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Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________to _______________________
Commission File Number 0-16821
UTILX CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 91-1171716
(State of Incorporation) (I.R.S. Employer Identification Number)
22820 Russell Road (98032)
P. O. Box 97009
Kent, Washington 98064-9709 (253) 395-0200
(Address of Principal Executive Offices) (Registrant's 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 (or for such shorter period that the registrant was
required to file such reports), 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, 1999, 7,431,560 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 $24,617,043.
DOCUMENTS INCORPORATED BY REFERENCE
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, 1999, the close of Registrant's 1999
fiscal year, is incorporated by reference into Part III hereof.
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TABLE OF CONTENTS
ITEM
PART I
1. Business......................................................... 3
2. Properties....................................................... 12
3. Legal Proceedings................................................ 12
4. Submission of Matters to a Vote of Security Holders.............. 13
PART II
5. Market for the Registrant's Common Stock and Related
Stockholder Matters........................................... 13
6. Selected Financial Data.......................................... 14
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 15
7A. Quantitative and Qualitative Disclosures about Market Risk....... 24
8. Financial Statements and Supplementary Data...................... 26
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................... 42
PART III
10. Directors and Executive Officers of the Registrant............... 43
11. Executive Compensation........................................... 43
12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 43
13. Certain Relationships and Related Transactions................... 43
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................... 43
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PART I
ITEM 1. BUSINESS
Forward-Looking Statements
Certain statements within the following description of the business of the
Company and elsewhere in 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, 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 unanticipated events.
General
UTILX/(R)/ Corporation ("UTILX" or the "Company") was incorporated in Delaware
in October 1984. UTILX provides specialty services and products to electric,
telecommunications, natural gas, water, sewer, and other utilities in the United
States and around the world, and drilling equipment to contractors and other
users outside the U.S. The Company's primary business is installing, replacing,
and restoring underground cables and pipes. Installation and replacement
services are provided through the Company's FlowMole/(R)/ and conventional
trenching services. The Company also provides its CableCure/(R) /service to
utility customers to repair or prevent water damage and materially extend the
life of electric and telephone cables. 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. On March 31, 1999, the
Company sold its FlowMole drilling operations and renamed the subsidiary UTILX
Limited.
The Company is currently enhancing its existing technologies and is developing
new technologies in an effort to improve and expand the complementary services
it offers through its nationwide network of operating and service centers.
The FlowMole Drilling Systems
Each of the FlowMole trenchless drilling systems is a self-contained, mobile
unit that can be maneuvered into areas often inaccessible to backhoes. A
FlowMole drilling system is composed of:
. the field power unit, a truck which supplies drilling fluid and hydraulic
and electrical power;
. the drilling unit, consisting of the drill head, drill pipe and steering
controls, which drills tunnels and pulls in cable and pipe;
. the locating equipment, which consists of an electromagnetic position-
monitoring device that receives signals from a transmitter inside the drill
head and identifies the position of the drill head;
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. the spoils removal equipment, when required, which is a truck-mounted
spoils vacuum tank that removes displaced soil and fluid; and
. safety equipment, including a proprietary grounding and alarm system.
The work itself generally consists of job planning, site preparation,
drilling, locating and steering, reaming, utility installation and site
restoration.
Through its research and engineering efforts, the Company has been able to
significantly increase the capabilities of the FlowMole drilling system and
broaden the range of applications for which this use is cost-effective. The
Company has developed upgraded 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,
resulting in greater accuracy and increased efficiency in drilling tunnels.
The FlowMole drilling system offers several benefits over conventional
excavation technologies. In developed communities, underground drilling
minimizes the need for expensive restoration of landscaping and other
improvements, thereby reducing costs and improving customer relations for the
utilities. The self-contained, fully mobile FlowMole drilling system can be
maneuvered into areas often inaccessible to backhoes and other trenching
equipment. The Company's drilling system is powerful and precise and,
consequently, less likely than conventional equipment to damage existing utility
cables and pipes. In addition, UTILX believes the FlowMole drilling system is
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 the FlowMole drilling system to operate in a greater variety of soils
than other competitive equipment.
The Company's technology is not appropriate or cost-effective when replacement
without excavation is possible, where avoidance of surface disruption and
difficulty of access are not factors, and for cables and utilities that can be
installed at very shallow depths, such as those used for cable television and
irrigation systems. The FlowMole drilling system 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 soil.
The CableCure Service
UTILX offers two different CableCure fluids, CableCure/XL and CableCure/CB, to
provide cable restoration services to utilities. The CableCure/XL fluid is a
silicone-based 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.
In September 1991, the Company acquired a worldwide exclusive license from Dow
Corning Corporation ("Dow Corning") to market the CableCure process to
utilities. Dow Corning holds the patents on both the CableCure/XL and CB
fluids. UTILX holds, or has pending, patents on materials and processes
associated with the treatment process. The Company also has exclusive
agreements with electrical component manufacturers for patented or proprietary
injection technology. UTILX 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.
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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. 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 CableCure and
FlowMole services. "Test, Treat or Replace" service provides for the evaluation
of deteriorating cables ("Test") as to whether they are suitable injection
candidates for CableCure fluid ("Treat") or whether the cables should be
replaced using FlowMole service ("Replace") if the cable has been evaluated as
unsuitable for injection.
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. Cities and suburbs rely on an infrastructure 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. These networks were installed as the land was initially developed,
using machinery such as a backhoe or trencher to dig a trench into which cables
and pipes were laid. Over time, surface improvements such as roads, sidewalks,
and landscaping make the use of conventional excavation techniques to repair,
replace, or expand this infrastructure costly and disruptive.
The Company recognized the limitations of traditional excavation methods for
installing, replacing, or repairing utilities in established communities and
developed a proprietary technology to serve this segment of the utility market.
Demand for installation and replacement in developed areas is driven by two
factors:
. Buried pipe and cable eventually degrade and need to be replaced.
. Utility companies in fully developed areas seek to provide expanded
services through the installation of additional telephone lines, the
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 has accepted trenchless technology to
such an extent that it is now specified on certain jobs. In addition, UTILX
believes that more and more utilities are outsourcing this type of work in order
to become more efficient. Such outsourcing is frequently accomplished through
an open and 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
they negotiate business, requiring contractors to offer both trenchless and
traditional trenching capabilities. The Company has expanded its capabilities
to provide trenching and other services to benefit from these trends.
Electric Utilities. The Company's primary focus to date has been the
treatment or replacement of direct-buried electric distribution cable which came
into widespread use in the early 1960s, as utilities responded to
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community pressure to remove or avoid the use of unsightly overhead wires. In
fiscal 1999, 79% of UTILX's total consolidated revenues came from the domestic
electric utility industry. 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. 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 treatment or 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 to replacing the cable and is a preventive treatment to
avoid deterioration. See "The CableCure Service" in Part I, Item 1.
Telecommunications. The Company's second largest market segment in fiscal
1999, comprising 7% of the Company's total consolidated revenue, was the
domestic telecommunications industry. The volume of direct-buried
telecommunications cable exceeds the volume of direct-buried electric cable but
several factors differentiate this industry from the electric utility industry
and serve to reduce the available market for the Company's services. These
factors include lower cable failure rates, generally lower pricing per foot for
installation and replacement projects, and the requirement for contractors to
participate in work that is atypical for the industry. Notwithstanding these
factors, demand exists for installation and replacement of telephone and fiber
cable in developed areas that have a need for additional telecommunications
services. In addition, the expansion of fiber optic and interactive
communication networks has created demand for installation of new telephone
cables. The Company anticipates that substantial demand for 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 UTILX, by
other contractors, or by utility crews.
The Company has grown and expanded in this market segment by offering turnkey
service to telephone distribution and fiber loop providers. During fiscal 1999,
U S West became a major customer with 6% of the Company's total consolidated
revenues. The Company is also marketing CableCure/CB to the telecommunications
industry. See "North America Marketing and Sales" included in Part I, Item 1.
Gas Utilities. The Company's third largest market segment, comprising 5% of
the Company's total consolidated revenue, is the installation of natural gas
pipe in developed but previously unserved areas, where trenchless installation
is generally more cost-effective than excavation. The Company offers full-
service gas pipe installations, including fusion of installed pipe to existing
mains, installation of residential service lines, and pressure testing including
gas-up of the installed main. 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.
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 system or providing
its CableCure services at certain times of the year. In addition, the Company
believes that the regular budgetary cycles of certain of its North American
utility customers tend to concentrate demand for the Company's services during
the third quarter of its fiscal year (the fourth quarter of the calendar year),
although other budgetary factors described below may override this trend in any
given quarter. As a result of these factors, results of 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 2000.
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Other. The Company's services are also used by sewer and water utilities.
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.
North American Marketing and Sales
The Company introduces its CableCure and FlowMole drilling services to
potential customers through intensive sales efforts which consist of
presentations to corporate engineering and operations staff and follow-up sales
calls to district managers responsible for local construction programs. The
Company may also perform small initial trial projects to acquaint first-time
customers with the Company's services. Multiple contacts are generally required
at both corporate and district levels over an extended period of time.
Sales are conducted through East and West regional sales and operations
organizations. Each regional sales organization has three dedicated field sales
representatives as well as operations personnel who conduct sales activities as
part of their general responsibilities. The Company also uses commissioned
sales representatives in those locations or market segments where the use of
Company-employed sales representatives would not be cost effective. Marketing
support is provided to the regional offices by the Company's Kent, Washington
headquarters for marketing communications, public relations and service-line
support.
In fiscal 1999, the Company provided services to 217 customers in North
America. In fiscal 1999, sales to Florida Power & Light Company ("Florida Power
& Light"), Virginia Electric and Power Company, and Alabama Power Company
amounted to 29%, 12% and 8%, respectively, of the Company's total consolidated
revenues. Domestic CableCure services accounted for 25% of the Company's total
consolidated revenues. 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 CableCure and FlowMole
businesses in North America typically provide for termination by the customer
upon short notice. 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, utility installation, repair, and restoration services
utilizing CableCure injection technology by specially-trained Company crews or
subcontractors and FlowMole drilling systems operated by the Company's own
specially-trained crews. By using Company crews and specially-trained
subcontractors, the Company can more easily implement changes in technology,
operating procedures, training, and maintenance and facilitate feedback on the
impact of such changes in the field.
The Company believes that there is a trend in the industry towards requiring
contractors to provide full service installation, replacement, and renovation
capabilities including providing both trenchless and traditional excavation
work, electrical craft work associated with cable installation, and fusion and
pressure testing of gas pipe as options under a single master contract. The
Company has increased its ability to perform these services in order to market
an expanded package of service options to its customers.
