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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED
MARCH 31, 1996
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UTILX CORPORATION
COMMISSION FILE NUMBER 0-16821
DELAWARE 91-1171716
(State of Incorporation) (I.R.S. Identification Number)
22404 - 66TH AVENUE SOUTH
P. O. BOX 97009
KENT, WASHINGTON 98064-9709 (206) 395-0200
(Address of Principal Executive Offices) (Telephone Number)
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Securities registered pursuant to Section 12(b) or (g) of the Act:
COMMON STOCK, .01 PAR VALUE
(Class of Security)
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Indicate by checkmark whether the Registrant has (1) 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 and (2) 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 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. [X]
As of May 31, 1996, 7,184,116 shares of Common Stock were outstanding and the
aggregate market value of the voting stock held by nonaffiliates of the
registrant, based upon the closing price quoted by the Nasdaq National Market on
that date, was $19,756,319.
Information from Registrant's definitive Proxy Statement, which involves the
election of directors and which will be filed with the Securities and Exchange
Commission within 120 days after March 31, 1996, the close of Registrant's 1996
fiscal year, is incorporated by reference into Part III hereof.
The total number of pages in this Form 10-K is 48.
See Index to Exhibits on page 43.
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TABLE OF CONTENTS
ITEM
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PART I
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . 13
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 13
4. Submission of Matters to a Vote of Security Holders. . . . . 13
PART II
5. Market for the Registrant's Common Stock and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . 14
6. Selected Financial Data . . . . . . . . . . . . . . . . . . 15
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . 16
8. Financial Statements and Supplementary Data . . . . . . . . 25
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . 42
PART III
10. Directors and Executive Officers of the Registrant . . . . . 42
11. Executive Compensation . . . . . . . . . . . . . . . . . . . 42
12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . 42
13. Certain Relationships and Related Transactions . . . . . . . 42
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . 42
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PART I
ITEM 1. BUSINESS
UTILX-Registered Trademark- Corporation ("UTILX" or the "Company") was
incorporated in Delaware in October 1984. UTILX provides specialty services to
electric, telecommunications, natural gas, water, sewer and other utilities
primarily in the United States and drilling equipment to contractors and other
users outside of the United States. The Company's primary business is
installing and replacing underground cables and pipes through its
FlowMole-Registered Trademark- service. In addition, the Company sells its
drilling systems and related products in international markets. The Company
also provides its CableCure-Registered Trademark- service to utility customers
for injecting a silicone fluid into electric and telephone cables to repair
water damage. The Company acquired the worldwide exclusive licensing rights to
the CableCure process in September 1991.
In December 1986, the Company established FlowMole Limited, a wholly owned
United Kingdom subsidiary headquartered in Corby, Northamptonshire through which
it conducts its European operations. In 1994, the Company established FlowMole
Environmental Services Corporation ("FESC"), a jointly owned corporation with a
subsidiary of Union Oil Company of California whose purpose was to offer
environmental remediation services using the Company's guided drilling
technology. In fiscal 1996, FESC ceased operations. In January 1990, the
Company acquired the Revalt business, which refurbished, restored and sealed
underground utility vaults and manholes in the United States and Puerto Rico,
from Utilitech, Incorporated. In fiscal 1995, the Company curtailed the
offering of Revalt services and sold the assets that were employed in this
business.
The Company is currently enhancing its existing technologies and is
developing other technologies in an effort to improve and expand the
complementary services it offers through its nationwide network of operating
centers.
THE FLOWMOLE DRILLING SYSTEMS
The FlowMole drilling systems are self-contained and mobile and include a
dolly-mounted unit that can be maneuvered into areas often inaccessible to
backhoes. The work itself generally consists of job planning, site preparation,
drilling, locating and steering, reaming, utility installation and restoration.
The FlowMole drilling systems typically consist of five major components: (i)
the field power unit, which consists of a truck containing various power
generating components, and supplies drilling fluid ("mud") and hydraulic and
electrical power; (ii) the dolly-mounted drilling unit, which consists of the
drill head, drill pipe and steering controls, and which drills tunnels and pulls
in cable and pipe; (iii) the locating equipment which consists of an
electromagnetic position-monitoring device that receives signals from a
transmitter inside the drill head and identifies the position of the drill head;
(iv) when required, the spoils removal equipment, which is a truck-mounted
spoils vacuum tank that removes displaced soil and fluid; and (v) the safety
equipment, which includes a proprietary grounding and alarm system and which
provides warning and protection to the operators.
The FlowMole guided drilling process usually begins with workers digging
small pits at the junction points for the cable or utility which is being
replaced or installed. The FlowMole drilling unit is then positioned behind the
starting junction pit and drilling begins at the surface, with the drill head
horizontally entering the starting junction pit at the desired depth. The drill
head cuts through the soil and is advanced by coupling successive sections of
drill pipe which form the drill string. A technician walking above the drill
head with the locating equipment relays steering instructions to the technician
at the drilling unit controls. By orienting the position of the drill head,
this technician controls the direction of the drill head such that the path of
the tunnel does not have to be in a straight line or level as the drill head is
guided to the ending junction pit.
After the drill head reaches the ending junction pit, the drill head is
removed and a reamer is typically attached to the drill string. The new cable
or utility is then attached to the reamer. As the drill string is withdrawn by
the drilling unit, the tunnel is expanded by the reamer and the new cable or
utility is pulled into place. As the reamer is withdrawn, it releases
additional drilling fluid into the tunnel to stabilize loose soil,
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transport the excavated soil out of the tunnel and lubricate the tunnel to
facilitate the installation of the cable or utility. After the cable or
utility is installed, the junction pits provide access for connection to the
utility system. Once the pits are filled, only the pit areas need to be
restored for the job to be completed.
Through its research and engineering efforts, the Company has been able to
significantly increase the capabilities of the FlowMole drilling systems and
broaden the range of applications for which their use is cost-effective. The
Company has developed new drilling systems and upgrades for existing systems
which deliver greater horsepower to the drill head and provide greater pullback
force. This increased downhole power, together with developments in the drill
pipe, drill head, reamers and other tools have enabled the Company to drill in a
wider range of soil conditions, including certain sandy and rocky soils, and to
drill tunnels up to 26 inches in diameter and 1,200 feet in length. Newly
developed guidance systems have effectively removed most limitations associated
with tunnel depth. Through the development of advanced electromagnetic guidance
techniques, the Company has achieved significant improvements in the precision
of its locating system. The Company's latest generation locating equipment also
provides technicians with constantly updated information regarding orientation
of the drill head, allowing greater accuracy and increased efficiency in
drilling tunnels.
The FlowMole drilling systems offer several benefits over conventional
excavation technologies. In developed communities and neighborhoods, the
FlowMole drilling systems cause substantially less disruption and inconvenience
compared to conventional trenching. Underground drilling minimizes the need for
expensive restoration of landscaping and other improvements, thereby reducing
costs and improving customer relations for the utilities. The FlowMole drilling
systems are completely self-contained, fully mobile and easily set up by the
FlowMole crew at the job site. When mounted on the Company's mobile carriage,
the drilling unit can be maneuvered through gates into areas often inaccessible
to backhoes and other trenching equipment. The FlowMole drilling systems are
powerful enough to cut through soil, but because they are more precise, they are
less likely than conventional equipment to damage existing utility cables and
pipes. In addition, the Company believes the FlowMole drilling systems are
state-of-the-art among trenchless drilling systems, with better drilling range,
a more accurate guidance system and a superior mud system that enables them to
drill in a greater variety of soils than other currently available drilling or
trenching systems.
The Company's technology is not appropriate or cost-effective for projects
which permit installation or replacement without excavation, such as densely
populated urban areas where utilities are placed overhead or in large
underground structures. In rural areas and new developments, the principal
competitive advantage of the FlowMole drilling systems generally does not exist
because avoidance of surface disruption and difficulty of access usually are not
factors. Likewise, the FlowMole drilling systems are not competitive for cables
and utilities which can be installed at very shallow depths, such as those used
for cable television and irrigation systems. The FlowMole drilling systems
currently cannot be used to install utilities in holes requiring diameters in
excess of 26 inches and is less effective in rocky and very hard soils.
THE CABLECURE SERVICE
In September 1991, the Company acquired an exclusive license from Dow
Corning Corporation ("Dow Corning") to market the CableCure process to
utilities. There are two unique CableCure fluids which may be used to provide
the CableCure service. The CableCure XL fluid is a silicone-based restoration
fluid that is injected into electrical cables at a transformer or other
termination point. The CableCure XL fluid extends the life of electric cables
by healing and preventing damage caused by water treeing, a type of progressive
failure of the insulation caused by water absorption. In most instances,
CableCure XL treatment will be more cost-effective than immediate cable
replacement. The CableCure CB fluid is a silicone-based fluid which creates a
barrier to moisture and is used in telecommunications and some electric network
cables. Dow Corning holds the patents on the CableCure XL and CB fluids. The
Company knows of no competing products which either use similar technology or
provide comparable benefits. The CableCure fluid is injected by the Company's
specially trained crews and subcontractors.
The Company believes that the CableCure service complements the FlowMole
drilling service and that together they enable the Company to serve a broader
range of customer needs. The market for CableCure services
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consists of the same electric utilities and telecommunications companies to
which the Company offers its FlowMole service. This allows the Company's field
sales representatives and commissioned sales representation firms to offer both
the CableCure and FlowMole services during sales calls.
The use of CableCure fluids to extend cable life will reduce the size of
the potential market for cable replacement available for FlowMole services and
the services of the Company's guided drilling competitors. The Company
believes, however, that it is able to offset any such reduction and expand the
market for its services by offering the CableCure service to current customers
as an additional service and to potential customers as a special service that
distinguishes the Company from its competitors. For example, the Company offers
a "Test, Treat or Replace" service combining both FlowMole and CableCure
services. Test, Treat or Replace service provides for injection with CableCure
fluid ("Treat") of deteriorating cables which have been evaluated as suitable
injection candidates and replacement ("Replace") of cables evaluated as
unsuitable for injection or where injection has been unsuccessful.
In May 1995, Dow Corning filed for protection under Chapter 11 of the
United States Bankruptcy Code and began to operate as a debtor in possession.
To date, Dow Corning has not filed any motion to assume or reject the exclusive
license agreement with the Company. The Company is unaware of any orders in the
bankruptcy court to date which pertain to the exclusive license agreement.
Management of Dow Corning has repeatedly indicated to the Company that it
intends to continue conducting business with the Company, and the Company is
currently unaware of any facts which would lead it to believe that Dow Corning
intends to discontinue the relationship. The Company's rights under the
exclusive licensing agreement will eventually be determined in the bankruptcy
proceeding.
THE MARKET
OVERVIEW. Modern cities and suburbs rely on a network of cables and pipes
buried beneath streets, sidewalks and landscaping to supply electric power,
communications, natural gas, water and sewer services to individual homes and
businesses. In most areas, these networks are installed as the land is
initially developed, using machinery such as a backhoe or trencher to dig a
trench along the desired path. The cables and pipes are then laid and the
trench is filled. This approach is suited to undeveloped areas where there is
easy access for machinery and where open trenches, construction traffic and
noise cause no major disruption or inconvenience. Over time, however, the
installation of surface improvements such as roads, sidewalks and landscaping
makes the use of conventional excavation techniques costly and disruptive.
The Company recognized the limitations of traditional excavation methods
for installing utilities in established communities and neighborhoods and
developed a proprietary technology to serve this segment of the utility
installation market. Demand for installation and replacement in developed areas
is driven by two factors. First, buried pipe and cable are made of metal or
plastic and eventually degrade, necessitating replacement. Second, various
utility companies in fully developed and mature urban and suburban areas seek to
provide expanded services through the installation of additional telephone
lines, installation of electrical lines with greater capacity or the extension
of natural gas lines into areas previously unserved.
Since the Company pioneered trenchless drilling technology for applications
in the utility industry in 1985, the market place has undergone a major
transformation. In those early years, utility customers had to be educated as
to the relative benefits of trenchless drilling. Today, as more contractors
offer trenchless services, the market has accepted trenchless technology to such
an extent that it is now specified on certain jobs. In addition, the Company
believes that there is a gradual and continuing trend among utilities to
outsource services in order to become more efficient, which the Company believes
has the potential to benefit the Company by increasing the pool of available
projects. Such outsourcing is frequently accomplished through an open,
competitive bidding process between qualified suppliers to the utility customer.
ELECTRIC UTILITIES. The Company's primary focus to date has been the
replacement of direct-buried electric distribution cable which came into
widespread use in the early 1960s, as utilities responded to community pressure
to remove or avoid the use of unsightly overhead wires. Published sources
indicate that in excess of 50
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million feet of electric cable have been buried each year since 1970. The
Company believes that this direct-buried cable has an average underground life
of 25 to 35 years and that cable failures will increase as the majority of the
direct-buried cable approaches the end of its expected life.
Cable failures generally result from deterioration of the inner plastic
insulation caused by water absorption and/or by corrosion of the outer
concentric neutral wires in unjacketed cable. Deterioration of the electric
cable tends to be accelerated by high-voltage stress, high operating
temperatures and environmental factors such as lightning strikes. Once electric
cable has failed, the cable may be repaired by splicing in order to restore
service to customers. After several failures occur in an area, an electric
utility generally finds that replacement of the entire cable is not only
necessary for maintaining good customer relations but cost-effective as well.
For failures that result primarily from water absorption which causes "treeing"
or progressive failure of the insulation, the CableCure chemical treatment
process offers an alternative for repairing, rather than replacing, the cable
and for preventive treatment to avoid deterioration. See "The CableCure
Service" included in Part I, Item 1.
TELECOMMUNICATIONS. The Company's second major market focus is the
telecommunications industry, where the volume of direct-buried
telecommunications cable exceeds the volume of direct-buried electric cable.
Despite the larger potential telecommunications market, several factors
differentiate the industry from the electric utility industry and serve to
reduce the available market for the Company's services. These factors include
lower telephone cable failure rates, a lower price for telecommunications
replacement projects, smaller project size, and the practice of some
telecommunications companies to contract with sole source providers who possess
both overhead and underground installation capabilities. Notwithstanding these
conditions, the Company has had some success in penetrating this market by
increasing its productivity, competing primarily for larger installation
projects, and subcontracting to sole source providers. See "North America
Marketing and Sales" included in Part I, Item 1.
Demand also exists for installation of telephone cable in developed areas
where there is a need for additional lines. In addition, the expansion of fiber
optic and interactive communication networks has created demand for installation
of new telephone cables. Although the interstate fiber optic distribution
system is substantially completed, the Company anticipates that substantial
demand for local connections to the fiber optic network will occur in the
future.
OTHER. The Company's services are also used by natural gas, sewer and
water utilities and for environmental remediation projects. The majority of the
demand for the installation of natural gas pipe arises from the extension of
services to developed but previously unserved areas, rather than replacement of
existing pipe. The Company also provides services to contractors on special
projects, such as those where the FlowMole drilling system's ability to drill
under highways, railroad crossings and waterways makes it ideally suited. The
Company is also continuing its efforts to develop and expand services in the
large diameter and difficult soil markets.
INTERNATIONAL OPERATIONS
The Company's international strategy consists of selling and leasing its
FlowMole drilling systems and spare parts to businesses in Europe, Asia and
South America. The Company also offers an underground utility installation
service in the United Kingdom and CableCure installation service in Europe. On
a selective basis, the Company may also choose to send its own crews to perform
FlowMole or CableCure services in other continents as well. Operations in
Europe are headquartered in Corby, Northamptonshire, United Kingdom and are
conducted through the Company's wholly-owned subsidiary, FlowMole Limited. For
a discussion of revenues, net income and assets with respect to European
operations, see Note 14 of Notes to Consolidated Financial Statements included
in Part II, Item 8. Beginning in January, 1992, Asian operations, specifically
in Japan, were conducted through a joint venture in which the Company was a 50%
owner. In fiscal 1994, the Company terminated this joint venture. Asian and
South American operations are currently conducted through the Company's
corporate headquarters in Kent, Washington.
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NORTH AMERICAN MARKETING AND SALES
When the Company first introduces its FlowMole drilling and CableCure
services, its primary sales approach has been to identify and educate potential
utility customers. The Company introduces customers to its services through
intensive sales efforts which consist of presentations to corporate engineering
and operations staff, with follow-up sales calls to district managers
responsible for local construction programs. Multiple contacts are generally
required at both corporate and district levels over an extended period of time.
The Company may also perform small initial trial projects to acquaint first-time
customers with the Company's services.
The Company's sales approach for FlowMole services has changed in the
electric utility and telecommunications markets from education of its customer
base about the advantages of trenchless installation over conventional trenching
techniques to differentiation of the Company's services from those of other
trenchless installation contractors. The approach also includes introducing the
customer to the CableCure service as an alternative to cable replacement. This
approach reflects both the rapid acceptance in certain markets of trenchless
installation and the emergence of competitors employing trenchless installation
equipment. An increasing and substantial amount of trenchless work is being
awarded through a competitive bidding process. This new practice is commonplace
in both the telecommunications industry and the utility industry. A significant
portion of the Company's utility projects in fiscal 1996 were obtained through
competitive bidding.
Sales are conducted through a sales and marketing organization which
includes eight dedicated field sales representatives, a Vice President/Sales and
Marketing, and operations personnel who conduct sales activities as part of
their general responsibilities. The Company also uses commissioned sales
representation firms in those locations where the use of Company-employed sales
representatives would not be cost-effective. Operations personnel are managed
through the Company's regional operations centers. Both the sales and
operations personnel have responsibility for monitoring the quality of the
Company's services and providing customer support. The sales and operations
personnel are also responsible for preparation of contract and bid proposals
within their regions.
In fiscal 1996, the Company provided services to 261 customers in North
America. Of those, 107 were utilities, consisting of 67 electric, 22
telecommunications, 6 gas and 12 other utilities. During the period from
fiscal 1988 to fiscal 1995, the percentage of consolidated revenues from the
Company's ten largest customers decreased from 77% to 46%. In fiscal 1996,
sales to Virginia Electric and Power Company ("Virginia Power") amounted to 16%
of the Company's consolidated revenues. See Note 3 of Notes to Consolidated
Financial Statements included in Part II, Item 8. For a discussion of revenues,
net income and assets with respect to North American Operations, see Note 14 of
Notes to Consolidated Financial Statements included in Part II, Item 8.
BACKLOG
Current purchase orders and work orders in the FlowMole and CableCure
businesses in North America typically provide for termination by the customer
upon short notice. Similarly, the international business for the sale of
equipment involves deliveries generally being made within 30 days of the date of
order. As a result, the Company believes that it is not able to provide a
record of firm backlog of sales orders that would be a meaningful indicator of
future revenues.
NORTH AMERICAN OPERATIONS NETWORK
The Company's basic strategy in North America is to offer customers,
including other contractors, a utility installation service utilizing the
FlowMole drilling systems operated by the Company's own specially-trained crews
and the CableCure service using specially-trained Company crews or
subcontractors. This specialty service approach allows the Company to control
both the technology and the quality and safety of the work performed. By using
Company crews and specially-trained subcontractors, changes in technology,
operating procedures, training and maintenance are implemented with greater
ease, and feedback on the impact of such changes in the field is facilitated.
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Operations in North America are divided into three major regions with
13 operations and service centers that have provided the Company's services to
customers in 38 states and one province of Canada since the beginning of fiscal
1996. These centers operate with a high degree of autonomy and are responsible
for performing utility services and managing day-to-day sales activities. Each
center's field operations staff coordinates operations, including, on occasion,
the movement of staff and equipment between operations centers to balance
workload. FlowMole drilling system crews are based in these operations centers
and typically consist of a crew manager with overall job responsibility, a field
technician, and one or more assistants. CableCure injection crews are based at
three of these operations centers, with each injection crew consisting of two to
four members. Service to customers in new areas is generally provided on a
remote basis by a crew from an existing operations center. If a sufficient
level of work develops in an area, the Company opens an operations center for
that area. A significant portion of the Company's profitability is attributable
to the productivity of its field crews. The Company expends a significant
amount of time and resources on educational and training programs to maintain
and improve the quality of its service and promote safety. The Company has an
incentive compensation system to reward operations managers, crew managers and
crew members based on productivity, quality of service, measurements of safety
and customer satisfaction.
As of March 31, 1996, the Company had 88 FlowMole drilling systems
currently available in North America. The number of fully utilized systems in
operation at any one time will be less than the total available due to market
factors, downtime, lost time in transit between job sites, weather, manpower
availability, planned backup and other related factors. In fiscal 1996, the
Company averaged 46 fully utilized systems in operation and reached a maximum,
measured on a monthly basis, of 52 fully utilized systems in operation.
STRATEGY FOR ADDITIONAL SERVICES
The Company's strategy includes the possible acquisition or development of
additional services that can be provided to utilities through its network of
operations centers.
In February 1994, the Company established FESC, a corporate joint venture
which supplied near-surface horizontal remediation systems, focusing
exclusively on environmental applications of guided boring technology. Guided
boring remediation technology can be technically superior to and more
cost-effective than other remediation technologies in a number of
circumstances, including, for example, in certain situations where surface
operations cannot be disrupted, contamination has migrated off-site, surface
structures interfere with vertical wells or trenching and disposal costs for
excavated material are high. Guided boring remediation technology is not
suitable for all circumstances, however, and as a relatively new technology has
not yet gained wide acceptance. The Company performed all of the guided boring
services supplied by FESC, as a subcontractor. FESC ceased operations as of
December 1995. The Company maintains the guided boring skills and expertise
but has no near term plans to emphasize the marketing of environmental drilling
services.
