20.00 678,395 3.9 years $ 13.75 464,006 $ 14.09
$20.00 and above 1,466,999 6.3 years $ 27.24 1,196,779 $ 27.61
--------- ----------
2,264,139 5.7 years $ 22.23 1,780,230 $ 22.82
========= ==========
F-21
2003 2002 2001
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------------------------------------------------------------
Options outstanding, beginning of
year 2,150,969 $ 23.59 1,857,302 $ 22.50 1,743,002 $ 18.10
Granted 371,515 12.84 676,471 23.88 656,463 29.02
Exercised (39,231) 11.09 (205,280) 12.26 (418,588) 14.46
Forfeited (219,114) 21.27 (177,524) 25.99 (123,575) 22.20
---------- ---------- ----------
Options outstanding, end
of year 2,264,139 $ 22.23 2,150,969 $ 23.59 1,857,302 $ 22.50
========== ========== ==========
Options exercisable, end of year 1,780,230 $ 22.82 1,442,413 $ 22.28 1,052,779 $ 19.36
========== ========== ==========
Weighted average fair value of
options granted $ 7.53 $ 14.26 $ 21.26
At December 31, 2003, 2,515,593 shares of common stock were reserved pursuant to
stock option plans.
The Company granted 57,300 restricted shares of common stock to executives and
key employees during 2003. The restrictions on the restricted stock granted to
executive officers of the Company lapse on May 27, 2006, provided that certain
Company performance goals are met as of March 31, 2004, and that employment
continues through May 27, 2006. The Company will not be able to calculate
whether the performance goals have been met until after March 31, 2004. For
non-executive officers, the restrictions on these shares lapse on May 27, 2006,
provided that employment continues through May 27, 2006. All restricted shares
are charged to compensation expense through the performance period based on
changes in the market price of the Company's common stock and ratably over the
vesting period. During the third and fourth quarters of 2003, 28,900 shares were
forfeited due to changes in the Company's senior management. At December 31,
2003, there were 28,400 shares of restricted stock outstanding, and the Company
has recorded $79,000 in compensation expense, net of the effect of forfeitures,
during 2003. There were no restricted stock grants or related compensation
expense in 2002 or 2001.
On December 15, 2003, the Company granted an aggregate of 27,500 deferred stock
units to its Board of Directors, excluding the Company's Chief Executive
Officer. Each deferred stock unit represents the Company's obligation to
transfer one share of common stock to the director in the future, and is fully
vested at grant. Following termination of the director's service on the
Company's board due to death or a change in control, or six months after
termination of the director's service for any other reason, shares of the
Company's common stock equal to the number of deferred stock units reflected on
the director's account, will be distributed. A director may, while serving on
the Company's board, elect to defer the distribution date in annual installments
over a period up to five years, beginning in the year following termination of
service on the board. The Company recorded $0.4 million in compensation expense
in 2003 related to this grant.
Shareholders' Rights Plan
In February 2002, the Company's Board of Directors adopted a Shareholder Rights
Plan. Pursuant to the Shareholder Rights Plan, the Board of Directors declared a
dividend distribution of one preferred stock purchase right ("Right") for each
outstanding share of the Company's common stock, $.01 par value ("Common
Stock"), payable to the Company's stockholders of record as of March 13, 2002.
Each Right, when exercisable, entitles the holder to purchase from the Company
one one-hundredth of a share of a new series of voting preferred stock,
designated as Series A Junior Participating Preferred Stock, $0.10 par value, at
an exercise price of $116.00 per one one-hundredth of a share.
F-22
The Rights will trade in tandem with the Common Stock until ten days after a
"distribution event" (i.e., the announcement of an intention to acquire or the
actual acquisition of 20% or more of the outstanding shares of Common Stock), at
which time the Rights would become exercisable. Upon exercise, the holders of
the Rights (other than the person who triggered the distribution event) will be
able to purchase for the exercise price shares of Common Stock having the then
market value of two times the aggregate exercise price of the Rights. The Rights
expire on March 12, 2012, unless redeemed, exchanged or otherwise terminated at
an earlier date.