Operations in North America are divided into five major regions with 17
operations and service centers that have provided the Company's services to
customers in 34 states and two provinces of Canada since the beginning of fiscal
1999. 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,
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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 seven 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, safety and customer
satisfaction.
As of March 31, 1999, the Company had 127 FlowMole drilling systems 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 45 conventional excavation crews. Such equipment is also
available to the Company on a monthly or other short-term rental basis from a
variety of sources enabling the Company to add equipment to conventional crews
without investing in any equipment purchase or long-term lease. 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. As of March 31, 1999, the Company had 90 drilling and
excavation crews and 41 CableCure crews in operation.
International Operations
The Company's international operations include direct performance of CableCure
services in Western Europe, licensing of CableCure technology in Scandinavia,
South Korea, and Poland, and international sales of FlowMole drilling systems
and spare parts. The European CableCure operations are headquartered in
Rinteln, Germany, which is a branch office of the Company's wholly owned
subsidiary, UTILX Limited, based in Corby, Northamtonshire, England.
International sales of CableCure services accounted for 4% of the Company's
total consolidated revenues, while international sales of drilling equipment
accounted for 3%.
On March 31, 1999, the Company sold its FlowMole drilling business in the
United Kingdom to a customer for cash totalling approximately $601,000. The
Company recorded a gain on sale of approximately $24,000 related to this sale.
The Corby office continues to handle FlowMole parts sales for Europe, Asia, and
South America. For fiscal 2000, the Company has discontinued the sale of its
FlowMole drills in the international marketplace. 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 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.
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Research and Engineering
The Company is engaged in ongoing research to extend the applications for
CableCure technology to new market segments including new cable manufacturing,
telecommunication applications, on site diagnostic testing and metropolitan
network systems. In addition, the Company is aggressively pursuing patents on
new technology to further advance the performance, reliability and cost-
effectiveness of the service. 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,
become subject to the existing license agreement.
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. Engineers also work closely with field crews in research and
engineering efforts. The Company has not depended on outside contractors to any
substantial degree for expertise in any of these disciplines. However, in the
future, the Company may look to leverage some of this intellectual property to
forge alliances with partners who can offer tactical and strategic advantages in
terms of new products and support.
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 flow. The Company issued
purchase orders to a number of manufacturers for new FlowMole drilling systems
that were delivered in fiscal 1998 and 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.
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 several 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 a total of 11
current 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.
Beginning in May 1999, the Company began licensing several of the FlowMole
patents to other companies in the trenchless drilling industry. The Company
does not believe that its competitive position will be jeopardized in any way by
the licensing activity and will continue to look for opportunities to leverage
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proprietary technology, including those covered by UTILX patents, where there is
a clear financial and strategic value to the Company.
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"
and "The Service You Can't See."
In September 1991, the Company purchased the exclusive rights to market the
CableCure process to utility companies and other related assets pursuant to an
Exclusive License and Distribution Agreement with Dow Corning. The agreement
terminates when 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 through the Company's 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.
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 cable
replacement. 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.
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, conventional trenching
contractors are often able to provide lower-priced services where disruption of
the surface is not a significant concern and where the service is performed in
soil containing substantial rock, underground improvements or other similar
obstacles.
Price competition in the market for utility installation services 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
10
<PAGE>
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 the event of
drilling in and disturbing contaminated soil. To date, the Company has not
incurred any material liability under state or federal environmental laws or
regulations as a result of its work in contaminated soil. However, to the
extent that the Company performs services on contaminated sites, it may increase
its exposure to potential liability under such laws and regulations. In
addition, the Company cannot predict the impact on its operations of future
developments, such as the improved capability to detect substances in the
environment, the adoption of new and increasingly strict environmental laws and
regulations, and stricter enforcement of such laws and regulations.
Employees
As of March 31, 1999, worldwide employment of the Company totaled 763
individuals. Of the Company's 747 employees in the United States, 82 were
based in Kent, Washington, and 665 in regional operations and sales centers. A
total of 14 employees were engaged in sales and marketing, 679 in operations, 16
in manufacturing, 5 in research and engineering, and 33 in general and
administrative functions. In Europe, 12 were engaged in engineering and
operations and 4 were engaged in sales, general and administrative functions.
Currently, the Company is a party to collective bargaining agreements covering
approximately 36 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, 1999, 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:
William M. Weisfield (age 57) has been a director of the Company since January
1995, Chairman of the Board since January 1996 and the Company's President and
Chief Executive Officer since November 1998. He was Senior Vice President of
Benaroya Capital Company, a privately held investment company specializing in
development of Pacific Northwest real estate and other investments, from January
1994 to December 1998. Mr. Weisfield previously served as Chief Operating
Officer for Robbins Company, an underground tunnel boring manufacturing company,
from November 1992 to December 1993. Mr. Weisfield also acts as a director of
Lindal Cedar Homes, Inc., Lifespan Biosciences, Inc. and the Downtown Seattle
Association, and is the president of the Seattle Rotary Club.
Darla Vivit Norris (age 49) has been Senior Vice President, Chief Financial
Officer and Treasurer since December 1998. Previously she was Vice President,
Finance of Cable Plus, a privately held company which owned and operated cable
television and telephone systems. Other positions include Vice President, Chief
Financial Officer of Cornerstone Columbia Development Company, a real estate
joint venture between
11
<PAGE>
Weyerhaeuser and Portland General Electric, and Vice President, Investment
Manager of Weyerhaeuser Venture Company, a subsidiary of Weyerhaeuser Real
Estate Company.
James E. Bartholomew (age 44) has been Senior Vice President/Eastern Region
since December 1998, 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.
Scott E. Reynolds (age 47) has been Senior Vice President/Western Region since
December 1998, Vice President/Western Region since February 1996 and was
Director of the 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.
Glen J. Bertini (age 41) has been Vice President, Business Development since
December 1998. From 1991 to 1998, he was the Company's Director of CableCure.
Previously, he was employed at Dow Corning from 1980 to 1991 as a Project
Engineer.
George T. Taylor (age 35) has been Vice President, Corporate Operations since
December 1998. He was promoted to Acting Vice President of Florida Operations
in June 1998 through December 1998. Mr. Taylor joined the Company in April 1997
as Manager of Operations and Materials and was promoted to Director of
Operations and Materials in June 1997. Previously, he worked as Materials
Manager for Augat Communications Products and for the Boeing Company.
Phyllis A. Boyd (age 39) has been Controller and Chief Accounting Officer
since February 1999. She was Controller of Lease Crutcher Lewis, a Seattle
based construction company, from 1990 to 1998. Other positions include Senior
Staff Accountant for the Hillhaven Corporation, a provider of retirement and
healthcare facilities, from 1985 to 1988, and Senior Staff Accountant with
Deloitte, Haskins and Sells, CPAs from 1982 to 1985.
ITEM 2. PROPERTIES
The Company leased a new corporate headquarters and manufacturing facility of
approximately 24,000 square feet located in Kent, Washington, for a ten year
period commencing in April 1998. In addition, the Company leases approximately
409,000 total square feet of space for operations and outside storage purposes
in Alabama, Colorado, Florida, Illinois, Maryland, Minnesota, New Jersey, North
Carolina, Texas, Oklahoma and Virginia, 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. For lease terms greater than one year, the Company attempts
to negotiate the right to terminate the lease early in exchange for the payment
of a penalty.
ITEM 3. LEGAL PROCEEDINGS
In December 1998, the Company executed a settlement agreement with a
subcontractor. The Company will pay the subcontractor $1,000,000 in four equal
installments over two years, of which the first payment occurred in December
1998. The subcontractor agreed to dismiss an ongoing dispute over the amount to
be paid to the contractor for injection services performed subsequent to April
1, 1997, and to desist from competing against the Company for seven years. The
Company had previously accrued $362,000 for this dispute and realized expense of
$381,000 in fiscal 1999.
The Company is involved in litigation matters, both as plaintiff and as
defendant, arising in the ordinary course of 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.
12
<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, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Common Stock is traded on the Nasdaq National Market under the symbol
"UTLX." The following table sets forth the high and low sale prices for the
Common Stock as quoted on the Nasdaq National Market during the quarters
indicated. The closing price for the Common Stock on June 2, 1999 as reported on
the Nasdaq National Market was $3.3125.
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
1999 Fiscal Year
----------------
1st Quarter Ending June 30, 1998......................... $5 3/4 4 1/8
2nd Quarter Ending September 30, 1998.................... 5 3 1/4
3rd Quarter Ending December 31, 1998..................... 3 7/16 1 7/16
4th Quarter Ending March 31, 1999........................ 3 1/2 1 1/2
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
</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, 1999, the number of stockholders of record of Common Stock was 606,
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.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Financial Summary:
<TABLE>
<CAPTION>
For the Years Ended March 31,
----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(In thousands except earnings per share)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues........................................... $78,866 $82,464 $64,875 $48,993 $49,717
Gross profit....................................... 3,646 7,346 10,352 6,408 6,744
Operating income (loss)......................... (6,123) (1,568) 2,058 (2,680) (2,531)
Income (loss) before income taxes............... (6,678) (2,117) 2,022 (2,589) (2,821)
Net income (loss)............................... (6,678) (2,118) 2,968 (4,489) (2,022)
Earnings (loss) per share:
Basic............................................ (.90) ($.29) $ 0.41 ($0.62) ($0.28)
Diluted.......................................... (.90) ($.29) $ 0.41 ($0.62) ($0.28)
Weighted average shares outstanding:
Basic............................................ 7,420 7,214 7,180 7,185 7,172
Diluted.......................................... 7,420 7,214 7,303 7,185 7,172
</TABLE>
<TABLE>
<CAPTION>
As of March 31,
----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital.................................... $ 8,262 $14,252 $16,560 $13,349 $18,073
Total assets....................................... 38,575 43,479 35,912 30,624 35,348
Capital lease obligations, net of current portion.. 2,210 2,224
Common stockholders' equity........................ 18,109 24,831 26,741 23,456 28,070
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of results 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 Factors 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)
--------------------------- -------------------------------
1999 1998 1997 1999-1998 1998-1997
-------- -------- ------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues............................... 100.0% 100.0% 100.0% (4.4%) 27.1%
Cost of revenues....................... 95.4 91.1 84.0 .1 37.8
----- ----- ----- --------- ---------
Gross profit........................... 4.6 8.9 16.0 (50.4) (29.0)
----- ----- ----- --------- ---------
Operating expenses:
Selling, general and administrative.. 11.6 10.0 11.7 10.6 8.5
Research and engineering............. .8 .8 1.1 (2.4) (3.6)
----- ----- ----- --------- ---------
Total operating expenses............. 12.4 10.8 12.8 9.6 7.5
----- ----- ----- --------- ---------
Operating income (loss)................ (7.8) (1.9) 3.2 290.5 (176.2)
Other expense, net..................... (.7) (.7) (.1) 1.1 1,625.0
----- ----- ----- --------- ---------
Income (loss) before income taxes...... (8.5) (2.6) 3.1 215.4 (204.7)
Income tax benefit..................... (.0) (.0) (1.5) (100.0) 100.0
----- ----- ----- --------- ---------
Net income (loss)...................... (8.5%) (2.6%) 4.6% 215.3% (171.4%)
===== ===== ===== ========= =========
</TABLE>
Fiscal Year 1999 Compared to Fiscal Year 1998
Revenues. Consolidated revenues decreased approximately 4% due to a 5%
decrease in revenues from North American services partially offset by a 6%
increase in revenues from international operations.