The Company is also engaged in ongoing development of technology and
equipment that may permit it to expand further the services it provides. See
"Research and Engineering" included in Part I, Item 1.
RESEARCH AND ENGINEERING
The Company's research and engineering department possesses expertise in
various disciplines critical to the FlowMole drilling systems, such as machine
design, hydraulics, electronics, fluid cutting, drilling and heavy equipment
design. The Company does not depend on outside contractors to any substantial
degree for expertise in any of these disciplines. Engineers receive feedback
from field crews which is used in their research and engineering efforts.
In fiscal 1994, the Company concentrated its research and engineering
program on the development of a new Series F Drilling Unit ("Series F Drill")
and Series 7400 Field Power Unit ("7400 FPU") having higher torque and power.
This program has been part of a continued effort to improve the strength and
reliability of equipment in order to permit drilling of increasingly larger
holes over longer distances and to penetrate more difficult soils.
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In fiscal year 1995, the Company concentrated its research and engineering
efforts on minor modifications to the Series F Drill and 7400 FPU and on the
development of new electronics guidance systems and downhole tools for
expanding the operating envelope of equipment. In fiscal year 1995, the
Company introduced the Wireline Guidance System, a system that enhances
guidance and productivity in specialty applications. In fiscal year 1995, the
Company also engineered an upgrade kit for its existing fleet of Series D
drills to increase pull force and torque, allowing installations of greater
length and diameter width. In fiscal 1996, the Company concentrated on the
development of a prototype for a new Series G Drilling Unit ("Series G Drill").
Field testing of the Series G Drill is expected to continue well into fiscal
1997. The Company also introduced a new steering tool. Long-term technology
plans include more equipment automation to reduce labor costs and focusing on
advancements in guidance and control.
MANUFACTURING
Manufacturing operations have been comprised of the assembly of components
supplied by a network of suppliers and the manufacture of selected components
where there is a technical or strategic advantage to do so. Drill pipe and
downhole guidance systems are manufactured by the Company in order to protect
the confidentiality of proprietary technologies that are employed. There are a
number of necessary components of drilling equipment that are outsourced, and
the Company carefully monitors these relationships. The Company generally has
alternative sources of outsourced components for drilling equipment
manufactured by the Company. The Company has undertaken actions to obtain more
competitive pricing on certain outsourced components. The Company also
continuously assesses whether it is preferable to manufacture and assemble
specific major components or to purchase them from suppliers.
On April 2, 1996, the Company announced a decision to cease its in-house
assembly of FlowMole drilling equipment. In the future, the components of such
equipment will be assembled by an outside supplier. No final selection of such
a supplier has been made. The Company believes that multiple potential sources
exist for the assembly services. The Company is evaluating the potential
options for manufacturing equipment for its own use as well as for continued
sales of new equipment to international customers. The assembly process has
historically constituted only a small component of the overall cost of the
equipment. Therefore, management believes that any potential increase in the
ultimate equipment cost would not be material.
CableCure fluids are obtained solely from Dow Corning under an exclusive
license and distribution agreement between the Company and Dow Corning. See
"The CableCure Service" included in Part I, Item 1. Additionally, certain
injection components used in the CableCure injection process are obtained from a
sole source supplier. As a result, the cost of injecting certain sizes of cable
may be substantially increased if a special order is required to obtain the
needed injection components. The Company attempts to carry several months
supply of these components to mitigate the risk of service disruption if its
supplier should choose to exit this business. The Company believes that an
alternate supplier would be available but there can be no assurance that a
service disruption could be avoided.
PATENTS, LICENSES AND TRADEMARKS
The Company attempts to preserve its proprietary technology through patent
filings and, in the United States, by providing services rather than making
unrestricted sales of equipment. In June 1987 and November 1988, the Company
was granted U. S. patents covering certain principal features of the FlowMole
fluidjet drilling system. In May 1989, the Company received notice that a
European patent application corresponding in part to these two U. S. patents had
also been granted. In October 1991, that patent was declared invalid in an
administrative opposition proceeding conducted in the European Patent Office.
The Company appealed the matter and, on October 8, 1993, received a favorable
provisional decision by the appeals panel of the European Patent Office.
Statements by both sides in response to the provisional opinion have been filed
and an oral hearing was scheduled to take place in the fall of 1995. Prior to
the oral hearing, the oppositions were withdrawn See "Legal Proceedings,"
included in Part I, Item 3. The Company has also been granted a number of U. S.
and foreign patents related to drilling technology and electronics associated
with locating and sensing. To date, the Company has been granted a total of 14
patents in the United States relating to underground drilling. Applications for
what
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the Company believes are its most valuable patents have also been filed in
the foreign countries which the Company has identified as most important to its
current and prospective operations. Due to recent amendments to U.S. patent
laws, patents granted by the United States Patent and Trademark Office generally
expire 20 years from filing. The Company's first patent will expire in 2006.
In addition to protecting its technology with patents, the Company follows
procedures designed to preserve trade secrets.
The Company developed guided drilling technology which is the subject of a
number of patents and pending applications under contract with FlowMole
Partners, a Research and Development Limited Partnership, a Washington Limited
Partnership ("FlowMole Partners"), and subsequently acquired that technology in
exchange for a royalty. In June 1993, the Company entered into an agreement
with FlowMole Partners settling a dispute over the payment of royalties and
terminating future royalty obligations. The Company has also obtained trademark
registrations in the United States and certain foreign countries for the
trademarks "UTILX," "FlowMole" and "CableCure" and in the United States for the
trademarks "GuideDril," "FlowCator" and "The Service You Can't See."
In September 1991, the Company purchased the exclusive rights to market the
CableCure process to utility companies and other related assets pursuant to an
Exclusive License and Distribution Agreement with Dow Corning. The agreement
terminates when the last patent subject to the agreement expires and upon other
events specified in the agreement. To date, Dow Corning has expressed a desire
to continue the agreement. For a discussion of the terms of the Exclusive
License and Distribution Agreement, see Note 15 of Notes to Consolidated
Financial Statements included in Part II, Item 8. For a discussion of the
CableCure business, see "The CableCure Service" included in Part I, Item 1.
Although the Company attempts to protect its proprietary technology
through available legal means as well as through its sales and distribution
methods, certain aspects of its technology are not patentable and may not be
protectible through trademark or trade secret law or outstanding licenses.
Furthermore, enforcement of the Company's intellectual property rights
frequently involves litigation, which may be costly and time consuming. It may
not always be possible or cost-effective for the Company to attempt to enforce
all of its intellectual property rights in all jurisdictions. Consequently,
the Company does not rely exclusively on patents or other intellectual property
rights to protect its existing technological advantages, but also attempts to
preserve and augment them through a continuous program of research and
engineering. See "Research and Engineering" included in Part I, Item 1 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Fiscal Year 1996 Compared to Fiscal Year 1995 -- Operating
Expenses," included in Part II, Item 7.
COMPETITION
UTILX provides FlowMole services in the United States and the United
Kingdom, provides CableCure services in the United States, Canada and Europe,
and sells equipment outside the United States.
FlowMole services for underground utility installation compete with small,
regional and multiregional utility contractors who use both conventional
trenching equipment and competitive guided drilling equipment. Many of these
contractors also provide additional installation-related services and possess
other capabilities which in some circumstances may cause them to be judged a
better choice by potential customers. In addition, conventional trenching
contractors are often able to provide lower-priced services where disruption of
the surface is not a significant concern and in soil containing substantial
rock, underground improvements or other similar obstacles.
CableCure services are sold as an alternative to cable replacement.
CableCure services are priced at a discount to the total cost of cable
replacement in order to make the CableCure service an attractive economic
choice, after taking into account the benefits of the longer anticipated service
life from replacement cable. Any factor which would significantly reduce the
cost of cable replacement could adversely affect CableCure's competitive
position. The Company is currently unaware of any product or service that
competes with its CableCure service, but competitive products could be developed
in the future.
-10-
<PAGE>
International equipment sales are subject to increasing competition from a
large number of U.S. and European manufacturers of guided drilling equipment.
Many of these manufacturers offer equipment that is currently comparable to the
Company's equipment in the quantifiable measures of performance, such as thrust,
pull back and torque. However, the Company believes that its equipment is
superior in overall performance, quality and durability. Nonetheless, some of
these manufacturers have greater financial and other resources than the Company
and have improved the capabilities of their equipment over time. The prices
charged for competitors' equipment are subject to the markups applied by local
distributors, which vary from country to country, and are often influenced by
the degree of competition and may be greater than, comparable to, or less than
the Company's prices. The Company has not observed that there is a single
principal competitor. Rather, the competitive significance in an international
market of the equipment provided by a specific manufacturer appears to be
related to the performance of the manufacturer's local licensed distributor.
Price competition in the market for utility installation services and in
international markets for equipment sales is primarily a result of the
increasing availability and quality of guided drilling equipment from other
equipment manufacturers. The Company believes that continued improvements in
guided drilling equipment on the part of the Company and other manufacturers
will serve to increase both the demand for guided drilling services and
equipment and the price competition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operation," Part II, Item 7 for a
discussion of the effects of competition on financial performance.
GOVERNMENT REGULATIONS
Federal, state and local provisions regulating construction, land use or
the protection of the environment and work safety and health are the principal
governmental regulations affecting the Company. To date, such regulations have
not had a material adverse impact on the Company's operations. The Company's
manufacturing processes are limited in scope and the Company believes that
hazardous waste generated by the manufacturing process is disposed of in
compliance with applicable laws. The bentonite drilling mud which the Company
uses in the FlowMole drilling process is an inert substance, the use of which is
not generally restricted by environmental laws. Similarly, the CableCure
service utilizes substances which are not generally subject to regulation.
Environmental issues may arise in connection with the risk of drilling in
contaminated soil, such as subcontract work performed for FESC. Those risks
arise from disturbing contaminated soil and other risks potentially encountered
when providing remediation services at a contaminated site. To date, the
Company has not incurred any material liability under state or federal
environmental laws or regulations as a result of its work in contaminated soil.
However, to the extent that the Company performs services on contaminated sites,
it may increase its exposure to potential liability under such laws and
regulations. In addition, the Company cannot predict the impact on its
operations of future developments such as the improved capability to detect
substances in the environment, the adoption of new and increasingly strict
environmental laws and regulations, and stricter enforcement of such laws and
regulations.
EMPLOYEES
As of March 31, 1996, worldwide employment of the Company totaled
515 individuals, of which 489 were employed on a full-time, regular basis
and 26 were employed in various temporary, part-time and on-call capacities.
Of the Company's 486 employees in the United States, 96 were based in Kent,
Washington and 390 in regional operations and sales centers. A total of 12
employees were engaged in North American sales and marketing, 388 in
operations, 38 in manufacturing, 9 in research and engineering, and 39 in
general and administrative functions. In Europe, 18 were engaged in
engineering and operations and 11 were engaged in sales and general and
administrative functions. Currently, the Company is a party to collective
bargaining agreements with three labor organizations covering approximately 19
employees in Chicago, Illinois, Houston, Texas and Minnesota. The Company is
considering work in certain other markets and for certain customers which may
also require the use of unionized labor. In April 2, 1996, the Company
announced a restructuring designed to eliminate 40 positions at its Kent,
Washington facility.
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<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
As of June 14, 1996, the following persons were the executive officers of
the Company, who serve at the discretion of the Board and are not elected for a
fixed term of office:
JAMES E. BARTHOLOMEW (age 42) has been Vice President/Northeast Region
since March 1994 and was Director of Northeast Operations from February 1991 to
March 1994 and New Jersey Operations Manager from April 1985 to January 1991.
M. BRUCE BOSWELL (age 58) has been Vice President/Manufacturing and
Engineering since May 1995. From October 1994 to May 1995, he served as Vice
President/Manufacturing. From 1962 to September 1994, he was employed by
Westinghouse Electric Corporation, a diversified, technology-based company, most
recently as its General Manager, Westinghouse Magnet Systems Division and
previously as its President, Westinghouse Materials Company of Ohio and West
Valley Nuclear Services Company.
ALBERT W. CHAU (age 47) has been Vice President/Research and Engineering
since October 1992 and was Director of Research and Development from August 1990
to October 1992. He was Director of Electronics System Development from
November 1988 to August 1990, Project Manager from December 1986 to October
1988, and Project Engineer from November 1984 to November 1986.
GREGORY W. DAUL (age 50) has been Senior Vice President/North American
Operations since August 1994. From July 1991 to July 1994, he was President of
Pyropower Corporation, a solid fuel combustion technology company. From March
1985 to June 1991, he was employed by North American Energy Services Company, a
utility services company, most recently as its Vice President Construction and
Maintenance Services.
CRAIG E. DAVIES (age 53) has been a director of the Company and President
and Chief Executive Officer since April 1994. From May 1993 to April 1994, he
was employed by Sithe Energies, a publicly owned developer, owner and operator
of independent electric power generating facilities, most recently as Vice
President and Chief Operating Officer. From August 1985 to May 1993, he was
President and Chief Executive Officer of North American Energy Services Company,
a utility services company, and from August 1985 to November 1992, he served as
Chairman of the Board. For the prior 16 years, he held a succession of
management and executive positions with Westinghouse Electric Corporation, a
diversified, technology-based company. Mr. Davies is also an officer and
director of FlowMole Export Sales Corporation, a wholly-owned subsidiary of the
Company.
THOMAS L. MARKL (age 48) has been Vice President/Sales and Marketing and
Secretary since May 1995. From June 1994 to May 1995, he served as Vice
President/Marketing, and he was elected Secretary in April 1995. In addition,
from September 1995 to April 1996, Mr. Markl was responsible for overseeing
operations of the Company's Western Region. From March 1986 to April 1994, he
was employed by North American Energy Services Company, a utility services
company, most recently as its Senior Vice President and previously as its Vice
President, Marketing. Mr. Markl is also an officer and director of FlowMole
Export Sales Corporation, a wholly-owned subsidiary of the Company.
LARRY D. PIHL (age 37) has been Vice President, Chief Financial Officer
and Treasurer since May 1995 and has been Controller since July 1994. From July
1981 to June 1994, he was employed by Coopers & Lybrand L.L.P., an accounting
firm, most recently as its Seattle Office Director of Finance, Personnel &
Administration, and as Audit Manager. Mr. Pihl is also an officer and director
of FlowMole Export Sales Corporation, a wholly-owned subsidiary of the Company.
SCOTT E. REYNOLDS (age 44) has been Vice President, Western Region since
February 1996, and was Director, Western Region from July 1994 to February 1996.
From December 1986 to July 1994, he was employed by North American Energy
Services Company, a utility services company, as Director of Maintenance and
Modification Services.
-12-
<PAGE>
ITEM 2. PROPERTIES
The Company's lease for its corporate headquarters and manufacturing
facilities of approximately 44,000 square feet located in Kent, Washington
expires on January 31, 1998. The Company believes that these facilities will
exceed its needs for the foreseeable future and anticipates reducing its square
footage under lease upon expiration of this lease or at an earlier date if
feasible. In addition, the Company leases approximately 116,000 total square
feet of space for operations and storage purposes in Alabama, Colorado,
Florida, Georgia, Illinois, Maryland, Minnesota, New Jersey, Ohio, Oklahoma,
Tennessee, Virginia and Washington and approximately 11,000 square feet of
space for an operations center in Corby, England. To preserve the flexibility
to relocate its operations centers in order to respond to market needs, the
Company generally attempts to enter into leases for such facilities ranging
from one to three years.
ITEM 3. LEGAL PROCEEDINGS
EUROPEAN PATENT MATTERS. In May 1989, the Company was granted European
Patent No. 0 195 559 by the European Patent Office covering subject matter
related to the Company's drilling technology similar to two patents previously
granted to the Company in the United States in June 1987 and November 1988. In
October 1991, an Opposition Board of the European Patent Office revoked the
patent. The Company appealed the ruling. On October 8, 1993, the Technical
Board of Appeal issued a provisional opinion favorable to the Company. The
Company and opposers both filed statements in response to the provisional
opinion and an oral hearing before the Technical Board of Appeal was scheduled
to take place on October 25, 1995. Prior to the oral hearing, the oppositions
were withdrawn. As a result, the Appeal hearing was canceled and the patent was
subsequently upheld in an amended form by the European Patent Office.
EMERSON V. UTILX CORPORATION, A. B. CHANCE CO. AND THE CITY OF BRYAN. In
August 1995, the Company was named a defendant in litigation filed in the United
States District Court for the Southern District of Texas on behalf of a person
alleging serious personal injury in June 1994 while performing work at a Company
work site. The plaintiff has alleged negligence, gross negligence and breach of
contract by the Company. The complaint requests an unspecified amount of
damages in excess of $50,000 and punitive damages, plus interest and costs. The
Company has received a settlement offer near the limits of the Company's
insurance policy. The Company is defending this matter. The City of Bryan, a
co-defendant, has tendered its defense in this litigation to the Company's
insurer, which has accepted the tender under reservation of rights.
OTHER. The Company is involved in other litigation matters, both as a
plaintiff and as a defendant, arising in the ordinary course of its business.
Management expects that these matters will not have a materially adverse effect
on the consolidated financial position, results of operations or liquidity of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended March 31, 1996.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Common Stock is traded on the Nasdaq National Market under the symbol
"UTLX." The following table sets forth the high and low stock prices for the
Company's Common Stock as reported during the quarters indicated. The closing
price for the Common Stock on June 14, 1996 as reported on the Nasdaq National
Market was $2-7/8.
HIGH LOW
-------- -------
1996 FISCAL YEAR
----------------
1st Quarter Ending June 30, 1995 $3 7/8 $2 9/16
2nd Quarter Ending September 30, 1995 3 1/2 2 3/4
3rd Quarter Ending December 31, 1995 3 1/4 1 3/4
4th Quarter Ending March 31, 1996 2 5/16 1 1/2
1995 FISCAL YEAR
----------------
1st Quarter Ending June 30, 1994 $5 5/8 $4 7/8
2nd Quarter Ending September 30, 1994 5 3/8 3 1/8
3rd Quarter Ending December 31, 1994 4 3/8 3 1/8
4th Quarter Ending March 31, 1995 3 1/8 2 7/8
The Company currently intends to retain its earnings to fund the
development and growth of its business. The Company has not paid cash
dividends on Common Stock to date and does not anticipate doing so in the
foreseeable future.
At May 31, 1996, the number of stockholders of record holding Common Stock
was 454. The Company estimates that there are approximately 3,700 additional
stockholders holding Common Stock in brokerage accounts.
-14-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL SUMMARY:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues $48,993 $49,717 $49,077 $47,759 $51,647
Gross profit 6,408 6,744 13,069 12,969 16,865
Operating income (loss) excluding royalty litigation
and settlement expenses (2,680) (2,531) 4,079 1,295 4,234
Royalty litigation and settlement expenses 7,833
Operating income (loss) (2,680) (2,531) 4,079 (6,538) 4,234
Income (loss) before income taxes (2,589) (2,821) 4,338 (5,935) 4,738
Net income (loss) (4,489) (2,022) 3,331 (4,009) 2,961
Earnings (loss) per share:
Primary ($0.62) ($0.28) $0.46 ($0.55) $0.40
Fully diluted ($0.62) ($0.28) $0.46 ($0.55) $0.40
Weighted average shares outstanding:
Primary 7,185 7,203 7,232 7,229 7,485
Fully diluted 7,185 7,204 7,246 7,231 7,485
<CAPTION>
AS OF MARCH 31,
----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $13,349 $18,073 $18,345 $12,298 $19,717
Total assets 30,624 35,348 35,761 39,990 39,726
Long-term portion of capital lease obligations 1,163
Common stockholders' equity 23,456 28,070 29,648 23,840 29,494
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items of
the Company's Consolidated Statements of Operations as a percentage of total
revenues and the percentage change of the dollar amounts from period to period.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES PERIOD TO PERIOD PERCENTAGE
YEAR ENDED MARCH 31, INCREASE (DECREASE)
-------------------------- -------------------
1996 1995 1994 1995-1996 1994-1995
---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% (1.5)% 1.3%
Cost of revenues 86.9 86.5 73.4 (0.9) 19.4
----- ----- ----- ------ --------
Gross profit 13.1 13.5 26.6 (5.0) (48.5)
----- ----- ----- ------ --------
Operating expenses:
Selling, general and administrative 17.2 15.5 15.7 9.3 0.0
Research and engineering 1.4 3.1 2.6 (57.4) 21.9
----- ----- ----- ------ --------
Total operating expenses 18.6 18.6 18.3 (2.0) 3.2
----- ----- ----- ------ --------
Operating income (loss) (5.5) (5.1) 8.3 (5.9) (162.3)
Other income (expense):
Interest income (expense), net (0.2) 0.2 0.4 (190.1) (55.8)
Other 0.4 (0.8) 0.1 146.5 (1,396.4)
----- ----- ----- ------ --------
Income (loss) before income taxes (5.3) (5.7) 8.8 8.2 (165.0)
Income tax expense (benefit) 3.9 (1.6) 2.1 (337.8) (179.3)
----- ----- ----- ------ --------
Net income (loss) (9.2)% (4.1)% 6.7% (122.0)% (160.7)%
----- ----- ----- ------ --------
----- ----- ----- ------ --------
</TABLE>
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
REVENUES. Consolidated revenues decreased 1.5%, due to a 14% decrease in
revenues from FlowMole drilling activities in North America ("FlowMole
operations") offset by a 101% increase in North American CableCure revenue and a
10% increase in revenue from the Company's international operations.