11. OTHER INCOME (EXPENSE):
Other income (expense) was comprised of the following for the year ended
December 31 (in thousands):
2003 2002 2001
--------------------------------------------
Interest income $ 1,507 $ 1,898 $ 2,226
Gain (loss) on sale/disposal of assets (1,375) 1,225 -
Reserve for notes receivable (1,090) - -
Other (316) (68) 83
--------------------------------------------
$ (1,274) $ 3,055 $ 2,309
============================================
During the fourth quarter of 2003, the Company reserved $1.1 million in notes
receivable from the purchaser of certain discontinued operations.
During 2002, the Company disposed of a real estate investment acquired with
Kinsel for proceeds of $1.9 million and a gain of $1.2 million, included in the
table above.
12. TAXES ON INCOME:
Income from continuing operations before taxes on income is as follows for the
years ended December 31 (in thousands):
2003 2002 2001
------------------------------------
Domestic $ 4,097 $ 38,464 $ 28,871
Foreign 7,985 6,863 10,864
------------------------------------
Total $ 12,082 $ 45,327 $ 39,735
====================================
Provisions for taxes on income from continuing operations consist of the
following components for the years ended December 31 (in thousands):
2003 2002 2001
--------------------------------------
Current:
Federal $ 3,342 $ 15,578 $ 8,320
Foreign 4,007 3,935 4,822
State 1,084 2,302 1,620
--------------------------------------
$ 8,433 $ 21,815 $ 14,762
--------------------------------------
Deferred:
Federal $ (1,581) $ (3,705) $ 580
Foreign (56) (247) 247
State 13 (412) 64
--------------------------------------
$ (1,624) $ (4,364) $ 891
--------------------------------------
Total tax provision $ 6,809 $ 17,451 $ 15,653
======================================
F-23
A reconciliation between the U.S. federal statutory tax rate and the effective
tax rate follows:
2003 2002 2001
----------------------
Income taxes at U.S. federal statutory tax rate 35.0% 35.0% 35.0%
Increase in taxes resulting from:
State income taxes, net of federal income tax benefit 2.5 3.5 3.2
Amortization of intangibles (5.8) (1.5) 2.4
Effect of foreign income taxes 5.5 0.5 (0.1)
Valuation allowance on NOLs 6.2 - -
Non-deductible meals and entertainment 13.5 0.4 0.5
Other (0.5) 0.6 (1.6)
----------------------
Total taxes on income 56.4% 38.5% 39.4%
----------------------
Net deferred taxes consist of the following at December 31 (in thousands):
2003 2002
------------------------
Deferred income tax assets:
Foreign tax credits and net operating loss carryforwards, net $ 4,418 $ 1,527
Accrued expenses 8,106 4,918
Other 1,514 1,679
------------------------
Total deferred income tax assets 14,038 8,124
------------------------
Deferred income tax liabilities:
Property, plant and equipment $ (6,021) (4,855)
Other (2,766) (1,535)
------------------------
Total deferred income tax liabilities (8,787) (6,390)
------------------------
Net deferred income tax assets $ 5,251 $ 1,734
========================
The tax credits and net operating losses (NOLs) included here as deferred tax
assets are subject to various expiration dates and are shown net of a valuation
allowance on certain NOLs. The Company has a foreign tax credit of $3.0 million
which begins expiring in 2006. There are U.S. and state NOLs of $3.6 million
expiring in various years through 2016. There are also foreign NOLs of $2.3
million expiring in 2010. Except as noted below, the Company believes it will
have sufficient earnings to realize the benefit of these deferred tax assets.
Certain adjustments were recorded to the Company's income and other tax reserves
at December 31, 2003. Due to substantial continuing losses in the Company's
operations in France and Belgium, it was determined that a full valuation
allowance was necessary primarily relative to net operating loss carryforwards,
thereby increasing income tax expense by $0.8 million. In analyzing its tax
return to tax provision differences, the Company determined that additional
taxes were required to be paid relative to the Company's meals and entertainment
tax deductions, increasing income tax expense by $1.0 million. In addition, the
Company also determined that increased accruals were necessary for use tax and
fuels tax in certain state jurisdictions, increasing cost of revenues by $0.6
million and tax expense by $0.2 million.