Total revenues from North American operations were $72.3 million in fiscal
1999. Revenues from electric utilities, telecommunications companies, and gas
utilities constituted 87%, 7% and 5%, respectively of such fiscal 1999 revenues.
Revenues from electric utilities decreased substantially in fiscal 1999,
primarily from the Company's largest customer, Florida Power & Light. Revenues
from this customer dropped from $25.6 million in fiscal 1998 to $22.8 million in
fiscal 1999. Revenues from telecommunications companies increased in fiscal 1999
due primarily to expansion of service capabilities to existing customers.
Revenues from North American installation and replacement services were $52.4
million in fiscal 1999 compared to $58.3 million in fiscal 1998. Decreased
replacement services for Florida Power & Light accounted for most of this
decrease. Accompanying this decline, the amount of cable installation or
replacement dropped nationwide from 793 miles in 1998 to 695 miles in 1999.
Early in the year, the Company purchased new
15
<PAGE>
equipment to add FlowMole drilling systems to its North American operations in
support of an anticipated increase in work from Florida Power and Light. Such
work was curtailed in the second and third quarters of the year. In January
1999, the Company resumed work under a new three year contract with this
customer. The total number of drilling systems increased nationwide from 118 at
April 1, 1998 to 127 at March 31, 1999. The Company also increased its capacity
to perform traditional trenching services, especially for the telecommunications
industry.
The decrease in the revenues from North American installation and replacement
services were partially offset by a 9% increase in revenues from North American
CableCure injection services. Although injection services for Florida Power and
Light were down from the prior year, levels from other customers were up. Total
cable injected in fiscal 1999 increased to 514 miles compared to 473 miles in
1998.
Revenue from the Company's international operations increased to $6.5 million
in fiscal 1999 compared to $6.2 million in fiscal 1998. Higher revenues from
CableCure injection services in Europe were partially offset by lower revenues
from sales of FlowMole drilling systems to international customers and drilling
operations in the United Kingdom. Demand for CableCure injection services
increased as European utilities increased their acceptance of the CableCure
technology and the Company increased its marketing efforts. Sales opportunities
to many customers in Asia continued to be limited by weak economic conditions.
At the end of March 1999, the Company sold its U.K. drilling operation and has
discontinued the sale of drilling systems in fiscal 2000.
Gross Profit. Gross profit, as a percentage of revenues, decreased to 5% of
total revenues in fiscal 1999 compared to 9% of total revenues in fiscal 1998.
During the second and third quarters of fiscal 1999, gross profit decreased
primarily due to the curtailment of work from Florida Power and Light. During
this time, the Company was able to redeploy certain crews; however, in
anticipation of the resumption of work, overhead expenses in the Florida
operations centers were maintained. In the fourth quarter of the year, work
resumed for Florida Power and Light under a new three year contract. The slow
startup under this contract continued to have a negative impact on gross margins
in the fourth quarter. Contract pricing terms combined with difficult soils
conditions on installation and replacement services for another major customer
also had a negative effect on gross margin; however, more favorable contract
terms with this customer were negotiated in the fourth quarter.
During 1999, the Company increased the reserves for inventory obsolescence and
for insurance claims from prior years. The Company also accrued a charge of
approximately $381,000 for a settlement of a legal dispute involving the pricing
of services from a subcontractor.
The Company experienced a higher gross profit as a percentage of revenue from
its international operations in fiscal 1999, increasing from 32% in fiscal 1998
to 36% in fiscal 1999. The Company earned higher margins on the equipment sales
it completed in fiscal 1999. Furthermore, 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.
Operating Expenses. The Company's operating expenses increased 10% in fiscal
1999 compared to fiscal 1998. Selling, general and administrative expenses
increased 11% in fiscal 1999, primarily due to one-time charges associated with
severance benefits for terminated employees and expenses related to the
settlement of a legal dispute with a subcontractor. Sales and marketing expenses
also increased as the Company increased its resources to pursue further growth
opportunities. Research and engineering expenses decreased 2.4% compared to
fiscal 1999. A lower level of spending on engineering activities associated with
the Company's drilling systems was the primary cause of the decrease.
Operating Income. As a result of the foregoing factors, the Company reported
an operating loss of $6,123,000 in fiscal 1999 compared to an operating loss of
$1,568,000 in fiscal 1998.
Other Income and Expense. Net interest expense was $583,000 in fiscal 1999,
compared to net interest expense of $444,000 in fiscal 1998. The increase was
primarily a result of higher borrowing costs, higher average
16
<PAGE>
usage of the Company's line of credit, and interest expenses on increased
capital leases used to finance some of the Company's purchases of new drilling
equipment in fiscal 1999.
Income Tax Benefit. The Company had no Federal or state income tax provision
related to United States operations in fiscal 1999 due to realizing the benefits
of net operating loss carryforwards and other net deferred tax assets. The
Company did not record any income tax benefits against its pretax loss in fiscal
1999, because the Company was in a loss carryforward position at the beginning
of fiscal 1999, and continues to provide a valuation allowance against the full
amount of its deferred tax assets as of March 31, 1999. On an ongoing basis, the
Company would typically expect an effective income tax rate of approximately 37%
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 $6,678,000 in fiscal 1999 compared to a net loss of $2,118,000 in fiscal
1998.
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 primarily due 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 contract with its
largest gas utility customer, Washington Gas Light Company, which accounted for
10% of consolidated revenues in fiscal 1998.
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 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. Accordingly, the Company substantially
increased 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 with 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. Unusually severe rains and thunderstorms in the Southeastern
United States, 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.
17
<PAGE>
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. Therefore, the Company was 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, and 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.
In the fourth quarter of fiscal 1998, the Company concentrated approximately
three-fourths of its crews in the Southeastern United States. The severe rains
and thunderstorms in the region attributed to "El Nino" adversely affected the
crews' ability to work. Accordingly, most of those crews 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 write down of inventories of parts held for sale, which
further reduced gross profit by approximately $985,000.
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 which was 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 $1,568,000 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 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
18
<PAGE>
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.
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.
Liquidity and Capital Resources
Since its initial public offering, the Company has primarily financed its
operations through cash flow from operations, cash reserves, leases and periodic
use of its line of credit.
The Company's cash and cash equivalents totaled $1,580,000 at March 31, 1999.
During fiscal 1999, the Company incurred capital expenditures of approximately
$3,305,000 primarily for upgrades and additions to its fleet of drilling
equipment, purchases of conventional and other equipment required to respond to
its customers requests for expanded service capabilities, and costs associated
with the development and installation of a new enterprise-wide information
system. The Company expects to continue the use of its revolving credit
facility 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 $2.6 million in capital expenditures in
fiscal 2000, primarily for upgrades to its fleet of drilling equipment,
purchases of conventional and other equipment in order to respond to its
customers' requests for expanded service capabilities, and miscellaneous
upgrades to its computer hardware and software.
The Company relies on cash flow from operations and lease financing, in
addition to its revolving credit facility, to fund operations. The Company
believes that its revolving credit facility and leasing arrangements, 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 such facilities 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, 1999, the Company had an available bank line of credit of
$7,500,000, and an outstanding balance on the facility of $5,538,000. On April
23, 1999, the Company closed a new, two year, revolving credit facility with
FINOVA Capital Corporation for $10,000,000. The facility is secured primarily
by the assets of the Company. See also Note 8 of Notes to Consolidated
Financial Statements included in Part II, item 8.
Review and Outlook
FlowMole and Related Services. The Company currently owns equipment to field
127 FlowMole systems and 45 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 acquire significant amounts of conventional trenching
equipment in fiscal 2000, but may also use short-term rentals to supplement its
equipment needs until it chooses to acquire new or used equipment of its own.
19
<PAGE>
The Company currently plans to increase its personnel to add additional
installation and replacement capabilities in fiscal 2000. 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, permitting and other work
difficulty determinants. See also the discussion under Utilities' Budgetary
Considerations, Competition and Seasonal Factors included under "Important Risk
Factors Regarding Forward-Looking Statements," below.
CableCure Services. The Company expects a continuation of the trend towards
increased customer acceptance of the CableCure process aided by a new 20-year
warranty, sales incentive structure and increased marketing. 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 seven largest CableCure
customers account for over 60% of consolidated CableCure revenues. The Company
expects to see increased volumes from new customers in fiscal 2000 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 Utilities'
Budgetary Considerations, Competition, Seasonal Factors and Dow Corning
Corporation included under "Important Risk Factors Regarding Forward-Looking
Statements," below.
International Operations. The Company intends to emphasize its CableCure
service in future international operations. Although it continues to support
customers with the sale of spare parts, the Company has discontinued the sales
of new drilling equipment overseas for fiscal 2000.
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 $2,775,000 in fiscal 1999 and $1,750,000 in fiscal 1998. 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.
The Company operated five drilling crews in the United Kingdom in fiscal 1999
and 1998. Revenues from drilling operations in the United Kingdom were 25% and
27% of revenue from international operations in fiscal 1999 and fiscal 1998,
respectively. On March 31, 1999, the Company sold its drilling operation in the
U.K. to a customer for cash totaling approximately $601,000. The Company
recorded a gain on sale of approximately $24,000 related to this sale. The
Company will maintain spare parts sales to Europe, Asia and South America. Spare
parts sales accounted for 17% and 32% of revenue from international operations
in fiscal 1999 and fiscal 1998, respectively.
Operating Expenses. The Company anticipates that its current staffing levels
can support the planned growth in the Company's operations for fiscal 2000, and
accordingly expects operating expenses to remain relatively stable in fiscal
2000.
The Company has begun contacting its major vendors and customers to obtain
their assurance that systems affecting the Company are Year 2000 compliant. 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 1999 levels if the projections for
increasing levels of CableCure revenues are achieved. In addition, based on
historical results and laboratory tests, a new 20 year warranty to be
20
<PAGE>
offered to customers in fiscal 2000 is not expected to increase the warranty
expense associated with CableCure. See Note 14 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 2000, capital spending
will emphasize the upgrading of existing field power units to support existing
drills units, the purchase of additional conventional equipment, such as
backhoes, to support customer requirements for increased turnkey capabilities
and the continued upgrade of computer hardware and software.