FlowMole revenues in fiscal 1996 were $33.4 million, compared to $38.7
million in fiscal 1995. FlowMole operations accounted for 68% and 78% of
consolidated revenues for fiscal 1996 and 1995, respectively. The decrease in
revenue from FlowMole operations in fiscal 1996 was primarily a result of a
planned crew reduction which occurred between April 1995 and July 1995, in
addition to the continued impact of competition on pricing and on the Company's
ability to obtain work. As a result of the crew reductions, the Company
experienced periods of limited capacity during much of fiscal 1996, and did not
rebuild its crew count to the prior year level until November 1995. In
addition, severe winter weather throughout the eastern United States adversely
affected the Company's FlowMole revenues in the fourth quarter of fiscal 1996.
FlowMole revenues in the fourth quarter of fiscal 1996 were $7.3 million,
compared to $9.3 million in the same period of fiscal 1995. As a result of the
above factors, the weighted average number of fully utilized FlowMole drilling
systems in operation during fiscal 1996 was 46, compared to 54 in fiscal 1995.
CableCure revenues in North America increased to $7.9 million in fiscal
1996, compared to $3.9 million in fiscal 1995. The total cable injected in
North America increased to 1.2 million feet in fiscal 1996, compared to
approximately 500,000 feet in fiscal 1995. Much of this increase is
attributable to increased revenues from customers choosing a "Test, Treat or
Replace" contract. Under such a contract, the Company is assigned certain
spans of cable which are tested for splices or corrosion, and either injected
with CableCure fluid or replaced by the Company's FlowMole crews. Most cable
can be injected, and the Company attempts to schedule the replacement portions
of such work in a manner that affords maximum productivity.
-16-
<PAGE>
Revenue from the Company's international operations increased to $7.7
million in fiscal 1996, compared to $7.0 million in fiscal 1995, due to
increased revenues from service operations and spare parts sales in Asia.
Increased sales of equipment in Asia offset decreased sales of equipment in
Europe. Total revenues from equipment sales was unchanged at $3.4 million in
both fiscal 1996 and fiscal 1995.
GROSS PROFIT. Gross profit, as a percentage of revenues, decreased to
13.1% of total revenues in fiscal 1996, compared to 13.5% of total revenues in
fiscal 1995. Gross profit from FlowMole operations was adversely affected by
the lower revenue levels and increasing customer requirements for additional
ancillary services under drilling contracts. The fixed costs of FlowMole
operations are a significant component of total costs, and gross profit as a
percentage of revenue declined significantly in fiscal 1996. This effect was
partially offset by higher gross profit levels from increased CableCure
activities. The Company restructured its CableCure hiring and training
practices in fiscal 1996, and crews began to achieve a high level of improved
productivity, measured in terms of feet injected per day, during the second
quarter of fiscal 1996, which served to boost gross profit.
The Company experienced an increase in gross profit percentage in its
international operations compared to fiscal 1995. The Company generates a
higher margin on international services and international spare parts sales, so
the increased mix of services and spare parts revenue aided overall gross
profit. Average profit margins on equipment sales improved slightly as well.
OPERATING EXPENSES. Selling, general and administrative expenses
increased by 9.3% in fiscal 1996 compared to fiscal 1995. Research and
engineering expenses decreased by 57.4% in fiscal 1996 compared to fiscal 1995.
The increase in selling, general and administrative expenses was primarily
due to having a full year of expenses in fiscal 1996 from sales and
administrative positions added during fiscal 1995, as well as a $125,000
provision for severance and outplacement benefits recorded in the fourth
quarter of fiscal 1996. The decreased research and engineering costs in fiscal
1996 reflect the completion of the Company's fiscal 1995 efforts to refine and
improve its Series F Drill and 7400 FPU, as well as a reduction in the level of
contracted research expenses performed in connection with its CableCure
activities.
OPERATING INCOME. As a result of the foregoing factors, the Company
reported an operating loss of $2,680,000, or 5.5% of revenues, in fiscal 1996,
compared to an operating loss of $2,531,000, or 5.1% of revenues, in fiscal
1995.
OTHER INCOME AND EXPENSE. Net interest income (expense) was an expense of
$91,000 in fiscal 1996, compared to income of $101,000 in fiscal 1995, due to
higher levels of borrowing on the Company's line of credit during fiscal 1996.
In fiscal 1995, the Company reported an expense of $378,000, due to its share of
the startup losses of its environmental joint venture, FESC. In fiscal 1996, the
Company reported a gain of $17,000 from the operations of FESC, which ceased
operations in December 1995. See Note 17 of Notes to Consolidated Financial
Statements included in Part II, Item 8.
INCOME TAX BENEFIT. The Company reported a provision of $2,601,000 in the
fourth quarter of fiscal 1996 to provide a valuation allowance against the full
amount of its net deferred tax assets. Excluding this charge, the Company's
income tax benefit for fiscal 1996 would have been $699,000, and the effective
federal and state tax rate would have been 27% in fiscal 1996, compared to 28%
in fiscal 1995. In fiscal 1996 and 1995, nondeductible expenses reduced the
Company's income tax benefit and were the primary causes of the low effective
tax rate (in comparison to the 34% federal tax rate). See Note 4 of Notes to
Consolidated Financial Statements included in Part II, Item 8.
NET LOSS. As a result of the foregoing factors, the Company reported a net
loss of $4,489,000 ($1,888,000 before the provision for a deferred tax valuation
allowance) in fiscal 1996, compared to a net loss of $2,022,000 in fiscal 1995.
-17-
<PAGE>
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
REVENUES. Consolidated revenues increased 1%, due to an 11% increase in
revenues from FlowMole operations offset by decreases in North American
CableCure revenue and revenue from the Company's international operations.
FlowMole operations accounted for 78% and 71% of consolidated revenues
for fiscal 1995 and 1994, respectively. The increased revenue from FlowMole
operations in fiscal 1995 was primarily a result of a 10% increase in total
footage drilled during fiscal 1995, compared to fiscal 1994. The weighted
average number of fully utilized FlowMole drilling systems in operation
during fiscal 1995 was 54, up from 47 in fiscal 1994.
The Company has experienced a long-term trend of declining prices,
particularly for smaller diameter utility installations, due to competitive
pressures and changes in utility bidding practices. Although the Company's
average price per foot drilled in fiscal 1995 increased slightly over its
fiscal 1994 results, the Company attributes this increase to having performed
a larger percentage of more difficult projects (e.g., larger diameters) for
which the Company receives a higher price per foot. Adjusting for the
increased work difficulty, the Company believes that its average price for
identical work has decreased in fiscal 1995, compared to fiscal 1994 pricing.
CableCure revenues in North America decreased 13% in fiscal 1995,
compared to 1994 levels. Much of this decrease is attributable to lower
revenues from Florida Power & Light, which had previously been the Company's
largest CableCure customer. The Company has successfully obtained initial
projects from a large number of new customers since acquiring the CableCure
business in fiscal 1992. In fiscal 1995, the number of customers increased to
42, compared to 37 in fiscal 1994 and 24 in fiscal 1993. However, these
initial demonstration projects typically are not large in scope and there can
be no assurance of the ultimate revenue to be earned from such new customers
in the future. In addition, the market price for CableCure injection
services is affected by the decreasing prices for cable replacement, and the
Company has decreased the price per foot charged for its injection services.
Revenue from the Company's international operations decreased by 24% in
fiscal 1995, compared to fiscal 1994. The Company reported a nonrecurring
gain in fiscal 1994 from the settlement of arbitration with FlowTex,
accounting for 9% of the decrease. The remainder of the decrease was due to
decreased revenue from international sales of equipment, offset in part by
increased revenues from service operations in the United Kingdom,
international CableCure revenues, and spare parts sales. The price at which
the Company is able to sell its equipment in certain international markets
decreased in fiscal 1995, compared to fiscal 1994 levels, primarily due to
increased competition for equipment sales from competitor manufacturers. The
number of FlowMole drilling systems sold in fiscal 1995 was adversely
affected by delays in receiving orders for the Company's new Series F Drill.
The Company shipped its first prototype Series F Drill at the beginning of
fiscal 1995 for use in demonstration projects. Subsequently, the Company
made minor modifications to the Series F Drill and companion 7400 FPU, and
began manufacturing and shipping the modified Series F Drill and 7400 FPU in
the third quarter of fiscal 1995.
Revenues from the Company's Revalt division were not significant in
fiscal 1994, and the division was sold at the end of the first quarter of
fiscal 1995.
GROSS PROFIT. Gross profit, as a percentage of revenues, decreased to
13.5% of total revenues in fiscal 1995, compared to 26.6% of total revenues
in fiscal 1994. Gross profit from FlowMole operations was adversely affected
by the continued trend of declining prices and requirements to provide
additional ancillary services under drilling contracts. In addition, in
certain regions the Company experienced high levels of employee turnover and
high percentages of remote work. In late December 1994, the Company closed
its Atlanta office and merged the Southeast region into another region.
Consequently, two service centers were opened in locations closer to
customers in an effort to reduce costs associated with crew travel.
- 18 -
<PAGE>
Gross profit was also adversely affected by additional reserves provided
in the third quarter of fiscal 1995 for casualty losses under the Company's
loss-sensitive insurance program and for increased state tax reserves due to
current audits by state and local jurisdictions.
The Company experienced a lower gross profit percentage from CableCure
operations, primarily attributable to performing a large number of smaller
demonstration projects and to lower pricing from Florida Power & Light. The
Company also relied heavily on specialized subcontractors for services in
order to meet a short-term increase in the volume of work required by
customers during the third quarter of fiscal 1995, which adversely affected
overall gross profit.
The Company experienced a decrease in gross profit percentage in its
international operations compared to fiscal 1994. Fiscal 1994 gross profit
was favorably affected by having a gain from settlement of arbitration, and
having recorded several sales of previously leased equipment, which generated
large gross profit amounts as the equipment was fully depreciated.
Competitive pressures on pricing in fiscal 1995 caused further reductions in
gross profit.
OPERATING EXPENSES. Selling, general and administrative expenses,
including royalties and profit sharing expenses, as a percentage of revenues,
decreased by 0.2% in fiscal 1995, compared to fiscal 1994. Research and
engineering expenses, as a percentage of revenues, increased by 0.5% in
fiscal 1995, compared to fiscal 1994.
During fiscal 1995, the Company temporarily reduced its North American
sales force from eight to five employees. In January 1995, the Company hired
three new sales employees in geographic regions where the Company believes it
can gain additional market share. The Company also hired, in late fiscal
1995, a full-time employee dedicated to Central and South American sales
activities, replacing a consultant used previously. Royalties and profit
sharing expenses are no longer a significant portion of the Company's
expenses, as the Company ceased paying royalties to FlowMole Partners after
fiscal 1993. The Company is required to pay Dow Corning one-half of the
adjusted net profits before tax generated by its CableCure operations
pursuant to its license agreement; no such payments were earned in connection
with fiscal 1995 operations.
The increased research and engineering costs in fiscal 1995 reflect the
Company's efforts to refine and improve its Series F Drill and 7400 FPU, as
well as to continue developing new tools designed to enhance crew
profitability and the attractiveness of FlowMole drilling systems to
international customers.
OPERATING INCOME. As a result of the foregoing factors, the Company
reported an operating loss of $2,531,000, or 5.1% of revenues, in fiscal
1995, compared to operating income of $4,079,000, or 8.3% of revenues, in
fiscal 1994.
OTHER INCOME AND EXPENSE. Interest income decreased to $101,000 in
fiscal 1995, compared to $231,000 in fiscal 1994 due to lower levels of cash
available for investment during fiscal 1995. In fiscal 1995, the Company
reported an expense of $378,000, due to its share of the startup losses of
its environmental joint venture, FESC.
INCOME TAX EXPENSE (BENEFIT). The Company's effective federal and state
tax rate was 28% in fiscal 1995, compared to 23% in fiscal 1994. In fiscal
1995, nondeductible expenses and state income tax effects were the primary
causes of the low effective tax rate (in comparison to the 34% federal tax
rate). In fiscal 1994, the reversal of a deferred tax valuation reserve was
the primary contributor to the low effective tax rate.
NET LOSS. As a result of the foregoing factors, the Company reported a
net loss of $2,022,000 in fiscal 1994, compared to net income of $3,331,000
in fiscal 1994.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company funded its early growth and the commercial introduction of
its services through equipment sale leaseback financing, and the issuance of
debt and equity securities, including the sale of Common Stock in an initial
public offering in March 1988. Since its initial public offering, the
Company has primarily financed its operations through cash flow from
operations, cash reserves, and periodic usage of its line of credit.
The Company's cash and cash equivalents totaled $495,000 at March 31,
1996. During fiscal 1996, the Company incurred capital expenditures of
approximately $3,138,000, primarily for upgrades and additions to its fleet
of drilling equipment and purchases of conventional and other equipment in
order to respond to its customers requests for expanded ancillary service
capabilities. Uses of cash also included approximately $1,400,000 to fund
insurance and other reserves accrued during fiscal 1995. The Company expects
to continue the periodic use of its line of credit to meet its short term
financing needs, due to seasonal and other factors which impact the carrying
amounts of accounts receivable, inventories, accounts payable and accrued
liabilities.
At March 31, 1996, the Company had an available bank credit facility of
$5,000,000, and an outstanding balance on the facility of $2,500,000. The
credit facility expires during fiscal 1997; however, the Company expects to
be able to obtain a renewal of the facility.
REVIEW AND OUTLOOK
FLOWMOLE OPERATIONS. The Company currently has equipment to field 88
FlowMole systems, and personnel to field between 55 and 70 crews, depending
on the mix of work available. The personnel level is consistent with the peak
level achieved during fiscal 1996. The equipment level reflects the addition
of five Vector drilling systems and one Series F drilling system; these
additions were targeted at changing the mix of equipment available. The
Company typically plans for excess equipment to allow time for preventative
maintenance, matching of equipment to job types, mobilization time, or other
equipment downtime factors. The Company's current crew capacity exceeds its
fiscal 1996 level, and the Company plans to maintain these higher levels
throughout fiscal 1997. However, the Company's revenue levels from FlowMole
operations, and the weighted average number of systems in operation on any
given day, are also affected by factors which include weather, pricing,
competition, customer work release practices, soil and other work difficulty
determinants, and permitting. The Company may also choose to increase or
decrease its capacity; however the current plan is to only add crews or
equipment when a high degree of confidence exists in the Company's ability to
keep the added crews busy. See also the discussion under COMPETITION,
SEASONAL FACTORS AND UTILITIES' BUDGETARY CONSIDERATIONS included under "Risk
Factors", below.
CABLECURE OPERATIONS. The Company expects a continuation of the trend
towards increased customer acceptance of the CableCure process, including an
increased level of work under "Test, Treat or Replace" contracts. The Company
has projected an increase to 2 million feet of cable injected with CableCure
fluid in the United States in fiscal 1997. The Company anticipates that the
trend towards lower pricing for cable replacement will continue to place
downward pressure on the price for CableCure services. See "Competition"
under Part I, Item I. The increased trend towards customer requirements for
turnkey services will also place pressure on the level of labor and other
costs required to deliver the CableCure service. Because the Company's
customers can typically cancel their work on short notice, a certain degree
of uncertainty always exists in the Company's future revenue levels. See also
the discussion under COMPETITION, SEASONAL FACTORS, UTILITIES' BUDGETARY
CONSIDERATIONS and DOW CORNING CORPORATION included under "Risk Factors",
below.
INTERNATIONAL OPERATIONS. The Company intends to emphasize its service
businesses and continuation of its spare parts revenues in future
international operations.
The Company operated three drilling crews in the United Kingdom in
fiscal 1996 and fiscal 1995, and has increased to four crews in fiscal 1997
with plans for further expansion. Revenues from drilling operations in the
United Kingdom were 19% and 22% of revenue from international operations in
fiscal 1996 and fiscal 1995,
- 20 -
<PAGE>
respectively. Customer orders for United Kingdom drilling services are
typically of very short duration, so sudden unanticipated changes in the
level of competition or customer demand could have an immediate adverse
impact on the Company's operations.
CableCure services in Europe have been concentrated in Germany and
Austria. Revenue levels, primarily from small demonstration projects, were
approximately $500,000 in both fiscal 1996 and fiscal 1995. The Company
believes that potential exists for growth in European CableCure services, but
customer acceptance of the CableCure process is proceeding slowly in Europe,
as it did in past years in the United States. The Company plans to continue
expanding its sales efforts throughout Europe
Spare parts sales accounted for 20% and 18% of revenue from
international operations in fiscal 1996 and fiscal 1995, respectively. The
Company expects to be able to maintain or increase its spare parts sales, due
to the sales of additional new equipment in fiscal 1996 and any such sales in
the future. The Company currently has inventories of new equipment available
for sale in the first two quarters of fiscal 1997, at levels equivalent to
the prior year. See the discussion below under "OPERATING EXPENSES AND
RESTRUCTURING ACTIVITIES". Because the Company has yet to make any final
decisions about future sources of manufacturing of new equipment, it cannot
predict the level of any future equipment sales, and risk exists that its
potential equipment customers and existing spare parts customers may award
their business to competitors prior to any final such decision being
implemented. Therefore, the Company cannot predict any future level of
equipment sales, and spare parts sales may also be adversely affected.
OPERATING EXPENSES AND RESTRUCTURING ACTIVITIES. On April 2, 1996, the
Company announced a restructuring designed to reduce headcount, overhead and
inventory costs by outsourcing its internal manufacturing of new FlowMole
drilling equipment. As a result of this restructuring, the Company also
initiated a plan designed to eliminate 40 manufacturing and administrative
jobs at its Kent, Washington headquarters, and to reduce operating expenses
by $1.5 million in fiscal 1997, compared to fiscal 1996 levels. Because the
Company has not yet operated at these reduced levels, there can be no
assurance that the Company will be able to achieve or maintain the targeted
expense reductions. Also, subsequent changes in the Company's business may
require offsetting spending increases in other areas.
Previously, the Company had designed and engineered its own equipment
and assembled the equipment from components manufactured by outside vendors.
As a result of the restructuring, the Company plans to outsource all
manufacturing and assembly of equipment. No final decision has yet been made
about the vendor for the final assembly process. Although the Company expects
to have multiple options for obtaining such services, the ultimate cost of
new equipment in the future may increase from past levels. The Company has a
prototype Series G Drill under testing, and expects that the testing process,
finalization of design, selection of a final vendor and receipt of completed
Series G Drills, will not be completed until at least late 1996 or early 1997.
The Company is required to pay a royalty to Dow Corning based on the net
profits from CableCure services, as defined in the underlying exclusive
license agreement. The level of such provisions for royalty expenditures will
increase if the projections of improving levels of CableCure revenues are
achieved. Such royalty payments were not material in fiscal 1996 or fiscal
1995. See Note 15 of Notes to Consolidated Financial Statements included in
Part II, Item 8.
CAPITAL EXPENDITURES AND OTHER MATTERS. The Company expects to continue
to require substantial levels of capital spending.
In fiscal 1997, capital spending will emphasize upgrading of existing
field power units to support existing Series D Drills and future production
of Series G Drills, as well as the purchase of additional conventional
equipment, such as backhoes, to support customer requirements for increased
turnkey capabilities. In addition, if the Company is unable to sell its
remaining inventory of existing equipment, such equipment may be placed into
service with the Company's own crews.
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<PAGE>
The Company's line of credit expires on November 30, 1996. The Company
expects to be able to negotiate an extension of this credit facility, or
obtain a replacement facility from another financial institution, at similar
terms and interest rates. The Company's financial performance through
September 30, 1996 will be a factor in determining the Company's ability to
achieve the renewal without an increase in borrowing costs.
The Company expects to be able to finance its capital expenditures
through cash generated by operations, together with the periodic use of its
line of credit. The Company may also rely on lease financing for the
acquisition of capital equipment. However, there can be no assurance that
such sources of financing will be available on acceptable terms, and the
Company may be forced to delay or reduce its capital spending as a result.
OTHER MATTERS. In March 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
Be Disposed Of" ("FAS 121"). FAS 121 requires that long-lived assets and
certain intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. If impairment has occurred, an impairment loss must be
recognized. Implementation of FAS 121 is required in fiscal 1997. The impact
of the adoption of this standard is not expected to be material to the
financial position, results of operations, or liquidity of the Company.
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"). FAS 123 establishes a fair value
based method of accounting for stock-based compensation plans for encourages
entitles to adopt that method in place of the provisions of Accounting
Principles Board Opinion No. 25 ("APB 25"). The Company intends to continue
to apply the provisions of APB 25 in recognizing compensation expense related
to stock option plans. See Note 10 of Notes to Consolidated Financial
Statements included in Part II, Item 8.
FORWARD LOOKING INFORMATION. This fiscal 1996 Form 10-K contains forward
looking statements, in addition to those under the caption "Review and
Outlook". Such statements are subject to substantial risk. Actual results may
vary materially due to risks and uncertainties inherent in the Company's
business, including those described under "Review and Outlook" and those
described under "Risk Factors", below.
