<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
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, 1998
UTILX CORPORATION
COMMISSION FILE NUMBER 0-16821
DELAWARE 91-1171716
(State of Incorporation) (I.R.S. Identification Number)
22820 RUSSELL ROAD
P. O. BOX 97009
KENT, WASHINGTON 98064-9709 (253) 395-0200
(Address of Principal Executive Offices) (Telephone Number)
--------------------------------------
Securities registered pursuant to Section 12(b) or (g) of the Act:
COMMON STOCK, .01 PAR VALUE
(Class of Security)
--------------------------------------
Indicate by check mark 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. [ ]
As of June 2, 1998, 7,407,760 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 $37,964,770.
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, 1998, the close of Registrant's 1998
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 45.
<PAGE>
TABLE OF CONTENTS
<TABLE>
ITEM
----
PART I
<S> <C> <C>
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . .14
4. Submission of Matters to a Vote of Security Holders. . . . . . . . .15
PART II
5. Market for the Registrant's Common Stock and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . .15
6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . .16
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . .17
8. Financial Statements and Supplementary Data. . . . . . . . . . . . .26
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . . . . .44
PART III
10. Directors and Executive Officers of the Registrant . . . . . . . . .44
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . .44
12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . .44
13. Certain Relationships and Related Transactions . . . . . . . . . . .44
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . .44
</TABLE>
- 2 -
<PAGE>
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
Certain statements within the following description of the business of the
Company and else wherein this Form 10-K constitute "forward-looking statements"
that involve risks and uncertainties. The statements contained in this report
that are not purely historical are forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, including, without
limitation, statements regarding the Company's expectations, beliefs, estimates,
intentions and strategies about the future. The words "believes,"
"anticipates," "expects," "intends," "plans'" "estimates," variations on such
words and similar expressions are intended to identify such forward-looking
statements, but their absence does not mean the statement is not forward
looking. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict and may cause actual results to differ materially from those projected
or anticipated by the statements made by the Company. Factors that could affect
the Company's actual results include, among other things, the competitive
pressures, weather, regulatory and other matters affecting the utilities
industry in general. See "Important Risk Factors Regarding Forward-Looking
Statements." Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report. The
Company undertakes no obligation to update publicly any forward-looking
statements, whether as the result of new information, future events or
otherwise, or release the results of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date of
this report or to reflect the occurrence of unanticipted events.
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, replacing and restoring underground cables and pipes. Installation
and replacement services primarily are provided through the Company's
FlowMole-Registered Trademark- service. In addition, the Company sells its
FlowMole 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, England
through which it conducts its European operations.
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 and
service centers. The Company is also expanding its capabilities to perform
other types of installation, replacement and restoration services, such as
installation by trenching methods, in order to offer a package of services to
its customers.
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, consisting of a truck containing various power generating
components, which supplies drilling fluid and hydraulic and electrical power;
(ii) the dolly-mounted drilling unit, consisting of the drill head, drill pipe
and steering controls, which drills tunnels and pulls in cable and pipe; (iii)
the locating equipment which consists of an electromagnetic position-monitoring
- 3 -
<PAGE>
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 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. Usually, a technician walking above the
drill head with 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. The Company has acquired and
developed advanced locating equipment that does not require a technician to
stand above the drill string when conditions (e.g., drilling under a riverbed)
render standard locating techniques impractical.
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, 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 drilling fluid 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 when
replacement without excavation is possible, as in 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
- 4 -
<PAGE>
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 are
less effective in rocky and very hard soils.
THE CABLECURE SERVICE
In September 1991, the Company acquired a worldwide exclusive license from
Dow Corning Corporation ("Dow Corning") to market the CableCure process to
utilities. There are two different 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. The CableCure fluid is injected by the Company's
specially trained crews, subcontractors and licensees. 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.
However, there can be no assurance that a competing product is not under
development or currently being marketed to select utility customers without the
Company's knowledge, or that such a product will not be developed in the future.
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 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 the evaluation of
deteriorating cables ("Test") as suitable injection candidates, and injection
with CableCure fluid ("Treat") or replacement of cables ("Replace") 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 attempt to discontinue the relationship. The Company's rights under
the exclusive licensing agreement will eventually be determined in the
bankruptcy proceeding. See also "Dow Corning Corporation" under "Important Risk
Factors Regarding Forward-Looking Statements" included in Part II, Item 7.
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.
- 5 -
<PAGE>
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, many contractors offer
trenchless services, and 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.
The Company also believes that there is a gradual and continuing trend among
utilities to reduce the number of contractors with which it directly negotiates
business, requiring contractors to offer both trenchless and traditional
trenching capabilities. The Company is currently expanding its capabilities to
provide trenching and other services to benefit from those trends.
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 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" in Part I, Item 1.
GAS UTILITIES. The Company's second largest market segment currently is
the installation of natural gas pipe in developed but previously unserved areas,
where trenchless installation is cost-effective in most circumstances. During
fiscal 1997 and 1998, the Company increased its ability to offer full-service
gas pipe installations, including fusion of installed pipe to existing mains,
installations of residential service lines, and pressure testing. However, in
March 1998, the Company terminated its contracts with its largest gas utility
customer, Washington Gas Light Company and accordingly anticipates that revenues
from the gas segment will decline substantially in fiscal 1999. The Company
believes that gas utilities will continue to market expansion of their services
into unserved areas, creating more demand for the Company's FlowMole services.
The Company believes it can distinguish itself from competitors for this work
based on the quality of its service, particularly in terms of quick response to
installation orders. The Company also offers the option of installation by
traditional trenching methods when necessary to expedite response to
installation orders involving rocky or very hard soil, or when its gas customers
prefer that service option.
- 6 -
<PAGE>
TELECOMMUNICATIONS. The Company's third largest market segment in fiscal
1998 was 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. The Company is also
marketing CableCure CB to the telecommunications industry. The Company expects
the telecommunications segment to become its second largest market in fiscal
1999. 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. The Company typically installs conduit in which the fiber optic cable
is subsequently installed by subcontractors, by other contractors, or by utility
crews.
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. Such factors severely
impacted the Company's operations in the fourth quarter of fiscal 1998. 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 operations in any given fiscal quarter are not necessarily indicative
of results in any other fiscal quarter.
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 1999.
OTHER. The Company's services are also used by sewer and water utilities
and for environmental remediation projects. 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 operations include both sales and licensing of
product as well as direct performance of services. The Company sells its
FlowMole drilling systems and spare parts to businesses in Europe, Asia and
South America. The Company also offers underground utility installation
services in the United Kingdom and CableCure injection services in Europe. In
addition, the Company has licensed firms to provide CableCure injection services
in Korea and certain countries in Scandinavia. On a selective basis, the
Company may also choose to send its own crews to perform FlowMole or CableCure
services internationally. Operations in Europe are headquartered in Corby,
Northamptonshire, England and are conducted through the Company's wholly-owned
subsidiary, FlowMole Limited. For a discussion of revenues, net income and
assets with respect to international operations, see Note 13 of Notes to
Consolidated Financial Statements included in Part II, Item 8.
FOREIGN CURRENCY FLUCTUATIONS. The Company's financial results are
affected by fluctuations in certain foreign currencies, particularly the
exchange rate between the British Pound Sterling and the German Deutschmark.
Such fluctuations could result in material adverse adjustments to the carrying
values of accounts receivable or
- 7 -
<PAGE>
other assets measured in foreign currencies, or on the reported results of
operations of the Company's European operations. See Note 13 of Notes to
Consolidated Financial Statements included in Part II, Item 8.
NORTH AMERICAN MARKETING AND SALES
When the Company first introduces its FlowMole drilling and CableCure
services, its primary sales approach is 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.
As trenchless installation has become more accepted in the Company's
primary markets and more competitors employ such methods, the Company's sales
approach for FlowMole services has focused on differentiating the Company's
services from those of other trenchless installation contractors and introducing
the customer to the CableCure service as an alternative to cable replacement.
An increasing and substantial amount of trenchless work is being awarded
through competitive bidding processes. This new practice is commonplace in both
the telecommunications industry and the utility industry. A significant portion
of the Company's projects in fiscal 1998 were obtained through competitive
bidding.
Sales are conducted through a sales and marketing organization which
includes eight dedicated field sales representatives, a Director of 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 1998, the Company provided services to 238 customers in North
America. Those customers included 155 electric, 11 gas and 29 other utilities in
addition to 27 telecommunications companies. In fiscal 1998, sales to Florida
Power & Light Company ("Florida Power & Light") and Washington Gas Light Company
amounted to 31% and 10%, respectively, of the Company's consolidated revenues.
Twelve utilities, including Florida Power & Light, contract with the Company for
both FlowMole and CableCure service; sales to such customers amounted to 47% and
25% the Company's consolidated revenues in fiscal 1998 and 1997, respectively.
See Note 2 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 13 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. By using Company
- 8 -
<PAGE>
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.
Operations in North America are divided into three major regions with 15
operations and service centers that have provided the Company's services to
customers in 35 states and one province of Canada since the beginning of fiscal
1998. The Company is in the process of reorganizing its rapidly growing
Southeast region into three separate regions as part of a program to increase
management oversight and control of its operations centers. 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 eight of
these operations centers, with each injection crew consisting of two to four
members. Since capital equipment requirements for CableCure injection crews are
insignificant, the Company's capacity to perform injection services is largely a
function of hiring and training qualified employees. A crew from an existing
operations center generally provides service to customers in new areas on a
remote basis. 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 to
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, 1998, the Company had 118 FlowMole drilling systems
currently available in North America. The Company also had a combination of
owned and leased equipment (including backhoes, trenchers, and other
conventional excavation equipment) to support 43 excavation crews. Such
equipment is also available on a monthly or other short term rental basis from a
variety of sources which the Company uses to add conventional crews prior to
investing in purchase or lease of its own equipment. Many of these crews, as
well as other specialized crews, also are equipped to perform gas pipe fusion,
termination of electric cables, or other services which the Company may offer to
supplement its installation and replacement capabilities.
The number of fully utilized crews 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 1998, the Company averaged 81 fully utilized
drilling and excavation crews in operation and reached a maximum, measured on a
monthly basis, of 96 fully utilized drilling and excavation crews 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. The Company believes that there is a current trend in the
utility industry towards requiring contractors to perform full service
installation, replacement and renovation capabilities including electrical
craftwork associated with cable installation, fusion and pressure testing of gas
pipe and options of providing both trenchless and traditional trenching methods
under a single master contract. Many of these services were previously
performed by utility employees. The Company has been increasing its resources
available to perform these services in order to market an expanded package of
service options to its customers.
The Company is also engaged in ongoing development of technology and
equipment that may permit it to expand further the services it provides. For
example, the Company has the capability to supply near-surface horizontal
remediation systems, focusing 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
- 9 -
<PAGE>
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 has no near term plans to emphasize the marketing
of environmental drilling services. See also "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 research and engineering efforts.
In fiscal 1996, 1997 and 1998, the Company concentrated on the development
of prototypes for a new Series G Drilling Unit ("Series G Drill") and upgrades
to existing electronics guidance and toolhead locating systems. Field testing
of the Series G Drill is expected to continue into fiscal 1999. The Company
also introduced a new steering tool in fiscal 1996. Long-term technology plans
include more equipment automation to reduce labor costs and advancements in
guidance and control.
The Company is engaged in ongoing research into CableCure fluid
improvements and enhancements to injection equipment and techniques. Most of
such research is performed under contracts with third parties, including Dow
Corning. The Company has applied for a United States patent on its injectible
cable splice and cable termination. Dow Corning participates in selected
research projects under the provisions of the exclusive license agreement, and
may become the owner of future additional patents which could, at the Company's
option, automatically become subject to the existing license agreement.
PURCHASING AND MANUFACTURING
Manufacturing operations have been historically 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.
On April 2, 1996, the Company announced a decision to cease its in-house
assembly of FlowMole drilling equipment in order to reduce overhead and
inventory levels, as well as to improve operating cash flows. The Company has
issued purchase orders to a number of manufacturers for new FlowMole drilling
systems to be delivered in fiscal 1999. The Company has at least two suppliers
capable of manufacturing each component of the FlowMole drilling system. The
Company believes that this will allow it to obtain competitive pricing for
equipment and to mitigate any adverse impact of a single supplier's inability to
meet delivery schedules or to conform to the Company's quality specifications.
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 in that event, but there can be no
assurance that a service disruption could be avoided.
The Company is party to an agreement which requires it to utilize a single
Florida-based subcontractor for performance of certain CableCure injection tasks
for Florida Power & Light through January 2000. The Company is currently
engaged in litigation with this subcontractor and is seeking the right to
terminate the
- 10 -
<PAGE>
agreement. There can be no assurance that there will not be a service
disruption due to issues arising from capacity constraints of the subcontractor,
or other issues arising from this relationship. See also "Legal Proceedings"
included in Part I, Item 3, and FLORIDA SUBCONTRACT NEGOTIATIONS under
"Important Risk Factors Regarding Forward-Looking Statements'' included in Part
II, Item 7.
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. 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 11
patents in the United States relating to underground drilling. Applications for
what 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 2004.
In addition to protecting its technology with patents, the Company follows
procedures designed to preserve trade secrets.
The Company has 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," "The Service You Can't See" and "Test, Treat or Replace."
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 all patents subject to the agreement, including patents granted
after the commencement of the agreement, have expired or upon other events
specified in the agreement. The patent on the original CableCure fluid ("2-2614
fluid") developed by Dow Corning expires in 2005. The patent on CableCure XL
fluid, which the Company believes significantly out performs the 2-2614 fluid,
expires in 2011. The Company is continually engaged in research aimed at
advancing its fluid technology and expects to seek additional patents when
appropriate. For a discussion of the terms of the Exclusive License and
Distribution Agreement, see Note 13 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.
COMPETITION
UTILX provides FlowMole services in the United States and the United
Kingdom, provides CableCure services in the United States, Canada and Europe,
has licensed the CableCure injection service in Korea and Scandinavia, and sells
equipment outside the United States.
FlowMole services for underground utility installation compete with small,
regional and multi-regional 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,
- 11 -
<PAGE>
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 there can be no assurance that
competitive products are not already under development or being currently
marketed to select utility customers without the Company's knowledge.
International equipment and spare parts 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 to competitive equipment 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
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," in Part II, Item 7 for a
discussion of the effects of competition on financial performance.
GOVERNMENT REGULATIONS
Federal, state and local provisions, including the laws of foreign
countries in which the Company operates, regulating construction, land use or
the protection of the environment, workplace 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 fluid which the Company
uses in the FlowMole drilling process is an inert substance, the use of which is
not generally restricted by environmental laws. The CableCure service utilizes
substances which are not generally subject to regulation. The Company contracts
with a national environmental services company for the disposal of spent
CableCure fluid. The Company seeks out local, certified disposal sites for the
disposal of excess drilling mud wherever it identifies any regulations
regarding such materials. Environmental issues may arise in connection with the
risk of drilling in contaminated soil. 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.