13. CHANGES IN OPERATING ASSETS:
The following are changes in operating assets, excluding the effect of
acquisitions and divestitures:
2003 2002 2001
--------------------------------------
Receivables, net and costs and estimated
earnings in excess of billings $ 1,614 $ (9,921) $ (6,054)
Inventories (200) 1,313 4,761
Prepaid expenses and other assets (4,605) (2,414) (1,530)
Accounts payable and accrued expenses 8,348 (8,635) (5,228)
--------------------------------------
$ 5,157 $ (19,657) $ (8,051)
======================================
F-24
14. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases a number of its administrative operations facilities under
noncancellable operating leases expiring at various dates through 2020. In
addition, the Company leases certain construction, automotive and computer
equipment on a multi-year, monthly or daily basis. During the fourth quarter of
2002, the Company entered into an arrangement for the sale-leaseback of a tunnel
boring machine ("TBM"). Future rent expense on the TBM operating lease will be
$1.7 million annually, extending for 7 years and is included in the minimum
lease payments presented below. No material gain or loss resulted from the
sale-leaseback transaction in 2002. Rent expense under all operating leases for
2003, 2002 and 2001 was $17.6 million, $18.6 million and $22.3 million,
respectively. Rental expense paid to a related party was $510,000, $600,000 and
$453,500 for the years ended December 31, 2003, 2002 and 2001, respectively.
At December 31, 2003, the future minimum lease payments required under the
noncancellable operating leases were as follows (in thousands):
Year Minimum Lease Payments
- ----------- ----------------------
2004 11,139
2005 7,455
2006 5,565
2007 4,634
2008 3,675
After 2008 4,993
------
Total 37,461
======
Litigation
In the third quarter of 2002, a Company crew had an accident on an Insituform
CIPP Process project in Des Moines, Iowa. Two workers died and five workers were
injured in the accident. The Company fully cooperated with Iowa's state OSHA in
the investigation of the accident. Iowa OSHA issued a Citation and Notification
of Penalty in connection with the accident, including several willful citations.
Iowa OSHA proposed penalties of $808,250. The Company challenged Iowa OSHA's
findings, and in the fourth quarter of 2003, an administrative law judge found
in favor of Iowa OSHA on some citations, found in favor of the Company on some
citations and combined a number of citations for purposes of assessing
penalties. The administrative law judge reduced the penalties to $158,000. The
Company is vigorously opposing the citations, and both the Company and Iowa OSHA
have appealed the decision to the Iowa Department of Inspections and Appeals. In
2002, Iowa OSHA referred this matter to the local county attorney's office for
potential criminal investigation. The local county attorney referred the matter
to the State of Iowa Department of Criminal Investigation.
The Company is involved in certain litigation incidental to the conduct of its
business and affairs. Management does not believe that the outcome of any such
litigation will have a material adverse effect on the financial condition,
results of operations or liquidity of the Company.
Retirement Plans
Substantially all of the Company's employees are eligible to participate in the
Company sponsored defined contribution savings plan, which is a qualified plan
under the requirements of Section 401(k) of the Internal Revenue Code. Total
Company contributions to the domestic plan were $1.6 million, $1.7 million and
$1.5 million for the years ended December 31, 2003, 2002 and 2001, respectively.
F-25
In addition, certain foreign subsidiaries maintain various other defined
contribution retirement plans. Company contributions to such plans for the years
ended December 31, 2003, 2002 and 2001 were $577,993, $224,718 and $214,552,
respectively.
Guarantees
The Company has entered into several contractual joint ventures to develop joint
bids on contracts for its installation businesses, and for tunneling operations.
In these cases, the Company could be required to complete the partner's portion
of the contract if the partner is unable to complete its portion. The Company is
at risk for any amounts for which the Company itself could not complete the work
and for which a third party contractor could not be located to complete the work
for the amount awarded in the contract. The Company has not experienced material
adverse results from such arrangements and foresees no future material adverse
impact on financial position, results of operations or cash flows. As a result,
the Company has not recorded a liability on the balance sheet associated with
this risk.
The Company has many contracts that require the Company to indemnify the other
party against loss from claims of patent or trademark infringement. The Company
also indemnifies its bonding agents against losses from third party claims of
subcontractors. The Company has not experienced material losses under these
provisions and foresees no future material adverse impact on financial position,
results of operations or cash flows.
15. SEGMENT AND GEOGRAPHIC INFORMATION:
The Company has principally three operating segments: rehabilitation, tunneling
and Tite Liner. The segments were determined based upon the types of products
sold by each segment and each is regularly reviewed and evaluated separately.