RISK FACTORS
COMPETITION. The Company has experienced a long-term trend of declining
prices for guided boring services, particularly for smaller diameter utility
installations, due to competitive pressures and changes in utility bidding
practices. This trend has also caused the Company to lower its prices for
CableCure injection services, which are priced at a discount to replacement
costs, including replacement via guided boring. In addition, the Company's
utility customers are increasing their requests for "turnkey" installation,
replacement and restoration services, requiring their drilling contractors to
take responsibility for switching circuits, terminating circuits, and other
non-incidental tasks. These tasks require additional equipment and labor, and
the cost increases can offset any price increase the Company is able to
negotiate for the expansion of its services. The Company's average price per
foot drilled or injected in fiscal 1996 decreased slightly over its fiscal
1995 results. The trend of falling prices for guided boring services is
expected to continue into the future, as more customers award work based on
competitive bidding, more customers require their drilling contractors to
perform additional tasks as part of the drilling contract, and more
conventional contractors acquire drilling capabilities in order to enter into
this segment of the construction industry. This trend will continue to put
downward pressure on the market price for CableCure Services. The Company
cannot predict the ultimate duration or the magnitude of these decreases.
SEASONAL FACTORS. Weather and other seasonal factors may decrease the
Company's revenues and profits in any given period. Adverse weather may
preclude the Company from operating its FlowMole drilling systems or
providing its CableCure services at certain times of the year. In addition,
the Company believes that the regular budgetary cycles of certain of its
North American utility customers tend to concentrate demand for the Company's
services during the third quarter of its fiscal year (the fourth quarter of
the calendar year), although other budgetary factors described below may
override this trend in any given quarter. As a result of these factors,
results of operation in any given fiscal quarter are not necessarily
indicative of results in any other fiscal quarter.
- 22 -
<PAGE>
UTILITIES' BUDGETARY CONSIDERATIONS. Budgetary considerations, arising
from unfavorable regulatory determinations on matters such as rate-setting,
capitalization of services performed by the Company, or siting of power
production facilities, or from reductions in new housing starts, reductions
in electric utility revenues due to mild weather, and general economic
downturns have affected the ability of some of the Company's utility
customers to sustain their cable replacement or other maintenance programs
and accordingly adversely impact the Company's revenues and profits.
Although the Company has broadened its customer base, one customer, Virginia
Power, continues to generate a significant portion of the Company's
consolidated revenues, and a small number of customers generate more than
half of its CableCure revenues. See Note 3 of Notes to Consolidated
Financial Statements included in Part II, Item 8. Because cable replacement,
restoration and other maintenance programs are, to a substantial extent,
deferrable and the Company's contracts with its utility customers permit
termination of orders on relatively short notice, postponement or
cancellation of such programs by customers can interject substantial
volatility into the Company's revenues and profits.
DOW CORNING CORPORATION. The Company purchases its CableCure fluid
exclusively from Dow Corning. In May 1995, Dow Corning filed for protection
under Chapter 11. While the Company has been informed by Dow Corning that it
intends to continue the CableCure business, there can be no assurance that
the bankruptcy trustee will not seek to amend or terminate the CableCure
license agreement. See the discussion under "The CableCure Service" in Part
I, Item 1.
IMPACT OF INFLATION AND CHANGING PRICES. Inflation has had only a
minimal effect on the Company's revenues and expenses and is not expected to
have a significant impact on revenues or expenses in fiscal 1997.
FOREIGN CURRENCY FLUCTUATIONS. The Company's financial results are
affected by fluctuations in certain foreign currencies, particularly the
British Pound Sterling.
- 23 -
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
UTILX Corporation
We have audited the consolidated financial statements of UTILX Corporation as
listed in Item 14(a) of this Form 10-K. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of UTILX
Corporation as of March 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1996 in conformity with generally accepted accounting
principles.
Seattle, Washington
May 10, 1996
- 24 -
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
UTILX CORPORATION
CONSOLIDATED BALANCE SHEET
MARCH 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARES)
ASSETS
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 495 $ 840
Accounts receivable, trade (net of allowance of $479
and $370, respectively) 10,659 11,525
Materials, supplies and inventories 8,128 8,486
Income taxes receivable 1,019 786
Current portion of deferred income taxes 2,829
Prepaid expenses and other 216 177
------- -------
Total 20,517 24,643
Equipment and improvements, net 9,113 9,489
Other assets, net 994 1,216
------- -------
Total assets $30,624 $35,348
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 2,500
Accounts payable 1,912 $ 2,346
Accrued liabilities 2,756 4,224
------- -------
Total 7,168 6,570
Long-term portion of deferred income taxes 708
------- -------
Total liabilities $ 7,168 $ 7,278
------- -------
------- -------
Commitments and contingencies:
Stockholders' equity:
Convertible preferred stock
(no shares issued and outstanding)
Common Stock, $0.01 par value
(authorized 25,000,000 shares) 72 72
Common Stock warrants 936 936
Additional paid-in capital 17,399 17,404
Retained earnings 5,940 10,429
Unearned compensation (76) (158)
Cumulative foreign currency translation adjustment (815) (613)
------- -------
Total stockholders' equity 23,456 28,070
------- -------
Total liabilities and stockholders' equity $30,624 $35,348
------- -------
------- -------
Common Stock issued and outstanding 7,184,116 7,185,012
</TABLE>
See accompanying notes to consolidated financial statements.
- 25 -
<PAGE>
UTILX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Unrelated customers $ 40,738 $ 40,398 $ 41,678
Related parties 8,255 9,319 6,594
-------- -------- --------
Total revenues from operations 48,993 49,717 48,272
Settlement of litigation 805
-------- -------- --------
Total Revenues 48,993 49,717 49,077
Cost of revenues 42,585 42,973 36,008
-------- -------- --------
Gross Profit 6,408 6,744 13,069
-------- -------- --------
Operating expenses:
Selling, general and administrative 8,416 7,699 7,697
Research and engineering 672 1,576 1,293
-------- -------- --------
Total operating expenses 9,088 9,275 8,990
-------- -------- --------
Operating income (loss) (2,680) (2,531) 4,079
-------- -------- --------
Other income (expense):
Interest income (expense), net (91) 101 231
Share of FlowMole Environmental Services
Corporation income (loss) 17 (378) (39)
Other income (expense), net 165 (13) 67
-------- -------- --------
Total 91 (290) 259
-------- -------- --------
Income (loss) before income taxes (2,589) (2,821) 4,338
Income tax expense (benefit) 1,900 (799) 1,007
-------- -------- --------
Net income (loss) $ (4,489) $ (2,022) $ 3,331
-------- -------- --------
-------- -------- --------
Earnings (loss) per share:
Primary $ (.62) $ (.28) $ .46
Fully Diluted $ (.62) $ (.28) $ .46
Weighted average number of shares:
Primary 7,185 7,203 7,232
Fully Diluted 7,185 7,204 7,246
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
UTILX CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
COMMON STOCK CUMULATIVE
------------------ FOREIGN
COMMON ADDITIONAL CURRENCY
STOCK PAID-IN RETAINED UNEARNED TRANSLATION
SHARES AMOUNT WARRANTS CAPITAL EARNINGS COMPENSATION ADJUSTMENT
--------- ------ -------- ---------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1993 6,704,698 $ 67 $ 15,218 $ 9,457 $ (902)
Stock options exercised 64,600 1 114
Conversion of Series B and C
Preferred Stock to Common Stock 373,831 3 1,548
Issuance of Common Stock warrants $ 936
Change in cumulative foreign
currency translation adjustment (125)
Net income 3,331
--------- ------ -------- ---------- -------- -----------
Balance, March 31, 1994 7,143,129 71 936 16,880 12,788 (1,027)
Stock options exercised 45,000 1 144
Repurchase of Common Stock (95,000) (1) (337)
Issuance of vested Restricted
Stock, net 44,883 193
Issuance of nonvested Restricted
Stock 47,000 1 187 $(188)
Amortization of unearned
compensation 30
Change in cumulative foreign
currency translation adjustment 414
Net loss (2,022)
--------- ------ -------- ---------- -------- ------------ -----------
Balance, March 31, 1995 7,185,012 72 936 17,404 10,429 (158) (613)
Stock options exercised 1,200 1
Repurchase of Common Stock (2,096) (6)
Amortization of unearned
compensation 82
Change in cumulative foreign
currency translation adjustment (202)
Net loss (4,489)
--------- ------ -------- ---------- -------- ------------ -----------
Balance, March 31, 1996 7,184,116 $ 72 $ 936 $ 17,399 $ 5,940 $ (76) $ (815)
--------- ------ -------- ---------- -------- ------------ -----------
--------- ------ -------- ---------- -------- ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
UTILX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(4,489) $(2,022) $ 3,331
------- ------- -------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 3,622 3,611 3,539
Royalty litigation and settlement expenses (7,187)
Deferred income taxes 2,121 241 (47)
Share of FlowMole Environmental Services
Corporation loss (gain) (17) 378 39
Net book value of drilling systems sold 115 39 308
Other - non-cash expenses (income), net (76) (41) 179
Changes in:
Accounts receivable, trade 800 (1,025) (2,498)
Materials, supplies and inventories 263 (2,836) (1,008)
Prepaid expenses and other (37) 258 202
Other assets (38) 80 (255)
Income taxes (229) (1,433) 974
Accounts payable (488) (5) 25
Accrued liabilities and other (1,399) 1,065 143
------- ------- -------
Total adjustments 4,637 332 (5,586)
------- ------- -------
Net cash provided by (used in)
operating activities 148 (1,690) (2,255)
------- ------- -------
INVESTING ACTIVITIES:
Cost of additions to equipment (3,138) (3,958) (1,622)
Proceeds from sale of equipment 183 141 289
Investment in and advances to FlowMole
Environmental Services Corporation (150) (250)
Purchases of short term investments (6,225)
Sales of short term investments 3,690 10,802
------- ------- -------
Net cash provided by (used in) investing
activities (2,955) (277) 2,994
------- ------- -------
FINANCING ACTIVITIES:
Net borrowing on note payable to bank 2,500
Principal payments on long term borrowings (816)
Issuance of Common Stock 1 368 112
Repurchase of Common Stock (6) (338)
------- ------- -------
Net cash provided by (used in)
financing activities 2,495 30 (704)
------- ------- -------
CUMULATIVE EFFECT ON CASH FLOWS OF
FOREIGN CURRENCY TRANSACTIONS (33) 104 (34)
------- ------- -------
Net increase (decrease) in cash and cash
equivalents (345) (1,833) 1
CASH AND CASH EQUIVALENTS
Beginning of period 840 2,673 2,672
------- ------- -------
End of period $ 495 $ 840 $ 2,673
------- ------- -------
------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
- 28 -
<PAGE>
UTILX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
UTILX-Registered Trademark- Corporation ("UTILX" or the "Company") provides
specialty services to electric, telecommunications, natural gas, water, sewer
and other utilities primarily in the United States and drilling equipment to
contractors and other users outside of the United States. The Company's
primary business is installing and replacing underground cables and pipes
through its FlowMole service. In addition, the Company sells its drilling
systems and related products in international markets. The Company also
provides its CableCure service to utility customers for injecting a silicone
fluid into electric and telephone cables to repair water damage.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, FlowMole Limited, FlowMole Export Sales
Corporation and UTILX Foreign Sales Corporation. All significant intercompany
transactions and balances have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company classifies demand deposits, passbook savings accounts and
overnight balances as cash and cash equivalents. Other investments such as
government/agency bonds, bankers' acceptances and commercial paper are
classified as short-term investments. The Company records these investments
at amortized cost, which approximates market.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of temporary cash investments, short-term
investments and trade receivables.
The Company's policy is to invest temporary cash in high credit quality
securities and to reduce risk by limiting the amount of investment in any one
issuer and the type of investment. The Company's credit losses with respect
to trade receivables (which are uncollateralized) has been low due to the
financial base of its customers that are primarily utility companies. In
some cases, the Company performs such services as a subcontractor to the
general contractor hired by the utility company. International customers
(primarily contractors or distributors of construction equipment) that
purchase equipment and spare parts are generally required to provide an
irrevocable letter of credit prior to shipment until the Company has
sufficient experience with the customer to allow them credit. In general,
the Company's international customers place orders to fill immediate needs
related to construction projects.
MATERIALS, SUPPLIES AND INVENTORIES
Materials, supplies and inventories are valued at the lower of cost,
determined on the moving average basis, or market.
EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are stated at cost. Expenditures for
refurbishments and improvements that significantly add to productive capacity
or extend the useful life of an asset are capitalized. Expenditures for
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<PAGE>
maintenance and repairs are expensed on a current basis. Gains and losses on
assets sold or retired are reflected in the Consolidated Statement of
Operations. Depreciation and amortization is provided using the
straight-line method over the assets' estimated useful lives, ranging from
two to ten years.
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of"
("FAS 121"). FAS 121 requires that long-lived assets and certain intangibles
be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. If
impairment has occurred, an impairment loss must be recognized.
Implementation of FAS 121 is required in fiscal 1997. The impact of the
adoption of this standard is not expected to be material to the financial
position, results of operations, or liquidity of the Company.
In fiscal 1994, the Company wrote off approximately $325,000 related to older
drilling equipment that had been placed into service in prior years.
OTHER ASSETS
Included in other assets is the CableCure licensing right. Amortization is
provided using the straight-line method over the estimated useful life of
eight years.
INCOME TAXES
The Company uses the liability method of accounting for income taxes required
by Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("Statement No. 109"). Statement No. 109 requires recording
deferred tax balances, at the currently enacted tax rate, for all temporary
differences between the book and tax bases of assets and liabilities, net of
a valuation allowance as appropriate.
RECOGNITION OF REVENUES AND COSTS
Revenues from drilling, utility vault sealing and cable treatment services
performed by the Company are recognized when the service is rendered. Costs
are recorded as incurred.
Royalty, lease, spare parts and equipment sales are recognized as earned,
under provisions of the underlying sales, lease or license agreement.
FOREIGN CURRENCY TRANSLATION
The Company translates the assets and liabilities of FlowMole Limited, its
United Kingdom subsidiary, at rates of exchange in effect at year end.
Revenues, expenses and cash flows of the United Kingdom subsidiary are
translated at the average rates of exchange during the year. Gains and
losses resulting from translation of the balance sheet are accumulated as a
separate component of stockholders' equity until such time that the foreign
entity may be sold or liquidated. Gains and losses resulting from the effect
of exchange rates on transactions denominated in foreign currencies are
included in other income (expense) in the Consolidated Statement of
Operations.
RESEARCH AND ENGINEERING
Expenditures for research and engineering are charged to expense as incurred.
EARNINGS PER SHARE
Primary earnings per share is computed by dividing net income by the weighted
average number of shares of Common Stock of UTILX Corporation, $0.01 par
value per share (the "Common Stock"), and, when dilutive, common stock
equivalents outstanding during the period. Common stock equivalents include
shares issuable upon exercise of the Company's stock options and certain
warrants and, prior to fiscal 1995, upon conversion of the Company's
convertible preferred stock (see Notes 9 and 10). Fully diluted earnings per
share is computed based on the weighted average number of shares of Common
Stock and common stock equivalents outstanding during the period taking into
consideration maximum potential dilution.
- 30 -
<PAGE>
RECLASSIFICATIONS
Certain amounts in the fiscal 1995 and 1994 financial statements have been
reclassified in order to conform to the fiscal 1996 presentation with no
impact on previously reported net income (loss) or stockholders' equity.
STOCK OPTION PLANS
The Company accounts for stock option plans under the provisions of
Accounting Principles Board Opinion No. 25 ("APB 25"). In October 1995, the
FASB issued Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("FAS 123"), which is effective for years
beginning after December 15, 1995. FAS 123 establishes a fair value based
method of accounting for stock-based compensation plans and encourages
entities to adopt that method in place of the provisions of APB 25. The
Company intends to continue to apply the provisions of APB 25 in recognizing
compensation expense related to stock option plans and to disclose in the
footnotes in its fiscal 1997 financial statements the impact on net income
had FAS 123 been adopted for expense recognition purposes. See also Note 10.
NOTE 2 -- JOINT VENTURE AGREEMENT
In November 1983, FlowMole Partners, a Research and Development Limited
Partnership, a Washington Limited Partnership ("FlowMole Partners") was
organized to research, develop and commercially exploit certain excavation
technology. On May 30, 1984, the Company entered into the FlowMole Joint
Venture with FlowMole Partners (the "Joint Venture") whose purpose was to
manufacture and market systems and services utilizing the technology. On
November 1, 1985, pursuant to a Joint Venture Purchase Agreement, the Company
purchased the technology from FlowMole Partners for a royalty of 6% of the
collected revenues earned by the Company from the sale of services or
equipment utilizing the technology. The royalty was payable through November
1996, subject to certain maximums. On June 14, 1993, the Company closed a
settlement agreement with FlowMole Partners in which the parties settled
certain litigation and related matters. Under the terms of the settlement,
in fiscal 1994, the Company paid FlowMole Partners approximately $7.2 million
in cash and issued a five-year warrant to FlowMole Partners to purchase
600,000 shares of Common Stock at $5.50 per share in exchange for the
termination of litigation, a mutual release of all claims and the
termination of all future royalty obligations as of March 31, 1993. The
total net cost of the settlement of $7,833,000, including $936,000 assigned
to the warrant issued, was charged to expense in fiscal 1993.
The warrant is exercisable at the option of FlowMole Partners through June
14, 1998. At the time of exercise of the warrant, FlowMole Partners will
have the right to put to the Company the shares purchased at the current
market price (as defined in the warrant) and the Company has the right to
call said shares at the same price. If the put or call is exercised, the
difference between the market and warrant exercise prices may be paid to
FlowMole Partners in cash or in shares of Company Common Stock (based on the
then current market price) at the Company's option. The Company has granted
certain registration rights with respect to any shares issued in connection
with the warrant.
NOTE 3 -- RELATED-PARTY TRANSACTIONS
The Company, in the ordinary course of business, sells its services to
Virginia Electric and Power Company ("Virginia Power"), the principal
subsidiary of Dominion Resources, Inc. ("Dominion Resources"). During fiscal
1996, 1995 and 1994, such sales amounted to approximately $7,594,000 (16% of
consolidated revenues), $8,450,000 (17% of consolidated revenues), and
$6,594,000 (13% of consolidated revenues), respectively. Amounts due from
Virginia Power for services were $1,77l,231 and $2,286,146 at March 31, 1996
and 1995, respectively. At March 31, 1993, Dominion Capital, Inc. ("Dominion
Capital"), also a subsidiary of Dominion Resources, owned all of the shares
of the Company's preferred stock and 663,134 shares of Common Stock. During
the year ended March 31, 1994 all of the shares of the Company's preferred
stock were converted to
- 31 -
<PAGE>
373,831 shares of Common Stock pursuant to the conversion provisions of such
stock (see Note 9). During the year ended March 31, 1996, Dominion Capital
transferred its shares of common stock to Trilon Dominion Partners, L.L.C., a
limited liability company in which it retains an ownership interest
("Trilon"). As of March 31, 1996, Trilon owned 426,525 shares of Common
Stock. See also Note 17.
NOTE 4 -- INCOME TAXES
The components of income tax expense (benefit) related to continuing
operations were:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal and state $ (320) $ (971) $ 750
Foreign 99 (69) 304
-------- -------- --------
(221) (1,040) 1,054
-------- -------- --------
Deferred
Federal and state 2,121 241 (47)
-------- -------- --------
Total $ 1,900 $ (799) $ 1,007
-------- -------- --------
-------- -------- --------
</TABLE>
A reconciliation of income taxes on income at the federal statutory rate of
34% with the income tax provision in the consolidated statement of operations
is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before
income taxes $ (2,589) $ (2,821) $ 4,338
-------- -------- --------
Income tax expense
(benefit) at federal
statutory rate $ (880) $ (959) $ 1,475
State income taxes net of
federal tax effect (110) 12 170
Tax effect of nondeductible
expenses 187 197 62
Change in valuation
allowance 2,601 (728)
Other 102 (49) 28
-------- -------- --------
Total $ 1,900 $ (799) $ 1,007
-------- -------- --------
-------- -------- --------
</TABLE>
In order to realize the aggregate carrying value of its net deferred tax
assets, the Company will be required to generate certain amounts of taxable
income in future years. Management of the Company has taken several steps to
achieve such levels of future income; however, the ultimate success of such
efforts is uncertain. Also, the Company has incurred losses in its past two
fiscal years. Accordingly, under the provisions of Statement No. 109,
management estimates that realization of the net deferred tax assets can not
be projected at this time. Therefore, the Company recorded a valuation
allowance of $2,601,000 against the full amount of its net deferred tax
assets as of March 31, 1996. The estimate will be updated on a quarterly
basis. In fiscal 1994, based on taxable income in the fiscal 1994 and
estimates of expected future taxable income, the Company reversed the
valuation allowance established in fiscal 1993.
- 32 -
<PAGE>
The computation of the net deferred tax asset (liability) at March 31, is as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accruals for claims and expenses not
currently deductible $ 920 $ 1,135
Inventory reserves, net 509 329
Accounts receivable reserve, net 154 79
Royalty litigation and settlement
expenses 1,288
Net operating loss carry forwards
(expiring fiscal 2011) 1,588
Alternative minimum tax credit
carry forwards 141
Other 211 278
-------- --------
Total deferred tax assets $ 3,523 $ 3,109
-------- --------
-------- --------
Current $ 1,518 $ 2,829
Long-term 2,005 280
-------- --------
$ 3,523 $ 3,109
-------- --------
-------- --------
Deferred tax liabilities:
Basis difference for equipment
and improvements $ (647) $ (649)
Other (275) (339)
-------- --------
Total deferred tax liabilities $ (922) $ (988)
-------- --------
-------- --------
Valuation allowance $ (2,601)
--------
--------
</TABLE>
The Company's Federal income tax returns for fiscal 1993, 1994 and 1995 are
currently under examination by the Internal Revenue Service. While the
ultimate outcome of the examination cannot be predicted with certainty at
this time, it is the opinion of management that the ultimate disposition of
this matter will not have a material adverse effect on the consolidated
financial position, results of operations or liquidity of the Company.