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 2000.
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, siting of power production facilities, reductions in new housing
starts or electric utility revenues due to mild weather, and general economic
downturns have affected the ability of some of the Company's utility customers
to sustain their cable replacement or other maintenance programs. This has had
an adverse impact on the Company's revenues and profits. Although the Company
has broadened its customer base, one particular customer generates approximately
30% of the Company's consolidated revenues, and seven customers generate over
60% of consolidated 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 subject the Company's revenues and profits to
substantial volatility.
Competition. The Company has experienced a long-term trend of declining prices
for trenchless drilling 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. These trends are expected to continue and the
Company cannot predict the ultimate duration or the magnitude of these
decreases.
Seasonal Factors. Weather and other seasonal factors may cause a decrease in
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 had a severe
impact on 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
21
<PAGE>
factors, results of operations in any given fiscal quarter are not necessarily
indicative of results in any other fiscal quarter.
Management of 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. To
the extent that the Company is unable to manage its growth efficiently and
effectively, or is unable to attract and retain additional qualified management
personnel, there could be a material adverse effect on the Company's financial
condition.
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.
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, the German Deutschmark and the Euro. 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.
Year 2000 Risk Factors. Significant uncertainty exists concerning the
potential costs and effects associated with Year 2000 compliance. Any Year 2000
compliance problem of either the Company or its major vendors and customers
could have a material adverse effect on the Company's financial condition,
results of operations and cash flows.
Year 2000 Data Conversion. The year 2000 issue is the result of computer
programs having been written using two digits, rather than four, to define the
applicable year. Any of the Company's computers, computer programs,
manufacturing and administration equipment or construction equipment used by its
crews that have date-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. If any of the Company's systems or
equipment that have date-sensitive software use only two digits, system failures
or miscalculations may result causing disruptions of operations, including,
among other things, a temporary inability to process transactions with third
parties or engage in similar normal business activities.
During 1997, the Company initiated a project to address the Year 2000 issue
that encompasses operating and administrative areas of the Company. In addition,
executive management regularly monitors the status of the Company's Year 2000
remediation plans. The process includes an assessment of issues and development
of remediation plans, where necessary, as they relate to internally used
software, computer hardware, and use of computer applications in the Company's
processes and products. In addition, the Company is engaged in assessing the
Year 2000 issue with significant customers and suppliers.
Internal Infrastructure. The Company has determined that its propriety
equipment used by FlowMole and CableCure crews does not rely on date-sensitive
software. The Company believes that it has identified
22
<PAGE>
substantially all of the major computers, software applications, and related
equipment used in connection with is internal operations that must be modified,
upgraded, or replaced to minimize the possibility of a material disruption to
its business. The Company has completed the process of replacing systems that
have been identified as adversely affected. On November 2, 1998, the Company
converted its enterprise-wide information systems to newly installed software
certified by the vendor to be Year 2000 compliant.
Systems Other Than Information Technology Systems. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, photocopiers, telephone switches, security systems, elevators, and
other common devices may be affected by the Year 2000 problem. The Company is
currently assessing the potential effect of, and costs of remediating, the Year
2000 problem on its office and facilities equipment. The Company estimates the
total cost to the Company of completing any required modifications, upgrades, or
replacements of these other internal systems will not have a material adverse
effect on the Company's business or results of operations. This estimate is
being monitored and will be revised as additional information becomes available.
Customers. The Company is preparing to implement a communications plan with
its customers to attempt to identify and resolve, if possible, issues associated
with the Year 2000. If the Company's customers are unable to resolve Year 2000
issues, those customers could have difficulty preparing new work packages for
issuance to the Company or approving and paying invoices for the Company's
services. The Company's revenues and cash flows from operations could be
severely affected as a result. The Company's customers primarily consist of
large utility companies who are expending substantial resources to solve Year
2000 problems. However, there can be no assurance that the Company will be able
to determine if its customers have Year 2000 problems that will affect the
Company. Also, even if such problems are identified, the Company may not be able
to influence its customers to prioritize a timely solution to Year 2000 problems
that are identified. Any failure of customers to resolve Year 2000 issues in a
timely manner could have a material adverse effect on the Company's business,
financial condition, cash flows, and results of operations.
Suppliers. The Company has initiated communications with third party suppliers
of the products and financial services used, operated, or maintained by the
Company to identify and, to the extent possible, to resolve issues involving the
Year 2000 problem. The Company believes that its major suppliers are adequately
addressing their Year 2000 exposure. However, the Company has limited or no
control over the actions of these third party suppliers. Thus, while the Company
expects that it will be able to resolve any significant Year 2000 problems with
these systems before the occurrence of a material disruption to the business of
the Company or any of its customers, any failure of these third parties to
resolve Year 2000 problems with their systems in a timely manner could have a
material adverse effect on the Company's business, financial condition, cash
flows and results of operations.
Most Likely Consequences of Year 2000 Problems. The Company expects to
identify and resolve all Year 2000 problems that could materially adversely
affect its business operations. However, management believes that it is not
possible to determine with complete certainty that all Year 2000 problems
affecting the Company have been identified or corrected. The number of devices
that could be affected and the interactions among these devices are simply too
numerous. In addition, one cannot accurately predict how many Year 2000 problem-
related failures will occur or the severity, duration, or financial consequences
of potential failures. As a result, management expects that the Company could
likely suffer the following consequences:
1. a significant number of operational inconveniences and inefficiencies for
the Company and its clients that may divert management's time and
attention and financial and human resources from its ordinary business
activities; and
2. a lesser number of serious system failures that may require significant
efforts by the Company's customers to prevent or alleviate material
business disruptions.
Contingency Plans. The Company is currently developing contingency plans to be
implemented as part of its efforts to identify and correct Year 2000 problems
affecting its customers or major vendors. The Company
23
<PAGE>
expects to complete its contingency plans by September 30, 1999. These plans
could include increased work hours for Company personnel or use of contract
personnel to provide manual workaround solutions for customer work release
systems or invoice approval processes, and similar approaches. If the Company is
required to implement any of these contingency plans, it could have a material
adverse effect on the Company's financial condition and results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Company is subject to the risk of fluctuating interest rates in the normal
course of business, primarily as a result of its revolving credit facility which
bears interest at variable rates. See Note 8 to the consolidated financial
statements for information regarding the contractual interest rates of the
Company's debt.
The Company uses the U.S. Dollar as its functional currency, except for its
European operations. The assets and liabilities of the Company's European
operations are translated into U.S. Dollars at exchange rates in effect at the
balance sheet date. Income and expense items are translated at the average
exchange rates prevailing during the period. Aggregate translation gains and
losses included in the determination of net income have not been material.
24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of UTILX Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income, stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of UTILX Corporation and its subsidiaries (the "Company") at March 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended March 31, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Seattle, Washington
May 18, 1999
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
UTILX CORPORATION
CONSOLIDATED BALANCE SHEET
March 31, 1999 and 1998
(In thousands, except shares)
<TABLE>
<CAPTION>
ASSETS
1999 1998
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................ $ 1,580 $ 528
Accounts receivable, trade............................................... 16,301 19,720
Materials, supplies and inventories...................................... 6,941 8,839
Income taxes receivable.................................................. 191 433
Prepaid expenses and other............................................... 533 284
------- -------
Total current assets................................................... 25,546 29,804
Equipment and improvements, net............................................. 12,678 13,091
Other assets, net........................................................... 351 584
------- -------
Total assets................................................ $38,575 $43,479
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank..................................................... $ 5,538 $ 5,245
Current portion of capital lease obligations............................. 1,135 839
Accounts payable......................................................... 5,038 3,993
Other current liabilities................................................ 5,573 5,475
------- -------
Total current liabilities.............................................. 17,284 15,552
Capital lease obligations, net of current portion........................... 2,210 2,224
Other long term liabilities................................................. 972 872
------- -------
Total liabilities..................................................... 20,466 18,648
------- -------
Commitments and Contingencies
Stockholders' equity:
Common stock, $0.01 par value
(authorized 25,000,000 shares, 7,425,560 and 7,407,760 shares issued
and outstanding, respectively)......................................... 74 74
Additional paid-in capital............................................... 18,521 18,469
Retained earnings........................................................ 112 6,790
Cumulative foreign currency translation adjustment....................... (598) (502)
------- -------
Total stockholders' equity............................................. 18,109 24,831
------- -------
Total liabilities and stockholders' equity........................... $38,575 $43,479
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
UTILX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
for the years ended March 31, 1999, 1998 and 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Revenues:
Unrelated customers...................... $78,693 $81,574 $58,011
Related parties.......................... 173 890 6,864
------- ------- -------
Total revenues......................... 78,866 82,464 64,875
Cost of revenues............................ 75,220 75,118 54,523
------- ------- -------
Gross profit............................. 3,646 7,346 10,352
------- ------- -------
Operating expenses:
Selling, general and administrative...... 9,113 8,242 7,594
Research and engineering................. 656 672 700
------- ------- -------
Total operating expenses............... 9,769 8,914 8,294
------- ------- -------
Operating income (loss)..................... (6,123) (1,568) 2,058
------- ------- -------
Other income (expense):
Interest income (expense), net........... (583) (444) 24
Other income (expense), net.............. 28 (105) (60)
------- ------- -------
Total.................................. (555) (549) (36)
------- ------- -------
Income (loss) before income taxes........... (6,678) (2,117) 2,022
Income tax expense (benefit)................ 0 1 (946)
------- ------- -------
Net income (loss)........................... $(6,678) $(2,118) $ 2,968
======= ======= =======
Earnings (loss) per share:
Basic.................................... (.90) $(.29) $.41
Diluted.................................. (.90) $(.29) $.41
Weighted average number of shares:
Basic.................................... 7,420 7,214 7,180
Diluted.................................. 7,420 7,214 7,303
Calculation of Comprehensive Income (loss)
Net income (loss)........................ $(6,678) $(2,118) $ 2,968
Change in cumulative foreign currency
translation adjustment, net......... (96) 60 253
------- ------- -------
Comprehensive income (loss)................. $(6,774) $(2,058) $ 3,221
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
UTILX CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended March 31, 1999, 1998 and 1997
(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, 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
compensation 24
Cancellation of nonvested
Restricted Stock (15,778) (49) 49
Change in cumulative foreign
currency translation adjustment 253
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)
Stock options exercised 17,800 52
Change in cumulative foreign
currency translation adjustment (96)
Net loss (6,678)
--------- --- ---- ------- ------- ---- -----
Balance, March 31, 1999 7,425,560 $74 $ 0 $18,521 $ 112 $ 0 $(598)
========= === ==== ======= ======= ==== =====
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
UTILX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended March 31, 1999, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................... $(6,678) $(2,118) $ 2,968
------- ------- -------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 5,152 4,441 3,770
Deferred income taxes............................ 77
Other non-cash expenses (income), net............ (152) 123 (36)
Changes in:
Accounts receivable, trade..................... 3,390 (3,825) (5,141)
Materials, supplies and inventories............ 1,878 (1,108) 509
Prepaid expenses and other..................... (251) (108) 40
Other assets................................... (8) (104) (16)
Income taxes receivable, net................... 239 (39) 550
Accounts payable............................... 1,045 258 1,808
Accrued liabilities............................ 1,450 680 1,698
------- ------- -------
Total adjustments................................... 12,743 395 3,182
------- ------- -------
Net cash provided by (used in)
operating activities............................ 6,065 (1,723) 6,150
------- ------- -------
INVESTING ACTIVITIES:
Cost of additions to equipment...................... (3,305) (4,438) (3,848)
Proceeds from sale of equipment..................... 269 5 115
------- ------- -------
Net cash used in investing
activities...................................... (3,036) (4,433) (3,733)
------- ------- -------
FINANCING ACTIVITIES:
Net borrowing on note payable to bank............... 293 4,260 (1,515)
Net increase (decrease) in book overdraft........... (1,213) 1,213
Issuance of Common Stock............................ 52 146 41
Payments on Capital Leases.......................... (1,091) (434)
Repurchase of Common Stock.......................... 0 (1) (1)
------- ------- -------
Net cash provided by (used in)
financing activities............................ (1,959) 5,184 (1,475)
------- ------- -------
EFFECT ON CASH FLOWS OF
FOREIGN CURRENCY TRANSACTIONS......................... (18) 10 53
------- ------- -------
Net increase (decrease) in cash and cash
equivalents...................................... 1,052 (962) 995
CASH AND CASH EQUIVALENTS
Beginning of period................................. 528 1,490 495
------- ------- -------
End of period....................................... $ 1,580 $ 528 $ 1,490
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
UTILX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Operations
UTILX/(R)/ 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, UTILX 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.