The rehabilitation segment provides trenchless methods of rehabilitating sewers,
pipelines and other conduits using a variety of technologies including the
Insituform CIPP Process, pipebursting, microtunneling, and sliplining. The
tunneling segment engages in tunneling used in the installation of new
underground services, large diameter microtunneling and sliplining. The Tite
Liner segment provides a method of lining new and existing pipe with a corrosion
and abrasion resistant polyethylene pipe. These operating segments represent
strategic business units that offer distinct products and services and serve
different markets.
The following disaggregated financial results have been prepared using a
management approach, which is consistent with the basis and manner with which
management internally disaggregates financial information for the purpose of
assisting in making internal operating decisions. The Company evaluates
performance based on standalone operating income.
There were no customers which accounted for more than 10% of the Company's
revenues during each of the three years ended December 31, 2003, 2002 and 2001.
Financial information by segment was as follows at December 31 (in thousands):
2003 2002 2001
------------------------------------
Revenues:
Rehabilitation $ 366,690 $ 377,674 $ 369,219
Tunneling 100,020 86,297 49,019
Tite Liner 20,562 16,387 27,072
------------------------------------
Total revenues $ 487,272 $ 480,358 $ 445,310
====================================
F-26
Operating income:
Rehabilitation $ 14,465 $ 35,208 $ 36,191
Tunneling 3,956 12,165 5,754
Tite Liner 3,170 2,810 4,820
------------------------------------
Total operating income $ 21,591 $ 50,183 $ 46,765
====================================
Total assets:
Rehabilitation $ 300,198 $ 315,377 $ 311,949
Tunneling 68,494 63,218 30,346
Tite Liner 4,906 6,204 12,523
Corporate 133,499 80,305 76,770
Discontinued 1,263 7,909 32,034
------------------------------------
Total assets $ 508,360 $ 473,013 $ 463,622
====================================
Capital expenditures:
Rehabilitation $ 10,482 $ 6,093 $ 8,474
Tunneling 7,005 12,941 6,045
Tite Liner 1,051 353 61
Corporate 1,391 2,395 2,058
------------------------------------
Total capital expenditures $ 19,929 $ 21,782 $ 16,638
====================================
Depreciation and amortization:
Rehabilitation $ 10,146 $ 10,035 $ 16,893
Tunneling 3,811 2,570 1,292
Tite Liner 1,280 880 1,136
Corporate 1,879 2,345 2,062
------------------------------------
Total depreciation and amortization $ 17,116 $ 15,830 $ 21,383
====================================
Financial information by geographic area was as follows at December 31 (in
thousands):
2003 2002 2001
------------------------------------
Revenues:
United States $ 401,174 $ 408,218 $ 361,194
Canada 22,767 19,339 23,482
Other Foreign 63,331 52,801 60,634
------------------------------------
Total revenues $ 487,272 $ 480,358 $ 445,310
====================================
Operating income:
United States $ 13,525 $ 43,502 $ 39,003
Canada 3,327 2,616 3,714
Other Foreign 4,739 4,065 4,048
------------------------------------
Total operating income $ 21,591 $ 50,183 $ 46,765
====================================
Long-lived assets:
United States $ 80,641 $ 70,924 $ 63,467
Canada 2,330 2,772 2,969
Other Foreign 16,503 15,634 20,168
------------------------------------
Total long-lived assets $ 99,474 $ 89,330 $ 86,604
====================================
16. SUBSEQUENT EVENTS:
Effective March 12, 2004, the Company entered into an amended and restated bank
revolving credit facility (the "Amended Credit Facility") that replaces its
existing $75 million bank credit facility (the "Old Credit Facility"). The
Amended Credit Facility provides a borrowing capacity of $25 million, any
portion of which may be used for the issuance of standby letters of credit. The
Company believed that the covenants contained in the Old Credit Facility unduly
limited the Company in the operation of its business. In light of the Company's
being out of compliance with certain debt covenants at December 31, 2003 and
based on the determination that it did not anticipate using more than $25
million of its bank credit in the foreseeable future (primarily for standby
letters of credit), the Company decided to amend the Old Credit Facility and
F-27
consummate the Amended Credit Facility which subjects the Company to less
restrictive covenants. The Amended Credit Facility matures on September 12,
2005.