NOTE 5 -- MATERIALS, SUPPLIES AND INVENTORIES
Materials, supplies and inventories, at March 31, are classified as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and spare parts $ 5,233 $ 5,646
Work in process 1,077 2,184
Finished goods 2,753 1,416
Less allowance for potentially obsolete or
overstocked inventory (935) (760)
-------- --------
Total $ 8,128 $ 8,486
-------- --------
-------- --------
</TABLE>
- 33 -
<PAGE>
NOTE 6 -- EQUIPMENT AND IMPROVEMENTS
Equipment and improvements, at March 31, are classified as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment $ 27,332 $ 24,961
Leasehold improvements 327 304
Furniture and fixtures 462 464
Construction in progress, equipment 409 320
-------- --------
28,530 26,049
Less accumulated depreciation
and amortization (19,417) (16,560)
-------- --------
Total $ 9,113 $ 9,489
-------- --------
-------- --------
</TABLE>
Repairs and maintenance expenses for fiscal 1996, 1995 and 1994 were
approximately $975,000, $1,223,000, and $871,000, respectively.
NOTE 7 -- ACCRUED LIABILITIES
Accrued liabilities, at March 31, consist of:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accrued payroll and related costs $ 1,373 $ 1,386
Accrued sales tax 445 940
Accrued warranty 378 384
Accrued insurance, net of prepayments 34 1,044
Other 526 470
-------- --------
Total $ 2,756 $ 4,224
-------- --------
-------- --------
</TABLE>
Under the terms of its insurance policies, the Company pays fixed premiums
for certain types of insurance and pays premiums for other types of insurance
that are adjusted annually, based on retrospective calculations, and vary
between certain minimum and maximum amounts. The Company makes periodic
payments to its carrier, based on the projected total cost of its program.
The Company provides additional reserves for the estimated exposure for
outstanding claims under the retrospective portion of its policies.
NOTE 8 -- NOTE PAYABLE
The Company has a committed credit facility of $5,000,000 with Seattle-First
National Bank of Washington ("Seafirst"). The agreement is collateralized by
the Company's inventory and accounts receivable. The credit agreement
requires that the Company maintain certain financial covenants, including
requirements to maintain certain levels of tangible net worth, current ratio
and debt ratio. Borrowings bear interest at the Seafirst prime rate, the
LIBOR rate plus 1.40%, or other specified rates, at the Company's option.
The Company pays a commitment fee of up to 0.125% on the unused portion of
the facility. This line of credit currently expires on November 30, 1996.
The Company anticipates that it will be able to negotiate an extension of
this line of credit. At March 31, 1996, the Company had an outstanding
balance of $2,500,000 under this facility at an effective overnight borrowing
rate of 8.14%.
- 34 -
<PAGE>
NOTE 9 -- CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue up to 2,000,000 shares of preferred stock.
Three series of preferred stock, the Series A Convertible Preferred Stock,
$0.01 par value (the "Series A Stock"), the Series B Convertible Preferred
Stock, $0.01 par value (the "Series B Stock"), and the Series C Convertible
Preferred Stock, $0.01 par value (the "Series C Stock") have been designated.
The Series B Stock and the Series C Stock were owned by Dominion Capital, and
automatically converted to Common Stock either upon transfer to a party not
affiliated with Dominion Capital or on a quarterly basis, so as to maintain
the percentage ownership of Dominion Capital of Common Stock at no greater
than 9.85%. The Series B Stock converted at a ratio of 2.58824 shares of
Common Stock for each share of Series B Stock. The Company created a
non-dividend Series C Convertible Preferred Stock, 11,353 shares of which
were issued on May 25, 1989 to Dominion Capital in exchange for 113,530
shares of the Common Stock. The Series C Stock converted at a ratio of ten
shares of Common Stock for each share of Series C Stock. During fiscal 1994,
all preferred stock was converted to shares of Common Stock in accordance
with the provisions described above.
NOTE 10 -- COMMON STOCK
STOCK OPTIONS
In October 1984, a nonqualified stock option ("NSO") plan (the "NSO Plan")
and an incentive stock option ("ISO") plan (the "ISO Plan") were adopted by
the Company. In July 1994, the Company adopted a new stock option and
restricted stock plan (the "1994 Plan"), and ceased granting options under
the NSO Plan and the ISO Plan. The NSO Plan and the ISO Plan, as amended,
provided for the issuance of a maximum of 220,000 and 1,500,000 shares of
Common Stock, respectively. The 1994 Plan provides for the issuance of a
maximum of 600,000 shares under either options or restricted stock grants.
The ISO Plan and the 1994 Plan require that ISO's be granted at exercise
prices equal to the market value of the Common Stock on the date of grant.
The NSO Plan and the ISO Plan required that NSO's be granted at exercise
prices no less than 85% of the market value of the Common Stock on the date
of grant. The 1994 Plan requires that NSO's be granted at exercise prices
equal to the market value of the Common Stock on the date of the grant. The
NSO Plan and the ISO Plan and the 1994 Plan generally provide for full
vesting of options five years after grant. Options granted under the NSO
Plan and the ISO Plan, and the 1994 Plan, have terms, from the grant date, of
six and ten years, respectively. The options issued between fiscal 1987 and
1996 have exercise prices between $.50 and $14.50 per share. At March 31,
1996, 318,550 shares were issuable under the 1994 Plan.
- 35 -
<PAGE>
Pertinent information covering the plans follows:
Outstanding at April 1, 1993 442,500
Issued 95,000
Canceled (16,900)
Exercised ($.50 to $5.875 per share) (64,600)
--------
Outstanding at March 31, 1994 456,000
Issued 157,500
Canceled (234,700)
Exercised ($2.875 to $4.25 per share) (45,000)
--------
Outstanding at March 31, 1995 333,800
Issued 135,700
Canceled (41,900)
Exercised ($0.50 per share) (1,200)
--------
Outstanding at March 31, 1996 426,400
--------
--------
Exercisable at March 31, 1996 204,600
--------
--------
In fiscal 1988, the Company adopted a stock option plan for non-employee
directors (the "Director Plan") that, as amended, provides for the issuance of a
maximum of 300,000 shares of Common Stock to non-employee directors. The
Director Plan requires that options be granted upon initial appointment and
annually thereafter at exercise prices equal to the market value of the Common
Stock on the date options are granted. Vesting of initial grants occurs over
four years and occurs immediately for annual grants. In fiscal 1996, 1995 and
1994, the Company granted 30,000, 40,000, and 25,000 options, respectively,
under the Director Plan. Options granted between fiscal 1989 and 1996 have
exercise prices between $2.875 and $13.875 per share. In fiscal 1996, 1995 and
1994, no options for shares of common stock were canceled or exercised under the
Director Plan. At March 31, 1995, 200,000 options were outstanding under the
Director Plan, of which 188,000 were exercisable.
COMMON STOCK WARRANTS
In conjunction with the Company's Exclusive Licensing Agreement with Dow Corning
Corporation ("Dow Corning"), the Company granted Dow Corning a stock purchase
warrant to purchase up to 353,846 shares of the Common Stock at an exercise
price of $8.125 per share. This warrant is exercisable based upon the Company's
achievement of specific revenues from the CableCure process licensed from Dow
Corning and expires on September 25, 1999. See also Note 15.
On June 14, 1993, in connection with the closing of a settlement agreement, the
Company issued to FlowMole Partners a stock purchase warrant expiring on June
14, 1998 to purchase 600,000 shares of the Common Stock at an exercise price of
$5.50 per share. In addition, the Company also entered into an agreement with
FlowMole Partners granting certain registration rights with respect to the
Common Stock subject to the warrant. See also Note 2.
RESTRICTED STOCK PLAN
In July 1994, the Company awarded 70,000 Restricted Shares to certain key
employees. In fiscal 1995, 60,750 shares vested, and 9,250 shares were
forfeited pursuant to employee terminations. At the vesting dates, 15,867
-36-
<PAGE>
shares were redeemed in connection with payroll tax withholding requirements.
The shares granted were valued at $4.125 per share, the market value per share
on the date of award, and the shares redeemed were valued at the market value at
the effective date of the election to redeem shares.
In October 1994, the Company awarded 47,000 Restricted Shares to certain new
employees which contain a three-year vesting period from each employee's
respective date of hire. The shares were valued at the market value of $4.00
per share on the date of award. The aggregate award of $188,000 was recorded as
unearned compensation on the balance sheet and is being amortized over the
vesting period on a straight line basis. During fiscal 1996, pursuant to
provisions of the 1994 Plan, the Company repurchased 2,096 shares at market
prices on vesting dates to cover payroll tax withholding requirements of
approximately $6,000.
REPURCHASE OF COMMON STOCK
In April 1992, the Board of Directors of the Company authorized a stock
repurchase program for the repurchase on the open market, subject to certain
conditions and limitations, of up to 500,000 shares of the Company's Common
Stock. Prior to fiscal 1994, 204,900 shares were repurchased. During fiscal
1995, the Company purchased 95,000 shares at an aggregate cost of $338,000.
NOTE 11 -- PENSION PLAN
Employees of the Company may participate in a voluntary defined contribution
pension plan qualified under Section 401(k) of the Internal Revenue Code of
1986. Under this plan, employees who have met certain age and service
requirements may contribute up to a certain percentage of their compensation.
The Company makes contributions based on employee contributions and length of
employee service. Total contributions under this plan for fiscal 1996, 1995 and
1994 were approximately $216,000, $198,000 and $204,000, respectively.
NOTE 12 -- LEASE COMMITMENTS
The Company leases office space and manufacturing space under noncancelable
operating lease agreements with renewal options. The Company also leased
certain operations equipment under operating leases. The leases generally
require the Company to pay taxes, insurance and maintenance expenses related to
the leased assets. Rental expense under all operating leases, cancelable and
noncancelable, totaled approximately $2,017,000, $2,403,000 and $1,704,000 for
fiscal 1996, 1995 and 1994, respectively.
At March 31, 1996, future minimum lease payments under noncancelable operating
leases are as follows:
YEAR ENDING MARCH 31, OPERATING
--------------------- LEASES
------
(IN THOUSANDS)
1997 $ 739
1998 452
1999 84
2000 56
2001 50
Thereafter 259
-------
Total future minimum lease payments $ 1,640
-------
-------
-37-
<PAGE>
NOTE 13 -- SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
Supplemental cash flow information for fiscal 1996, 1995 and 1994 follows:
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
Cash paid during the year for:
Interest (net of capitalized interest) $116 $ 30 $ 33
Income taxes paid 38 164 156
In fiscal 1996, 1995 and 1994, the Company sold FlowMole drilling systems to
contractors in Europe, Asia and South America. Revenue from the sale of the
systems of approximately $3,386,000, $3,430,000, and $5,225,000 in fiscal 1996,
1995 and 1994, respectively, has been included in the statement of operations
and in operating activities in the statement of cash flows. A gain, before
allocating freight, duty and other selling costs, of approximately $1,050,000,
$987,000, and $4,167,000 was recognized on the sales in fiscal 1996, 1995 and
1994, respectively.
In fiscal 1994, Common Stock was issued upon conversion of Series B Stock (see
Note 9). In fiscal 1995, restricted shares of Common Stock valued at $439,000
were issued to certain employees, and shares valued at $58,000 were redeemed.
See Note 10.
In fiscal 1994, the Company entered into a settlement agreement with FlowTex
Technologies Import von Kabelverlegemaschinen ("FlowTex"). A gain of $120,000
on returned equipment was recognized as a result of this settlement. See Note
16.
NOTE 14 -- FINANCIAL INFORMATION RELATING TO NORTH AMERICAN AND
EUROPEAN OPERATIONS
The consolidated financial statements include accounts of the Company's North
American and European and Asian operations. Prior to fiscal 1994, Asian
operations, specifically in Japan, were being conducted through a joint venture
in which the Company was a 50% owner. In fiscal 1994, the Company terminated
this joint venture and conducted all Asian operations through the Company's
corporate headquarters. Asian and South American operations revenues and net
income are included in North American operations. Such revenues were
$4,228,000, $2,428,000, and $3,310,000 in fiscal 1996, 1995 and 1994,
respectively. North American operations also include drilling, utility vault
sealing and cable treatment services in the United States, Canada and Puerto
Rico. The following amounts are included in the consolidated financial
statements for North American and European operations:
<TABLE>
<CAPTION>
FISCAL YEAR 1996 (IN THOUSANDS)
------------------------------------------------------
ADJUSTMENTS
NORTH AND
AMERICAN EUROPEAN ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Unrelated customers $ 37,249 $ 3,489 $ 40,738
Related parties 8,255 8,255
Intersegment 1,030 $ (1,030)
-------- ------- -------- --------
Total Revenues $ 46,534 $ 3,489 $ (1,030) $ 48,993
Net income (loss) $ (4,374) $ 154 $ (269) $ (4,489)
Identifiable assets $ 27,169 $ 3,704 $ (249) $ 30,624
</TABLE>
-38-
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR 1995 (IN THOUSANDS)
------------------------------------------------------
ADJUSTMENTS
NORTH AND
AMERICAN EUROPEAN ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Unrelated customers $ 35,806 $ 4,592 $ 40,398
Related parties 9,319 9,319
Intersegment 2,353 $ (2,353)
-------- ------- -------- --------
Total revenues $ 47,478 $ 4,592 $ (2,353) $ 49,717
Net income (loss) $ (1,647) $ (205) $ (170) $ (2,022)
Identifiable assets $ 32,038 $ 3,480 $ (170) $ 35,348
<CAPTION>
FISCAL YEAR 1994 (IN THOUSANDS)
------------------------------------------------------
ADJUSTMENTS
NORTH AND
AMERICAN EUROPEAN ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Unrelated customers $ 36,555 $ 5,928 $ 42,483
Related parties 6,594 6,594
Intersegment 1,353 $ (1,353)
-------- ------- -------- --------
Total revenues $ 44,502 $ 5,928 $ (1,353) $ 49,077
Net income (loss) $ 2,888 $ 516 $ (73) $ 3,331
Identifiable assets $ 29,983 $ 5,851 $ (73) $ 35,761
</TABLE>
Intersegment revenues occur on sales of spare parts inventory and equipment.
Eliminations and adjustments are made to eliminate the intersegment revenues and
related profit.
NOTE 15 -- PURCHASE OF CABLECURE LICENSE RIGHTS
Effective September 26, 1991, the Company entered into an Exclusive License and
Distribution Agreement with Dow Corning. Under terms of the agreement, the
Company purchased the exclusive rights to market to utilities the CableCure
process (a chemical treatment to repair water damage and extend the life of
underground electric cable), and certain related assets with an approximate
value of $74,000. The Company paid Dow Corning $2,000,000 in cash and granted
Dow Corning warrants to purchase up to 353,846 shares of Common Stock at $8.125
per share. Accumulated amortization of the $2,000,000 payment was $1,091,000
and $853,000 at March 31, 1996 and 1995, respectively. The Company purchases
its chemicals exclusively from Dow Corning. Worldwide CableCure revenues
accounted for 17% of consolidated revenues in fiscal 1996.
The warrants are exercisable in increments based upon the Company's achievement
of specific revenues from the Dow Corning process and will expire on September
25, 1999. No warrants were exercisable at March 31, 1996. Additionally, Dow
Corning receives 50% of adjusted net profits before tax resulting from the
CableCure operations, and may elect to receive these profits in cash or in
Common Stock at a price of the greater of the then current average market
closing price or $8.50 per share. No such payments were due in connection with
fiscal 1995 CableCure operations. For fiscal 1996 and 1994, Dow Corning's share
of the profits were paid in cash.
In May 1995, Dow Corning filed for protection under Chapter 11 of the United
States Bankruptcy Code and began to operate as a debtor in possession. To date,
Dow Corning has not filed any motion to assume or reject the exclusive license
agreement with the Company. The Company is unaware of any orders in the
bankruptcy court to date which pertain to the exclusive license agreement.
Management of Dow Corning has indicated to the Company that it intends to
continue conducting business with the Company, and the Company is currently
-39-
<PAGE>
unaware of any facts which would lead it to believe that Dow Corning intends to
discontinue the relationship. The Company's rights under the exclusive
licensing agreement will eventually be determined in the bankruptcy proceeding.
NOTE 16 - ARBITRATION AND LITIGATION
FLOWTEX SETTLEMENT. In September 1993, the Company entered into an agreement
with FlowTex settling certain disputes, including an arbitration award obtained
by the Company in January 1992. Under the terms of the settlement, FlowTex paid
the Company $1,350,000 and the parties executed general releases in favor of
each other. In addition, the parties granted each other certain cross-licenses
in order to avoid possible future patent conflicts. As this settlement
represented the Company's effort to collect amounts due from FlowTex for
royalties earned, the Company recognized $805,000 in revenues in fiscal 1994
consisting of cash in the amount of $1,350,000 and equipment with an estimated
value of $120,000 offset by a net receivable of $665,000 that was accrued at
March 31, 1993. Also included in general and administrative expenses in fiscal
1994 is $120,000 of additional legal fees incurred relative to this transaction.
OTHER MATTERS. The Company is involved in matters of litigation, both as
plaintiff and as defendant, all arising in the ordinary course of business. In
August 1995, the Company was named a defendant in litigation filed in the United
States District Court for the Southern District of Texas on behalf of a person
alleging serious personal injury in June 1994, while performing work at a
Company work site. The plaintiff has alleged negligence, gross negligence and
breach of contract by the Company. The complaint requests an unspecified amount
of damages in excess of $50,000 and punitive damages plus interest and costs.
The Company has received a settlement offer near the limits of the Company's
insurance policy. The Company is defending this matter. A co-defendant has
tendered its defense in this litigation to the Company's insurer, which has
accepted the tender under reservation of rights. Management expects that these
matters will not have a materially adverse effect on the consolidated financial
position, results of operation or liquidity of the Company.
NOTE 17 - FLOWMOLE ENVIRONMENTAL SERVICES CORPORATION
The Company contributed $250,000 in cash to FlowMole Environmental Services
Corporation ("FESC"), a corporate joint venture, in fiscal year 1994 and loaned
FESC $150,000 in fiscal year 1995. The loan carried a 12% interest rate. The
Company recorded its 50% share of the results of FESC operations using the
equity method of accounting.
In fiscal 1996, 1995 and 1994 the Company recorded income (expense) of $17,000,
($378,000) and ($39,000) respectively for its share of the earnings or losses of
FESC.
In December 1995, the operations of the joint venture were terminated. The
Company expects to dissolve the joint venture during fiscal 1997. No material
expenses were incurred or are anticipated in connection with the dissolution of
FESC. The Company performed drilling services for FESC as a subcontractor.
Revenue from FESC in fiscal 1996 and 1995 amounted to $661,000 and $869,000,
respectively. Under its contracts with FESC, the Company's revenue billed to
FESC was equal to the Company's cost of performing such services. At March 31,
1995, FESC owed the Company $732,000 for such drilling services.
-40-
<PAGE>
NOTE 18 -- SELECTED QUARTERLY DATA (UNAUDITED)
1QFY96 2QFY96 3QFY96 4QFY96
------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 11,754 $ 11,119 $ 13,155 $ 12,965
Gross profit 1,513 1,253 2,357 1,285
Net income (loss) (460) (493) 104 (3,640)
Earnings (loss) per share:
Primary $ (.06) $ (.07) $ .01 $ (.50)
Fully Diluted $ (.06) $ (.07) $ .01 $ (.50)
1QFY95 2QFY95 3QFY95 4QFY95
------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 11,931 $ 12,177 $ 13,322 $ 12,287
Gross profit 1,865 2,278 1,105 1,496
Net income (loss) (287) 64 (976) (823)
Earnings (loss) per share:
Primary $ (.04) $ .01 $ (.14) $ (.11)
Fully Diluted $ (.04) $ .01 $ (.14) $ (.11)
During the fourth quarter of fiscal 1996, the Company recorded a $2,601,000
provision to provide a valuation allowance against its net deferred taxes (see
Note 4).
-41-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Information called for by Part III (Items 10, 11, 12 and 13) is
incorporated by reference from the Registrant's definitive proxy statement that
involves the election of directors and that will be filed with the Securities
and Exchange Commission within 120 days after March 31, 1996, the close of the
Registrant's 1996 fiscal year. For a description of the executive officers of
the Registrant, see "Executive Officers of the Registrant" included in Part I,
Item 1.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this report:
Sequential Page
Numbering
1. FINANCIAL STATEMENTS:
Report of Independent Accountants 24
Consolidated Balance Sheet, March 31, 1996 and 1995 25
Consolidated Statement of Operations for the years
ended March 31, 1996, 1995 and 1994 26
Consolidated Statement of Changes in Stockholders'
Equity for the years ended March 31, 1996, 1995
and 1994 27
Consolidated Statement of Cash Flows for the years
ended March 31, 1996, 1995 and 1994 28
Notes to Consolidated Financial Statements 29
2. FINANCIAL STATEMENT SCHEDULES:
All schedules and exhibits are omitted either because the required
information is not present in amounts sufficient to require submission of the
schedule or because the information required is included in the financial
statements and accompanying notes.