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 quality credit
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.
30
<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 restoration 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.
31
<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 1999
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. Such sales amounted to approximately $22,752,000 (29% of
consolidated revenues), $25,614,000 (31% of consolidated revenues) and
$11,159,000 (17% of consolidated revenues) for fiscal 1999, 1998 and 1997,
respectively. Amounts due from Florida Power & Light for services were
approximately $1,712,000 and $11,869,000 at March 31, 1999 and 1998,
respectively.
The Company also sells its services to Washington Gas Light Company ("Washington
Gas"). In fiscal 1998 and 1997, such sales amounted to approximately $8,535,000
(10% of consolidated revenues) and $7,916,000 (12% of consolidated revenues),
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 $173,000, $890,000 and $480,000 in fiscal 1999, 1998
and 1997, respectively. No amounts were due from Puget Sound Energy, Inc. at
March 31, 1999 and 1998.
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"). Sales to Virginia Power in
fiscal 1997 amounted to approximately $7,847,000 (12% of consolidated revenues).
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.
In May 1998, the Company moved into a new corporate headquarters pursuant to a
ten year lease. One of the Company's directors was an executive officer of the
company that owns the building. See Note 11.
NOTE 3 -- ACCOUNTS RECEIVABLE
Accounts receivable, trade at March 31, consist of the following:
<TABLE>
<CAPTION>
1999 1998
------- -------
(In thousands)
<S> <C> <C>
North American customers:
Completed work not yet billed...................... $ 5,825 $ 7,299
Billed but uncollected............................. 9,332 11,527
International customers............................... 2,652 1,349
Less allowance for doubtful accounts.................. (1,508) (455)
------- -------
Total $16,301 $19,720
======= =======
</TABLE>
32
<PAGE>
NOTE 4 -- INCOME TAXES
The components of income tax expense (benefit) were:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- -----
(In thousands)
<S> <C> <C> <C>
Current
Federal and state......... $0 $1 $(827)
Foreign................... 0 0 (119)
-- -- -----
0 1 (946)
Deferred
Federal and state......... 0 0 0
-- -- -----
Total $0 $1 $(946)
== == =====
</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>
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Income (loss) before income taxes....................... $(6,678) $(2,117) $ 2,022
------- ------- -------
Income tax expense (benefit) at federal statutory rate.. $(2,271) $ (720) $ 687
State income taxes net of federal tax effect............ 0 (78) 60
Tax effect of nondeductible expenses.................... 314 323 241
Change in valuation allowance........................... 1,938 522 (1,915)
Other................................................... 19 (46) (19)
------- ------- -------
Total $ 0 $ 1 $ (946)
======= ======= =======
</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
maintains a valuation allowance against the full amount of its net deferred tax
assets as of March 31, 1999 and 1998.
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 commenced a new examination of the Company's
amended returns for fiscal 1991 through 1995. The Internal Revenue service
completed its examination of these amended returns in December 1998. As a
result, income tax refunds of approximately $177,000, including a refund related
to loss carryback from fiscal 1996, were received in March 1999. The Company
has agreed to the final examiner's report.
33
<PAGE>
The computation of the net deferred tax asset (liability) at March 31, is as
follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Accruals for claims and expenses not currently deductible.......... $ 939 $ 912
Inventory reserves, net............................................ 781 327
Accounts receivable reserve, net................................... 71 80
Net operating loss carryforwards (expiring through fiscal 2019).... 2,033 502
Other............................................................ 49 52
-------- --------
Total deferred tax assets........................................ $ 3,873 $ 1,873
======== ========
Current............................................................ $ 1,791 $ 1,319
Long-term.......................................................... 2,082 554
-------- --------
$ 3,873 $ 1,873
======== ========
Deferred tax liabilities:
Basis difference for equipment and improvements.................... $ (594) $ (518)
Other.............................................................. (133) (147)
-------- --------
Total deferred tax liabilities..................................... $ (727) $ (665)
======== ========
Valuation allowance................................................. $ (3,146) $ (1,208)
======== ========
</TABLE>
NOTE 5 -- MATERIALS, SUPPLIES AND INVENTORIES
Materials, supplies and inventories, at March 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Raw materials and spare parts........................................ $ 8,377 $ 8,810
Work in process...................................................... 26 684
Finished goods....................................................... 0 116
Less allowance for obsolete or overstocked inventory................. (1,462) (771)
-------- --------
Total............................................................... $ 6,941 $ 8,839
======== ========
</TABLE>
NOTE 6 -- EQUIPMENT AND IMPROVEMENTS
Equipment and improvements, at March 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Machinery and equipment........................................... $ 32,017 $ 33,595
Equipment under capital lease..................................... 4,866 3,533
Leasehold improvements............................................ 366 209
Furniture and fixtures............................................ 305 498
Construction in progress, equipment............................... 0 384
Computer software under development............................... 286 371
-------- --------
37,840 38,590
Less accumulated depreciation and amortization.................... (25,162) (25,499)
-------- --------
Total........................................................... $ 12,678 $ 13,091
======== ========
</TABLE>
34
<PAGE>
Accumulated amortization related to equipment under capital leases was $915,000
and $331,000 at March 31, 1999 and 1998, respectively.
Repairs and maintenance expenses for fiscal 1999, 1998 and 1997 were
approximately $1,616,000, $1,656,000, and $1,391,000, respectively.
NOTE 7 -- OTHER LIABILITIES
Other current liabilities, at March 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Accrued payroll and related costs........................ $1,858 $2,693
Book overdraft........................................... 0 1,213
Accrued sales tax........................................ 223 413
Accrued insurance, net of prepayments.................... 1,988 716
Other.................................................... 1,504 440
------ ------
Total................................................... $5,573 $5,475
====== ======
</TABLE>
Other long-term liabilities, at March 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Accrued warranty.......................................... $ 815 $ 700
Other..................................................... 157 172
------ ------
Total.................................................. $ 972 $ 872
====== ======
</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 had a committed credit facility of $7,500,000 with Seafirst National
Bank of Washington ("Seafirst"), which was replaced in April 1999. At March 31,
1999 and 1998, the Company had an outstanding balance of $5,538,000 and
$5,245,000, respectively, under this facility at a weighted average borrowing
rate of 9.75% and 7.69%, respectively.
On April 23, 1999, this facility was replaced with a $10,000,000, two year,
revolving credit facility from FINOVA Capital Corporation ("FINOVA").
Outstanding borrowings under the facility are not to exceed the lesser of
$10,000,000 or the sum of a) 85% of eligible accounts receivable, plus, b) an
amount not to exceed the lesser of 50% of the auction value of the Company's
equipment or $4,000,000, less, c) any loan reserves. Upon funding of this
facility the Company had $10,000,000 available for use. The FINOVA facility is
secured by the Company's assets. The credit agreement requires that the Company
maintain certain financial covenants including requirements to maintain certain
levels of net worth and debt service. The agreement also places certain
restrictions on capital expenditures, other indebtedness and executive
compensation. Borrowings bear interest at prime plus 1%. The Company pays
annual fees of $50,000, monthly fees of $2,000 and certain termination fees if
the Company terminates the facility prior to the two year term.
35
<PAGE>
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, 1998,
251,864 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.
At March 31, 1999, 267,227 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, 1999, 38,000
shares were issuable under the Director Plan.
Pertinent information covering the plans follows:
<TABLE>
<CAPTION>
Employee Plans Director Plan
--------------------------- --------------------------
Shares Average Price Shares Average Price
-------- -------------- -------- -------------
<S> <C> <C> <C> <C>
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
Issued 500,750 2.55 30,000 4.38
Canceled (468,152) 3.71 (45,000) 7.01
Exercised (2,800) 2.74 (15,000) 2.90
-------- ----- ------- -----
Outstanding, March 31, 1999 752,898 $2.96 180,000 $5.39
======== ===== ======= =====
Exercisable, March 31, 1999 149,328 $4.12 168,000 $5.38
======== ===== ======= =====
</TABLE>
36
<PAGE>
All options issued in fiscal 1999, 1998 and 1997 were granted at exercise prices
equal to fair market value. Had the Company adopted the provisions of FAS 123
for fiscal 1999, 1998 and 1997 grants, fiscal 1999, 1998 and 1997 would have
included a compensation expense provision of $535,000, $373,000 and $139,000,
respectively. Proforma net loss and diluted loss per share for fiscal 1999 would
have been $(7,213,000) and $(.97), respectively. Proforma net loss and diluted
loss per share for fiscal 1998 would have been $(2,491,000) and $(.35),
respectively. Proforma net earnings and diluted earnings per share for fiscal
1997 would have been $2,829,000 and $.39, 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>
1997 6.42% 6 Years 46% None
1998 6.00% 6 Years 53% None
1999 5.38% 6 Years 71% None
</TABLE>
Pertinent information regarding options outstanding as of March 31, 1999 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>
$2.00 to $ 2.50 411,000 $2.1655 8.85 63,600 $2.50
$2.75 to $ 4.3750 319,400 $3.3347 8.43 119,400 $3.8283
$4.6250 to $14.50 202,498 $6.1480 6.29 134,328 $6.7122
------- -------
932,898 317,328
======= =======
</TABLE>
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, 1999. 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 and 1997, pursuant to
provisions of the 1994 Plan, the Company repurchased 345 and 407 shares at
market prices on vesting dates to cover payroll tax withholding requirements of
approximately $1,000 and $1,000, respectively. During fiscal 1997, 15,778
restricted shares were canceled pursuant to employee terminations.