- 12 -
<PAGE>
EMPLOYEES
As of March 31, 1998, worldwide employment of the Company totaled 778
individuals, of which 775 were employed on a full-time, regular basis and 3 were
employed in various temporary, part-time and on-call capacities. Of the
Company's 751 employees in the United States, 84 were based in Kent, Washington
and 667 in regional operations and sales centers. A total of 15 employees were
engaged in sales and marketing, 645 in operations, 11 in manufacturing, 7 in
research and engineering, and 51 in general and administrative functions. In
Europe, 23 were engaged in engineering and operations and 4 were engaged in
sales and general and administrative functions. Currently, the Company is a
party to collective bargaining agreements covering approximately 18 employees
with labor organizations in Illinois and New York. The Company is considering
work in certain other markets and for certain customers which may also require
the use of unionized labor.
EXECUTIVE OFFICERS OF THE REGISTRANT
No family relationships exist between any directors and executive
officers of the Company. As of June 1, 1998, 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 43) 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.
CRAIG E. DAVIES (age 55) 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 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 April 1987 to November 1992, he served as Chairman of the
Board
RONALD M. DOHR (age 47) has been Vice President/Human Resources since July
1996 and was Director of Human Resources from July 1995. From January 1994 to
June 1996, he was self-employed as a human resources and organizational
consultant. From September 1986 to December 1993, he was employed by NC
Machinery Company, a distributor of construction equipment, most recently as
Director of Quality and Organizational Development.
CHARLES W. HUTCHINSON (age 38) has been Vice President/Florida Region since
April 1998 and was Vice President/Southeast Region from February 1997 to March
1998, was Director of Southeast Operations from February 1996 to January 1997,
and Northern Virginia Area Manager from March 1994 to February 1996. He was
employed by Danella S.E. Inc., a construction company, from March 1990 to March
1994, most recently as Vice President and previously as Operations Manager.
THOMAS L. MARKL (age 50) has been Senior Vice President and Secretary since
April 1997. From May 1995 to March 1997 he served as Vice President/Sales and
Marketing and Secretary. 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, Sales and Marketing.
LARRY D. PIHL (age 39) 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.
- 13 -
<PAGE>
SCOTT E. REYNOLDS (age 46) has been Vice President, Western Region since
January 1996, and was Director, Western Region from July 1994 to January 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.
ITEM 2. PROPERTIES
The Company has leased a new corporate headquarters and manufacturing
facilities of approximately 24,000 square feet located in Kent, Washington, for
a ten year period commencing in May 1998. In addition, the Company leases
approximately 156,000 total square feet of space for operations and storage
purposes in Alabama, Colorado, Florida, Georgia, Illinois, Maryland, Minnesota,
New Jersey, Ohio, Oklahoma, 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
UTILX CORPORATION VS. POWER CABLE RESTORATION, INC. AND RONALD E. ALESHIRE
- - On October 31, 1997, the Company filed a complaint in Federal District Court
in Florida against Power Cable Restoration, Inc. ("PCR"), a contractor in
Florida with whom the Company has a contract for certain cable injection
services for Florida Power & Light through January 2000, and Ronald E. Aleshire,
a principal shareholder in PCR. The complaint alleges certain failures and
breaches of contractual obligations and requests declaratory relief and
determination that UTILX has sufficient grounds to terminate its contracts with
PCR. The Company and PCR have an ongoing dispute over the amount to be paid to
PCR under its subcontract for certain cable injection services performed
subsequent to April 1, 1997. The complaint also requests, among other matters,
that the court determines that the price being paid currently by UTILX to PCR is
in accordance with the contract between the parties. In December 1997, the
defendants filed a Motion for Dismissal and a Motion to Transfer Action. In
January 1998, defendants' Motion to Transfer Action to the Southern District of
Florida was granted.
In April 1998 the Court denied defendants Motion to Dismiss (with the
limited exception of UTILX's prayer for attorneys fees which was dismissed
without prejudice). Discovery has progressed with UTILX obtaining production of
certain documents of PCR. UTILX was required to file a Motion to Compel
Discovery to obtain access to additional records PCR had objected to producing.
The Motion to Compel was granted in April 1998 and PCR's Motion for
Reconsideration of the Order Compelling Discovery was denied in May 1998. The
additional records should be reviewed in June 1998. PCR has requested documents
from UTILX. Additionally, UTILX conducted depositions of seven PCR employees in
April 1998 and additional depositions are being scheduled for Summer 1998. The
Court held a Scheduling Conference on April 27, 1998, and the case has been
placed on the two week trial calendar for January 18, 1999. Discovery and other
pretrial activities must be completed before then. PCR filed a Motion to Compel
Arbitration of a portion of the case (i.e., issues relating to a subcontract for
the period from March 1996 to March 1997). UTILX has opposed PCR's Motion to
Compel Arbitration and a ruling from the court is expected in June 1998. There
is still substantial discovery and trial preparation work to be accomplished and
at this time it is not possible to predict with certainty the outcome of this
matter (See also note 15 of Notes to Consolidated Financial Statements included
in Part I, Item 1.)
The Company is not a party to other material 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.
- 14 -
<PAGE>
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, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Common Stock is traded on the Nasdaq Stock Market under the symbol
"UTLX." The following table sets forth the high and low stock for the Common
Stock as quoted on the Nasdaq Stock Market during the quarters indicated. The
closing price for the Common Stock on June 2, 1998 as reported on the Nasdaq
Stock Market was $5.125.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1998 FISCAL YEAR
1st Quarter Ending June 30, 1997......... $ 4 7/8 $ 3 13/16
2nd Quarter Ending September 30, 1997.... 5 3/8 4
3rd Quarter Ending December 31, 1997..... 6 7/8 4 3/8
4th Quarter Ending March 31, 1998........ 7 7/8 4 7/8
1997 FISCAL YEAR
1st Quarter Ending June 30, 1996......... $ 3 1/8 $ 2
2nd Quarter Ending September 30, 1996.... 4 1/4 2 9/16
3rd Quarter Ending December 31, 1996..... 5 1/2 3 1/4
4th Quarter Ending March 31, 1997........ 5 3/4 4 1/8
</TABLE>
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 June 2, 1998, the number of stockholders of record of Common Stock was
359, which does not include the number of stockholders whose shares were held of
record by a broker or clearing agency, but does include such broker or clearing
agency as a holder of record.
- 15 -
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL SUMMARY:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues . . . . . . . . . . . . . . . . . . . . . . . $82,464 $64,875 $48,993 $49,717 $49,077
Gross profit . . . . . . . . . . . . . . . . . . . . . 7,346 10,352 6,408 6,744 13,069
Operating income (loss). . . . . . . . . . . . . . . . (1,568) 2,058 (2,680) (2,531) 4,079
Income (loss) before income taxes. . . . . . . . . . . (2,117) 2,022 (2,589) (2,821) 4,338
Net income (loss). . . . . . . . . . . . . . . . . . . (2,118) 2,968 (4,489) (2,022) 3,331
Earnings (loss) per share:
Basic . . . . . . . . . . . . . . . . . . . . . . ($.29) $ 0.41 ($0.62) ($0.28) $0.46
Diluted . . . . . . . . . . . . . . . . . . . . . ($.29) $ 0.41 ($0.62) ($0.28) $0.46
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . 7,214 7,180 7,185 7,172 7,105
Diluted . . . . . . . . . . . . . . . . . . . . . 7,214 7,303 7,185 7,172 7,233
<CAPTION>
AS OF MARCH 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital. . . . . . . . . . . . . . . . . . . . $14,252 $16,560 $13,349 $18,073 $18,345
Total assets . . . . . . . . . . . . . . . . . . . . . 43,479 35,912 30,624 35,348 35,761
Capital lease obligations, net of current portion. . . 2,224
Common stockholders' equity. . . . . . . . . . . . . . 24,831 26,741 23,456 28,070 29,648
</TABLE>
- 16 -
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following discussion of result of operations, liquidity and capital
resources includes certain forward-looking statements made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
words "believes," "anticipates," "expects," and similar expressions are intended
to identify such forward-looking statements, but their absence does not mean
that a statement is not forward-looking. Such statements are based on current
expectations and are subject to certain risks and uncertainties that could cause
actual results to differ materially from those anticipated by the statements
made by the Company. See "Important Risk Factor Regarding Forward-Looking
Statements."
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)
----------------------------------- ---------------------------
1998 1997 1996 1997-1998 1996-1997
---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 27.1% 32.4%
Cost of revenues . . . . . . . . . . . . . . . . . . . 91.1 84.0 86.9 37.8 28.0
----- ----- ----- ------- ------
Gross profit . . . . . . . . . . . . . . . . . . . . . 8.9 16.0 13.1 (29.0) 61.6
----- ----- ----- ------- ------
Operating expenses:
Selling, general and administrative . . . . . . . 10.0 11.7 17.2 8.5 (9.8)
Research and engineering. . . . . . . . . . . . . .8 1.1 1.4 (3.6) 4.2
----- ----- ----- ------- ------
Total operating expenses. . . . . . . . . . . . . 10.8 12.8 18.6 7.5 (8.7)
----- ----- ----- ------- ------
Operating income (loss). . . . . . . . . . . . . . . . (1.9) 3.2 (5.5) (176.2) 176.8
Other income (expense), net. . . . . . . . . . . . . . (.7) (.1) .2 1,625.0 139.6
----- ----- ----- ------- ------
Income (loss) before income taxes. . . . . . . . . . . (2.6) 3.1 (5.3) (204.7) 178.1
Income tax expense (benefit) . . . . . . . . . . . . . (.0) (1.5) 3.9 100.0 149.8
----- ----- ----- ------- ------
Net income (loss). . . . . . . . . . . . . . . . . . . (2.6%) 4.6% (9.2)% (171.4%) 166.1%
----- ----- ----- ------- ------
----- ----- ----- ------- ------
</TABLE>
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
REVENUES. Consolidated revenues increased approximately 27% due to a 37%
increase in revenues from North American installation and replacement services
and a 18% increase in North American repair and restoration services, partially
offset by a 10% decrease in revenue from international operations.
Total revenues from North American operations were $76.3 million in fiscal
1998. Revenues from electric utilities, gas utilities and telephone companies
constituted 70%, 16% and 6%, respectively of such fiscal 1998 revenues. Revenues
from electric utilities increased substantially in fiscal 1998, primarily from
the Company's largest customer, Florida Power & Light. Revenues from gas
utilities also increased in fiscal 1998 due primarily to expansion on service
capabilities to existing customers. In March 1998, due to issues associated with
contract pricing and mix of work, the Company terminated its contracts with its
largest gas utility customer, Washington Gas Light Company, which accounted for
10% of consolidated revenues in fiscal 1998. Accordingly, revenues from gas
utilities are expected to decline in fiscal 1999.
Revenues from North American installation and replacement services were
$58.3 million in fiscal 1998 compared to $42.5 million in fiscal 1997. Increased
replacement services for customers under "Test, Treat or
- 17 -
<PAGE>
Replace" contracts, particularly Florida Power & Light, accounted for most of
this increase. The Company ordered new equipment to add FlowMole drilling
systems to its North American operations from new vendors and began to receive
deliveries in September 1997. The total number of drilling systems increased
from 88 at April 1, 1997 to 118 at March 31, 1998. The Company accordingly
increased substantially its capacity to perform installation and replacement
services in response to increased customer demand. The Company also increased
its capacity to perform traditional trenching services, but eliminated many of
those crews in March 1998 due to termination of work for its largest gas utility
customer.
The average price per foot charged for installation and replacement
services increased 7% in fiscal 1998 compared to fiscal 1997, reflecting the
increased difficulty of work performed, primarily attributed to performing a
higher percentage of installation and replacement projects in extremely hard or
rocky soil conditions. In the fourth quarter of fiscal 1998, the Company
concentrated most of its crews in the Southeastern United States. Usually
severe rains and thunderstorms in that region, attributed to "El Nino" weather
patterns, adversely affected the Company's revenues in the fourth quarter.
Accordingly, the Company's revenues from North American installation and
replacement services decreased to $15.5 million in the fourth quarter of fiscal
1998 compared to $16.7 million in the third quarter of fiscal 1998, in spite of
an increase in the number of crews available to work.
The increase in revenues from North American repair and restoration
services resulted primarily from the addition of crews equipped to perform
repair of faulted underground electric cables for Florida Power & Light, as well
as increased levels of CableCure injection services for other customers. Total
cable injected in fiscal 1998 increased to 2.5 million feet, compared to 2.2
million feet in fiscal 1997.
Revenue from the Company's international operations decreased to $6.2
million in fiscal 1998 compared to $7.0 million in fiscal 1997. Lower revenues
from sales of FlowMole drilling systems to international customers offset higher
revenues from CableCure injection services in Europe. The Company had
substantially sold its inventory of drilling systems at the beginning of fiscal
1998 and did not begin to receive new drilling systems from its new vendors
until September 1997. The Company was therefore limited in its ability to quote
new systems for sale during the first two quarters of fiscal 1998. In the third
and fourth quarters of fiscal 1998, sales opportunities to many customers in
Asia were limited by weak economic conditions. Demand for CableCure injection
services increased as European utilities increased their acceptance of the
CableCure technology and the Company increased its marketing efforts.
GROSS PROFIT. Gross profit, as a percentage of revenues, decreased to 8.9%
of total revenues in fiscal 1998 compared to 16.0% of total revenues in fiscal
1997. During the first two quarters of fiscal 1998, gross profit decreased due
primarily to investment in employees and equipment to perform new services,
including repair of faulted underground electric cables, in addition to hiring
and training new employees for FlowMole crews in anticipation of the receipt of
new drilling systems, which commenced in September 1997. Also, changes in
contract pricing and subsequent changes in the mix of work received from the
Company's largest gas utility customer produced a decrease in gross profit as a
percentage of revenue. The Company began to improve its gross profit in the
third quarter of fiscal 1998 as new drilling equipment was placed into service,
utilizing existing employees to form new crews, and the Company renegotiated
pricing on a number of contracts to increase gross profit.
However, in the fourth quarter of fiscal 1998, the Company concentrated
approximately three-fourths of its crews in the Southeastern United States.
Usually severe rains and thunderstorms in the region, attributed to "El Nino"
weather patterns, adversely affected the crews' ability to work. Most of those
crews accordingly lost approximately thirty percent of their available workdays.