3. EXHIBITS:
See subparagraph (c) below.
(b) REPORTS ON FORM 8-K: None.
(c) EXHIBITS: Exhibits identified below, on file with the Securities and
Exchange Commission, are incorporated herein by reference as exhibits hereto.
-42-
<PAGE>
INDEX TO EXHIBITS
-----------------
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Registrant's Certificate of Incorporation, as amended. Incorporated
by reference to Exhibit Number 3.1 to Registrant's Registration
Statement filed under the Securities Act of 1933 (the "Securities
Act") on Form S-1, as amended, Registration No. 33-17028.
3.2 Registrant's Certificate of Designations dated May 19, 1989 for
Series C Convertible Preferred Stock. Incorporated by reference to
Exhibit Number 3.2 to Registrant's Annual Report filed under the
Securities Exchange Act of 1934 (the "Exchange Act") on Form 10-K
for the Fiscal Year ended March 31, 1989.
3.3 Registrant's Certificate of Ownership and Merger of FlowMole
Corporation and UTILX Corporation. Incorporated by reference to
Exhibit Number 3.3 to Registrant's Annual Report filed under the
Exchange Act on Form 10-K for the Fiscal Year ended March 31, 1991.
3.4 Registrant's Restated By-laws. Incorporated by reference to Exhibit
Number 3.4 to Registrant's Annual Report filed under the Exchange
Act on Form 10-K for the Fiscal Year ended March 31, 1991.
3.5 Amendment to Registrant's Restated By-laws. Incorporated by reference
to Exhibit Number 3.5 to Registrant's Annual Report filed under the
Exchange Act on Form 10-K for the Fiscal Year ended March 31, 1993.
4.1 Registration Rights Agreement dated as of June 14, 1993 between UTILX
Corporation and FlowMole Partners, a Research and Development
Limited Partnership, a Washington Limited Partnership. Incorporated
by reference to Exhibit Number 4.5 to Registrant's Annual Report
filed under the Exchange Act on Form 10-K for the Fiscal Year ended
March 31, 1992.
4.2 Stock Purchase Warrant dated as of September 26, 1991 issued by UTILX
Corporation to Dow Corning Corporation. Incorporated by reference
to Exhibit Number 2 to Registrant's Form 8-K dated September 26,
1991 filed under the Exchange Act.
4.3 Registration Rights Agreement dated as of September 26, 1991 between
UTILX Corporation and Dow Corning Corporation. Incorporated by
reference to Exhibit Number 3 to Registrant's Form 8-K dated
September 26, 1991 filed under the Exchange Act.
4.4 Stock Purchase Warrant dated as of June 14, 1993 issued by UTILX
Corporation to FlowMole Partners, a Research and Development
Limited Partnership, a Washington Limited Partnership. Incorporated
by reference to Exhibit Number 4.4 to Registrant's Annual Report
filed under the Exchange Act on Form 10-K for the Fiscal Year ended
March 31, 1993.
10.1 Registrant's 1984 Restated Stock Option Plan, as amended.
Incorporated by reference to Exhibit Number 10.1 to Registrant's
Annual Report filed under the Exchange Act on Form 10-K for the
Fiscal Year ended March 31, 1992.
10.2 Registrant's 1984 Restated Nonqualified Stock Option Plan, as
amended. Incorporated by reference to Exhibit Number 10.2 to
Registrant's Annual Report filed under the Exchange Act on Form
10-K for the Fiscal Year ended March 31, 1991.
10.3 Registrant's 1987 Restated Stock Option Plan for Non-employee
Directors, as amended. Incorporated by reference to Exhibit Number
10.3 to Registrant's Annual Report filed under the Exchange Act on
Form 10-K for the Fiscal Year ended March 31, 1992.
-43-
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
-----------------------------
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.4 Registrant's Deferred Compensation Plan for Executive Employees, as
Amended and Restated effective January 1, 1995. Incorporated by
reference to Exhibit Number 10.4 to Registrant's Annual Report
filed under the Exchange Act on Form 10-K for the Fiscal Year ended
March 31, 1995.
10.5 Registrant's Deferred Compensation Plan for Directors, as Amended and
Restated effective January 1, 1995. Incorporated by reference to
Exhibit Number 10.5 to Registrant's Annual Report filed under the
Exchange Act on Form 10-K for the Fiscal Year ended March 31, 1995.
10.7 Registrant's 1994 Option and Restricted Stock Plan. Incorporated by
reference to Exhibit Number 10.7 to Registrant's Annual Report
filed under the Exchange Act on Form 10-K for the Fiscal Year ended
March 31, 1994.
10.8 Exclusive License and Distribution Agreement dated as of September
26, 1991 between UTILX Corporation and Dow Corning Corporation.
Incorporated by reference to Exhibit Number 1 to Registrant's Form
8-K dated September 26, 1991 filed under the Exchange Act.
10.12 Lease Agreement dated as of March 19, 1991, between Registrant and
Birtcher LP/LC Partnership, a Washington Limited Partnership.
Incorporated by reference to Exhibit Number 10.12 to Registrant's
Annual Report filed under the Exchange Act on Form 10-K for the
Fiscal Year ended March 31, 1991.
10.14 Settlement Agreement effectively dated June 14, 1993 between
Registrant and FlowMole Partners, a Research and Development
Limited Partnership, a Washington Limited Partnership. Incorporated
by reference to Exhibit Number 10.14 to Registrant's Annual Report
filed under the Exchange Act on Form 10-K for the Fiscal Year ended
March 31, 1993.
10.17 Employment Agreement between Registrant and Craig E. Davies dated
April 1, 1994. Incorporated by reference to Exhibit Number 10.17 to
Registrant's Annual Report filed under the Exchange Act on Form
10-K for the Fiscal Year ended March 31, 1994.
10.18 Employment Agreement between Registrant and Richard K. Brinton dated
September 1, 1993. Incorporated by reference to Exhibit Number
10.18 to Registrant's Annual Report filed under the Exchange Act on
Form 10-K for the Fiscal Year ended March 31, 1994.
10.19 Employment Agreement between Registrant and Albert W. Chau dated
September 1, 1993. Incorporated by reference to Exhibit Number
10.19 to Registrant's Annual Report filed under the Exchange Act on
Form 10-K for the Fiscal Year ended March 31, 1994.
10.22 Employment Agreement between Registrant and Thomas L. Markl dated
June 1, 1994. Incorporated by reference to Exhibit Number 10.22 to
Registrant's Annual Report filed under the Exchange Act on Form
10-K for the Fiscal Year ended March 31, 1994.
10.25 Employment Agreement between Registrant and Gregory W. Daul dated as
of August 22, 1994. Incorporated by reference to Exhibit Number
10.25 to Registrant's Annual Report filed under the Exchange Act on
Form 10-K for the Fiscal Year ended March 31, 1995.
-44-
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
-----------------------------
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.26 Employment Agreement between Registrant and M. Bruce Boswell dated as
of September 6, 1994. Incorporated by reference to Exhibit Number
10.26 to Registrant's Annual Report filed under the Exchange Act on
Form 10-K for the Fiscal Year ended March 31, 1995.
10.27 Employment Agreement between Registrant and Lynn Edelstein Du Bey
dated as of May 1, 1995. Incorporated by reference to Exhibit
Number 10.27 to Registrant's Annual Report filed under the Exchange
Act on Form 10-K for the Fiscal Year ended March 31, 1995.
10.28 Employment Agreement between Registrant and Larry D. Pihl dated July
1, 1994. Incorporated by reference to Exhibit Number 10.28 to
Registrant's Annual Report filed under the Exchange Act on Form
10-K for the Fiscal Year ended March 31, 1995.
10.29 Separation Agreement between Registrant and Michael A. Corn dated
March 24, 1995. Incorporated by reference to Exhibit Number 10.29
to Registrant's Annual Report filed under the Exchange Act on Form
10-K for the Fiscal Year ended March 31, 1995.
10.30 Separation Agreement between Registrant and Charles A. Reilly dated
May 12, 1995. Incorporated by reference to Exhibit Number 10.30 to
Registrant's Annual Report filed under the Exchange Act on Form
10-K for the Fiscal Year ended March 31, 1995.
10.31 Consultant Agreement between Registrant and Charles A. Reilly
effective May 22, 1995. Incorporated by reference to Exhibit Number
10.31 to Registrant's Annual Report filed under the Exchange Act on
Form 10-K for the Fiscal Year ended March 31, 1995.
10.33 Full-Recourse Promissory Note between Registrant and Gregory W. Daul
dated October 20, 1994. Incorporated by reference to Exhibit Number
10.33 to Registrant's Annual Report filed under the Exchange Act on
Form 10-K for the Fiscal Year ended March 31, 1995.
10.34 Promissory Note between Registrant and FlowMole Environmental
Services Corporation dated November 1, 1994. Incorporated by
reference to Exhibit Number 10.34 to Registrant's Annual Report
filed under the Exchange Act on Form 10-K for the Fiscal Year ended
March 31, 1995.
10.35 Credit Agreement between Registrant and Seattle-First National Bank
dated December 2, 1994. Incorporated by reference to Exhibit Number
10.35 to Registrant's Annual Report filed under the Exchange Act on
Form 10-K for the Fiscal Year ended March 31, 1995.
10.36 Registrant's Fiscal Year 1996 Executive Compensation Plan.
Incorporated by reference to Exhibit Number 10.36 to Registrant's
Annual Report filed under the Exchange Act on Form 10-K for the
Fiscal Year ended March 31, 1995.
10.37 Loan Modification Agreement between Registrant and Bank of America
NW, N.A., doing business as Seafirst Bank, successor by name change
to Seattle-First National Bank, dated May 16, 1996. Filed herewith.
10.38 Separation Agreement between Registrant and M. Bruce Boswell dated
May 28, 1996. Filed herewith.
-45-
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
-----------------------------
EXHIBIT
NUMBER DESCRIPTION
------- -----------
11.1 Statement Regarding Computation of Per Share Earnings. Filed herewith.
21.1 Subsidiaries of Registrant. Filed herewith.
23.1 Consent of Independent Accountants. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
99.1 Additional Stockholder Material. Filed herewith.
-46-
<PAGE>
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.
UTILX CORPORATION
June 24, 1996
By /s/ CRAIG E. DAVIES
---------------------
Craig E. Davies
Its President and Chief Executive 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 Registrant and in
the capacities and on the dates indicated.
President, Chief Executive June 24, 1996
/s/ CRAIG E. DAVIES Officer and Director
- ---------------------------
(Craig E. Davies)
/s/ LARRY D. PIHL Vice President, Chief Financial
- --------------------------- Officer, Controller and Treasurer June 24, 1996
(Larry D. Pihl)
/s/ STANLEY J. BRIGHT Director June 24, 1996
- ---------------------------
(Stanley J. Bright)
/s/ JOHN W. ELLIS Director June 24, 1996
- ---------------------------
(John W. Ellis)
/s/ FRANK W. GRIFFITH Director June 24, 1996
- ---------------------------
(Frank W. Griffith)
/s/ ROBERT E. RUNICE Director June 24, 1996
- ---------------------------
(Robert E. Runice)
/s/ WILLIAM M. WEISFIELD Director and Chairman of the Board June 24, 1996
- ---------------------------
(William M. Weisfield)
-47-
<PAGE>
INDEX TO EXHIBITS
-----------------
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Registrant's Certificate of Incorporation, as amended. Incorporated
by reference to Exhibit Number 3.1 to Registrant's Registration
Statement filed under the Securities Act of 1933 (the "Securities
Act") on Form S-1, as amended, Registration No. 33-17028.
3.2 Registrant's Certificate of Designations dated May 19, 1989 for Series
C Convertible Preferred Stock. Incorporated by reference to Exhibit
Number 3.2 to Registrant's Annual Report filed under the Securities
Exchange Act of 1934 (the "Exchange Act") on Form 10-K for the Fiscal
Year ended March 31, 1989.
3.3 Registrant's Certificate of Ownership and Merger of FlowMole
Corporation and UTILX Corporation. Incorporated by reference to
Exhibit Number 3.3 to Registrant's Annual Report filed under the
Exchange Act on Form 10-K for the Fiscal Year ended March 31, 1991.
3.4 Registrant's Restated By-laws. Incorporated by reference to Exhibit
Number 3.4 to Registrant's Annual Report filed under the Exchange Act
on Form 10-K for the Fiscal Year ended March 31, 1991.
3.5 Amendment to Registrant's Restated By-laws. Incorporated by reference
to Exhibit Number 3.5 to Registrant's Annual Report filed under the
Exchange Act on Form 10-K for the Fiscal Year ended March 31, 1993.
4.1 Registration Rights Agreement dated as of June 14, 1993 between UTILX
Corporation and FlowMole Partners, a Research and Development Limited
Partnership, a Washington Limited Partnership. Incorporated by
reference to Exhibit Number 4.5 to Registrant's Annual Report filed
under the Exchange Act on Form 10-K for the Fiscal Year ended March
31, 1992.
4.2 Stock Purchase Warrant dated as of September 26, 1991 issued by UTILX
Corporation to Dow Corning Corporation. Incorporated by reference to
Exhibit Number 2 to Registrant's Form 8-K dated September 26, 1991
filed under the Exchange Act.
4.3 Registration Rights Agreement dated as of September 26, 1991 between
UTILX Corporation and Dow Corning Corporation. Incorporated by
reference to Exhibit Number 3 to Registrant's Form 8-K dated September
26, 1991 filed under the Exchange Act.
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
-----------------------------
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.4 Stock Purchase Warrant dated as of June 14, 1993 issued by UTILX
Corporation to FlowMole Partners, a Research and Development Limited
Partnership, a Washington Limited Partnership. Incorporated by
reference to Exhibit Number 4.4 to Registrant's Annual Report filed
under the Exchange Act on Form 10-K for the Fiscal Year ended March
31, 1993.
10.1 Registrant's 1984 Restated Stock Option Plan, as amended.
Incorporated by reference to Exhibit Number 10.1 to Registrant's
Annual Report filed under the Exchange Act on Form 10-K for the Fiscal
Year ended March 31, 1992.
10.2 Registrant's 1984 Restated Nonqualified Stock Option Plan, as amended.
Incorporated by reference to Exhibit Number 10.2 to Registrant's
Annual Report filed under the Exchange Act on Form 10-K for the Fiscal
Year ended March 31, 1991.
10.3 Registrant's 1987 Restated Stock Option Plan for Non-employee
Directors, as amended. Incorporated by reference to Exhibit Number
10.3 to Registrant's Annual Report filed under the Exchange Act on
Form 10-K for the Fiscal Year ended March 31, 1992.
10.4 Registrant's Deferred Compensation Plan for Executive Employees, as
Amended and Restated effective January 1, 1995. Incorporated by
reference to Exhibit Number 10.4 to Registrant's Annual Report filed
under the Exchange Act on Form 10-K for the Fiscal Year ended March
31, 1995.
10.5 Registrant's Deferred Compensation Plan for Directors, as Amended and
Restated effective January 1, 1995. Incorporated by reference to
Exhibit Number 10.5 to Registrant's Annual Report filed under the
Exchange Act on Form 10-K for the Fiscal Year ended March 31, 1995.
10.7 Registrant's 1994 Option and Restricted Stock Plan. Incorporated by
reference to Exhibit Number 10.7 to Registrant's Annual Report filed
under the Exchange Act on Form 10-K for the Fiscal Year ended March
31, 1994.
10.8 Exclusive License and Distribution Agreement dated as of September 26,
1991 between UTILX Corporation and Dow Corning Corporation.
Incorporated by reference to Exhibit Number 1 to Registrant's Form 8-K
dated September 26, 1991 filed under the Exchange Act.
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
-----------------------------
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.12 Lease Agreement dated as of March 19, 1991, between Registrant and
Birtcher LP/LC Partnership, a Washington Limited Partnership.
Incorporated by reference to Exhibit Number 10.12 to Registrant's
Annual Report filed under the Exchange Act on Form 10-K for the Fiscal
Year ended March 31, 1991.
10.14 Settlement Agreement effectively dated June 14, 1993 between
Registrant and FlowMole Partners, a Research and Development Limited
Partnership, a Washington Limited Partnership. Incorporated by
reference to Exhibit Number 10.14 to Registrant's Annual Report filed
under the Exchange Act on Form 10-K for the Fiscal Year ended March
31, 1993.
10.17 Employment Agreement between Registrant and Craig E. Davies dated
April 1, 1994. Incorporated by reference to Exhibit Number 10.17 to
Registrant's Annual Report filed under the Exchange Act on Form 10-K
for the Fiscal Year ended March 31, 1994.
10.18 Employment Agreement between Registrant and Richard K. Brinton dated
September 1, 1993. Incorporated by reference to Exhibit Number 10.18
to Registrant's Annual Report filed under the Exchange Act on Form
10-K for the Fiscal Year ended March 31, 1994.
10.19 Employment Agreement between Registrant and Albert W. Chau dated
September 1, 1993. Incorporated by reference to Exhibit Number 10.19
to Registrant's Annual Report filed under the Exchange Act on Form
10-K for the Fiscal Year ended March 31, 1994.
10.22 Employment Agreement between Registrant and Thomas L. Markl dated June
1, 1994. Incorporated by reference to Exhibit Number 10.22 to
Registrant's Annual Report filed under the Exchange Act on Form 10-K
for the Fiscal Year ended March 31, 1994.
10.25 Employment Agreement between Registrant and Gregory W. Daul dated as
of August 22, 1994. Incorporated by reference to Exhibit Number 10.25
to Registrant's Annual Report filed under the Exchange Act on Form
10-K for the Fiscal Year ended March 31, 1995.
10.26 Employment Agreement between Registrant and M. Bruce Boswell dated as
of September 6, 1994. Incorporated by reference to Exhibit Number
10.26 to Registrant's Annual Report filed under the Exchange Act on
Form 10-K for the Fiscal Year ended March 31, 1995.
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
-----------------------------
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.27 Employment Agreement between Registrant and Lynn Edelstein Du Bey
dated as of May 1, 1995. Incorporated by reference to Exhibit Number
10.27 to Registrant's Annual Report filed under the Exchange Act on
Form 10-K for the Fiscal Year ended March 31, 1995.
10.28 Employment Agreement between Registrant and Larry D. Pihl dated July
1, 1994. Incorporated by reference to Exhibit Number 10.28 to
Registrant's Annual Report filed under the Exchange Act on Form 10-K
for the Fiscal Year ended March 31, 1995.
10.29 Separation Agreement between Registrant and Michael A. Corn dated
March 24, 1995. Incorporated by reference to Exhibit Number 10.29 to
Registrant's Annual Report filed under the Exchange Act on Form 10-K
for the Fiscal Year ended March 31, 1995.
10.30 Separation Agreement between Registrant and Charles A. Reilly dated
May 12, 1995. Incorporated by reference to Exhibit Number 10.30 to
Registrant's Annual Report filed under the Exchange Act on Form 10-K
for the Fiscal Year ended March 31, 1995.
10.31 Consultant Agreement between Registrant and Charles A. Reilly
effective May 22, 1995. Incorporated by reference to Exhibit Number
10.31 to Registrant's Annual Report filed under the Exchange Act on
Form 10-K for the Fiscal Year ended March 31, 1995.
10.33 Full-Recourse Promissory Note between Registrant and Gregory W. Daul
dated October 20, 1994. Incorporated by reference to Exhibit Number
10.33 to Registrant's Annual Report filed under the Exchange Act on
Form 10-K for the Fiscal Year ended March 31, 1995.
10.34 Promissory Note between Registrant and FlowMole Environmental Services
Corporation dated November 1, 1994. Incorporated by reference to
Exhibit Number 10.34 to Registrant's Annual Report filed under the
Exchange Act on Form 10-K for the Fiscal Year ended March 31, 1995.
10.35 Credit Agreement between Registrant and Seattle-First National Bank
dated December 2, 1994. Incorporated by reference to Exhibit Number
10.35 to Registrant's Annual Report filed under the Exchange Act on
Form 10-K for the Fiscal Year ended March 31, 1995.
10.36 Registrant's Fiscal Year 1996 Executive Compensation Plan.
Incorporated by reference to Exhibit Number 10.36 to Registrant's
Annual Report filed under the Exchange Act on Form 10-K for the Fiscal
Year ended March 31, 1995.
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
-----------------------------
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.37 Loan Modification Agreement between Registrant and Bank of America NW,
N.A., doing business as Seafirst Bank, successor by name change to
Seattle-First National Bank, dated May 16, 1996. Filed herewith.
10.38 Separation Agreement between Registrant and M. Bruce Boswell dated May
28, 1996. Filed herewith.