Under the Amended Credit Facility, the Company has paid a $25,000 closing fee
and will pay a commitment fee equal to 0.4% per annum on the unborrowed balance
at the end of each fiscal quarter. The Company will also pay a letter of credit
fee of 2.25% per annum on the aggregate stated amount for each letter of credit
that is issued and outstanding at the end of each fiscal quarter. Any loan under
the Amended Credit Facility will bear interest at the rate equal to the Bank of
America prime rate (currently set at 4.0% per annum). The Amended Credit
Facility contains cross-default provisions to the Company's amended Senior Notes
as summarized below.
At December 31, 2003, the Company had an unborrowed balance under the Old Credit
Facility of $69.8 million, and the commitment fee was 0.3%. The remaining $5.2
million was being utilized at year end for non-interest bearing letters of
credit, the majority of which were collateral for insurance. The letters of
credit under the Old Credit Facility will be transferred to the Amended Credit
Facility and remain outstanding. The Company issued $4.2 million in additional
letters of credit under the Amended Credit Facility relating to collateral for
the benefit of its insurance carrier, bringing the total amount of letters of
credit issued to $9.2 million at March 12, 2004. Since there were no
interest-bearing borrowings under the Old Credit Facility at December 31, 2003,
there had been no applicable interest rate determined under the facility.
On March 12, 2004, the Company, with the requisite approval of the holders of
the Company's Senior Notes, Series A, due February 14, 2007, and the Company's
Senior Notes, Series 2003-A, due April 24, 2013, amended certain of the terms
and conditions of the Senior Notes. In connection with the amendment, the
Company paid the noteholders an amendment fee of 0.25%, or $0.3 million, of the
outstanding principal balance of each series of Senior Notes. In addition, the
interest rate on each series of Senior Notes increases by 0.75% per annum at
closing, reducing by 0.25% per annum beginning on April 1, 2005 and by an
additional 0.5% per annum beginning on April 1, 2006.
Prior to the amendment, the Senior Notes, Series A, bore interest, payable
semi-annually, at 7.88% per annum. At December 31, 2003, the outstanding
principal amount under the Senior Notes, Series A, was $62.9 million. Each year
through maturity the Company is required to make principal payments under the
Senior Notes, Series A, of $15.7 million. Upon specified change in control
events, each holder of the Senior Notes, Series A, has the right to require the
Company to purchase its notes, without premium.
Prior to the amendment, the Senior Notes, Series 2003-A, bore interest, payable
semi-annually, at a rate of 5.29% per annum. At December 31, 2003, the
outstanding principal amount under the Senior Notes, Series 2003-A, was $65.0
million. The principal amount of the Senior Notes, Series 2003-A, is due in a
single payment on April 24, 2013. Upon specified change in control events, each
holder of the Senior Notes, Series 2003-A, has the right to require the Company
to purchase its notes, without premium. The proceeds of the Senior Notes, Series
2003-A, were used by the Company to pay off balances on the Old Credit Facility
and to provide liquidity to the Company for general corporate purposes.
The amended note purchase agreements of the Senior Notes, Series A, and the
Senior Notes, Series 2003-A, and the Amended Credit Facility obligate the
Company to comply with certain amended financial ratios and restrictive
covenants through the end of the first quarter of 2005. These covenants, among
other things, place limitations on operations, stock repurchases, dividends,
capital expenditures, acquisitions and sales of assets by the Company and/or its
subsidiaries and limit the ability of the Company and its subsidiaries to incur
further indebtedness. On April 1, 2005, the financial covenants will revert to
original covenants prior to the March 12, 2004 amendment.
At December 31, 2003, the Company was out of compliance with certain of the debt
covenants under the note purchase agreements, Old Credit Facility and an
insurance collateral agreement, but with the recent
F-28
amendments, are now in compliance with all newly amended covenants. The Company
believes it will be in compliance with the amended covenants in 2004 and beyond.
As a result of the issuance of the $4.2 million in additional letters of credit
under the Amended Credit Facility referenced above, the insurance collateral
agreement was cancelled, as it was no longer necessary and the related amount of
restricted cash posted as insurance collateral will be released.
In connection with the refinancing/amendments of its debt agreements as
described above, the Company expects to record a charge to interest expense in
the quarter ending March 31, 2004 of approximately $0.6 million relative to
costs incurred for the refinancing/amendments, including the write-off of a
portion of deferred financing fees.