The reduced revenues, coupled with an increased number of crews operating,
substantially contributed to lower gross profit. Gross profit in the fourth
quarter of fiscal 1998 was also adversely affected by costs to terminate the
Company's contracts with its largest gas utility customer. In addition, in the
fourth quarter of fiscal 1998, the Company incurred higher than normal expenses
for warranty costs, reserves for inventory obsolescence, and a writedown of
inventories of parts held for sale, which further reduced gross profit by
approximately $985,000.
- 18 -
<PAGE>
The Company experienced a higher gross profit as a percentage of revenue
from its international operations in fiscal 1998. The Company earned higher
margins on the equipment sales it completed in fiscal 1998. Also, CableCure
services in Europe typically generate higher margins than other international
revenues, and the increased mix of revenue from such services contributed to the
improved gross profit percentage in fiscal 1998.
OPERATING EXPENSES. The Company's operating expenses increased 7.5% in
fiscal 1998 compared to fiscal 1997. Selling, general and administrative
expenses increased 8.5% in fiscal 1998, primarily due to increased sales and
marketing expenses, as the Company increased its resources to pursue further
growth opportunities. In addition, the Company incurred approximately $350,000
in expenses in the fourth quarter of fiscal 1998 related to the design of new
enterprise wide computer software expected to be installed in the third quarter
of fiscal 1999. Research and engineering expenses decreased 4% compared to
fiscal 1997. Lower levels of spending on the Company's prototype Series G Drill
than was incurred in fiscal 1997 was the primary cause of the decrease.
OPERATING INCOME. As a result of the foregoing factors, the Company
reported an operating loss of $1,586,000 in fiscal 1998 compared to operating
income of $2,058,000 in fiscal 1997.
OTHER INCOME AND EXPENSE. Net interest expense was $444,000 in fiscal 1998
compared to net interest income of $24,000 in fiscal 1997 as a result of higher
average usage of the Company's line of credit and interest expenses on capital
leases used to finance some of the Company's purchases of new drilling equipment
in fiscal 1998.
INCOME TAX BENEFIT. The Company reported a provision in fiscal 1996 to
provide a valuation allowance against the full amount of its net deferred tax
assets. The Company had no Federal or state income tax provision related to
United States operations in fiscal 1997 due to realizing the benefits of net
operating loss carryforwards and other net deferred tax assets. In addition,
the Company reported an $850,000 income tax benefit in fiscal 1997 due to
additional refunds from prior years generated as a result of a favorable
conclusion of an Internal Revenue Service examination of its fiscal 1994 Federal
tax return. Also, the Company recognized $118,000 in tax refunds associated
with fiscal 1997 tax losses incurred by its European subsidiary. The Company
did not record any income tax benefits against its pretax loss in fiscal 1998
because the Company was in a loss carryforward position at the beginning of
fiscal 1998, and continues to provide a valuation allowance against the full
amount of its deferred tax assets as of March 31, 1998. On an ongoing basis,
the Company would typically expect an effective income tax rate of approximately
40% due to state income taxes and the impact of nondeductible expenses. 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 recorded a net
loss of $2,118,000 in fiscal 1998 compared to net income of $2,968,000 in fiscal
1997.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
REVENUES. Consolidated revenues increased approximately 32%, due to a 27%
increase in revenues from North American FlowMole operations and a 96% increase
in North American CableCure revenue, partially offset by a 10% decrease in
revenue from the Company's international operations.
Total revenues from North American operations in fiscal 1997 were $57.9
million. Revenues from electric utilities, gas utilities and telephone
companies constituted 74%, 19% and 5%, respectively, of such fiscal 1997
revenues. Revenues from electric utilities, including CableCure revenues,
increased substantially in fiscal 1997, primarily due to growth from "Test,
Treat or Replace" customers. Revenues from gas utilities also increased
substantially in fiscal 1997 due to expansion of the Company's ability to offer
traditional trenching services and full service installations, including gas
pipe fusion.
FlowMole revenues in fiscal 1997 were $42.5 million, compared to $33.4
million in fiscal 1996 and include both revenue from trenchless and conventional
trenching methods of installation and replacement of underground utilities.
FlowMole operations accounted for 66% and 68% of consolidated revenues for
fiscal 1997
- 19 -
<PAGE>
and 1996, respectively. The increase in revenue from FlowMole operations in
fiscal 1997 was primarily a result of increased demand for the Company's
services. The Company's "Test, Treat or Replace" service option has
generated significant increases in replacement work from electric utility
customers who were not major FlowMole customers in prior years. In addition,
the Company has significantly increased its capabilities to perform gas pipe
fusion and to perform installation and replacement services using
conventional trenching methods. As a result, revenues from gas utilities
contributed a significant portion of the increase in FlowMole revenues. The
Company's average price per foot installed or replaced increased 7% in fiscal
1997 compared to fiscal 1996, reflecting the increased complexity of work
performed by the Company. In the fourth quarter of fiscal 1997, the Company
did not experience the severe winter weather throughout the eastern United
States that adversely affected the Company's FlowMole revenues in the fourth
quarter of fiscal 1996. Consequently, FlowMole revenues in the fourth
quarter of fiscal 1997 were $12.3 million, compared to $7.3 million in the
same period of fiscal 1996. As a result of the above factors, the weighted
average number of fully utilized FlowMole drilling systems in operation
during fiscal 1997 was 59, compared to 46 in fiscal 1996.
CableCure revenues in North America increased to $15.4 million in fiscal
1997, compared to $7.9 million in fiscal 1996. The total cable injected in
North America increased to over 2 million feet in fiscal 1997, compared to 1.2
million feet in fiscal 1996. 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.
Revenue from the Company's international operations decreased to $7.0
million in fiscal 1997, compared to $7.7 million in fiscal 1996. Total revenues
from equipment sales were $2.5 million in fiscal 1997 compared to $3.4 million
in fiscal 1996. The Company substantially sold its inventory of new equipment
in the first half of fiscal 1997. Revenue from service operations in Europe
increased in fiscal 1997, partially offsetting the decline in revenue from
equipment sales.
GROSS PROFIT. Gross profit, as a percentage of revenues increased to 16.0%
of total revenues in fiscal 1997, compared to 13.1% of total revenues in fiscal
1996. The fixed costs of FlowMole operations are a significant component of
total costs, and therefore gross profit as a percentage of revenue improved in
fiscal 1997 due to higher revenue levels. Also, 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
increase gross profit in the second half of fiscal 1996 and in all of fiscal
1997.
The Company experienced an increase in gross profit percentage in its
international operations in fiscal 1997 compared to fiscal 1996 due to a change
in the mix of revenues. The Company generates a higher margin on international
services and international spare parts sales than on sales of equipment.
OPERATING EXPENSES. Selling, general and administrative expenses decreased
by 10% in fiscal 1997 compared to fiscal 1996. Research and engineering
expenses increased by 4% in fiscal 1997 compared to fiscal 1996. The decrease in
selling, general and administrative expenses was primarily due to the Company's
restructuring announced on April 2, 1996 which allowed the elimination of a
number of corporate staff positions and a $1.5 million reduction in overhead
expenses. The Company achieved its cost reduction objectives. The savings were
partially offset by higher royalty payments to Dow Corning under the Company's
exclusive CableCure license agreement. Due to the growth in revenues and gross
profit from worldwide CableCure operations, the provisions for such royalty
payments increased to approximately $900,000 in fiscal 1997. Provisions for
such payments amounted to approximately $100,000 in fiscal 1996. The higher
research and engineering expense levels in fiscal 1997 reflect the prototype
testing of the Series G drill and enhanced electronics guidance systems.
OPERATING INCOME. As a result of the foregoing factors, the Company
reported operating income of $2,058,000, or 3.2% of revenues, in fiscal 1997,
compared to an operating loss of $2,680,000, or 5.5% of revenues, in fiscal
1996.
- 20 -
<PAGE>
OTHER INCOME AND EXPENSE. Net interest income (expense) was income of
$24,000 in fiscal 1997, compared to an expense of $91,000 in fiscal 1996, due to
lower levels of borrowing on the Company's line of credit during fiscal 1997.
Other income (expense), net includes foreign exchange losses, resulting
primarily from operations in Germany, which increased in fiscal 1997 compared to
fiscal 1996.
INCOME TAX BENEFIT. The Company reported a provision in fiscal 1996 to
provide a valuation allowance against the full amount of its net deferred tax
assets. The Company had no Federal or state income tax provision related to
United States operations in fiscal 1997 due to realizing the benefits of net
operating loss carryforwards and other net deferred tax assets. In addition,
the Company reported an $850,000 income tax benefit in fiscal 1997 due to
additional refunds from prior years generated as a result of a favorable
conclusion of an Internal Revenue Service examination of its fiscal 1994 Federal
tax return. Also, the Company recognized $118,000 in tax refunds associated
with fiscal 1997 tax losses incurred by its European subsidiary.
NET INCOME. As a result of the foregoing factors, the Company reported net
income of $2,968,000 in fiscal 1997, compared to a net loss of $4,489,000 in
fiscal 1996.
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, leases and periodic usage of its line of credit.
The Company's cash and cash equivalents totaled $528,000 at March 31, 1998.
During fiscal 1998, the Company incurred capital expenditures of approximately
$4,438,000 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 service capabilities. 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.
The Company anticipates approximately $5 million in capital and
capital-related expenditures in fiscal 1999. Such expenditures include
approximately $1.6 million in remaining costs for the installation of new
enterprise-wide computer software and hardware, targeted for completion in the
third quarter of fiscal 1999. A portion of such expenditures, including user
training and data conversion costs, will be charged to general and
administrative expenses in fiscal 1999.
The Company also has ordered FlowMole drilling equipment for delivery in
fiscal 1999 with an aggregate acquisition cost of $1.4 million. Other equipment
will be ordered during fiscal 1999.
The Company relies on cash flow from operations and lease financing, in
addition to its line of credit, to fund operations. The Company believes that
its lease facility and line of credit, together with cash flow from operations,
will be adequate to meet its financing needs for the foreseeable future. There
can be no assurance, that such facilities will continue to be available on
terms acceptable to the Company or at all. The Company's financial performance
will be a key factor in determining the availability of such facilities. If
either facility became unavailable to the Company, or if the Company is required
to seek additional capital to fund anticipated growth, the Company would be
required to seek other sources of public or private capital. There can be no
assurance that adequate funds will be available to the Company through such
sources when needed or will be available on terms favorable to the Company. If
at any time the Company is unable to obtain sufficient funds, the Company will
be required to restrict or eliminate plans for expansion and other aspects of
its operations.
At March 31, 1998, the Company had an available bank credit facility of
$10,000,000, and an outstanding balance on the facility of $5,245,000. The
credit facility expires on January 4, 1999; however, the Company expects to be
able to obtain a renewal of the facility or to negotiate a similar facility with
another financial institution.
- 21 -
<PAGE>
REVIEW AND OUTLOOK
INSTALLATION AND REPLACEMENT SERVICES. The Company currently owns
equipment to field 118 FlowMole systems, and 43 conventional trenching crews.
The Company typically plans for excess equipment to allow time for preventive
maintenance, matching of equipment to job types, mobilization time, or other
equipment downtime factors. The Company expects to sell some new drilling
systems to international customers and has flexibility to adjust delivery
schedules and to quickly place new systems into service operations if demand
arises. The Company also expects to acquire significant amounts of conventional
trenching equipment in fiscal 1999, but will use short term rentals to
supplement its equipment needs until it chooses to acquire new or used equipment
of its own.
The Company currently plans to increase its personnel to add additional
installation and replacement capabilities in fiscal 1999. However, the
Company's revenue levels, and the weighted average number of crews in operation
on any given day, will be affected by various factors, including weather,
pricing, competition, customer work release practices, soil and other work
difficulty determinants, and permitting. See also the discussion under
COMPETITION, SEASONAL FACTORS AND UTILITIES' BUDGETARY CONSIDERATIONS included
under "Important Risk Factors Regarding Forward-Looking Statements", below.
REPAIR AND RESTORATION SERVICES. 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
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 Company's ten largest CableCure
customers account for the majority of the Company's CableCure revenues. The
Company expects to see increased volumes from new customers in calendar 1998,
and some increased volumes from existing customers, but expects to continue to
be dependent upon a small number of customers. The Company's goal is to reduce
this dependency through growth. 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 "Important Risk Factors Regarding
Forward-Looking Statements", 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 five drilling crews in the United Kingdom in fiscal
1998 and 1997. Revenues from drilling operations in the United Kingdom were 27%
and 26% of revenue from international operations in fiscal 1998 and fiscal 1997,
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.
The Company also has current licensees operating in Korea and Scandinavia.
International CableCure revenue levels, primarily from German operations, were
approximately $1,750,000 in fiscal 1998 and $1,000,000 in fiscal 1997. The
Company is in the process of adding personnel to support expected growth in
European CableCure services. Customer acceptance of the CableCure process,
however, 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 and Asia.
Spare parts sales accounted for 32% and 23% of revenue from international
operations in fiscal 1998 and fiscal 1997, 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 1998 and any such sales in the future
However, the Company's sales of new drilling systems has declined in the
past year due to limited inventories of new equipment available and weakness in
the general economy in certain Asian countries, and
- 22 -
<PAGE>
there can be no assurance that international customers will continue to purchase
new equipment or spare parts from the Company.
OPERATING EXPENSES. The Company plans to add resources for recruiting,
training, sales and marketing, and enhanced information systems during fiscal
1999 to support the planned growth in the Company's operations, and accordingly
expects operating expenses to increase in fiscal 1999. The exact amount of such
increases cannot be projected with certainty.
The Company has determined that some of its management information systems
do not accurately adjust for the year 2000, and has commenced a project to
replace its management information systems in its entirety. The software
selected is certified by the vendor to be Year 2000 compliant. The
implementation of the new system is scheduled for no later than the third
quarter of fiscal 1999. See also discussion of capital expenditures under
"Liquidity and Capital Resources", above. The Company does not anticipate any
material charge to earnings associated with writing off the net book value of
capitalized hardware and software costs.
The Company has begun contacting its major vendors and customers to obtain
their assurance that systems affecting the Company are Year 2000 complaint. To
date, the Company is unaware of any situations of noncompliance that would
adversely affect its operations. The Company has also analyzed its equipment
and its operations and has not identified any processes that depend upon
software that is date sensitive or otherwise subject to risks associated with
the Year 2000. See also discussion of capital expenditures under "Liquidity and
Capital Resources", above.
The Company is required to pay a royalty to Dow Corning based on the net
profits from worldwide CableCure services, as defined in the underlying
exclusive license agreement. The level of such provisions for royalty
expenditures will increase from fiscal 1998 levels if the projections of
improving levels of CableCure revenues are achieved. See Note 13 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 1999, capital
spending will emphasize acquisition of new drilling systems, upgrading of
existing field power units to support existing Series D Drills, as well as the
purchase of additional conventional equipment, such as backhoes, to support
customer requirements for increased turnkey capabilities.