11.1 Statement Regarding Computation of Per Share Earnings. Filed herewith.
21.1 Subsidiaries of Registrant. Filed herewith.
23.1 Consent of Independent Accountants. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
99.1 Additional Stockholder Material. Filed herewith.
<PAGE>
EXHIBIT 10.37
LOAN MODIFICATION
AGREEMENT
- -------------------------------------------------------------------------------
This agreement amends the Credit Agreement dated December 2, 1994 ("Credit
Agreement"), executed by UTILX CORPORATION ("Borrower") in favor of Bank of
America NW, N.A., doing business as Seafirst Bank, successor by name change
to Seattle-First National Bank ("Bank"), regarding a loan in the maximum
principal amount of $5,000,000 (the "Loan"). For mutual consideration,
Borrower and Bank agree to amend the above loan documents as follows:
1. COLLATERAL. A new Article 4A is added to the Credit Agreement, to read
as follows:
ARTICLE 4A
COLLATERAL SECURITY
4A.1 COLLATERAL. As security for the prompt payment and performance of all
Obligations, Borrower has granted or will grant to Bank a first lien
security interest in all of Borrower's accounts and inventory, and all
proceeds thereof, including those constituting general intangibles,
documents, instruments, chattel paper, or deposit accounts (the
"Collateral"). All terms used in the preceding sentence shall have the
meaning given to such terms under the Washington version of the Uniform
Commercial Code, RCW Section 62A.9-101, ET SEQ.
4A.2 MAINTENANCE OF SECURITY. Borrower shall execute and deliver to Bank,
whenever requested, such security instruments as Bank deems necessary,
in its sole opinion, for the preservation of its security interest or to
ensure the priority of each security interest. If a Default shall
occur, Bank shall have the right to proceed against the Collateral in
addition to all of its other remedies under this Agreement.
4A.3 NEGATIVE PLEDGE. So long as any amount is payable by Borrower under
this Agreement, Borrower shall not allow any Collateral to be
transferred or encumbered, except in the ordinary course of business or
to secure the obligations under this Agreement.
1. COVENANTS. The following covenant of the Credit Agreement is modified as
follows:
- - Section 7.2 of the Credit Agreement is amended to require Borrower to
maintain, as of each fiscal quarter end, a minimum Tangible Net Worth of not
less than $22,000,000.
- - Section 7.3 of the Credit Agreement is amended to require Borrower to
maintain, as of each fiscal quarter end, a ratio of Current Assets to Current
Liabilities of not less than 2.63 to 1.
<PAGE>
3. WAIVER FOR PRIOR PERIOD. Bank waives compliance with the above
covenants for the period ending March 31, 1996, but for that period only.
Compliance with these covenants is not waived for any other period, and Bank
reserves the right to strictly enforce these and all other covenants of the
Credit Agreement in the future.
4. OTHER TERMS. Except as specifically amended by this agreement or any
prior amendment, all other terms, conditions, and definitions of the Credit
Agreement, and all other notes, security agreements, guaranties, deeds of
trust, mortgages, and other instruments or agreements entered into with
regard to the Loan shall remain in full force and effect. This agreement
shall only take effect upon satisfaction of all the requirements of Article
4A of the Credit Agreement, set forth above.
DATED May 16, 1996
Bank: Borrower:
SEAFIRST BANK UTILX CORPORATION
By /S/ TERRY L. JONES By /S/ LARRY D. PIHL
--------------------------- ---------------------------
Title VICE PRESIDENT Title VICE PRESIDENT AND CFO
------------------------ -------------------------
<PAGE>
EXHIBIT 10.38
SEPARATION AGREEMENT
THIS SEPARATION AGREEMENT (the "Agreement") dated as of May 28, 1996, is
entered into by and between M. Bruce Boswell ("Mr. Boswell") and UTILX
Corporation, a Delaware corporation ("UTILX").
RECITALS
A. In order to facilitate a smooth and orderly transition with respect to
Mr. Boswell's position at UTILX as Vice President, Manufacturing and
Engineering of UTILX and to clarify and resolve any disputes that may exist
between the parties arising out of the employment relationship and its
termination, and any continuing obligations of the parties to one another
following the end of the employment relationship, and in lieu of certain
provisions contained in the employment agreement dated as of October 1, 1994,
between Mr. Boswell and UTILX (the "Employment Agreement"), and
notwithstanding any provisions to the contrary in the Employment Agreement,
the parties have agreed to the following.
B. Mr. Boswell's employment relationship with UTILX will terminate
effective on the Termination Date, which shall be the earlier of September
30, 1996 or 5 days after the date on which Mr. Boswell gives written notice
of intent to terminate to UTILX, pursuant to Sections 7 and 13 of the
Employment Agreement ("Termination Notice").
C. UTILX has advised Mr. Boswell of his right to consult an attorney prior
to signing this Agreement and has provided him with up to 21 days to consider
its severance offer and to seek legal assistance. Mr. Boswell has either
consulted an attorney of his choice or voluntarily elected not to consult
legal counsel, and understands that he is waiving all potential claims
against UTILX.
D. This Agreement is not and should not be construed as an admission or
statement by either party that it or any other party has acted wrongfully or
unlawfully. Both parties expressly deny any wrongful or unlawful action.
AGREEMENTS
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises contained below, it is agreed as follows:
<PAGE>
1. EMPLOYMENT TERMINATION DATE
Mr. Boswell's employment with UTILX shall terminate effective the earlier
of September 30, 1996 or 5 days after the date on which Mr. Boswell gives
written notice of intent to terminate to UTILX, pursuant to Sections 7 and 13
of the Employment Agreement.
2. RESIGNATION FROM OFFICES
Upon receipt of the Termination Notice, Mr. Boswell will have resigned as
Vice President, Manufacturing and Engineering of UTILX as well as an officer,
director or any other positions of any subsidiary or affiliated corporations
of UTILX.
3. SEVERANCE, SALARY AND BENEFITS
Salary and benefits shall be paid as follows:
3.1 Mr. Boswell shall continue as an employee at his current salary and
with all current benefits until the Termination Date, but he shall be excused
from reporting to work and relieved from all other employment duties during
the period after the Agreement has been signed which precedes the Termination
Date. After the Termination Date, so long as Mr. Boswell remains unemployed
he shall receive his current salary, excluding all benefits, through November
30, 1996. In the event that Mr. Boswell obtains employment for thirty (30)
hours per week prior to November 30, 1996 or the Termination Date, this
provision shall automatically terminate upon commencement of such employment.
3.2 On the Termination Date, Mr. Boswell will be paid salary and accrued
vacation owed to him through the Termination Date, and such payment will be
net of taxes and deductions. As soon as is reasonably possible after the
Termination Date, Mr. Boswell will be paid deferred compensation, including
UTILX match (to the extent applicable, if any) and earnings, net of taxes and
deductions.
3.3 Medical benefits under any UTILX plan will terminate on the
Termination Date and after such date, Mr. Boswell will have the right to
self-pay medical benefits under COBRA if he elects to do so.
3.4 The vested amounts Mr. Boswell has, if any, in any 401(k) plan shall
be determined as of the Termination Date and shall be distributed pursuant to
the terms of such plan.
3.5 Provided that Mr. Boswell has not revoked this Agreement, the vested
portions of the following incentive stock options granted pursuant to UTILX'
1994 Option and Restricted Stock Plan (the "Plan") shall be converted into
nonqualified stock options pursuant to the Plan, effective as of the
Termination Date, so that the exercise period of such options shall be
extended to one year after the Termination Date, at which time such options
shall expire:
<PAGE>
DATE OF GRANT NUMBER OF SHARES EXERCISE PRICE PER SHARE
------------- ---------------- ------------------------
10/1/94 3,000 $4.125
4/20/95 2,540 $3.125
Other than those benefits and payments specified in this Section 3, UTILX
shall provide no further payments or benefits to Mr. Boswell.
4. CONFIDENTIAL INFORMATION
Mr. Boswell will maintain the confidentiality of all confidential
information he has regarding UTILX including nonpublic information regarding
UTILX' finances, customers, plans, strategies and new products. Mr. Boswell
will not disclose or use such information, either directly or indirectly.
The parties hereto will not make disparaging or derogatory comments about
each other.
5. RECOMMENDATION
UTILX will provide a favorable letter of recommendation on behalf of Mr.
Boswell and respond favorably to any telephone inquiries from prospective
employers in that regard.
6. NONCOMPETITION AND NONSOLICITATION
6.1 Scope of Competition
Mr. Boswell agrees that he will not for a period of two years from the
Termination Date directly or indirectly be employed by, consult with or
otherwise perform services for, own, manage, operate, join, control or
participate in the ownership, management, operation or control of or be
connected with, in any manner, any Competitor. A "Competitor" shall include any
entity which, directly or indirectly, competes with UTILX or produces, markets,
distributes or otherwise derives benefit from the production, marketing or
distribution of products or services which compete with products presently
produced or services presently being provided or marketed by UTILX or the
feasibility for production of which UTILX is presently actually studying, or
which it is preparing to market or is developing products or services that will
be in competition with the products or services presently produced or being
studied or developed by UTILX, in each case within the geographical area
described in Attachment A hereto, unless released from such obligation in
writing by the Board of Directors of UTILX. Mr. Boswell shall be deemed to be
related to or connected with a Competitor if such Competitor is (a) a
partnership in which he is a general or limited partner or employee, (b) a
corporation or association of which he is a shareholder, officer, employee or
director, or (c) a partnership, corporation or association of which he is a
member, consultant or agent; provided, however, that nothing herein shall
prevent the purchase or ownership by Mr. Boswell of shares which constitute less
than five percent of the
<PAGE>
outstanding equity securities of a publicly or privately held corporation, if
Mr. Boswell has no other relationship with such corporation.
6.2 Scope of Nonsolicitation
Mr. Boswell shall not directly or indirectly solicit or entice any
employee or consultant of UTILX to cease his or her relationship with UTILX
or solicit, influence, entice or in any way divert any customer, distributor,
partner, joint venturer or supplier of UTILX to do business with or in any
way become associated with any Competitor. This Section 6.2 shall apply
during the time period and geographical area described in Section 6.1 hereof.
6.3 Equitable Relief
Mr. Boswell acknowledges that the provisions of this Section 6 are
essential to UTILX, that UTILX would not enter into this Agreement if it did
not include this Section 6 and that damages sustained by UTILX as a result of
a breach of this Section 6 cannot be adequately remedied by damages, and Mr.
Boswell agrees that UTILX, notwithstanding any other provision of this
Agreement, in addition to any other remedy it may have under this Agreement
or at law, shall be entitled to injunctive and other equitable relief to
prevent or curtail any breach of any provision of this Agreement.
Mr. Boswell acknowledges that the restrictions in this Section 6 are
reasonable in time, scope and territory, are designed to eliminate
competition which would otherwise be unfair to UTILX, do not stifle his
exercise of skill and experience, would not bar his sole means of support,
are fully required to protect UTILX' legitimate interests, do not confer a
benefit on UTILX disproportionate to the detriment to Mr. Boswell and that
additional consideration has been given for Mr. Boswell's entering into the
noncompetition and nonsolicitation provisions of this Agreement.
6.4 Definition of UTILX
For purposes of Section 6 hereof, "UTILX" shall include all subsidiaries
of UTILX, any parent corporation of UTILX and any business ventures in which
UTILX, its subsidiaries or any such parent corporation may participate.
7. UTILX' PROPERTY
Except as otherwise agreed in writing by the President of UTILX, Mr.
Boswell confirms that he has or will immediately upon termination turn over
to UTILX all files, memoranda, records, credit cards, and other documents or
physical property which he received from UTILX or its employees or generated
himself in the course of his employment with UTILX.
<PAGE>
8. CONFIDENTIALITY OF AGREEMENT
Mr. Boswell agrees that he will keep the terms of this Agreement
(including but not limited to the severance amounts) completely confidential,
and that he will not disclose any information concerning this Agreement or
its terms to anyone other than his immediate family, legal counsel, and/or
financial advisors, who will be informed of and bound by this confidentiality
clause.
9. RELEASE OF CLAIMS
Mr. Boswell represents that he has not filed any complaints, charges or
lawsuits against UTILX with any governmental agency or any court. Mr.
Boswell expressly waives any claims against UTILX and releases UTILX
(including its officers, directors, stockholders, managers, agents and
representatives) from any claims that he may have in any way connected with
his employment with UTILX and the termination thereof. It is understood that
this release includes, but is not limited to, any claims for wages,
employment benefits, or damages of any kind whatsoever, arising out of any
contracts, express or implied, any legal restriction on the UTILX' right to
terminate employees, or any federal, state, local or other governmental
statute or ordinance, including, without limitation, Title VII of the Civil
Rights Act of 1964, the federal Age Discrimination in Employment Act or any
other legal limitation on the employment relationship. This waiver and
release shall not waive or release claims where the events in dispute first
arise after execution of this Agreement, nor shall it preclude Mr. Boswell
from filing a lawsuit for the exclusive purpose of enforcing his rights under
this Agreement.
10. REVIEW AND REVOCATION PERIOD
Mr. Boswell and UTILX agree that Mr. Boswell shall have up to 21 days to
review this Agreement and consult legal counsel, if he so chooses, during
which time the proposed terms of this Agreement shall not be amended,
modified or revoked by UTILX. Mr. Boswell may revoke this Agreement if he so
chooses by providing notice of his decision to revoke the Agreement to UTILX
within seven days following the date he signs this Agreement.
11. SEVERABILITY
The provisions of this Agreement are severable, and if any part of it is
found to be unlawful or unenforceable, the other provisions of this Agreement
shall remain fully valid and enforceable to the maximum extent consistent
with applicable law.
12. KNOWING AND VOLUNTARY AGREEMENT
Mr. Boswell represents and agrees that he has read this Agreement,
understands its terms and the fact that it releases any claim he might have
against UTILX and its agents, understands that he has the right to consult
counsel of choice and has either done so or knowingly waived the right to do
so, and enters into this Agreement without duress or coercion from any source.
<PAGE>
13. ENTIRE AGREEMENT
This Agreement sets forth the entire understanding between Mr. Boswell and
UTILX and supersedes any prior agreements or understandings, express or
implied, pertaining to the terms of his employment with UTILX and the
termination of the employment relationship. Mr. Boswell acknowledges that in
executing this Agreement, he does not rely upon any representation or
statement by any representative of UTILX concerning the subject matter of
this Agreement, except as expressly set forth in the text of the Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the dates
indicated below.
UTILX CORPORATION M. BRUCE BOSWELL
By /s/ Craig E. Davies /s/ M. Bruce Boswell
-------------------- --------------------
Its President
-------------------
DATED: May 28, 1996 DATED: May 28, 1996
<PAGE>
STATE OF WASHINGTON)
) ss.
COUNTY OF KING )
M. Bruce Boswell, known to me to be the individual described in and who
executed the within and foregoing instrument, personally appeared before me
this day, and acknowledged that he signed the same as his free and voluntary
act and deed, for the uses and purposes therein mentioned.
GIVEN under my hand and official seal this 28th day of May, 1996.
/s/ Alisa Scott
------------------------------------
NOTARY PUBLIC in and for the State of
Washington, residing at Issaquah
-------------
My Commission Expires: 01/01/01
--------------
STATE OF WASHINGTON)
) ss.
COUNTY OF KING )
Craig E. Davies, known to me to be the person who signed as President of
UTILX Corporation, the corporation that executed the within and foregoing
instrument, personally appeared before me this day, and acknowledged this
instrument to be the free and voluntary act and deed of said corporation,
for the uses and purposes therein mentioned, and on oath stated that he was
authorized to execute this instrument on behalf of said corporation.
GIVEN under my hand and official seal this 28th day of May, 1996.
/s/ Alisa Scott
------------------------------------
NOTARY PUBLIC in and for the State of
Washington, residing at Issaquah
-------------
My Commission Expires: 01/01/01
--------------
<PAGE>
ATTACHMENT A
Territory is all of North America, South America, Central America, Europe, the
United Kingdom and Asia.
<PAGE>
EXHIBIT 11.1
UTILX CORPORATION
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------------
1996 1995 1994
------------------- -------------- -----------------
Earnings Earnings
(Loss) Shares (Loss) Shares Earnings Shares
-------- ------ -------- ------ -------- ------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C>
Primary earnings (loss) per common share:
Net earnings (loss) available for common stock
and weighted average common shares outstanding $(4,489) 7,185 $(2,022) 7,172 $3,331 6,918
Weighted average convertible preferred shares outstanding 187
Stock options and warrants assumed exercised - net 31 127
------- ------ ------- ----- ------ -----
Total net earnings (loss) and primary common shares $(4,489) 7,185 $(2,022) 7,203 $3,331 7,232
------- ------ ------- ----- ------ -----
------- ------ ------- ----- ------ -----
Primary earnings (loss) per common share $(.62) $(.28) $.46
------- ------- ------
------- ------- ------
Fully diluted earnings (loss) per common share:
Net earnings (loss) available for common stock and
weighted average common shares outstanding $(4,489) 7,185 $(2,022) 7,172 $3,331 6,918
Weighted average convertible preferred shares outstanding 187
Stock options and warrants assumed exercised - net 32 140
------- ------ ------- ----- ------ -----
Total net earnings (loss) and fully diluted common
shares $(4,489) 7,185 $(2,022) 7,204 $3,331 7,245
------- ------ ------- ----- ------ -----
------- ------ ------- ----- ------ -----
Fully diluted earnings (loss) per common share $(.62) $(.28) $.46
------- ------- ------
------- ------- ------
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
SUBSIDIARY JURISDICTION OF INCORPORATION
FlowMole Export SalesCorporation Washington
FlowMole Limited United Kingdom
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
UTILX Corporation
We consent to the incorporation by reference in the Registration Statement of
UTILX Corporation on Form S-8 (Reg. No. 33-83728) of our report dated May 10,
1996, on our audits of the consolidated financial statements of UTILX
Corporation as of March 31, 1996 and 1995 and for the three years in the
period ended March 31, 1996, which report is included in this Annual Report
on Form 10-K.
COOPERS & LYBRAND L.L.P.
Seattle, Washington
June 19, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF UTILX CORPORATION FOR THE YEAR ENDED MARCH 31, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 495
<SECURITIES> 0
<RECEIVABLES> 11,138
<ALLOWANCES> 479
<INVENTORY> 8,128
<CURRENT-ASSETS> 20,517
<PP&E> 28,530
<DEPRECIATION> 19,417
<TOTAL-ASSETS> 30,624
<CURRENT-LIABILITIES> 7,168
<BONDS> 0
0
0
<COMMON> 72
<OTHER-SE> 23,384
<TOTAL-LIABILITY-AND-EQUITY> 30,624
<SALES> 48,993
<TOTAL-REVENUES> 48,993
<CGS> 42,585
<TOTAL-COSTS> 51,673
<OTHER-EXPENSES> (91)
<LOSS-PROVISION> 259
<INTEREST-EXPENSE> 158
<INCOME-PRETAX> (2,589)
<INCOME-TAX> 1,900
<INCOME-CONTINUING> (4,489)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,489)
<EPS-PRIMARY> (0.62)
<EPS-DILUTED> (0.62)
</TABLE>
<PAGE>
1996 ANNUAL REPORT
EXHIBIT 99.1 AND FORM 10-K
UTILX Team Values
We, the people of UTILX, would like our Company to be one that:
- - Has a vision for the future with customer service, quality and innovation
being the well-spring for our vision.
- - Recognizes that its most important asset is its people and the most
important characteristic is trust -- and accordingly, the people work as a
cohesive team and treat one another with
honesty, openness, courtesy
and respect.
- - Embodies quality by encouraging every person to always exercise their best
judgment -- to seek out and do the right thing, right the first time.
- - Invites people at all levels to
participate in decision making
in key areas which affect them.
- - Encourages open, direct and
supportive communications throughout the organization.
- - Is focused on good business
ethics and obsessed with
customer satisfaction --
always on the lookout to find
new and better ways to help
our customers succeed.
- - Promotes consistency, fairness and fun in all that we do --
and expects in return
commitment and dedication
to our goals.
- - Is goal/performance driven --
it encourages, recognizes and rewards innovation, achievement and
continuous improvement.
- - Achieves continuous improvement through participative, well thought out
plans by all the people who must carry out the plans.
- - Loves simplicity, as it makes everything easier, and has no use for
bureaucracy.
OUR MISSION
- --------------------------------------------------------------------------------
To assist companies of the world in the installation and maintenance
of their underground infrastructure. We will do this by providing
UTILX-Registered Trademark- services and products in a way that helps our
customers achieve their goals and solve their problems. We will achieve success
by making our customers successful.
In the process of providing the highest quality product and services to our
customers, we will be admired and possibly held in awe by our competitors. This
will occur because our technology will be the best in the world and because the
people of UTILX, through their pride, commitment, teamwork, and ability to focus
on doing what it takes to make our customers successful, will be absolutely
unbeatable by our competition.
Through exceptional customer service and world-class safety, cost-effectiveness,
quality and technology, our mission includes being the best in the entire world
at what we do.
CORPORATE PROFILE
- --------------------------------------------------------------------------------
UTILX-Registered Trademark- Corporation provides services and products used to
replace and renovate underground utilities. Domestically, UTILX provides its
technology through its FlowMole-Registered Trademark- and CableCure-Registered
Trademark- services, while internationally it supplies equipment, parts,
services and training. Based in Kent, Washington, UTILX Corporation was formed
in 1983 and began commercial operations in 1984. The Company was incorporated
in Delaware and its initial public offering was completed on March 25, 1988.