37
<PAGE>
Preferred Stock
The Company has 2,000,000 shares of authorized Preferred Stock. During fiscal
years 1999, 1998 and 1997, no shares were designated, issued, or are
outstanding.
In October 1998, the Company declared a dividend, payable to shareholders of
record on November 9, 1998, of one preferred share purchase right ("Right") for
each outstanding share of the Company's common stock. A total of 7,425,560
Rights were issued which will expire on November 9, 2008 unless earlier redeemed
or exchanged by the Company. Each Right entitles its holder to purchase from
the Company one one-hundredth (1/100th) of a share of Series D Participating
Cumulative Preferred Stock, $0.01 par value ("Preferred Shares"), at a price of
$8 per one one-hundredth (1/100th) Preferred Share, subject to adjustment.
Holders of Preferred Shares will be entitled to a preferential quarterly
dividend payment equal to the greater of (a) $0.01 per share or (b) 100 times
the dividend declared per common share. The Preferred Shares have liquidation
preference in the event of dissolution or any merger or business combination of
all accrued and unpaid dividends plus 100 times the distribution to be made per
common share. There were no preferred shares outstanding at March 31, 1999.
Earnings (Loss) Per Share
In fiscal 1999, 1998, and 1997, the weighted average number of outstanding
shares of the Company Common Stock, used to calculate basic earnings (loss) per
share, was 7,420,000, 7,214,000 and 7,180,000, 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 1999 or fiscal 1998 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 1999, 1998 and
1997 were approximately $344,000, $307,000 and $239,000, respectively.
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 $4,997,000, $5,135,000 and $2,456,000 for fiscal 1999, 1998 and
1997, respectively.
38
<PAGE>
At March 31, 1999, 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>
Operating Capital
Year ending March 31 Leases Leases
-------------------- --------- -------
(In thousands)
<S> <C> <C>
2000................................................................. $ 3,792 $1,408
2001................................................................. 3,212 1,397
2002................................................................. 1,800 906
2003................................................................. 686 224
2004................................................................. 547 10
Thereafter........................................................... 1,523 0
------- ------
Total future minimum lease payments.................................. $11,560 3,945
=======
Less interest included in minimum capital lease payments........ 600
------
Capital lease obligations, March 31, 1999....................... 3,345
Less current portion, March 31, 1999............................ 1,135
------
Long-term portion of capital lease obligations, March 31, 1999.. $2,210
======
</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 $87,000 for fiscal year 1999.
NOTE 12 -- SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
Supplemental cash flow information for fiscal 1999, 1998 and 1997 follows:
1999 1998 1997
------ ------ ------
(In thousands)
Cash paid during the year for:
Interest..................... $ 617 $445 $ 55
Income taxes refunded, net... (177) (78) (1,521)
In fiscal 1999, 1998 and 1997, the Company sold FlowMole drilling systems to
contractors in Europe, Asia and South America. Revenue from the sale of the
systems of approximately $695,000, $1,494,000 and $2,559,000 in fiscal 1999,
1998 and 1997, 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 $218,000, $560,000 and $616,000 was recognized on the sales in
fiscal 1999, 1998 and 1997, respectively.
The Company acquired equipment pursuant to vendor financed capital leases in the
aggregate amount of approximately $1,333,000, $3,533,000 and $0 in fiscal 1999,
1998 and 1997, respectively.
39
<PAGE>
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 $1,628,000, $2,399,000 and $3,269,000 in fiscal 1999, 1998 and 1997,
respectively. The following amounts are included in the consolidated financial
statements for North American and European operations:
<TABLE>
<CAPTION>
Fiscal Year 1999 (In thousands)
----------------------------------------------------
Adjustments
North and
American European Eliminations Consolidated
--------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues
Unrelated customers.. $73,789 $4,904 $ $78,693
Related parties...... 173 173
Intersegment......... 189 $(189)
------- ------ ----- -------
Total revenues.... $74,151 $4,904 $(189) $78,866
Net income (loss)...... $(6,309) $ (164) $(205) $(6,678)
Identifiable assets.... $35,799 $2,944 $(168) $38,575
<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
</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.
40
<PAGE>
On March 31, 1999, the Company sold its FlowMole drilling business in the United
Kingdom to a customer for cash totaling approximately $601,000. The Company
recorded a gain on sale of approximately $24,000 related to this sale.
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 $1,805,000 and
$1,567,000 at March 31, 1999 and 1998, respectively. The Company purchases its
chemicals exclusively from Dow Corning. Worldwide CableCure revenues accounted
for 29% of consolidated revenues in fiscal 1999.
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 1999, 1998 and 1997,
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.
NOTE 15 -- ARBITRATION AND LITIGATION
In December 1998, the Company executed a settlement agreement with a
subcontractor. The Company will pay the subcontractor $1,000,000 in four equal
installments over two years, of which the first payment occurred in December
1998. The subcontractor agreed to dismiss an ongoing dispute over the amount to
be paid to the contractor for injection services performed subsequent to April
1, 1997, and to desist from competing against the Company for seven years. The
Company had previously accrued $362,000 for this dispute and realized expense of
$381,000 in fiscal 1999.
The Company is involved in litigation matters, both as plaintiff and as
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.
41
<PAGE>
NOTE 16 -- SELECTED QUARTERLY DATA (UNAUDITED)
Fiscal Year 1999 1QTR 2QTR 3QTR 4QTR
---- ---- ---- ----
(In thousands, except per share data)
Revenues.................... $22,024 $18,885 $17,065 $20,892
Gross profit................ 2,577 432 (757) 1,394
Net income (loss)........... 16 (1,902) (3,857) (935)
Earnings (loss) per share:
Basic.................... $ .00 $ (.26) $ (.52) $ (.13)
Diluted.................. $ .00 $ (.26) $ (.52) $ (.13)
Fiscal Year 1998 1QTR 2QTR 3QTR 4QTR
---- ---- ---- ----
(In thousands, except per share data)
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)
During the fourth quarter of fiscal 1999, the Company recorded $800,000 of
expenses for warranty costs and reserves for inventory obsolescence.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
42
<PAGE>
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, 1999, the close of the
Registrant's 1999 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
<TABLE>
<S> <C> <C>
(a) The following documents are filed as part of this report:
1. Financial Statements:
Report of Independent Accountants 26
Consolidated Balance Sheet, March 31, 1999 and 1998 27
Consolidated Statement of Operations and Comprehensive Income for the years ended 28
March 31, 1999, 1998 and 1997
Consolidated Statement of Changes in Stockholders' Equity for the years ended March
31, 1999, 1998 and 1997 29
Consolidated Statement of Cash Flows for the years ended March 31, 1999, 1998 and 1997 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: None.
(c) Exhibits: Exhibits identified below, on file with the Securities and
Exchange Commission, are incorporated herein by reference as exhibits
hereto.
</TABLE>
43
<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.
4.4 Registrant's Rights Agreement between UTILX Corporation and American
Stock Transfer & Trust Company dated as of November 9, 1998.
Incorporated by reference to Exhibit Number 4.1 to Registrant's Form 8-
K dated November 9, 1998 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.
</TABLE>
44
<PAGE>
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.
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 under the
Exchange Act on Form 10K for the Fiscal Year ended March 31, 1998.
10.40 Loan and Security Agreement between Registrant and FINOVA Capital
Corporation dated April 23, 1999. 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.
45
<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/ WILLIAM M. WEISFIELD JUNE 7, 1999
-----------------------------
William M. Weisfield
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.
/s/ WILLIAM M. WEISFIELD President, Chief Executive June 7, 1999
- ------------------------- Officer and Chairman of the Board
(William M. Weisfield) (Principal Executive Officer)
/s/ DARLA VIVIT NORRIS Senior Vice President, Chief June 7, 1999
- ------------------------- Financial Officer and Treasure
(Darla Vivit Norris) (Principal Financial Officer)
/s/ PHYLLIS A. BOYD Controller, Chief June 7, 1999
- ------------------------- Accounting Officer
(Phyllis A. Boyd) (Principal Accounting Officer)
/s/ STANLEY J. BRIGHT Director June 7, 1999
- -------------------------
(Stanley J. Bright)
/s/ JOHN D. DURBIN Director June 7, 1999
- -------------------------
(John D. Durbin)
/s/ JOHN W. ELLIS Director June 7, 1999
- -------------------------
(John W. Ellis)
/s/ WALTER M. HIGGINS Director June 7, 1999
- -------------------------
(Walter M. Higgins)
/s/ ROBERT E. RUNICE Director June 7, 1999
- --------------------
(Robert E. Runice)
46
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit
Number
- -------
Description
-----------
3.1 Registrant's Certificate of Incorporation, as amended. Incorporated by
reference to Exhibit Number 3.1 to Registrant's Registration Statement
filed under the Securities Act of 1933 (the "Securities Act") on Form S-1,
as amended, Registration No. 33-17028.
3.3 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.
4.4 Registrant's Rights Agreement between UTILX Corporation and American Stock
Transfer & Trust Company dated as of November 9, 1998. Incorporated by
reference to Exhibit Number 4.1 to Registrant's Form 8-K dated November 9,
1998 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.
<PAGE>
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.
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 under the Exchange
Act on Form 10K for the Fiscal Year ended March 31, 1998.
10.40 Loan and Security Agreement between Registrant and FINOVA Capital
Corporation dated April 23, 1999. Filed herewith.