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 1999.
OTHER MATTERS. In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS) No. 130,
"Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
financial statements. Comprehensive income includes items such as foreign
currency translation adjustments that are currently being presented by the
company as a component of stockholders' equity. The impact of adopting FAS 130
has not been determined. The Company will adopt the statement for the year
ending March 31, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 establishes standards
for disclosures about operating segments in annual financial statements and
selected disclosures about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. FAS 131 supersedes FAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." FAS 131 is effective for the year ending
March 31, 1999 and requires restatement of earlier periods presented. The
impact of adopting FAS 131 has not been determined. The Company will adopt the
statement for the year ending March 31, 1999.
- 23 -
<PAGE>
IMPORTANT RISK FACTORS REGARDING FORWARD LOOKING STATEMENTS
The Company may from time to time make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases, and in reports
to stockholders. The Private Securities Litigation Reform Act of 1995 contains
a safe harbor for forward-looking statements on which the Company relies in
making such disclosures. In connection with this safe harbor provision, the
Company is hereby identifying important factors that could cause actual results
to differ materially from those contained in any forward-looking statement made
by or on behalf of the Company. Any such statement is qualified by reference to
the following cautionary statements:
UTILITIES' BUDGETARY CONSIDERATIONS. Budgetary considerations, arising
from unfavorable regulatory determinations on matters such as rate-setting,
capitalization of services performed by the Company, approval of mergers and
acquisitions 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, or overall utility profitability relative to its
objectives 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 generates 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 2 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.
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 1998 increased slightly over its fiscal 1997
results due to increased work difficulty. The overall 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. Such factors severely
impacted the Company's operations in the fourth quarter of fiscal 1998. 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 operations in any given fiscal quarter are not necessarily indicative
of results in any other fiscal quarter.
MANAGEMENT OF GROWTH. The Company expects significant internal growth.
There can be no assurance that the Company's systems, procedures and controls
will be adequate to support the Company's operations as they expand. Any future
growth will impose significant additional responsibilities on members of senior
management, including the need to identify, recruit and integrate new senior
level managers and executives. There can be no assurance that such additional
management will be identified and retained by the Company. To
- 24 -
<PAGE>
the extent that the Company is unable to manage its growth efficiently and
effectively, or is unable to attract and retain additional qualified management,
the Company's financial condition and results of operations could be materially
adversely affected.
AVAILABILITY OF QUALIFIED EMPLOYEES. The Company's ability to provide
high-quality services on a timely basis requires an adequate supply of skilled
laborers, equipment operators, journeymen linemen and project managers.
Accordingly, the Company's ability to increase its productivity and
profitability will be limited by its ability to employ, train and retain skilled
personnel necessary to meet the Company's requirements. Many companies in the
Company's industry are currently experiencing shortages of qualified personnel,
and there can be no assurance that the Company will be able to maintain an
adequate skilled labor force necessary to operate efficiently, that the
Company's labor expenses will not increase as a result of a shortage in the
supply of skilled personnel or that the Company will not have to curtail its
planned internal growth as a result of labor shortages.
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 Dow
Corning or the bankruptcy court will not take action to amend or terminate the
CableCure license agreement. See the discussion under "The CableCure Service"
in Part I, Item 1.
FLORIDA SUBCONTRACT NEGOTIATIONS. The Company is party to an agreement
(the "underlying agreement") under which it utilizes a single Florida-based
subcontractor for performance of certain CableCure injection tasks for Florida
Power & Light through January 2000. The underlying agreement calls for the
Company to pay the subcontractor a percentage of the amount charged to Florida
Power & Light for certain services defined in the underlying agreement. The
Company agreed to new pricing in its contract with Florida Power & Light in the
first quarter of fiscal 1998. The Company is in a dispute with this
subcontractor, over amounts to be paid to the subcontractor effective April 1,
1997. An interim agreement, subject to retroactive adjustments, was agreed to
by the Company and the subcontractor for the period April 1, 1997 to May 31,
1997. The subcontractor is continuing to perform the injection services
required by the Company under the underlying agreement. The Company believes
that payments made to the subcontractor subsequent to April 1, 1997 are in
conformity with the underlying agreement. The subcontractor claims to be
entitled to a percentage of additional amounts. On October 31, 1997, the
Company filed suit against the subcontractor in Florida, seeking resolution of
the price dispute, among other matters. There can be no assurance that the
final price settled upon for payments to the subcontractor will not have a
material adverse effect on the gross profit realized by the Company under its
contract with Florida Power & Light. Based on the footage injected by the
subcontractor during the fiscal 1998, management of the Company does not
anticipate that the final resolution of this matter will result in any material
adverse impact on fiscal 1998 results of operations, or on the Company's
consolidated financial position or liquidity, as of March 31, 1998.
FOREIGN CURRENCY FLUCTUATIONS. The Company's financial results are
affected by fluctuations in certain foreign currencies, particularly the
exchange rate between the British Pound Sterling and the German Deutschmark.
Such fluctuations could result in material adverse adjustments to the carrying
values of accounts receivable or other assets measured in foreign currencies, or
on the reported results of operations of the Company's European operations. See
Note 13 of Notes to Consolidated Financial Statements included in Part II, Item
8.
- 25 -
<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 consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of UTILX
Corporation as of March 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1998 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Seattle, Washington
May 12, 1998, except as to the information presented in Note 8, for which the
date is June 16, 1998.
- 26 -
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
UTILX CORPORATION
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARES)
ASSETS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 528 $ 1,490
Accounts receivable, trade. . . . . . . . . . . . . . . 19,720 15,873
Materials, supplies and inventories . . . . . . . . . . 8,839 7,715
Income taxes receivable . . . . . . . . . . . . . . . . 433 469
Prepaid expenses and other. . . . . . . . . . . . . . . 284 184
------- -------
Total current assets . . . . . . . . . . . . . . . 29,804 25,731
Equipment and improvements, net. . . . . . . . . . . . . . . 13,091 9,446
Other assets, net. . . . . . . . . . . . . . . . . . . . . . 584 735
------- -------
Total assets . . . . . . . . . . . . . . . . . . . . . $43,479 $35,912
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank. . . . . . . . . . . . . . . . . . $ 5,245 $ 985
Current portion of capital lease obligations. . . . . . 839
Accounts payable. . . . . . . . . . . . . . . . . . . . 3,993 3,737
Other current liabilities . . . . . . . . . . . . . . . 5,475 3,764
------- -------
Total current liabilities. . . . . . . . . . . . . 15,552 8,486
Capital lease obligations, net of current portion. . . . . . 2,224
Other long term liabilities. . . . . . . . . . . . . . . . . 872 685
------- -------
Total liabilities. . . . . . . . . . . . . . . . . 18,648 9,171
------- -------
Commitments and Contingencies
Stockholders' equity:
Common Stock, $0.01 par value
(authorized 25,000,000 shares). . . . . . . . . . . . 74 72
Common Stock warrants . . . . . . . . . . . . . . . . . 936
Additional paid-in capital. . . . . . . . . . . . . . . 18,469 17,390
Retained earnings . . . . . . . . . . . . . . . . . . . 6,790 8,908
Unearned compensation . . . . . . . . . . . . . . . . . (3)
Cumulative foreign currency translation adjustment. . . (502) (562)
------- -------
Total stockholders' equity . . . . . . . . . . . . 24,831 26,741
------- -------
Total liabilities and stockholders' equity. . $43,479 $35,912
------- -------
------- -------
Common Stock issued and outstanding . . . . . . . . . . 7,407,760 7,184,631
</TABLE>
See accompanying notes to consolidated financial statements.
- 27 -
<PAGE>
UTILX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Unrelated customers . . . . . . . . . . . . . $ 81,574 $ 58,011 $ 40,738
Related parties . . . . . . . . . . . . . . . 890 6,864 8,255
-------- -------- --------
Total Revenues. . . . . . . . . . . . . . . 82,464 64,875 48,993
Cost of revenues . . . . . . . . . . . . . . . . . 75,118 54,523 42,585
-------- -------- --------
Gross Profit. . . . . . . . . . . . . . . . . 7,346 10,352 6,408
-------- -------- --------
Operating expenses:
Selling, general and administrative . . . . . 8,242 7,594 8,416
Research and engineering. . . . . . . . . . . 672 700 672
-------- -------- --------
Total operating expenses. . . . . . . . . . 8,914 8,294 9,088
-------- -------- --------
Operating income (loss). . . . . . . . . . . . . . (1,568) 2,058 (2,680)
-------- -------- --------
Other income (expense):
Interest income (expense), net. . . . . . . . (444) 24 (91)
Share of FlowMole Environmental Services
Corporation income. . . . . . . . . . . . . 17
Other income (expense), net . . . . . . . . . (105) (60) 165
-------- -------- --------
Total . . . . . . . . . . . . . . . . . . . (549) (36) 91
-------- -------- --------
Income (loss) before income taxes. . . . . . . . . (2,117) 2,022 (2,589)
Income tax expense (benefit) . . . . . . . . . . . 1 (946) 1,900
-------- -------- --------
Net income (loss). . . . . . . . . . . . . . . . . $ (2,118) $ 2,968 $ (4,489)
-------- -------- --------
-------- -------- --------
Earnings (loss) per share:
Basic . . . . . . . . . . . . . . . . . . . . $ (.29) $ .41 $ (.62)
Diluted . . . . . . . . . . . . . . . . . . . $ (.29) $ .41 $ (.62)
Weighted average number of shares:
Basic . . . . . . . . . . . . . . . . . . . . 7,214 7,180 7,185
Diluted . . . . . . . . . . . . . . . . . . . 7,214 7,303 7,185
</TABLE>
See accompanying notes to consolidated financial statements.
- 28 -
<PAGE>
UTILX CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
COMMON COMMON COMMON ADDITIONAL CURRENCY
STOCK STOCK STOCK PAID-IN RETAINED UNEARNED TRANSLATION
SHARES AMOUNT WARRANTS CAPITAL EARNINGS COMPENSATION ADJUSTMENT
------ ----- -------- ------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 1, 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 82
compensation
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)
Stock options exercised 16,700 41
Repurchase of Common Stock (407) (1)
Amortization of unearned 24
compensation
Cancellation of nonvested
Restricted Stock (15,778) (49) 49
Change in cumulative foreign 253
currency
translation adjustment
Net income 2,968
--------- ----- ----- -------- --------- ------- ---------
Balance, March 31, 1997 7,184,631 72 936 17,390 8,908 (3) (562)
Stock options exercised 41,000 146
Repurchase of Common Stock (345) (1)
Exercise of Common Stock Warrant 182,474 2 (936) 934
Amortization of unearned
compensation 3
Change in cumulative foreign
currency translation adjustment 60
Net loss (2,118)
--------- ----- ----- -------- --------- ------- ---------
Balance, March 31, 1998 7,407,760 $ 74 $ 0 $ 18,469 $ 6,790 $ 0 $ (502)
--------- ----- ----- -------- --------- ------- ---------
--------- ----- ----- -------- --------- ------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
- 29 -
<PAGE>
UTILX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)...................................... $(2,118) $2,968 $(4,489)
------- ------ -------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 4,441 3,770 3,622
Deferred income taxes............................ 77 2,121
Share of FlowMole Environmental Services
Corporation income.......................... (17)
Net book value of equipment sold................. 115
Other - non-cash expenses (income), net.......... 121 (36) (76)
Other non-cash expenses (income), net............ 123 (36) (76)
Changes in:
Accounts receivable, trade................... (3,825) (5,141) 800
Materials, supplies and inventories......... (1,108) 509 263
Prepaid expenses and other................... (108) 40 (37)
Other assets................................. (104) (16) (38)
Income taxes receivable, net................. (39) 550 (229)
Accounts payable............................. 258 1,808 (488)
Accrued liabilities.......................... 680 1,698 (1,399)
-------- ------- --------
Total adjustments...................................... 395 3,182 4,637
-------- ------- --------
Net cash provided by (used in)
operating activities.......................... (1,723) 6,150 148
-------- ------- --------
INVESTING ACTIVITIES:
Cost of additions to equipment......................... (4,438) (3,848) (3,138)
Proceeds from sale of equipment........................ 5 115 183
-------- ------- --------
Net cash used in investing
activities.................................... (4,433) (3,733) (2,955)
-------- ------- --------
FINANCING ACTIVITIES:
Net borrowing on note payable to bank.................. 4,260 (1,515) 2,500
Net increase in book overdraft......................... 1,213
Issuance of Common Stock............................... 146 41 1
Payments on Capital Leases............................. (434)
Repurchase of Common Stock............................. (1) (1) (6)
-------- ------- --------
Net cash provided by (used in)
financing activities.......................... 5,184 (1,475) 2,495
-------- ------- --------
EFFECT ON CASH FLOWS OF
FOREIGN CURRENCY TRANSACTIONS........................... 10 53 (33)
-------- ------- --------
Net increase (decrease) in cash and cash
equivalents...................................... (962) 995 (345)
CASH AND CASH EQUIVALENTS
Beginning of period.................................... 1,490 495 840
-------- ------- --------
End of period.......................................... $ 528 $1,490 $ 495
-------- ------- --------
-------- ------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
- 30 -
<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, replacing and restoring underground cables and pipes.
Installation and replacement services primarily are provided through the
Company's FlowMole service. In addition, the Company sells its FlowMole
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 and prevent water
damage. The Company acquired the worldwide exclusive licensing rights to the
CableCure process in September 1991.
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 International Product Sales, Inc. 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. The Company uses its line of credit
under its cash management system to cover checks presented for payment in excess
of cash balances. As of March 31, 1998, the Company had a book overdraft of
approximately $1,213,000, which is included in other current liabilities.
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.
- 31 -
<PAGE>
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 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.
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 which
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
Installation, replacement and restorations services performed by the Company
involve thousands of jobs which are typically completed in one week or less.
Revenues on such jobs are recognized when each individual billable service is
completed. Costs are recorded as incurred. In March 1998 the Company commenced
work on a $1.8 million installation contract which was completed in April 1998.
Costs were recorded as incurred and revenue was recognized on the percentage of
completion basis.
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
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This
statement changes the computation, presentation and disclosure requirements for
earnings per share ("EPS"). This statement was implemented in these financial
statements. This statement replaced "primary" EPS with "basic" EPS, the
principal difference being the exclusion of common stock equivalents in the
computation of basic EPS. Earnings per share amounts for prior periods were
restated with no effect on previously reported amounts.