<PAGE>
CONSOLIDATED FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR YEARS ENDED MARCH 31, 1996 1995 1994 1993* 1992
<S> <C> <C> <C> <C> <C>
Revenues $48,993 $49,717 $49,077 $47,759 $51,647
Net income (loss) (4,489) (2,022) 3,331 (4,009) 2,961
- ------------------------------------------------------------------------------------------------------------------------
Cash and short-term investments 495 840 6,236 10,874 13,098
Total assets 30,624 35,348 35,761 39,990 39,726
- ------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share (.62) (.28) .46 (.55) .40
Weighted average book value per share 3.59 4.01 3.80 3.91 3.89
- ------------------------------------------------------------------------------------------------------------------------
Cash flow from (used by) operations 148 (1,690) (2,255)** 6,480 8,722
Capital expenditures 3,138 3,958 1,622 5,801 4,783
- ------------------------------------------------------------------------------------------------------------------------
Long-term debt 1,163
Stockholders' equity 23,456 28,070 29,648 23,840 29,494
- ------------------------------------------------------------------------------------------------------------------------
Current ratio 2.9 3.8 4.0 1.9 3.9
Working capital 13,349 18,073 18,345 12,298 19,717
</TABLE>
<TABLE>
<CAPTION>
*Effect of royalty expense and royalty litigation settlement expenses in fiscal 1993: Pretax After Tax Per Share
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Royalty expense $ (2,134) $ (1,330) $ (.18)
Royalty litigation and settlement expenses $ (7,833) $ (5,608) $ (.77)
</TABLE>
**Includes effect of $7,187 cash payment to FlowMole Partners. Effect on net
income is reflected in fiscal 1993.
FLOWMOLE
[GRAPH]
CUSTOMERS IN
NORTH AMERICA
[GRAPH]
MILES INSTALLED ANNUALLY
IN NORTH AMERICA
CABLECURE
[GRAPH]
CUSTOMERS IN
NORTH AMERICA
[GRAPH]
MILES INJECTED ANNUALLY
IN NORTH AMERICA
i
<PAGE>
[LOGO]
<PAGE>
FELLOW SHAREOWNERS:
- -------------------
This has been a difficult year, but one of significant accomplishment. We've
made some tough management decisions and also experienced a severe winter that
adversely affected our fourth quarter results. On the surface, UTILX might look
the same. In reality, we are leaner, stronger and smarter. We've laid a solid
foundation on which we will continue to build.
I had hoped to use this space to announce our success in breaking the $50
million mark after four years of flat revenues. It did not happen. We ended
the year at $49 million, down 1.5% from $49.7 million last year. We also
reported a net loss of $.62 per share, in part because we established a $2.6
million reserve against the full amount of the company's net deferred tax
assets. The tax adjustment represents a loss of $.36 per share. Without the
non-cash expenses, we would have reported a loss of $.26 per share, compared to
a loss of $.28 in 1995.
The obvious question is this: What will we be doing differently to make us
profitable and allow us to grow? The answer affects every aspect of our
business and squeezes it into a new shape. As a result, we are moving from a
specialty contractor to a single-source solution for underground utility
renovation.
In reshaping UTILX, we are responding to the changing needs of our utility
customers. The electric utility industry, our largest customer segment,
continues to grapple with the onset of deregulation and competition. As
utilities and municipalities streamline operations and outsource work, we need
to do much more than expertly provide a single underground service.
In some areas of the country, UTILX has already moved in that direction. We
trench portions of projects we once left to others. We provide fusing crews for
gas-line installation projects. In each case, these auxiliary services have been
key to winning contracts. Most representative of our new direction is our
CableCure Test, Treat or Replace program, which provides incentives for electric
utilities to use both our CableCure injection and FlowMole drilling services.
Last year, we more than doubled the amount of cable we injected under the Test,
Treat or Replace program over the previous year. Such contracts accounted for
75 miles of injections last year, and turnkey CableCure operations -- which also
rely on expanded capabilities -- accounted for an additional 80 miles, up more
than five times over the previous year. Turnkey contracts have us switching,
terminating circuits and performing other tasks separate from the injection
process. The 155 miles injected under either Test, Treat or Replace or turnkey
contracts represents more than two-thirds of our total CableCure mileage for
fiscal 1996.
iii
<PAGE>
New times call for different equipment, different training, different work
processes. We've incorporated these elements into the critical strategies we
identified two years ago to strengthen our Company: strive to become our
industry's most cost-effective service provider, focus intensely on the
customer, create a strong team to run the business, provide the training, tools
and technology that the team needs to be successful, and instill in each team
member a dedication to safety and quality. Here are some of the actions we've
taken during the last fiscal year to bring ourselves closer to these objectives:
BECOME THE MOST COST-EFFECTIVE SERVICE PROVIDER.
By refocusing on our core competencies, we have also reduced our fixed costs. We
are expending a lot of energy that we believe will help us achieve
profitability. Here are some steps we took last year, and the results:
- - REDUCED OVERHEAD. In December of 1995, we closed FlowMole Environmental
Services Corporation, our unprofitable joint venture with Union Oil Company of
California. Several months later, just after the end of our fiscal year, we
announced that UTILX would outsource the manufacturing of its equipment. The
resulting elimination of 40 positions at our headquarters represents an annual
savings of $1.5 million for fiscal 1997 and helps clear the way for a move to
smaller corporate offices.
- - BOOSTED PRODUCTIVITY IN BOTH SERVICE BUSINESSES. Our FlowMole crews are
generating a higher gross profit per foot than in the prior year. And our newly
hired and trained CableCure crews are setting records for daily productivity.
- - STARTED MOVING INVENTORY AND SPARE PARTS FROM HEADQUARTERS TO THE FIELD. By
moving these products closer to our crews and customers, we expect to reduce
carrying costs and improve availability of these materials.
- - IMPROVED MANAGEMENT OF OUR RECEIVABLES. Last year, collections from service
customers took an average 82 days from the start of work. We've since reduced
this by 20% and are taking actions to get us below industry norms.
FOCUS ON THE CUSTOMER.
We're reshaping our organization to become market-driven, instead of technology-
driven. Here are some of the steps we've taken:
- - FLATTENED THE ORGANIZATION. By the end of the summer, we'll have eliminated
four vice-president positions. We've peeled off layers of management -- up to
three in some areas -- that keep us removed from customers. Our 15 area
managers, who have day-to-day responsibility for customer needs, are now at most
one person removed from me. As area managers are in the unique position of
providing both leadership to their crews and support to their customers, they
are the most accountable for our success. Now, with the paring down, I am now
more accountable for their success.
iv
<PAGE>
- - BUILT OUR CABLECURE BUSINESS. Last fiscal year we injected 1.2 million feet,
more than twice the footage treated during the year before. This coming fiscal
year, we expect to treat more than 2 million feet. Credit goes to an expanded
sales force, enhanced sales and operations training, and greatly improved
injection productivity.
- - ADDED AUXILIARY SERVICES. Customers want us to help reduce the number of
underground service providers they must use. Last year, we bolstered our full-
service capabilities by adding conventional crews, gas-pipe fusion crews, and
related equipment. We've added former utility linemen to our crews to perform
the increased amount of turnkey work required. We are also testing one
combination CableCure/FlowMole crew that can test, inject, drill and de-
energize/energize cables as the job requires.
- - BROADENED THE GEOGRAPHICAL BASE OF CUSTOMERS. Building on our market analysis
of the previous year, which identified areas of opportunity, we have begun
providing services in Hawaii and have re-established footholds in California and
Arizona. As a result, our Western Region surpassed the $10 million revenue mark
for the first time.
CREATE A STRONG TEAM.
Two years ago we developed UTILX team values. We've continued to experiment with
self-directed teams, in which goals are set by the people who will work to
achieve them. We also bolstered the ability of teams to achieve change by
providing them critical information. This past year, teams were responsible for
several areas of accomplishment:
- - GREATLY IMPROVED CABLECURE PRODUCTIVITY. After our Southeast CableCure staff
focused on this issue, they hired better qualified crew members, modified
training and refined the safety program. As a result of these changes, they
learned what it takes to be productive and profitable and were able to quickly
transfer that knowledge to other CableCure crews.
- - IDENTIFIED AREAS TO FOCUS TRAINING EFFORTS. A FlowMole Best Practices Team
drawn from throughout North American Operations identified field practices that
have consistently helped us achieve results. We are using this information in
our training programs.
- - DEVELOPED THE G DRILL. When we set out to create our next generation
directional drill, the goal was a cost-effective, versatile machine with the
power and features to meet the needs of our crews. To accomplish this, we
turned the project over to a team of experts drawn from all areas of UTILX. The
G Team set its own goals and timelines and worked closely with vendors and field
customers. Since March of 1995, they've worked to design, build and field test a
prototype unit. So far they've successfully met both design specifications and
manufacturing-budget criteria. Additional field trials will help us measure our
success at meeting the larger goal.
v
<PAGE>
PROVIDE THE TRAINING, TECHNOLOGY AND TOOLS FOR SUCCESS.
Our goal is reliable, cost-effective equipment and people who know how to get
the most out of it. Here are some actions we took last year:
- - INSTITUTED SKILLS-BASED PAY. The program creates pay incentives for crew
members to learn new skills. We tested the program in our Western Region and
decided to implement it nationally for all FlowMole crews. Although it's too
soon to attribute our productivity gains to the program, our Western Region has
seen success of another kind: several of its trainees advanced four skills
levels to crew leader in only six months.
- - CONTINUED TO IMPROVE OUR FLOWMOLE EQUIPMENT. We designed our new G Series
Drill using concurrent engineering practices with the objectives that it cost
less to produce and operate than our other drills. Field testing has begun
that, if successful, will result in a strong addition to our drilling fleet. In
addition, we started to upgrade a number of older Field Power Units. We've
enhanced the hydraulic systems to maximize the potential of our Super D drills
and, ultimately, provide a capable unit to work with our G Drills.
- - IMPROVED OUR FLOWMOLE STEERING CAPABILITIES. We recently performed water
crossings that would have stymied us in the past. The difference was our new
steering tool, which uses the earth's magnetic field to track the drill tool's
location and orientation. The steering tool is designed to work with our D and
F Series drills to produce a more accurate bore without a surface locating
device.
- - ADVANCED THE BOUNDARIES OF CABLECURE INJECTION CAPABILITIES. UTILX staff has
continued to perfect technology to successfully inject more types of
polyethylene cables. Last fall, the silicone fluid was injected through a
10,702-foot submarine cable underneath chilly Lake Superior, thanks to FlowMole
pumping technology adapted for this project. UTILX crews also injected the
largest cables yet -- three phases and a spare of a 115 kV transmission line.
While we continue to inject mostly residential distribution cable, last year we
treated nearly nine times more feeder cable than in the previous year.
INSTILL INDIVIDUAL AND COLLECTIVE DEDICATION TO SAFETY AND QUALITY.
We continue to define tasks and desired outcomes to create a culture in which
prevention is the norm. Here are some of our achievements:
- - REFINED OUR SAFETY PROGRAM. We charged a new corporate safety director with
reviewing the process and implementing continual improvement efforts. We've
started updating all safety policies and procedures and coordinating closely
with the training department to improve safety training. Earlier last year, we
initiated a safety award program to recognize and reward field employees not
involved in vehicle accidents, lost-time
vi
<PAGE>
personal injuries or marked utility hits. We've since seen improvements
throughout the year in reducing the number of marked utility hits and
personal injuries companywide. We were also able to cut in half from last year
the number of incidents involving lost-time work.
- - CONTINUED OUR PROGRESS UNDER ISO 9000 GUIDELINES. Since our ISO 9000 program
has focused both on the design and support of manufacturing, we have in no way
lost momentum by deciding to outsource equipment production. We have started an
identical process for the service portion of our business, drawing on lessons
learned during the first round of documentation. The real achievement of the
process is that it has changed the way people think. We now are more committed
to analyzing work processes and more ready to build in continuous improvement at
every step.
Although we fell short of our revenue goals, it was not from lack of effort. I
have watched our people confront, challenge and recast deeply held attitudes and
beliefs. Our pursuits are more effective today because people are more willing
to consider unconventional ideas, more practiced at sifting out real insight and
more adept at translating that insight into action -- changes due, in
significant measure, to their experience with our quality process.
Even as we refocus, restaff and retrain ourselves to offer expanded
capabilities, we are holding on to the best and most durable principles of our
past. Our Company pioneered two services that changed the way utilities manage
their underground systems. As a result, the brand names FlowMole and CableCure
have come to identify their categories. We will continue to nurture that spirit
of innovation at all levels of the organization. The difference is that these
days, our challenges focus not just on improving the technology, but on
improving our service. Our drilling systems can be no better than the people who
use them.
Finally, I'd like to acknowledge the significant contributions made by Granville
Holman, our long-time chairman. Granny, as he was known by everyone here, left
the Board for health reasons at the end of 1995. He brought a genuine passion
for the business and will be missed.
My thanks to all of the people of UTILX for their hard work and dedication and
also to our shareowners for their support during this continuing period of
change. While the last few years have been challenging and at times
frustrating, I speak for all of us here when I say that we clearly see better
times ahead.
Sincerely,
/s/ Craig E. Davies
Craig E. Davies
President and CEO
As utilities continue to streamline operations and outsource, they depend on
vendors like UTILX to help deliver quality service to their customers.
Here's what Perry Wilcox,
Business Development Manager at Washington Gas Light says
"My unit in Northern Virginia handles about half the new construction
at Washington Gas. We can draw from a group of about 15 contractors,
all qualified to install gas pipe using
conventional or guided boring
methods. When it comes to converting homes in established
neighborhoods to natural gas, however, we choose UTILX and its
FlowMole technology.
UTILX crews minimize the construction mess that can rip apart
landscaped yards, sprinkler systems, septic fields, driveways,
sidewalks and multiple utilities in a confined area. Crew members are
involved and informed. Any one of them is able to talk to
customers and handle problems. This helps sell our service.
UTILX is the right kind of partner for us. The turnkey service makes
my operation more efficient. Crews drill, fuse the pipe, install it
and put it into service. All we have to do is install a meter.
UTILX's ability to meet the ever-changing construction needs within my
territory ultimately benefits our natural gas customers."
For Test, Treat or Replace
customers, UTILX tests cables to determine whether it's more cost-effective to
treat with CableCure or replace using FlowMole services.
Here's what David Phillips, Manager of Distribution Engineering and
Services at Florida Power & Light, says
"UTILX's CableCure service is the only way we know to extend the life
of underground cable. Florida Power & Light has millions of feet of
direct buried cable. In 1996, UTILX will treat or replace between
700,000 and
1 million feet of it.
Renewing our direct-buried cable was
crucial, because we'd learned that
repairing it wasn't the answer. Repairs were costly, difficult and
labor intensive. Worse, we found ourselves going back to the same
section multiple times. When we looked at how to lower future
maintenance costs, our choices were either replace problem cable or
treat with CableCure.
Once the economics pointed to
injecting over replacement, we faced one more hurdle. We wanted a
mutually beneficial relationship with
a viable vendor.
UTILX management brought to the table the same values that we had. We
were looking for a business relationship in which both parties would
put everything on the table. A big piece of the agreement was a
willingness to maintain open, candid communication. We wanted to work
with someone who was truly interested in helping us get to where we
wanted to be.
UTILX made that commitment. Both sides agreed that there would be
mutual gains from process improvement. The value of that cannot be
underestimated."
UTILX's challenge focuses not just on improving our technology but improving our
service. One place where we're doing that is Washington Water Power.
Here's what Steve Hadley, the
utility's manager responsible
for cable replacement, says
"We've been working with UTILX for many years. Since Washington Water
Power began its formal cable replacement program in 1993, UTILX crews
have installed 325,000 feet of conductor and conduit in Washington
state and Idaho.
Years ago, UTILX was our only choice for guided boring. Later, when
other contractors started to pop up, UTILX won our work based on price
and workmanship. But the situation was different this year. For the
first time, other contractors offered competitive prices.
UTILX regional management came back to us with two things that set the
company apart. The first was a multi-year agreement that offered us
price incentives. The second was a performance incentive based on
safety and workmanship criteria that's measured after each guided
boring project. So far this year, UTILX has been right on course in
performance.
This process showed a willingness to address concerns and remain
accountable. Since then, some of us at the
utility have talked about setting
similar criteria for other vendors."
vii
<PAGE>
DIRECTORS AND OFFICERS
- ----------------------
DIRECTORS
STANLEY J. BRIGHT
PRESIDENT, OFFICE OF THE CEO
MIDAMERICAN ENERGY COMPANY
DES MOINES, IOWA
DIRECTOR, EDISON ELECTRIC INSTITUTE
DIRECTOR, ASSOCIATION OF EDISON ILLUMINATING COMPANIES
CRAIG E. DAVIES
PRESIDENT AND CHIEF EXECUTIVE OFFICER
UTILX CORPORATION
JOHN W. ELLIS
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
THE BASEBALL CLUB OF SEATTLE
FORMER CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PUGET SOUND POWER & LIGHT COMPANY
BELLEVUE, WASHINGTON
FORMER CHAIRMAN, EDISON ELECTRIC INSTITUTE
FRANK W. GRIFFITH
FORMER CHAIRMAN AND PRESIDENT
MIDWEST RESOURCES, INC.
SIOUX CITY, IOWA
FORMER CHAIRMAN, EDISON ELECTRIC INSTITUTE
ROBERT E. RUNICE
PRIVATE INVESTOR & BUSINESS CONSULTANT
FORMER VICE PRESIDENT, U S WEST, INC.
FORMER PRESIDENT, U S WEST
COMMERCIAL DEVELOPMENT DIVISION
ENGLEWOOD, COLORADO
WILLIAM M. WEISFIELD
CHAIRMAN
UTILX CORPORATION
CHIEF OPERATING OFFICER
NORTHERN CAPITAL CORPORATION
SEATTLE, WASHINGTON
OFFICERS
CRAIG E. DAVIES
PRESIDENT AND CHIEF EXECUTIVE OFFICER
JAMES E. BARTHOLOMEW
VICE PRESIDENT/NORTHEAST REGION
M. BRUCE BOSWELL
VICE PRESIDENT/MANUFACTURING & ENGINEERING
ALBERT W. CHAU
VICE PRESIDENT/RESEARCH & ENGINEERING
GREGORY W. DAUL
SENIOR VICE PRESIDENT/NORTH AMERICAN OPERATIONS
THOMAS L. MARKL
VICE PRESIDENT/SALES & MARKETING AND SECRETARY
LARRY D. PIHL
VICE PRESIDENT, CHIEF FINANCIAL OFFICER,
CONTROLLER AND TREASURER
SCOTT E. REYNOLDS
VICE PRESIDENT/WESTERN REGION
viii
<PAGE>
UTILX CORPORATION INFORMATION
- --------------------------------------------------------------------------------
ANNUAL REPORT AND FORM 10-K
This publication serves as both our 1996 Annual Report to Stockholders and the
Report on Form 10-K filed with the Securities and Exchange Commission. This
publication will be provided without charge to any stockholder making a written
request to Larry D. Pihl, Vice President and Chief Financial Officer, UTILX,
22404 66th Avenue South, P.O. Box 97009,
Kent, Washington 98064-9709.
1996 ANNUAL MEETING
The 1996 Annual Meeting of Stockholders of UTILX is Thursday, July 25, 1996, at
3:00 p.m., at the Doubletree Inn at Southcenter, Elm-Oak Room, 205 Strander
Boulevard, Tukwila, Washington, 98188.
STOCK PRICE AND STOCKHOLDER DATA
The common stock of UTILX, par value $0.01 per share, is traded in the over-the-
counter market. The high and low stock prices quoted by the Nasdaq National
Market system during the quarters indicated are as shown in the table below.
1996 FISCAL YEAR High Low
- ---------------------------------------------
1st Quarter $ 3 7/8 2 9/16
2nd Quarter 3 1/2 2 3/4
3rd Quarter 3 1/4 1 3/4
4th Quarter 2 5/16 1 1/2
1995 FISCAL YEAR
- ---------------------------------------------
1st Quarter $ 5 5/8 4 7/8
2nd Quarter 5 3/8 3 1/8
3rd Quarter 4 3/8 3 1/8
4th Quarter 3 1/8 2 7/8
On May 31, 1996, the number of common stockholders of record was 454. The
Company estimates there are 3,700 additional stockholders holding common stock
in brokerage accounts.
DIVIDEND POLICY
The Company currently intends to retain its earnings to fund the development and
growth of its business. The Company has not paid cash dividends on common stock
to date and does not anticipate doing so in the foreseeable future.
CORPORATE HEADQUARTERS
UTILX Corporation
22404 66th Avenue South
P.O. Box 97009
Kent, Washington 98064-9709
Telephone (206) 395-0200
Facsimile (206) 395-1040
INTERNATIONALSUBSIDIARY
FlowMole Limited
33 Maylan Road
Earlstrees Industrial Estate
Corby, Northamptonshire
United Kingdom NN17 4DR
Telephone 011 44 (1536) 400141
Facsimile 011 44 (1536) 400142
LEGAL COUNSEL
Perkins Coie, Seattle, Washington
AUDITORS
Coopers & Lybrand L.L.P.,
Seattle, Washington
TRANSFER AGENT
AND REGISTRAR
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
Telephone (718) 921-8200
Facsimile (718) 921-8355
STOCK TRADING
UTILX Corporation stock trades on the Nasdaq National Market system under the
symbol UTLX.
UTILX-Registered Trademark-, FLOWMOLE-Registered Trademark- AND
CABLECURE-Registered Trademark- ARE REGISTERED TRADEMARKS OF UTILX CORPORATION.
UTILX CORPORATION IS AN EQUAL-OPPORTUNITY, AFFIRMATIVE-ACTION EMPLOYER.
<PAGE>
[LOGO]
22404 66th Avenue South
P.O. Box 97009
Kent, Washington 98064-9709