21.1 Subsidiaries of Registrant. Filed herewith.
23.1 Consent of Independent Accountants. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
99.1 Additional Stockholder Material. Filed herewith.
<PAGE>
EXHIBIT 10.40
FINOVA LOAN AND SECURITY AGREEMENT
Borrower: UTILX Corporation
Address: 22820 Russell Road
Kent, Washington 98032
Borrower Fed ID Tax No. 91-1171716
Credit Limit: $10,000,000
Date: April 20, 1999
================================================================================
BUSINESS CREDIT
================================================================================
<PAGE>
THIS LOAN AND SECURITY AGREEMENT (collectively with the Schedule to Loan
Agreement (the "Schedule") attached hereto, the "Agreement") dated the date set
--------- ---------
forth on the cover page, is entered into by and between the borrower named on
the cover page (jointly and severally, the "Borrower"), whose address is set
forth on the cover page and FINOVA Capital Corporation ("FINOVA"), whose address
is 355 South Grand Avenue, Los Angeles, California 90071.
1. DEFINITIONS.
1.1 Defined Terms. As used in this Agreement, the following terms have
-------------
the definitions set forth below:
1.2 "ADA" the meaning set forth in Section 4.1(aa) hereof.
---
"Additional Sums" has the meaning set forth in Section 2.9(a) hereof.
---------------
"Affiliate" means any Person controlling, controlled by or under common
---------
control with Borrower. For purposes of this definition, "control" means the
possession, directly or indirectly, of the power to direct or cause direction of
the management and policies of any Person, whether through ownership of common
or preferred stock or other equity interests, by contract or otherwise. Without
limiting the generality of the foregoing, each of the following shall be an
Affiliate: any officer, director, employee or other agent of Borrower, any
shareholder, member or subsidiary of Borrower, and any other Person with whom or
which Borrower has common shareholders, officers or directors.
"Agreement" has the meaning set forth in the preamble.
---------
"Annual Renewal Fee" has the meaning set forth in the Schedule.
------------------
"Applicable Usury Law" has the meaning set forth in Section 2.9(b) hereof.
--------------------
"Blocked Account" has the meaning set forth in Section 2.10(c) hereof.
---------------
"Business Day" means any day on which commercial banks in both Los Angeles,
------------
California and Phoenix, Arizona are open for business.
"Capital Expenditures" means all expenditures made and liabilities incurred
--------------------
for the acquisition of any fixed asset or improvement, replacement, substitution
or addition thereto which has a useful life of more than one year and including,
without limitation, those arising in connection with Capital Leases.
"Capital Lease" means any lease of property by Borrower that, in accordance
-------------
with GAAP, should be capitalized for financial reporting purposes and reflected
as a liability on the balance sheet of Borrower.
"Closing Fee" has the meaning set forth in the Schedule.
------------
"Closing Date" means the date of the initial advance made by FINOVA
------------
pursuant to this Agreement.
"Code" means the Uniform Commercial Code as adopted and in effect in the
----
State of Arizona from time to time.
"Collateral" has the meaning set forth in Section 3.1 hereof.
----------
"Collateral Monitoring Fee" has the meaning set forth in the Schedule.
-------------------------
"Deposit Accounts" has the meaning set forth in Section 9105 of the Code.
----------------
"Dominion Accounts" has the meaning set forth in Section 2.10(c) hereof.
-----------------
"Eligible Inventory" means Inventory which FINOVA, in its Permitted
------------------
Discretion, deems Eligible Inventory, based on such reasonable considerations as
FINOVA may from time to time deem appropriate. Without limiting the generality
of the foregoing, no Inventory shall be Eligible Inventory unless, in FINOVA's
Permitted Discretion, such Inventory (i) consists of raw materials and finished
goods, in good, new and salable condition which are not obsolete or
unmerchantable, and are not comprised of work in process, packaging materials or
supplies; (iii) meets all standards imposed by any governmental agency or
authority; (iv) conforms in all respects to the warranties and representations
set forth herein; (v) is at all times subject to FINOVA's duly perfected, first
priority security interest; and (vi) is situated at a location in compliance
with Section 5.16 hereof.
"Eligible Receivables" means Receivables arising in the ordinary course of
--------------------
Borrower's business from the sale of goods or rendition of services, which
FINOVA, in its Permitted Discretion, shall deem eligible based on such good
faith considerations as FINOVA may from time to time deem appropriate. Without
limiting the foregoing, a Receivable shall not be deemed to be an Eligible
Receivable if (i) the account
1
<PAGE>
debtor has failed to pay the Receivable within a period of ninety (90) days
after invoice date, to the extent of any amount remaining unpaid after such
period; (ii) the account debtor has failed to pay more than 25% of all
outstanding Receivables owed by it to Borrower within ninety (90) days after
invoice date; (iii) the account debtor is an Affiliate of Borrower; (iv) the
goods relating thereto are placed on consignment, guaranteed sale, "bill and
hold", "COD" or other terms pursuant to which payment by the account debtor may
be conditional; (v) the account debtor is not located in the United States,
unless the Receivable is supported by a letter of credit or other form of
guaranty or security, in each case in form and substance satisfactory to FINOVA;
(vi) the account debtor is the United States or any department, agency or
instrumentality thereof; (vii) Borrower is or may become liable to the account
debtor for goods sold or services rendered by the account debtor to Borrower;
(viii) the account debtor's total obligations to Borrower exceed 15% of all
Eligible Receivables, to the extent of such excess (except for Florida Power &
Light which shall not exceed 35% of all Eligible Receivables and for U.S. West
which shall not exceed 20% for all Eligible Receivables); (ix) the account
debtor disputes liability or makes any claim with respect thereto (up to the
amount of such liability or claim), or is subject to any insolvency or
bankruptcy proceeding, or becomes insolvent, fails or goes out of a material
portion of its business; (x) the amount thereof consists of late charges or
finance charges; (xi) the amount thereof consists of a credit balance more than
ninety (90) days past due; (xii) the face amount thereof exceeds $100,000,
unless accompanied by evidence of shipment of the goods relating thereto
satisfactory to FINOVA in its Permitted Discretion; (xiii) the invoice
constitutes a progress billing on a project not yet completed, except that the
final billing at such time as the matter has been completed and delivered to the
customer may be deemed an Eligible Receivable; or (xiv) the amount thereof is
not yet represented by an invoice or bill issued in the name of the applicable
account debtor.
"Equipment" means all of Borrower's present and hereafter acquired
---------
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and
other tangible personal property (other than Inventory) of every kind and
description used in Borrower's operations or owned by Borrower and any interest
in any of the foregoing, and all attachments, accessories, accessions,
replacements, substitutions, additions or improvements to any of the foregoing,
wherever located.
"ERISA" means the Employment Retirement Income Security Act of 1974, as
-----
amended, and the regulations thereunder.
"ERISA Affiliate" means each trade or business (whether or not incorporated
---------------
and whether or not foreign) which is or may hereafter become a member of a group
of which Borrower is a member and which is treated as a single employer under
ERISA Section 4001(b)(1), or IRC Section 414.
"Event of Default" means any of the events set forth in Section 7.1 of this
----------------
Agreement.
"Examination Fees" has the meaning set forth in the Schedule.
----------------
"Facility Fees" the meaning set forth in the Schedule.
-------------
"FINOVA Affiliates" has the meaning set forth in Section 9.22 hereof.
-----------------
"GAAP" means generally accepted accounting principles in the United States
----
of America as in effect from time to time as set forth in the opinions and
pronouncements of the Accounting Principles Board and the American Institute of
Certified Public Accountants and the statements and pronouncements of the
Financial Accounting Standards Boards which are applicable to the circumstances
as of the date of determination consistently applied, except that, for the
financial covenants set forth in this Agreement, GAAP shall be determined on the
basis of such principles in effect on the date hereof and consistent with those
used in the preparation of the audited financial statements delivered to Lender
prior to the date hereof.
"General Intangibles" means all general intangibles of Borrower, whether
-------------------
now owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints,
Trademarks, Licenses and Patents, names, trade secrets, goodwill, copyrights,
registrations, licenses, franchises, customer lists, security and other
deposits, rights in all litigation presently or hereafter pending for any cause
or claim (whether in contract, tort or otherwise), and all judgments now or
hereafter arising therefrom, all claims of Borrower against FINOVA, rights to
purchase or sell real or personal property, rights as a licensor or licensee of
any kind, royalties, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation
credit, liability, property and other insurance) tax refunds and claims,
computer programs, discs, tapes and tape files, claims
2
<PAGE>
under guaranties, security interests or other security held by or granted to
Borrower to secure payment of any of the Receivables by an account debtor, all
rights to indemnification and all other intangible property of every kind and
nature (other than Receivables).
"Indebtedness" means all of Borrower's present and future obligations,
------------
liabilities, debts, claims and indebtedness, contingent, fixed or otherwise,
however evidenced, created, incurred, acquired, owing or arising, whether under
written or oral agreement, operation of law or otherwise, and includes, without
limiting the foregoing (i) the Obligations, (ii) obligations and liabilities of
any Person secured by a lien, claim, encumbrance or security interest upon
property owned by Borrower, even though Borrower has not assumed or become
liable therefor, (iii) obligations and liabilities created or arising under any
lease (including Capital Leases but excluding leasing of real property,
vehicles, and office equipment) or conditional sales contract or other title
retention agreement with respect to property used or acquired by Borrower, even
though the rights and remedies of the lessor, seller or lender are limited to
repossession, (iv) all unfunded pension fund obligations and liabilities and (v)
deferred taxes.
"Initial Term" has the meaning set forth on the Schedule.
------------
"Inventory" means all of Borrower's now owned and hereafter acquired goods,
---------
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease, all raw materials, work in
process, finished goods and materials and supplies of any kind, nature or
description which are or might be used or consumed in Borrower's business or
used in connection with the manufacture, packing, shipping, advertising, selling
or finishing of such goods, merchandise or other personal property, and all
documents of title or other documents representing them.
"Inventory Loans" has the meaning set forth in the Schedule.
---------------
"IRC" means the Internal Revenue Code of 1986, as amended, and the
---
regulations thereunder.
"LC Fees" has the meaning set forth in Section 2.4 hereof.
----------
"Letters of Credit" has the meaning set forth in Section 2.4. hereof.
-----------------
"Loans" has the meaning set forth in Section 2.2 hereof.
-------
"Loan Documents" means, collectively, this Agreement, any note or notes
--------------
executed by Borrower and payable to FINOVA, and any other present or future
agreement entered into in connection with this Agreement, together with all
alterations, amendments, changes, extensions, modifications, refinancings,
refundings, renewals, replacements, restatements, or supplements, of or to any
of the foregoing.
"Loan Party" means Borrower, each Guarantor, each Subordinating Creditor
----------
and each other party (other than FINOVA) to any Loan Document.