Basic earnings (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares of Common Stock of UTILX Corporation, $0.01
par value per share (the "Common Stock") outstanding during the period. Diluted
earnings (loss) per share is computed by dividing net income (loss) by the sum
of the weighted average number of shares of 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, net of the number of shares repurchasable on the open market with
proceeds from the exercise of such options and warrants. See Note 9.
- 32 -
<PAGE>
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 was effective for fiscal 1997. 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 elected to continue to apply the provisions of APB 25 in
recognizing compensation expense related to stock option plans and to disclose
in the footnotes the impact on net income had FAS 123 been adopted for expense
recognition purposes. See Note 9.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the fiscal 1998
presentation, with no effect on previously reported net income (loss),
stockholders' equity or cash flows.
NOTE 2 -- SIGNIFICANT CUSTOMERS AND RELATED-PARTY TRANSACTIONS
The Company, in the ordinary course of business, sells its services to Florida
Power & Light and Washington Gas Light Company ("Washington Gas"). During
fiscal 1998, such sales amounted to approximately $25,614,000 (31% of
consolidated revenues) for Florida Power & Light and $8,535,000 (10% of
consolidated revenues) for Washington Gas. Amounts due from Florida Power &
Light and Washington Gas for services were approximately $11,869,000 and
$1,068,000 at March 31, 1998, respectively.
The Company, in the ordinary course of business, also sells its services to
Puget Sound Energy, Inc., a utility whose Board of Directors includes two
directors who also serve on the Board of Directors of the Company. Such sales
amounted to approximately $890,000 and $480,000 in fiscal 1998 and 1997,
respectively. Amounts due from Puget Sound Energy, Inc. were $0 and $126,417 at
March 31, 1998 and 1997, respectively.
The Company, in the ordinary course of business, also sells its services to
Virginia Electric and Power Company ("Virginia Power"), the principal subsidiary
of Dominion Resources, Inc. ("Dominion Resources"). During fiscal 1997 and
1996, such sales amounted to approximately $7,847,000 (12% of consolidated
revenues), and $7,594,000 (16% of consolidated revenues), respectively. Dominion
Capital, Inc. ("Dominion Capital"), also a subsidiary of Dominion Resources, was
a shareholder of Company stock in prior years. During fiscal 1996, Dominion
Capital transferred its entire holdings of company stock to Trilon Dominion
Partners, L.L.C. ("Trilon"), a limited liability company in which Dominion
Capital retained an ownership interest. As of December 11, 1996, Trilon sold all
of its shares of Company stock in the open market. Revenue from related parties
in fiscal 1997 includes approximately $6,384,000 in sales to Virginia Power
through December 11, 1996.
FlowMole Environmental Services Corporation ("FESC") was a joint venture, 50%
owned by UTILX Corporation. In December 1995, the operation of FESC was
terminated. The Company subsequently dissolved the joint venture. Revenue from
services performed for FESC in fiscal 1996 amounted to approximately $661,000
and was billed to FESC at the Company's cost of service. In fiscal 1996, the
Company recorded income of $17,000 for its share of the earnings of FESC using
the equity method of accounting.
In May 1998 the Company moved into a new corporate headquarters pursuant to a
ten year lease. One of the Company's directors is an executive officer of the
company that owns the building. See Note 11.
- 33 -
<PAGE>
NOTE 3 -- ACCOUNTS RECEIVABLE
Accounts receivable, trade at March 31, consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
North American customers:
Completed work not yet billed........... $ 7,299 $ 5,396
Billed but uncollected.................. 11,527 9,427
International customers.................... 1,349 1,332
Less allowance for doubtful accounts....... (455) (282)
-------- --------
Total $ 19,720 $ 15,873
-------- --------
-------- --------
</TABLE>
NOTE 4 -- INCOME TAXES
The components of income tax expense (benefit) were:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal and state... $ 1 $ (827) $ (320)
Foreign............. 0 (119) 99
------ -------- -------
1 (946) (221)
Deferred
Federal and state... 0 0 2,121
------ -------- -------
Total $ 1 $ (946) $ 1,900
------ -------- -------
------ -------- -------
</TABLE>
A reconciliation of income taxes on income (loss) at the federal statutory rate
of 34% with the income tax provision (benefit) in the consolidated statement of
operations is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before income taxes....................... $(2,117) $ 2,022 $ (2,589)
-------- ------- --------
Income tax expense (benefit) at federal statutory rate.. $ (720) $ 687 $ (880)
State income taxes net of federal tax effect............ (78) 60 (110)
Tax effect of nondeductible expenses.................... 323 241 187
Change in valuation allowance........................... 522 (1,915) 2,601
Other................................................... (46) (19) 102
-------- -------- --------
Total $ 1 $ (946) $ 1,900
-------- -------- --------
-------- -------- --------
</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 success of such efforts is uncertain.
Also, the Company has incurred losses in two of its past three fiscal years.
Accordingly, management is currently unable to conclude that realization of the
net deferred tax assets is more likely than not. Therefore, the Company
recorded a
- 34 -
<PAGE>
valuation allowance of $1,208,000 and $686,000 against the full
amount of its net deferred tax assets as of March 31, 1998 and 1997,
respectively. The estimate will be updated on a quarterly basis.
In the third quarter of fiscal 1997, the Company filed several amended Federal
income tax returns. The amendments resulted from the conclusion of an Internal
Revenue Service examination of the Company's fiscal 1994 return, allowing the
immediate deductibility of certain royalty payments made in that year. The
Company accordingly reported an $850,000 income tax benefit in the third quarter
of fiscal 1997. Additional income tax benefits in the third quarter of fiscal
1997 reflect the recovery of foreign income taxes paid in prior years.
The Internal Revenue Service has commenced a new examination of the Company's
amended returns for fiscal 1991 through 1995. As a result, income tax refunds
of $518,000, including a refund related to loss carry-backs from fiscal 1996,
are being examined and the Company cannot be assured of receiving such refunds.
The examination is in its early stages and no adjustments have yet been
proposed. There can be no assurance that the final outcome of the examination
will not result in a material adverse adjustment to the Company's income tax
calculations.
The computation of the net deferred tax asset (liability) at March 31, is as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accruals for claims and expenses not
currently deductible..................................... $ 912 $ 604
Inventory reserves, net..................................... 327 197
Accounts receivable reserve, net............................ 80 96
Net operating loss carry forwards (expiring fiscal 2013).... 502 252
Alternative minimum tax credit carry forwards............... 0 50
Other ..................................................... 52 204
--------- --------
Total deferred tax assets................................... $ 1,873 $ 1,403
--------- --------
Current..................................................... $ 1,319 $ 897
Long-term................................................... 554 506
--------- --------
$ 1,873 $ 1,403
--------- --------
--------- --------
Deferred tax liabilities:
Basis difference for equipment and improvements............. $ (518) $ (603)
Other....................................................... (147) (114)
--------- --------
Total deferred tax liabilities.............................. $ (665) $ (717)
--------- --------
--------- --------
Valuation allowance............................................. $ (1,208) $ (686)
--------- --------
--------- --------
</TABLE>
- 35 -
<PAGE>
NOTE 5 -- MATERIALS, SUPPLIES AND INVENTORIES
Materials, supplies and inventories, at March 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Raw materials and spare parts....................................... $8,810 $6,729
Work in process..................................................... 684 562
Finished goods...................................................... 116 918
Less allowance for potentially obsolete or
overstocked inventory...................................... (771) (494)
------ ------
Total $8,839 $7,715
------ ------
------ ------
</TABLE>
NOTE 6 -- EQUIPMENT AND IMPROVEMENTS
Equipment and improvements, at March 31, is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment............................................. $ 33,595 $ 30,621
Equipment under capital lease....................................... 3,533 0
Leasehold improvements.............................................. 209 284
Furniture and fixtures.............................................. 498 493
Construction in progress, equipment................................. 384 631
Computer software under development................................. 371
-------- --------
38,590 32,029
Less accumulated depreciation and amortization...................... (25,499) (22,583)
-------- --------
Total $ 13,091 $ 9,446
-------- --------
-------- --------
</TABLE>
Accumulated amortization related to equipment under capital leases was $331,000
at March 31, 1998.
Repairs and maintenance expenses for fiscal 1998, 1997 and 1996 were
approximately $1,656,000, $1,391,000, and $975,000, respectively.
NOTE 7 -- OTHER LIABILITIES
Other current liabilities, at March 31, is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Accrued payroll and related costs................................... $2,693 $2,355
Book overdraft...................................................... 1,213
Accrued sales tax................................................... 413 468
Accrued insurance, net of prepayments............................... 716 521
Other............................................................... 440 420
------ ------
Total $5,475 $3,764
------ ------
------ ------
</TABLE>
- 36 -
<PAGE>
Other long term liabilities, at March 31, is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------
(IN THOUSANDS)
<S> <C> <C>
Accrued warranty............... $ 700 $ 500
Other.......................... 172 185
-------- ---------
Total $ 872 $ 685
-------- ---------
-------- ---------
</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 $10,000,000 with Seafirst
National Bank of Washington ("Seafirst"), scheduled to expire on June 30, 1998.
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, working capital 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. The Company has obtained an extension of this
line of credit to January 4, 1999, with an increase in the commitment fee to
0.25% of the unused portion, in addition to other modifications to its terms.
At March 31, 1998 and 1997, the Company had an outstanding balance of $5,245,000
and $985,000, respectively, under this facility at a weighted average borrowing
rate of 7.69% and 8.5%, respectively.
NOTE 9 -- COMMON STOCK, PREFERRED STOCK, OPTIONS AND WARRANTS
STOCK OPTIONS
In October 1984, a nonqualified stock option ("NSO") plan (the "NSO Plan") and
an incentive stock option 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 1994 Plan originally provided for the issuance of a maximum of 600,000
shares under either options or restricted stock grants. In fiscal 1998, the
1994 Plan was amended to add annually, for five years commencing April 1, 1997,
an amount equal to 3.4% of the then outstanding shares of Common Stock to the
shares issuable under the 1994 plan. Accordingly, effective April 1, 1997,
244,277 additional shares were added to the 1994 Plan. The 1994 Plan requires
that options be granted at exercise prices equal to the market value of the
Common Stock on the date of grant. Options granted under the NSO Plan, the ISO
Plan and the 1994 Plan generally provide for full vesting of options within 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 1998 have exercise prices between
$.50 and $14.50 per share. At March 31, 1998, 89,061 shares were issuable under
the 1994 Plan.
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. At March 31, 1998, 23,000
shares were issuable under the Director Plan.
- 37 -
<PAGE>
Pertinent information covering the plans follows:
<TABLE>
<CAPTION>
Employee Plans Director Plan
Shares Average Price Shares Average Price
------------ ------------- -------- -------------
<S> <C> <C> <C> <C>
Outstanding, April 1, 1995 333,800 $ 5.67 170,000 $ 7.00
Issued 135,700 3.10 30,000 2.94
Canceled (41,900) 5.74
Exercised (1,200) 0.50
-------------- ---------- ------- -------
Outstanding, March 31, 1996 426,400 4.86 200,000 6.40
Issued 325,000 2.50 25,000 2.75
Canceled (222,600) 4.92 (43,000) 8.20
Exercised (4,700) 1.51 (12,000) 2.85
-------------- ---------- ------- -------
Outstanding, March 31, 1997 524,100 3.40 170,000 5.74
Issued 267,000 4.55 50,000 5.04
Canceled (37,000) 4.89
Exercised (31,000) 3.88 (10,000) 2.84
-------------- ---------- ------- -------
Outstanding, March 31, 1998 723,100 $ 3.73 210,000 $ 5.71
-------------- ---------- ------- -------
-------------- ---------- ------- -------
Exercisable, March 31, 1998 154,380 $ 4.23 186,000 $ 5.75
-------------- ---------- ------- -------
-------------- ---------- ------- -------
</TABLE>
All options issued in fiscal 1998, 1997 and 1996 were granted at exercise prices
equal to fair market value. Had the Company adopted the provisions of FAS 123
for fiscal 1998, 1997 and 1996 grants, fiscal 1998, 1997 and 1996 would have
included a compensation expense provision of $373,000, $139,000 and $58,000,
respectively. Proforma net loss and diluted loss per share for fiscal 1998
would have been $(2,491,000)and $(.35), respectively. Proforma net income and
diluted income per share for fiscal 1997 would have been $2,829,000 and $0.39,
respectively. Proforma net earnings and diluted loss per share for fiscal 1996
would have been $(4,547,000) and $(0.63), respectively. Significant assumptions
used to value the options for compensation purposes include:
<TABLE>
<CAPTION>
Year Issued Risk-free Interest Rate Expected Life Expected Volatility Expected Dividends
- ----------- ----------------------- ------------- ------------------- ------------------
<S> <C> <C> <C> <C>
1996 6.84% 6 Years 46% None
1997 6.42% 6 Years 46% None
1998 6.00% 6 Years 53% None
</TABLE>
Pertinent information regarding options outstanding as of March 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------------------- ---------------------------------
Weighted Average Weighted Average Weighted Average
Range of Exercise Prices Shares Exercise Price Remaining Life Shares Exercise Price
- ------------------------ ------ -------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$2.50 to $4.625 775,100 $ 3.49 7.97 Years 208,380 $ 3.31
$5.25 to $7.50 118,000 $ 6.20 4.52 Years 92,000 $ 6.22
$9.00 to $14.50 40,000 $ 11.52 1.81 Years 40,000 $ 11.52
-------- --------
933,100 340,380
-------- --------
-------- --------
</TABLE>
- 38 -
<PAGE>
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 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. No warrants were exercisable at
March 31, 1998. See also Note 14.
On June 14, 1993, the Company issued to FlowMole Partners, a limited
partnership, a stock purchase warrant 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 Common Stock subject to the warrant. The warrant was
exercised in fiscal 1998. At the time of exercise of the warrant, FlowMole
Partners also exercised its right to put to the Company the shares purchased at
the current market price (as defined in the warrant). The Company exercised its
option to pay the difference between the market and warrant exercise prices in
shares of the Company's Common Stock (based on the then current market price).
Accordingly, 182,474 shares of the Company's Common Stock were issued to
FlowMole Partners in fiscal 1998.
RESTRICTED STOCK PLAN
In October 1994, the Company awarded 47,000 Restricted Shares to certain new
employees which contained 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 was amortized over the vesting
period on a straight-line basis. During fiscal 1998, 1997 and 1996, pursuant to
provisions of the 1994 Plan, the Company repurchased 345, 407 and 2,096 shares
at market prices on vesting dates to cover payroll tax withholding requirements
of approximately $1,000, $1,000 and $6,000, respectively. During fiscal 1997,
15,778 restricted shares were canceled pursuant to employee terminations.