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
(In thousands, except per share data)
1st 2nd 3rd 4th(1)
------------------------------------------------------------
Year ended December 31, 2003:
Revenues $ 123,348 $ 124,778 $ 117,360 $ 121,786
Gross profit 28,269 29,267 27,419 17,703
Operating income (loss) 11,186 10,285 7,771 (7,651)
Income (loss) from continuing operations 6,351 4,877 3,500 (10,100)
Income (loss) from discontinued operations 276 (292) (215) (872)
Net income (loss) 6,627 4,585 3,285 (10,972)
Basic earnings (loss) per share:
Income (loss) from continuing operations $ 0.24 $ 0.18 $ 0.13 $ (0.38)
Income (loss) from discontinued operations 0.01 (0.01) (0.01) (0.03)
------------------------------------------------------------
Net income (loss) $ 0.25 $ 0.17 $ 0.12 $ (0.41)
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ 0.24 $ 0.18 $ 0.13 $ (0.38)
Income (loss) from discontinued operations 0.01 (0.01) (0.01) (0.03)
------------------------------------------------------------
Net income (loss) $ 0.25 $ 0.17 $ 0.12 $ (0.41)
Year ended December 31, 2002:
Revenues $ 111,176 $ 118,488 $ 125,523 $ 125,171
Gross profit 28,889 30,997 32,758 32,978
Operating income 11,216 14,256 9,081 15,630
Income from continuing operations 5,905 8,238 5,665 8,752
Loss from discontinued operations (1,602) (927) (788) (2,552)
Net income 4,303 7,311 4,877 6,200
Basic earnings per share:
Income from continuing operations $ 0.22 $ 0.31 $ 0.21 $ 0.33
Loss from discontinued operations (0.06) (0.03) (0.03) (0.10)
------------------------------------------------------------
Net income $ 0.16 $ 0.28 $ 0.18 $ 0.23
Diluted earnings per share:
Income from continuing operations $ 0.22 $ 0.31 $ 0.21 $ 0.33
Loss from discontinued operations (0.06) (0.03) (0.03) (0.10)
------------------------------------------------------------
Net income $ 0.16 $ 0.28 $ 0.18 $ 0.23
(1) See Notes 7, 11 and 12 for discussion of certain fourth quarter 2003 items.
F-29
INDEX TO EXHIBITS (1, 2)
2 Agreement and Plan of Merger dated January 13, 2001 by and among the
Company, K Acquisition Corp. and TRX Acquisition Corp., Kinsel
Industries, Inc. and Tracks of Texas, Inc. and the Kinsel/Tracks
Shareholders (incorporated by reference to Exhibit 2 to the Current
Report on Form 8-K dated February 28, 2001 and filed March 14, 2001).
3.1 Restated Certificate of Incorporation, as amended, of the Company
(incorporated by reference to Exhibit 3.1 to the quarterly report on
Form 10-Q for the quarter ended June 30, 2000), and Certificate of
Designation, Preferences and Rights of Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit 3.1 to the annual
report on Form 10-K for the year ended December 31, 2001).
3.2 Amended and Restated By-Laws of the Company, as amended through July
22, 2003 (incorporated by reference to Exhibit 3.1 to the quarterly
report on Form 10-Q for the quarter ended June 30, 2003).
4 Rights Agreement dated as of February 26, 2002 between Insituform
Technologies, Inc. and American Stock Transfer & Trust Company
(incorporated by reference to Exhibit 1 to the Registration Statement
on Form 8-A dated March 8, 2002).
10.1 Credit Agreement (the "Credit Agreement") dated as of March 27, 2003
among the Company, Bank of America, N.A. as Administrative Agent, and
Letter of Credit Issuing Lender and the other Financial Institutions
party thereto (incorporated by reference to Exhibit 10.1 to the annual
report on Form 10-K for the year ended December 31, 2002), as amended
by First Amendment to Credit Agreement dated as of November 26, 2003
(incorporated by reference to Exhibit 10.1 to the current report on
Form 8-K dated and filed December 1, 2003, as further amended by Second
Amendment to Credit Agreement dated as of March 12, 2004.