PREFERRED STOCK
The Company has 2,000,000 shares of authorized Preferred Stock. During fiscal
years 1998, 1997, and 1996, no shares were designated, issued, or are
outstanding.
EARNINGS (LOSS) PER SHARE
In fiscal 1998, 1997 and 1996, the weighted average number of outstanding shares
of the Company Common Stock, used to calculate basic earnings (loss) per share,
was 7,214,000, 7,180,000 and 7,185,000, respectively. In fiscal 1997, the
weighted average number of issuable under outstanding stock options and
warrants, net of assumed shares repurchased, was 123,000. This amount was used
to calculate diluted earnings per share. No such adjustment was considered in
fiscal 1998 or fiscal 1996 because it would be antidilutive, due to net losses
incurred in each year.
NOTE 10 -- PENSION PLAN
Employees of the Company may participate in a voluntary defined contribution
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
matching contributions based on employee contributions and length of employee
service. Total Company contributions under this plan for fiscal 1998, 1997 and
1996 were approximately $307,000, $239,000 and $216,000, respectively.
- 39 -
<PAGE>
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
The Company leases office space and manufacturing space under noncancelable
operating lease agreements with renewal options. The Company also leases
certain construction equipment, pickup trucks and other motor vehicles, under
operating and capital 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 $5,135,000, $2,456,000 and $2,017,000 for fiscal 1998, 1997 and
1996, respectively.
At March 31, 1998, future minimum lease payments under noncancelable leases
including a new ten year lease for corporate headquarters space commencing in
May 1998, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31 OPERATING CAPITAL
--------------------- LEASES LEASES
---------- --------
(IN THOUSANDS)
<S> <C> <C>
1999..................................................................... $ 3,524 $ 1,075
2000..................................................................... 3,197 1,070
2001..................................................................... 2,925 1,070
2002..................................................................... 1,376 718
2003..................................................................... 495 62
Thereafter............................................................... 2,045 21
------- ------
Total future minimum lease payments...................................... $13,562 4,016
-------
-------
Less interest included in minimum capital lease payments............ 953
------
Capital lease obligations, March 31, 1998........................... 3,063
Less current portion, March 31, 1998................................ 839
------
Long term portion of capital lease obligations, March 31, 1998...... $ 2,224
------
------
</TABLE>
Certain of the leases allow for adjustments of payments based on interest rate
fluctuations. An increase in the underlying interest rate of 1%, would increase
aggregate minimum lease payments by approximately $94,000 for fiscal year 1999.
At March 31, 1998, the Company has entered into noncancellable purchase orders
for proprietary drilling equipment for delivery in fiscal 1999, with an
aggregate acquisition cost of $1.4 million. The Company also is in the process
of installing a new enterprise wide management information system, with
estimated remaining expenditures of $1.6 million as of March 31, 1998.
NOTE 12 -- SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
Supplemental cash flow information for fiscal 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the year for:
Interest............................................... $ 445 $ 55 $ 116
Income taxes paid (refunded), net ..................... (78) (1,521) 38
</TABLE>
- 40 -
<PAGE>
In fiscal 1998, 1997 and 1996, the Company sold FlowMole drilling systems to
contractors in Europe, Asia and South America. Revenue from the sale of the
systems of approximately $1,494,000, $2,559,000, and $3,386,000 in fiscal 1998,
1997 and 1996, respectively, has been included in the consolidated statement of
operations and in operating activities in the consolidated statement of cash
flows. A gain, before allocating freight, duty and other selling costs, of
approximately $560,000, $616,000, and $1,050,000 was recognized on the sales in
fiscal 1998, 1997 and 1996, respectively.
In fiscal 1998, the Company acquired equipment pursuant to vendor financed
capital leases in the aggregate amount of approximately $3,533,000.
NOTE 13 -- FINANCIAL INFORMATION RELATING TO NORTH AMERICAN AND
EUROPEAN OPERATIONS
The consolidated financial statements include accounts of the Company's North
American and European operations. Asian and South American revenues and net
income are included in North American operations, as those operations are
primarily conducted out of the Company's headquarters and primarily consist of
the sales of inventory held in North America. Asian and South American revenues
were $2,399,000, $3,269,000, and $4,228,00 in fiscal 1998, 1997 and 1996,
respectively. The following amounts are included in the consolidated financial
statements for North American and European operations:
<TABLE>
<CAPTION>
FISCAL YEAR 1998 (IN THOUSANDS)
---------------------------------------------------------------
ADJUSTMENTS
NORTH AND
AMERICAN EUROPEAN ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Unrelated customers............... $ 77,792 $ 3,782 $ 81,574
Related parties................... 890 890
Intersegment...................... 225 $ (225)
-------- -------- ---------- ---------
Total revenues............... $ 78,907 $ 3,782 $ (225) $ 82,464
Net income (loss)..................... $ (1,545) $ (566) $ (7) $ (2,118)
Identifiable assets................... $ 40,671 $ 2,980 $ (172) $ 43,479
<CAPTION>
FISCAL YEAR 1997 (IN THOUSANDS)
---------------------------------------------------------------
ADJUSTMENTS
NORTH AND
AMERICAN EUROPEAN ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Unrelated customers............... $ 54,358 $ 3,653 $ 58,011
Related parties................... 6,864 6,864
Intersegment...................... 1,013 $ (1,013)
---------- -------- ------- --------
Total Revenues............... $ 62,235 $ 3,653 $ (1,013) $ 64,875
Net income (loss)..................... $ 3,569 $ (320) $ (281) $ 2,968
Identifiable assets................... $ 32,387 $ 3,618 $ (93) $ 35,912
- 41 -
<PAGE>
<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>
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 14 -- 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 $1,567,000
and $1,329,000 at March 31, 1998 and 1997, respectively. The Company purchases
its chemicals exclusively from Dow Corning. Worldwide CableCure revenues
accounted for 22% of consolidated revenues in fiscal 1998.
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 equal to the greater of the then current
average market closing price or $8.50 per share. For fiscal 1998, 1997 and
1996, 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
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.
- 42 -
<PAGE>
NOTE 15 -- ARBITRATION AND LITIGATION
On October 31, 1997, the Company filed a complaint in Federal District Court in
Florida against a contractor in Florida with whom the Company has a contract for
certain cable injection services for Florida Power & Light through January 2000,
and its principal shareholder. The complaint alleges certain failures and
breaches of contractual obligations and requests declaratory relief and
determination that the Company has sufficient grounds to terminate its contracts
with the contractor. The Company and contractor have an ongoing dispute over
the amount to be paid to the contractor under its subcontract for certain cable
injection services performed subsequent to April 1, 1997. The complaint also
requests, among other matters, that the court determines that the price being
paid currently by the Company to the contractor is in accordance with the
contract between the parties. This case is in its early stages and at this time
it is not possible to predict with certainty the outcome of this matter.
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.
NOTE 16 -- SELECTED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1QFY98 2QFY98 3QFY98 4QFY98
------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues.......................... $ 18,767 $ 20,734 $ 22,523 $ 20,440
Gross profit...................... 1,900 1,835 3,198 413
Net income (loss)................. (268) (320) 755 (2,285)
Earnings (loss) per share:
Basic........................ $ (.04) $ (.04) $ .10 $ (.32)
Diluted...................... $ (.04) $ (.04) $ .10 $ (.32)
<CAPTION>
1QFY97 2QFY97 3QFY97 4QFY97
------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues.......................... $15,124 $15,549 $16,317 $17,885
Gross profit...................... 2,880 2,520 2,713 2,239
Net income........................ 653 516 1,756 43
Earnings per share:
Basic........................ $ .09 $ .07 $ .24 $ .01
Diluted...................... $ .09 $ .07 $ .24 $ .01
</TABLE>
During the fourth quarter of fiscal 1998, the Company recorded $985,000 of
expenses for warranty costs, reserves for inventory obsolescence and a writedown
of inventory held for sale. During the third quarter of fiscal 1997, the
Company recorded an $850,000 income tax benefit (see Note 4).
- 43 -
<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, 1998, the close of the
Registrant's 1998 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:
1. FINANCIAL STATEMENTS:
Report of Independent Accountants 26
Consolidated Balance Sheet, March 31, 1998 and 1997 27
Consolidated Statement of Operations for the years ended
March 31, 1998, 1997 and 1996 28
Consolidated Statement of Changes in Stockholders' Equity
for the years ended March 31, 1998, 1997
and 1996 29
Consolidated Statement of Cash Flows for the years ended
March 31, 1998, 1997 and 1996 30
Notes to Consolidated Financial Statements 31
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:
Item 14 (c) below.
(b) REPORT ON FORM 8-K. The Company filed a current report on Form 8-K
("Form 8-K") dated March 23, 1998 regarding the issuance of a press
release which announced that it expected to report a significant loss
for the three months ended March 31, 1998 and the termination of a
significant customer contract. The Form 8-K did not include financial
statements.
(c) EXHIBITS: Exhibits identified below, on file with the Securities and
Exchange Commission, are incorporated herein by reference as exhibits
hereto.
- 44 -
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<S> <C>
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.
3.3 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.
3.6 Registrant's Restated By-laws. Incorporated by reference to
Exhibit Number 3.6 to Registrant's Annual Report filed under
the Exchange Act on Form 10-K for the fiscal year ended March
31, 1997.
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.
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 Non-employee
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 Amended and Restated 1994 Option and Restricted
Stock Plan. Incorporated by reference as Appendix A to
Registrant's Proxy Statement filed under the Exchange Act for
the Fiscal Year ended March 31, 1997.
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.
</TABLE>
- 45 -
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
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.
10.22 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.
10.28 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.
10.35 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 under the Exchange Act on Form 10-K for the
Fiscal Year ended March 31, 1996.
10.38 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 November
27, 1996, filed under the Exchange Act on Form 10-K for the
Fiscal Year ended March 31, 1997.
10.39 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 June 16,
1998. 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.
</TABLE>
- 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
By /s/ CRAIG E. DAVIES June 19, 1998
--------------------------
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.
<TABLE>
<CAPTION>
<S> <C> <C>
President, Chief Executive June 19, 1998
/S/ CRAIG E. DAVIES Officer and Director
- ----------------------------------------
(Craig E. Davies)
/s/ LARRY D. PIHL Vice President, Chief Financial Officer, June 19, 1998
- ---------------------------------------- Controller and Treasurer
(Larry D. Pihl)
/s/ STANLEY J. BRIGHT Director June 19, 1998
- ----------------------------------------
(Stanley J. Bright)
/s/ JOHN D. DURBIN Director June 19, 1998
- ----------------------------------------
(John D. Durbin)
/s/ JOHN W. ELLIS Director June 19, 1998
- ----------------------------------------
(John W. Ellis)
/s/ WALTER M. HIGGINS Director June 19, 1998
- ----------------------------------------
(Walter M. Higgins)
/s/ ROBERT E. RUNICE Director June 19, 1998
- ----------------------------------------
(Robert E. Runice)
/s/ WILLIAM M. WEISFIELD Director and Chairman of the Board June 19, 1998
- ----------------------------------------
(William M. Weisfield)
</TABLE>
- 47 -
<PAGE>
As filed with the Securities and Exchange Commission on June 24, 1998
File No. 0-16821
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
EXHIBITS
TO
ANNUAL REPORT FORM 10-K
FOR THE YEAR ENDED MARCH 31, 1998
UNDER
THE SECURITIES EXCHANGE ACT OF 1934
----------------
UTILX CORPORATION
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<S> <C>
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.
3.3 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.
3.6 Registrant's Restated By-laws. Incorporated by reference to
Exhibit Number 3.6 to Registrant's Annual Report filed under
the Exchange Act on Form 10-K for the fiscal year ended March
31, 1997.
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.
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 Non-employee
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 Amended and Restated 1994 Option and Restricted
Stock Plan. Incorporated by reference as Appendix A to
Registrant's Proxy Statement filed under the Exchange Act for
the Fiscal Year ended March 31, 1997.
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.
10.17 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.
</TABLE>
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------
<S> <C>
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.
10.28 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.
10.35 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 under the Exchange Act on Form 10-K for the
Fiscal Year ended March 31, 1996.
10.38 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 November
27, 1996, filed under the Exchange Act on Form 10-K for the
Fiscal Year ended March 31, 1997.
10.39 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 June 16,
1998. 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.
</TABLE>
<PAGE>
SEAFIRST BANK EXHIBIT 10.39
LOAN MODIFICATION
AGREEMENT
- --------------------------------------------------------------------------------
This agreement amends the Credit Agreement dated December 2, 1994 ("Credit
Agreement"), each executed by UTILX CORPORATION ("Borrower") in favor of Bank of
America National Trust and Savings Association, doing business as SEAFIRST BANK,
successor by merger to Seattle-First National Bank and Bank of America NW, N.A.
("Bank"), regarding a loan in the maximum principal amount of $10,000,000 (the
"Loan"). Capitalized terms used in this agreement shall have the meaning given
in the Credit Agreement, as modified by any prior modification agreement. For
mutual consideration, Borrower and Bank agree to amend the above loan documents
as follows:
1. MATURITY DATE. Section 1.36 of the Credit Agreement is amended to
change the Termination Date to January 4, 1999.
2. REVOLVING NOTE. All references in the Credit Agreement to the
"Revolving Note" shall mean the Revolving Note dated June 16, 1998, and all
renewals, modifications, and extensions thereof.
3. INTEREST PROVISIONS. Article 4 of the Credit Agreement is deleted.
The Revolving Loan shall bear interest as provided in the Revolving Note.
4. FACILITY FEE. Section 2.4 of the Credit Agreement is amended to read
as follows:
2.4 FACILITY FEE. ON THE LAST BUSINESS DAY OF EACH MARCH, JUNE,
SEPTEMBER, AND DECEMBER, BEGINNING JUNE 30, 1998, BORROWER SHALL PAY TO
BANK IN ARREARS A COMMITMENT FEE EQUAL TO 0.25% PER ANNUM OF THE DIFFERENCE
BETWEEN (a) THE CREDIT LIMIT AND (b) "USAGE," WITH "USAGE" BEING DEFINED AS
THE SUM OF THE AVERAGE DAILY OUTSTANDING PRINCIPAL BALANCE OF THE REVOLVING
NOTE PLUS THE AVERAGE DAILY COMBINED OUTSTANDING PRINCIPAL AMOUNT OF ALL
LETTERS OF CREDIT.
5. DEBT RATIO. Section 7.4 of the Credit Agreement is amended to provide
that Borrower shall maintain a ratio of Debt to Tangible Net Worth, measured as
of each quarter end, of not more than 0.85 to 1.
6. BORROWING BASE. The definition of "Borrowing Base," added to the
Credit Agreement by Loan Modification Agreement dated September 30, 1997, is
amended to read as follows:
"BORROWING BASE" SHALL MEAN 75% OF ALL OF BORROWER'S BILLED ACCOUNTS
RECEIVABLE, BOTH FOREIGN AND DOMESTIC, WHICH ARE NOT MORE THAN 90 DAYS PAST
DUE UNDER THE TERMS OF THE SALES INVOICE.
Section 7.12 of the Credit Agreement, added by the same modification, is amended
to read as follows:
7.12 BORROWING BASE. THE OUTSTANDING PRINCIPAL BALANCE OF THE
REVOLVING NOTE PLUS THE FACE AMOUNT OF ALL LETTERS OF CREDIT OUTSTANDING
SHALL NOT EXCEED THE BORROWING BASE AS OF THE END OF ANY FISCAL QUARTER,
BEGINNING QUARTER ENDING JUNE 30, 1998. BORROWER SHALL PROVIDE TO BANK
WITHIN 30 DAYS OF EACH MONTH'S END A CERTIFICATE OF BORROWER'S CHIEF
FINANCIAL OFFICER CERTIFYING COMPLIANCE WITH THIS SECTION 7.12.
7. CAPITAL LEASES. Subsection 8.1(d) of the Credit Agreement is amended
to permit capital leases which require up to $1,500,000 in payments in the
aggregate during any one fiscal year.
Page 1
<PAGE>
8. OTHER TERMS. Except as specifically amended by this agreement or any
prior amendment, all other terms, conditions, and definitions of the Note,
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.
DATED as of June 16, 1998.
Bank: Borrower:
SEAFIRST BANK UTILX CORPORATION
By: By: /s/ Larry Pihl
--------------------------- ----------------------------
Title: Title: Vice President and Chief
------------------------ --------------------------
Financial Officer
--------------------------
Page 2
<PAGE>
DUE: JANUARY 4, 1999
REVOLVING NOTE
UTILX CORPORATION
$10,000,000.00 Dated: June 16, 1998
Seattle, Washington
UTILX CORPORATION, a Washington corporation ("Maker") unconditionally
promises to pay to the order of Bank of America National Trust and Savings
Association, doing business as SEAFIRST BANK ("Bank"), at its Metropolitan
Wholesale Team 3 office, on or before January 4, 1999, in immediately available
funds, the principal sum of Ten Million and No/100 Dollars ($10,000,000.00), or
such lesser sum as may be advanced hereunder. Maker further agrees to pay
interest on the daily unpaid principal balance, in arrears on the 1st day of
each month, beginning the 1st day of July, 1998, in accordance with the terms,
conditions, and definitions of Exhibit A attached, which are incorporated
herein.
This Note is the Revolving Note referred to in the Credit Agreement dated
December 2, 1994 (as subsequently amended, the "Agreement") between Maker, as
Borrower, and Bank, and the Agreement is incorporated herein.
All advances under this Note, all conversions between the interest rate
options, and all payments of principal and interest may be reflected on a
schedule or a computer-generated statement which shall become a part hereof.
All unpaid principal and accrued but unpaid interest under this Note shall be
paid in full on January 4, 1999.
If all or any portion of the principal amount or any installment of
interest is not paid when due, interest shall accrue, at the option of the
holder of this Note, from the date of default at a floating rate per annum
three percent (3%) above the Reference Rate, as the Reference Rate may vary
from time to time, and the entire unpaid principal amount of this Note,
together with all accrued interest, shall become immediately due and payable
at the option of the holder hereof.
Advances under this Note may be made by Bank at the oral or written
request of ______________________________________________________________,
any one acting alone, who are authorized to request advances and direct the
disposition of any such advances until written notice of the revocation of
such authority is received by Bank at its office indicated above. Any such
advance shall be conclusively presumed to have been made to or for the
benefit of Maker when made in accordance with such requests and directions,
or when said advances are deposited to the credit of an account of Maker with
Bank, regardless of the fact that persons other than those authorized under
this paragraph may have authority to draw against such account.
Maker hereby waives presentment, demand, protest, and notice of dishonor
hereof. Each party signing or endorsing this Note signs as maker and
principal, and not as guarantor, surety, or accommodation party; and is
estopped from asserting any defense based on any capacity other than maker or
principal.
This Note shall be governed by and construed in accordance with the laws
of the State of Washington.
Page 1
<PAGE>
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, TO EXTEND CREDIT, OR TO
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON
LAW.
UTILX CORPORATION
By:/s/ Larry Pihl
-----------------------------------
Its:Vice President and Chief Financial
----------------------------------
Officer
----------------------------------
Page 2
<PAGE>
EXHIBIT A
INTEREST PROVISIONS
ARTICLE 1
DEFINITIONS
All terms defined below shall have the meaning indicated:
1.1 ADJUSTED LIBOR RATE shall mean for any day that per annum rate
equal to the sum of (a) a margin of 2.00%, (b) the Assessment Rate, and (c) the
quotient of (i) the LIBOR Rate as determined for such day, divided by (ii) the
Reserve Adjustment. The Adjusted LIBOR Rate shall change with any change in the
LIBOR Rate on the first day of each Interest Period and on the effective date of
any change in the Assessment Rate or Reserve Adjustment.
1.2 ASSESSMENT RATE shall mean as of any day the minimum annual
percentage rate established by the Federal Deposit Insurance Corporation (or
any successor) for the assessment due from members of the Bank Insurance Fund
(or any successor) in effect for the assessment period during which said day
occurs based on deposits maintained at such members' offices located outside
of the United States. In the event of a retroactive reduction in the
Assessment Rate after a commencement of any Interest Period, Bank shall not
retroactively adjust as to such Interest Period any interest rate calculated
using the Assessment Rate.
1.3 BANK shall mean the holder of the Note.
1.4 BORROWER shall mean the maker of the Note.
1.5 BUSINESS DAY shall mean any day other than a Saturday, Sunday, or
other day on which commercial banks in Seattle, Washington, are authorized or
required by law to close.
1.6 COMMENCEMENT DATE shall mean the first day of any Interest Period
as requested by Borrower.
1.7 FLOATING RATE shall mean the Reference Rate plus 0% per annum.
1.8 FLOATING RATE LOANS shall mean those portions of principal of the
Note accruing interest at the Floating Rate.
1.9 INTEREST PERIOD shall mean the period commencing on the date of
any advance at or conversion to an Adjusted LIBOR Rate and ending on any date
thereafter as selected by Borrower, subject to the restrictions of Section 2.3.
If any Interest Period would end on a day which is not a Business Day,
the Interest Period shall be extended to the next succeeding Business Day.
1.10 LIBOR RATE shall mean for any Interest Period the per annum rate,
calculated on the basis of actual number of days elapsed over a year of 360
days, for U.S. Dollar deposits for a period equal to the Interest Period
appearing on the display designated as "Page 3750" on the Telerate Service
(or such other page on that service or such other service designated by the
British Banker's Association for the display of that Association's Interest
Settlement Rates for U.S. Dollar deposits) as of 11:00 a.m., London time, on
the day which is two London Banking Days prior to the first day of the
Interest Period. If there is no period equal to the Interest Period on the
display, the LIBOR Rate shall be determined by straight-line interpolation to
the nearest month (or week or day if expressed in weeks or days)
corresponding to the Interest Period between the two nearest neighboring
periods on the display.
Page A-1
<PAGE>
1.11 LIBOR RATE LOANS shall mean those portions of principal of the Note
accruing interest at the Adjusted LIBOR Rate.
1.12 LONDON BANKING DAY shall mean any day other than a Saturday,
Sunday, or other day on which commercial banks in London, England, are
authorized or required by law to close.
1.13 NOTE shall mean the promissory note to which this exhibit is
attached.
1.14 REFERENCE RATE shall mean the rate of interest publicly announced
from time to time by Bank in San Francisco, California, as its "Reference
Rate." The Reference Rate is set based on various factors, including Bank's
costs and desired return, general economic conditions, and other factors, and
is used as a reference point for pricing some loans. Bank may price loans to
its customers at, above, or below the Reference Rate. Any change in the
Reference Rate shall take effect at the opening of business on the day
specified in the public announcement of a change in the Reference Rate.
1.15 RESERVE ADJUSTMENT shall mean as of any day the remainder of one
minus that percentage (expressed as a decimal) which is the highest of any
such percentages established by the Board of Governors of the Federal Reserve
System (or any successor) for required reserves (including any emergency,
marginal, or supplemental reserve requirement) regardless of the aggregate
amount of deposits with said member bank and without benefit of any possible
credit, proration, exemptions, or offsets for time deposits established at
offices of member banks located outside of the United States or for
eurocurrency liabilities, if any.
ARTICLE 2
INTEREST RATE OPTIONS
2.1 INTEREST RATES AND PAYMENT DATE. The Note shall bear interest
from the date of Advance on the unpaid principal balance outstanding from
time to time at the Floating Rate or Adjusted LIBOR Rate as selected by
Borrower and all accrued interest shall be payable in arrears as provided in
the Note.
2.2 PROCEDURE. Borrower may, on any London Banking Day two London
Banking Days before a Commencement Date, request Bank to give an Adjusted
LIBOR Rate quote for a specified loan amount and Interest Period. Bank will
then quote to Borrower the available Adjusted LIBOR Rate. Borrower shall
have two hours from the time of the quote to elect an Adjusted LIBOR Rate by
giving Bank irrevocable notice of such election.
2.3 RESTRICTIONS. Each Interest Period shall be one, two, three, or
six months. In no event shall an Interest Period extend beyond January 4,
1999. The minimum amount of a LIBOR Rate Loan shall be $250,000.
2.4 PREPAYMENTS OF LIBOR RATE LOANS. If Borrower prepays all or any
portion of a LIBOR Rate Loan prior to the end of an Interest Period, there
shall be due at the time of any such prepayment a prepayment fee which equals
the amount (if any) by which:
(i) the additional interest which would have been payable on the
amount prepaid had it not been paid until the last day of the Interest
Period exceeds
Page A-2
<PAGE>
(ii) the interest which would have been recoverable by Bank by placing
the amount prepaid on deposit in the offshore dollar market for a period
starting on the date on which it was prepaid and ending on the last day of
the Interest Period.
Bank is under no obligation to actually reinvest any prepayment. The rates
may be based on information from either the Telerate or Reuters information
services, THE WALL STREET JOURNAL, or other information sources Bank deems
appropriate.
2.5 REVERSION TO FLOATING. The Note shall bear interest at the
Floating Rate unless an Adjusted LIBOR Rate is specifically selected. At the
termination of any Interest Period each LIBOR Rate Loan shall revert to a
Floating Rate Loan unless Borrower directs otherwise pursuant to Section 2.2.
2.6 INABILITY TO PARTICIPATE IN MARKET. If Bank in good faith cannot
participate in the offshore dollar market for legal or practical reasons, the
Adjusted LIBOR Rate shall cease to be an interest rate option. Bank shall
notify Borrower of and when it again becomes legal or practical to
participate in the offshore dollar market, at which time the Adjusted LIBOR
Rate shall resume being an interest rate option.
2.7 COSTS. Borrower shall, as to LIBOR Rate Loans, reimburse Bank
for all costs, taxes, and expenses, and defend and hold Bank harmless for any
liabilities, which Bank may incur as a consequence of any changes in the cost
of participating in, or in the laws or regulations affecting, the offshore
dollar market, including any additional reserve requirements, except to the
extent such costs are already calculated into the Adjusted LIBOR Rate. This
covenant shall survive the payment of the Note.
2.8 BASIS OF QUOTES. Borrower acknowledges that Bank may or may not
in any particular case actually match-fund a LIBOR Rate Loan. FDIC
assessments, and Federal Reserve Board reserve requirements, if any are
assessed, will be based on Bank's best estimates of its marginal cost for
each of these items. Whether such estimates in fact represent the actual cost
to Bank for any particular dollar or offshore dollar deposit or any LIBOR
Rate Loan will depend upon how Bank actually chooses to fund the LIBOR Rate
Loan. By electing an Adjusted LIBOR Rate, Borrower waives any right to
object to Bank's means of calculating the Adjusted LIBOR Rate quote accepted
by Borrower.
Page A-3
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
SUBSIDIARY JURISDICTION OF INCORPORATION
FlowMole Export Sales Corporation Washington
FlowMole Limited United Kingdom
UTILX International Product Sales, Inc. Barbados, West Indies
<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 and Reg. No. 333-53349) and
Form S-3 (Reg. No. 333-47113) of our report dated May 12, 1998, except as to
the information presented in Note 8, for which the date is June 16, 1998, on
our audits of the consolidated financial statements of UTILX Corporation as
of March 31, 1998 and 1997 and for the three years in the period ended March
31, 1997, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Seattle, Washington
June 19, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF UTILX CORPORATION FOR THE YEAR ENDED MARCH
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 528
<SECURITIES> 0
<RECEIVABLES> 20,175
<ALLOWANCES> 455
<INVENTORY> 8,839
<CURRENT-ASSETS> 29,804
<PP&E> 38,590
<DEPRECIATION> 25,499
<TOTAL-ASSETS> 43,479
<CURRENT-LIABILITIES> 15,552
<BONDS> 0
0
0
<COMMON> 74
<OTHER-SE> 24,757
<TOTAL-LIABILITY-AND-EQUITY> 43,479
<SALES> 82,464
<TOTAL-REVENUES> 82,464
<CGS> 75,118
<TOTAL-COSTS> 84,032
<OTHER-EXPENSES> 549
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 444
<INCOME-PRETAX> (2,117)
<INCOME-TAX> 1
<INCOME-CONTINUING> (2,118)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,118)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
<PAGE>
EXHIBIT 99.1
[LOGO]
UTILX CORPORATE PROFILE
UTILX -Registered Trademark- Corporation provides services and products used to
install, replace and renovate underground utilities. Domestically,
UTILX-Registered Trademark- 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.
DIRECTORS & OFFICERS
DIRECTORS JOHN W. ELLIS
WILLIAM M. WEISFIELD
CHAIRMAN AND CHIEF
CHAIRMAN, EXECUTIVE OFFICER,
UTILXCORPORATION THE BASEBALL CLUB OF SEATTLE
SENIOR VICE PRESIDENT, DIRECTOR,
BENAROYA CAPITAL COMPANY, AEGIS, LTD.
SEATTLE, WASHINGTON
FORMER CHAIRMAN AND
CHIEF EXECUTIVE OFFICER,
STANLEY J. BRIGHT PUGET SOUND POWER AND LIGHT CO.