10.2 Note Purchase Agreements (the "Note Purchase Agreements") dated as of
February 14, 1997 among the Company and, respectively, each of the
lenders (the "Noteholders") listed therein (incorporated by reference
to Exhibit 10.6 to the annual report on Form 10-K for the year ended
December 31, 1996), as amended by First Amendment to the Note Purchase
Agreements dated as of August 20, 1997 (incorporated by reference to
Exhibit 10(a) to the quarterly report on Form 10-Q for the quarter
ended September 30, 1997), as further amended by Second Amendment dated
as of March 30, 2000 to Note Purchase Agreements (incorporated by
reference to Exhibit 10.3 to the quarterly report on Form 10-Q for the
quarter ended March 31, 2000), as further amended by Third Amendment
dated as of February 28, 2003 to Note Purchase Agreements (incorporated
by reference to Exhibit 10.2 to the annual report on Form 10-K for the
year ended December 31, 2002), as further amended by Fourth Amendment
dated as of March 12, 2004.
10.3 Note Purchase Agreement (the "Note Purchase Agreement") dated as of
April 24, 2003 among the Company and each of the lenders listed therein
(incorporated by reference to Exhibit 10.1 to the quarterly report on
Form 10-Q for the quarter ended March 31, 2003), as further amended by
First Amendment dated as of March 12, 2004.
10.4 Master Guaranty dated as of March 27, 2003 by the Company and those
subsidiaries of the Company named therein (incorporated by reference to
Exhibit 10.3 to the annual report on Form 10-K for the year ended
December 31, 2002).
10.5 Amended and Restated Intercreditor Agreement dated as of April 24, 2003
among Bank of America, N.A. and the Noteholders (incorporated by
reference to Exhibit 10.2 to the quarterly report on Form 10-Q for the
quarter ended March 31, 2003).
10.6 Employment Letter dated March 7, 2003 between the Company and Thomas S.
Rooney, Jr. (incorporated by reference to Exhibit 10.3 to the quarterly
report on Form 10-Q for the quarter ended March 31, 2003), as amended
by Amendment dated March 1, 2004. (3)
10.7 Employment Letter dated July 15, 1998 between the Company and Anthony
W. Hooper (incorporated by reference to Exhibit 10.1 to the quarterly
report on Form 10-Q for the quarter ended September 30, 1998), as
amended by Amendment dated March 14, 2003 (incorporated by reference to
Exhibit 10.5 to the annual report on Form 10-K for the year ended
December 31, 2002). (3)
10.8 Note Modification Allonge executed on July 17, 2002 relating to
Promissory Note (incorporated by reference to Exhibit 10.1 to the
quarterly report on Form 10-Q for the quarter ended June 30, 2002). (3)
10.9 Promissory Note dated September 24, 1997 made by Anthony W. Hooper in
favor of the Company (incorporated by reference to Exhibit 10.2 to the
quarterly report on Form 10-Q for the quarter ended June 30, 2002). (3)
10.10 Letter agreement dated as of February 9, 1999 between the Company and
Thomas N. Kalishman (incorporated by reference to Exhibit 10.10 to the
annual report on Form 10-K for the year ended December 31, 1998). (3)
10.11 Executive Separation Agreement and Release effective as of July 22,
2003 by and between the registrant and Anthony W. Hooper (incorporated
by reference to Exhibit 10.1 to the quarterly report on Form 10-Q for
the quarter ended June 30, 2003). (3)
10.12 Employment Letter dated December 1, 2003 between the Company and
Christian G. Farman (incorporated by reference to Exhibit 10.1 to the
current report on Form 8-K dated and filed December 4, 2003). (3)
10.13 Employment Separation Agreement and Release effective as of December 4,
2003 by and between the Company and Joseph A. White. (3)
10.14 Employee Separation Agreement and Release effective as of July 1, 2003
by and between the Company and Carroll W. Slusher (incorporated by
reference to Exhibit 10.2 to the quarterly report on Form 10-Q for the
quarter ended June 30, 2003). (3)
10.15 Employment Agreement dated October 25, 1995 between the Company and
Robert W. Affholder (incorporated by reference to Exhibit 2(d) to the
Current Report on Form 8-K dated October 25, 1995), as amended by
Amendment No. 1 dated as of October 25, 1998 to Employment Agreement
(incorporated by reference to Exhibit 10.9 to the annual report on Form
10-K for the year ended December 31, 1998), and as amended by Amendment
No. 2 dated as of December 31, 1999 to Employment Agreement, and as
amended by Amendment No. 3 dated as of December 31, 2000 to Employment
Agreement (incorporated by reference to Exhibit 10.1 to the quarterly
report on Form 10-Q for the quarter ended March 31, 2001), and as
amended by Amendment No. 4 dated as of December 31, 2001 to Employment
Agreement (incorporated by reference to Exhibit 10.6 to the annual
report on Form 10-K for the year ended December 31, 2001), and as
amended by Amendment No. 5 dated as of December 31, 2002 to Employment
Agreement (incorporated by
reference to Exhibit 10.8 to the annual report on Form 10-K for the
year ended December 31, 2002), and as amended by Letter Agreement dated
March 1, 2004. (3)
10.16 Equipment Lease for 125 Ton American Crane [1] dated as of January 1,
2004 between A-Y-K-E Partnership and Affholder, Inc.