CHAIRMAN, FORMER CHAIRMAN,
PRESIDENT & CEO, EDISON ELECTRIC INSTITUTE
MIDAMERICAN ENERGY CO.,
DES MOINES, IOWA
WALTER M. HIGGINS
DIRECTOR,
EDISON ELECTRIC INSTITUTE CHAIRMAN, PRESIDENT &
CHIEF EXECUTIVE OFFICER,
DIRECTOR, AGL RESOURCES, INC.,
UTECH VENTURE CAPITAL CORP. ATLANTA, GEORGIA
DIRECTOR,
CRAIG E. DAVIES AEGIS, LTD.
PRESIDENT AND
CHIEF EXECUTIVE OFFICER, ROBERT E. RUNICE
UTILXCORPORATION
PRIVATE INVESTOR &
BUSINESS CONSULTANT
JOHN D. DURBIN
FORMER VICE PRESIDENT,
PRINCIPAL, US WEST, INC.
OLYMPIC CAPITAL PARTNERS,
SEATTLE, WASHINGTON FORMER PRESIDENT,
US WEST COMMERCIAL
GENERAL PARTNER, DEVELOPMENT DIVISION,
JOHN DURBIN & ASSOCIATES, ENGLEWOOD, COLORADO
BELLEVUE, WASHINGTON
DIRECTOR,
PUGET SOUND ENERGY, INC.
<PAGE>
OFFICERS
CRAIG E. DAVIES
PRESIDENT &
CHIEF EXECUTIVE OFFICER
THOMAS L. MARKL
SENIOR VICE PRESIDENT &
SECRETARY
JAMES E. BARTHOLOMEW
VICE PRESIDENT,
NORTHEAST REGION
RONALD M. DOHR
VICE PRESIDENT,
HUMAN RESOURCES
CHARLIE HUTCHINSON
VICE PRESIDENT,
FLORIDA REGION
LARRY D. PIHL
VICE PRESIDENT,
CHIEF FINANCIAL OFFICER,
CONTROLLER AND TREASURER
SCOTT E. REYNOLDS
VICE PRESIDENT,
WESTERN REGION
<PAGE>
CORPORATE HEADQUARTERS
UTILX Corporation
22820 Russell Road (98032)
P.O. BOX 97009
Kent, Washington 98064-9709
Telephone (253) 395-0200
Facsimile (253) 395-1040
INTERNATIONAL SUBSIDIARY
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 & REGISTRAR
American Stock Transfer & Trust Co.
40 Wall Street, 46th Floor
New York, New York 10005
Telephone (718) 921-8200
Facsimile (718) 921-8355
STOCK TRADING
UTILX Corporation common stock trades on the Nasdaq Stock Market System under
the symbol UTLX.
UTILX-Registered Trademark-, FlowMole-Registered Trademark-,
CableCure-Registered Trademark- and
Test, Treat or Replace-Registered Trademark- are registered
trademarks of UTILXCorporation.
UTILX Corporation is an equal-opportunity affirmative-action employer
<PAGE>
FELLOW SHAREOWNERS:
Last year, I informed you of our plans to invest heavily to prepare our
organization for a long-term growth strategy. We knew that, in order to achieve
our goal of consistently producing a superior return on equity, we needed UTILX
to grow well past the $100 million revenue mark. We invested in people,
equipment, training programs, and information systems, knowing that all this
investment would have a short-term adverse impact on our earnings. We believed
that we were on track to return to consistent profitability when we reported
positive earnings in the third quarter of the past year. Unfortunately, several
events turned against us in the fourth quarter of fiscal 1998, particularly the
unusual "El Nino" weather in the Southeastern United States, resulting in a
significant loss for the quarter and the fiscal year.
The enclosed financial statements speak for themselves, and the results cannot
be denied. While our revenues increased 27% over the prior year, even after a
devastating weather impacted fourth quarter, our costs incurred to earn those
revenues increased 38%. Accordingly, the Company lost money - which is not
acceptable.
We know that UTILX possesses unique services that will enable the Company to
grow, and we substantially improved our ability to grow last year. We have more
people and equipment than ever before, and we added more people and equipment in
the past year than in any year in the Company's history. Do we need to do a
better job managing our growth? Yes, most certainly, and we're already well
underway with our plans, including adding to our field operations management
team. Were all those investments in vain? Definitely not! Do we need to
demonstrate in our very next year that we can turn those increased revenues into
profits? Absolutely!!
FISCAL 1998: WHAT WENT RIGHT
While the past year was clearly disappointing in terms of financial results,
there were several significant achievements. I firmly believe that in our new
fiscal year, the Company will benefit from our investments. The entire UTILX
management team remains undaunted in our belief that we have positioned
ourselves well to take advantage of the trends developing in our primary
customer segment: the electric utility industry.
On balance, we made significant progress last year that is not reflected in our
income statement. UTILX enters fiscal 1999 approximately twice the size we were
a little more than two years ago. We did many things right last year, some with
real payoff in fiscal 1998, and some that will not pay off until late in our
next fiscal year. Some other steps were well intentioned, but unsuccessful, and
painful decisions had to be made to re-focus the Company on better
opportunities. Let me elaborate on some of the highlights.
1. We Grew and Refined Our "Prototype" Partnership Relationship
Our largest customer, Florida Power & Light ("FP&L"), is consistently
included among the most admired, progressive utilities in the country. We
have entered into a true partnership relationship with this important
customer and now have more crews operating on their system than the entire
Company utilized in the United States a little over two years ago.
Let me give you an example of the new services we provide. We've assumed
responsibility from FP&L for repairing failures (faults) in aging
underground electric cables, performing over 1,800 such jobs in fiscal 1998
compared to virtually none in the entire prior history of the Company.
We'll fix well over 2,000 faults in fiscal 1999. It's a service the
customer needed, and we believe we've helped them gain significant cost
savings. This new activity represented a significant investment on our
part, and we expect to be a lot more profitable in performing this work in
fiscal 1999. Plus, we now are prepared to market this service to other
utilities.
2. We Established Outside Vendors for Our Proprietary FlowMole Equipment
Until fiscal 1998, we had assembled virtually every existing FlowMole
drilling system ourselves. Our growth plans envisioned a need to more than
double our fleet of drilling equipment. We needed a better way to acquire
our equipment, consuming less working capital during the construction phase
and less management time, without a cost increase. We achieved that goal,
and have taken delivery of the first 45 new drilling systems. We'll add
still more drilling systems early in fiscal 1999 as we prepare to respond
to the increasing demand for our replacement services created by our
customers who choose a "Test, Treat or Replace" service option. As we
continue to grow, and our vendor relationships mature, we'll get still
better at this activity. And we will
<PAGE>
remain in the international equipment sales business, even though the
"Asian flu" is limiting our sales opportunities in the near term.
3. We Increased Our CableCure Revenue Base
New customer relationships are the key to sustaining our long-term growth,
and reducing our dependency on a few key customers. We know that electric
utilities have now widely accepted the CableCure injection technology as a
viable, cost-effective service for improving the reliability of their
underground distribution systems. Also, as the electric utility industry
prepares for deregulation, the need for improving system reliability at
lower annual operating costs will only accelerate.
However, each utility must find its own way to introduce CableCure as a
major component of its annual budget. FP&L had years of experience with
CableCure before commencing its partnering relationship with us. We need to
substantially increase the number of customers we have in order to count on
steady annual growth in injection revenues, and in that respect, fiscal
1998 was very successful.
During fiscal 1998, we performed initial projects for 28 new U.S.
customers. In addition, the customers that were small in fiscal 1997 got
bigger in fiscal 1998. In fiscal 1997, our four largest (out of 52)
CableCure customers generated 63% of our total U.S. injection footage.
Those other 48 customers increased their injection footage a combined 20%
in fiscal 1998. As a result, the share of total U.S. injection footage from
our four largest customers was reduced to 47% in fiscal 1998. I expect this
trend to continue, reducing the risks associated with dependency on a few
large customers. And these growing customers, in addition to other
customers we've lined up for initial trials in fiscal 1999, should produce
our next multi-million dollar relationship.
Similar market acceptance is developing in Europe. We believe that our
European customers are only a few years behind the North American market in
embracing CableCure. European CableCure revenues grew over 50% in fiscal
1998. While this market is still small today, we expect to see rapid growth
similar to our experience in the United States over the past four years,
and to date, this work has proven to be very profitable.
4. We Commenced Required Upgrading of Our Information Systems
Like many companies, we have software that will not adequately convert to
handle the Year 2000. We're taking advantage of this situation and will
replace old outdated systems that are no longer adequate to meet the needs
of a much larger and more complex business. Our new enterprise wide
software, utilizing SAP R/3 technology, will be state-of-the-art and will
provide us with a level of detailed information about our operations that
we've never had before. It's the same software many of our utility
customers are implementing. Long term, we plan to integrate our information
technology with our customer's systems.
This project caused us to incur over $350,000 in design and planning costs,
which we expensed in the fourth quarter of fiscal 1998. While the overall
project will ultimately cost about $2.5 million, much of which will be
capitalized, and will not be completed until the third quarter of fiscal
1999, we'll be much more capable of managing the growing complexity of our
expanding business.
WHAT WENT WRONG?
Some decisions do not pay off, and we took some risks in fiscal 1998 that fell
into that category. For example, we expanded our service offerings to the gas
utility industry in fiscal 1998, adding crews and equipment to perform repair
and maintenance services, and to install individual customer services. These
activities represented a substantial change from our successful history of
focusing on large gas main installation projects. In many such cases, we
ultimately found that we were confronted with a choice: obtain a price increase
from the customer or terminate the contract. We took the painful step of
terminating our contracts with our largest gas utility customer, taking great
care to leave the door open to return to work when the customer once again needs
a significant partner for gas main conversions.
Some of our new service offerings did pay off. We successfully injected
CableCure CB fluid into flood soaked network cables in East Grand Forks,
Minnesota. Other customers are looking into CableCure injection trials for
metropolitan feeder cable networks in fiscal 1999. We also performed well on a
new contract for US West
<PAGE>
Communications in Colorado, providing drilling and conventional trenching
services. We'll target such new service offerings in the future very
selectively and carefully.
We also took what seemed to be appropriate steps to take advantage of strong
customer demand in the Southeastern United States during the fourth quarter.
Unfortunately, we underestimated the severity of the El Nino rains and the
accompanying electric storms, which prevented us from working as planned. This
was the first time ever that weather factors had significantly impacted our
ability to work in this region in the fourth quarter. Fortunately, no work was
lost, just deferred, and a dry summer is forecast for the region. We won't
underestimate an El Nino effect again but, fortunately, will probably not have
to worry about a recurrence next year.
WHAT WILL NEXT YEAR BRING?
Our primary focus in fiscal 1999 is going to be improving margins. Although
results for the first quarter of 1999 will still be adversely impacted by
weather and other seasonal factors, by the third quarter, we expect to be
hitting our financial targets. This should be accomplished through a continued
infusion of management talent into our field organization, continued growth in
CableCure injection revenues, and an unwavering focus on the things that will
make our Company successful. We'll continue to focus on our track record in
safety, where we've reported improved results every year this management team
has been in place. We'll maintain our emphasis on training, and we expect that
the added experience of the crews we hired in the past year will produce
improved crew productivity.
We also will not lose sight of our long-term growth targets, expecting to
capitalize on the leverage that our proprietary CableCure technology provides.
We will maintain our investment in CableCure marketing and will continue to
invest in research and engineering efforts to develop improved fluid
technologies and new injection equipment and techniques. For instance, we
recently applied for a patent on a new underground cable splice that should
increase our injection productivity and assist us in increasing the penetration
of CableCure in the feeder cable market.
Most of all, we'll continue to emphasize a teamwork approach, fueled by the
commitment of an outstanding group of dedicated employees. Last year, Company
shareholders recognized the need to reward more individual employees for results
that create value for shareholders, and approved a five year expansion to our
employee stock option plan. The existing senior management group will
appropriately have to wait until profitability is restored in order to
participate in further option grants. However, as promised, we have added a
significant employee group to the option plan. We now have an incentive plan
that includes over 150 salaried employees who are eligible for stock options if
their individual performance objectives are achieved. The resulting heightened
interest in our performance for shareholders is already evident among these
employees.
In summary, as a shareholder myself, I join with the whole management team in
promising our full commitment to achieving our goals for UTILX. The year of
investment is largely behind us. It is time to reap rewards for you, our
shareholders.
Sincerely,
Craig Davies
President & CEO
TRANSMISSION &
DISTRIBUTION WORLD
JULY 1998 EDITION
MINIMIZING CUSTOMER INCONVENIENCE
"Florida Power and Light (FPL), examining its current operations to hold down
operations and maintenance costs, determined that the key to solving the problem
was to use CableCure technology
<PAGE>
and a single source contractor. At the time, underground reliability work
involved three outside contractors and four different crew types. By assigning
all tasks to one contractor who would be responsible, for the first time, for
switching and terminations there would be a benefit of a coordinated and more
efficient process. For customers, a single source contractor would require fewer
workers in backyards and hence, less inconvenience. For FPL the benefits would
include the elimination of bid evaluations, decreased supervision and
inspection, and a reduced accounting load. In its discussions with UTILX, FPL
found that there was a shared goal for both parties involving the desire to
maximize the use of the low-cost CableCure treatment. For FPL, the benefit was
to extend its budget to address twice as much failing cable as it could with
replacement alone. In addition, maximizing injection meant that UTILX could
perform the work twice as fast as it could with its guided-boring services."
ELECTRICAL WORLD
JUNE 1998 EDITION
MIX OF TOOLS IS EFFECTIVE
"The experience at FPL and CEC shows that creative solutions that mix
technological advances such as CableCure with planned and managed maintenance
programs will pay dividends. At both utilities, the use of CableCure fluid
injection technology along with prudent application of failure history
information and wise use of on-site time, have decreased URD (underground
residential distribution) cost, increased URD system reliability and extended
the service life of system components."
IEEE RURAL ELECTRIC
POWER CONFERENCE
ST. LOUIS, MISSOURI
APRIL 27, 1998
"In 1992, Central Electric Cooperative (Oregon) brought in UTILX, a
Washington-based utility contractor that is the exclusive provider of CableCure
fluid, a dielectric enhancement technology that restores water-damaged stranded
cable. CEC lineworkers worked with UTILX crews on several trial projects at
sub-divisions with numerous failures. When cable faults stopped at the treated
sites, CEC decided to expand the use of CableCure fluid and license the
technology from UTILX. Over time, the Coop moved from a reactive to a proactive
mode and developed a systematic plan for improving reliability that maximizes
the use of the CableCure process when it is the most cost-effective option for
the failing cable.
For CEC, this is money well invested. Since CEC's cost to inject a cable is
typically 50 to 75 percent less than the cost to replace, the Coop has improved
system reliability for a fraction of what it would otherwise have to spend."