10.17 Equipment Lease for 90 Ton Link Belt Crane dated as of January 1, 2004
between A-Y-K-E Partnership and Affholder, Inc.
10.18 Equipment Lease for 125 Ton American Crane [2] dated as of January 1,
2004 between A-Y-K-E Partnership and Affholder, Inc.
10.19 Equipment Lease for 110 Ton American Crane dated as of January 1, 2004
between A-Y-K-E Partnership and Affholder, Inc.
10.20 Equipment Lease for Lovat M-142 Tunnel Boring Machine dated as of
February 1, 2004 between A-Y-K-E Partnership and Affholder, Inc.
10.21 Equipment Lease for Lovat 90" Tunnel Boring Machine dated as of
February 1, 2004 between A-Y-K-E Partnership and Affholder, Inc.
10.22 1992 Employee Stock Option Plan of the Company (incorporated by
reference to Exhibit 10.11 to the annual report on Form 10-K for the
year ended December 31, 1999). (3)
10.23 1992 Director Stock Option Plan of the Company (incorporated by
reference to Exhibit 10.12 to the annual report on Form 10-K for the
year ended December 31, 1999). (3)
10.24 Amended and Restated 2001 Employee Equity Incentive Plan (incorporated
by reference to Appendix C to the definitive proxy statement on
Schedule 14A filed on April 16, 2003 in connection with the 2003 annual
meeting of stockholders. (3)
10.25 Amended and Restated 2001 Non-Employee Director Equity Incentive Plan
(incorporated by reference to Appendix B to the definitive proxy
statement on Schedule 14A filed on April 16, 2003 in connection with
the 2003 annual meeting of stockholders. (3)
10.26 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.3 to
the quarterly report on Form 10-Q for the quarter ended June 30, 2001).
(3)
10.27 Insituform Mid-America, Inc. Stock Option Plan, as amended
(incorporated by reference to Exhibit 4(i) to the Registration
Statement on Form S-8 No. 33-63953). (3)
10.28 Senior Management Voluntary Deferred Compensation Plan of the Company
(incorporated by reference to Exhibit 10.19 to the annual report on
Form 10-K for the year ended December 31, 1998), as amended by First
Amendment thereto dated as of October 25, 2000 (incorporated by
reference to Exhibit 10.15 to the annual report on Form 10-K). (3)
10.29 Form of Directors' Indemnification Agreement (incorporated by reference
to Exhibit 10.3 to the quarterly report on Form 10-Q for the quarter
ended June 30, 2002). (3)
21 Subsidiaries of the Company.
23 Consent of PricewaterhouseCoopers LLP.
24 Power of Attorney (See "Power of Attorney" in the annual report on Form
10-K).
31.1 Certification of Thomas S. Rooney, Jr. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Christian G. Farman pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Thomas S. Rooney, Jr. pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Christian G. Farman pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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(1) The Company's current, quarterly and annual reports are filed with the
Securities and Exchange Commission under file no. 0-10786.
(2) Pursuant to Reg. Section 229.601, does not include certain instruments
with respect to long-term debt of the Company and its consolidated
subsidiaries not exceeding 10% of the total assets of the Company and
its subsidiaries on a consolidated basis. The Company undertakes to
furnish to the Securities and Exchange Commission, upon request, a copy
of all long-term debt instruments not filed herewith.
(3) Management contract or compensatory plan or arrangement.