"Loan Reserves" means, as of any date of determination, such amounts as
-------------
FINOVA may from time to time establish and revise in good faith reducing the
amount of Revolving Credit Loans and Letters of Credit which would otherwise be
available to Borrower under the lending formula(s) provided in the Schedule:
(a) to reflect events, conditions, contingencies or risks which, as determined
by FINOVA in good faith, do or may affect either (i) the Collateral or any other
property which is security for the Obligations or its value, (ii) the assets,
business or prospects of Borrower or any Guarantor or (iii) the security
interests and other rights of FINOVA in the Collateral (including the
enforceability, perfection and priority thereof) or (b) to reflect FINOVA's good
faith belief that any collateral report or financial information furnished by or
on behalf of Borrower or any Guarantor to FINOVA is or may have been incomplete,
inaccurate or misleading in any material respect or (c) in respect of any state
of facts which FINOVA determines in good faith constitutes an Event of Default
or may, with notice or passage of time or both, constitute an Event of Default."
"Loan Year" means each twelve month period commencing on the Closing Date.
---------
"Management Fees" has the meaning set forth in the Schedule.
---------------
"Maximum Interest Rate" has the meaning set forth in Section 2.9(c) hereof.
---------------------
"Multiemployer Plan" means a "multiemployer plan" as defined in ERISA
------------------
Sections 3(37) or 4001(a)(3) or IRC Section 414(f) which covers employees of
Borrower or any ERISA Affiliate.
"Net Worth" at any date means the Borrower's net worth as determined in
---------
accordance with GAAP.
"Obligations" means all present and future loans, advances, debts,
-----------
liabilities, obligations, covenants, duties and indebtedness at any time owing
by Borrower to FINOVA, whether evidenced by this Agreement, any note or other
instrument or document, whether arising from an extension of credit, opening of
a letter of credit, banker's acceptance, loan, guaranty, indemnification or
3
<PAGE>
otherwise, whether direct or indirect (including, without limitation, those
acquired by assignment and any participation by FINOVA in Borrower's debts owing
to others), absolute or contingent, due or to become due, including, without
limitation, all interest, charges, expenses, fees, attorney's fees, expert
witness fees, Examination Fee, letter of credit fees, Collateral Monitoring Fee,
Closing Fee, Facility Fee, Termination Fee, Minimum Interest Charge and any
other sums chargeable to Borrower hereunder or under any other agreement with
FINOVA.
"Operating Cash Flow/Actual" means, for any period, Borrower's net income
--------------------------
or loss (excluding the effect of any extraordinary gains or losses), determined
in accordance with GAAP, plus or minus each of the following items, to the
---- ------
extent deducted from or added to the revenues of Borrower in the calculation of
net income or loss: (i) depreciation; (ii) amortization and other non-cash
charges; (iii) interest expense paid or accrued; (iv) total federal and state
income tax expense determined as the accrued liability of Borrower in respect of
such period, regardless of what portion of such expense has actually been paid
by Borrower during such period; and (v) Management Fees paid, to the extent
permitted hereunder, and after deduction for each of (a) federal and state
income taxes, to the extent actually paid during such period; (b) any non-cash
income; and (c) all actual Capital Expenditures made during such period and not
financed.
"Operating Cash Flow/Permitted" means, for any period, Borrower's net
-----------------------------
income or loss (excluding the effect of any extraordinary gains or losses),
determined in accordance with GAAP, plus or minus each of the following items,
---- ------
to the extent deducted from or added to the revenues of Borrower in the
calculation of net income or loss: (i) depreciation; (ii) amortization and
other non-cash charges; (iii) interest expense paid or accrued; (iv) total
federal and state income tax expense determined as the accrued liability of
Borrower in respect of such period, regardless of what portion of such expense
has actually been paid by Borrower during such period; and (v) Management Fees
and other fees paid to Subordinating Creditors, to the extent permitted
hereunder, and after deduction for each of (a) federal and state income taxes,
to the extent actually paid during such period; (b) any non-cash income; and (c)
all permitted Capital Expenditures (without regard to any waiver given by FINOVA
with respect to any limitation on such Capital Expenditures) actually made
during such period and not financed.
"Overadvance" has the meaning set forth in Section 2.3.
-----------
"Overline" has the meaning set forth in Section 2.3.
--------
"PBGC" means the Pension Benefit Guarantee Corporation.
----
"Permitted Discretions" means FINOVA's judgment exercised in good faith
---------------------
based upon its consideration of any factor which FINOVA believes in good faith:
(i) will or could adversely affect the value of any Collateral, the
enforceability or priority of FINOVA's liens thereon or the amount which FINOVA
would be likely to receive (after giving consideration to delays in payment and
costs of enforcement) in the liquidation of such Collateral; (ii) suggests that
any collateral report or financial information delivered to FINOVA by any Person
on behalf of the Borrower is incomplete, inaccurate or misleading in any
material respect; (iii) materially increases the likelihood of a bankruptcy,
reorganization or other insolvency proceeding involving the Borrower, any Loan
Party or any of the Collateral, or (iv) creates or reasonably could be expected
to create an Event of Default. In exercising such judgment, FINOVA may consider
such factors already included in or tested by the definition of Eligible
Receivables or Eligible Inventory, as well as any of the following: (i) the
financial and business climate of the Borrower's industry and general
macroeconomic conditions, (ii) changes in collection history and dilution with
respect to the Receivables, (iii) changes in demand for, and pricing of,
Inventory, (iv) changes in any concentration of risk with respect to Receivables
and/or Inventory, and (v) any other factors that change the credit risk of
lending to the Borrower on the security of the Receivables and Inventory. The
burden of establishing lack of good faith hereunder shall be on the Borrower.
"Permitted Encumbrance" means each of the liens, mortgages and other
---------------------
security interests set forth on the Schedule.
"Person" means any individual, sole proprietorship, partnership, joint
------
venture, trust, unincorporated organization, association, corporation, limited
liability company, government, or any agency or political division thereof, or
any other entity.
"Plan" means any plan described in ERISA Section 3(2) maintained for
----
employees of Borrower or any ERISA Affiliate, other than a Multiemployer Plan.
"Prepared Financials" means the balance sheets of Borrower as of the date
-------------------
set forth in the Schedule in the section entitled 'Reporting Requirements' , and
as of each subsequent date on which audited balance sheets are delivered to
FINOVA from time to time hereunder, and
- ---------------------------------------
4
<PAGE>
the related statements of operations, changes in stockholder's equity and
- ---
changes in cash flow for the periods ended on such dates.
"Prime Rate" has the meaning set forth in the Schedule.
----------
"Prohibited Transaction" means any transaction described in Section 406 of
----------------------
ERISA which is not exempt by reason of Section 408 of ERISA, and any transaction
described in Section 4975(c) of the IRC which is not exempt by reason of Section
4975(c)(2) of the IRC.
"Receivable Loans" has the meaning set forth on the Schedule."Receivables"
---------------- -----------
means all of Borrower's now owned and hereafter acquired accounts (whether or
not earned by performance), proceeds of any letters of credit naming Borrower as
beneficiary, contract rights, chattel paper, instruments, documents and all
other forms of obligations at any time owing to Borrower, all guaranties and
other security therefor, whether secured or unsecured, all merchandise returned
to or repossessed by Borrower, and all rights of stoppage in transit and all
other rights or remedies of an unpaid vendor, lienor or secured party.
5
<PAGE>
"Renewal Term" has the meaning set forth on the Schedule.
------------
"Reportable Event" means a reportable event described in Section 4043 of
----------------
ERISA or the regulations thereunder, a withdrawal from a Plan described in
Section 4063 of ERISA, or a cessation of operations described in Section 4068(f)
of ERISA.
"Revolving Credit Loans" has the meaning set forth in the Schedule.
----------------------
"Revolving Credit Limit" has the meaning set forth in the Schedule.
----------------------
"Revolving Interest Rate" has the meaning set forth in the Schedule.
-----------------------
"Schedule" has the meaning set forth in the preamble.
--------
"Senior Contractual Debt Service" means, for any period, the sum of
-------------------------------
payments made or required to be made by Borrower during such period for (i)
interest and scheduled principal payments due on the Term Loans (excluding
voluntary prepayment and payments made from Borrower's Excess Cash Flow, as
required pursuant to the Schedule), and (ii) interest only payments due on the
Revolving Credit Loans facility plus the Collateral Monitoring Fee, and (iii)
principal and interest payments due on the Permitted Senior Indebtedness.
"Start Date" has the meaning set forth in the Schedule.
----------
"Stock Pledge Agreement" has the meaning set forth in Section 4.1(cc)
----------------------
hereof.
"Subordinated Debt" means liabilities of Borrower the repayment of which is
-----------------
subordinated, to the payment and performance of the Obligations, pursuant to a
subordination agreement acceptable to FINOVA in its sole discretion.
"Term Loans" has the meaning set forth in the Schedule.
----------
"Termination Fee" has the meaning set forth in Section 9.2(d) hereof.
---------------
"Total Contractual Debt Service" means, for any period, the sum of payments
------------------------------
made (or, as to clause (i) of this sentence, required to be made) by Borrower
during such period for (i) Senior Contractual Debt Service, (ii) pursuant to the
Seller Note and/or Noncompete Agreement, and (iii) interest and scheduled
principal payments due on any and all other Indebtedness (excluding accrued
liabilities, trade payables and other contractual obligations to suppliers and
customers incurred in the ordinary course of business) of Borrower, including
without limitation the Subordinated Indebtedness.
"Total Facility" has the meaning set forth in Section 2.1 hereof.
--------------
"Trademarks, Copyrights, Licenses and Patents" means all of Borrower's
--------------------------------------------
right, title and interest in and to, whether now owned or hereafter acquired:
(i) trademarks, trademark registrations, trade names, trade name registrations,
and trademark or trade name applications, including without limitation such as
are listed on the Schedule attached hereto and made a part hereof, as the same
may be amended from time to time, and (a) renewals thereof, (b) all income,
royalties, damages and payments now and hereafter due and/or payable with
respect thereto, including without limitation, damages and payments for past or
future infringements thereof, (c) the right to sue for past, present and future
infringements thereof, (d) all rights corresponding thereto throughout the
world, and (e) the goodwill of the business operated by Borrower connected with
and symbolized by any trademarks or trade names; (ii) copyrights, copyright
registrations and copyright applications, including without limitation such as
are listed on the Schedule attached hereto and made a part hereof, as the same
may be amended from time to time, and (a) renewals thereof, (b) all income,
royalties, damages and payments now and hereafter due and/or payable with
respect thereto, including without limitation, damages and payments for past or
future infringements thereof, (c) the right to sue for past, present and future
infringements thereof, and (d) all rights corresponding thereto throughout the
world; (iii) license agreements, including without limitation such as are listed
on the Schedule attached hereto and made a part hereof, and the right to prepare
for sale, sell and advertise for sale any Inventory now or hereafter owned by
Borrower and now or hereafter covered by such licenses; and (iv) patents and
patent applications, registered or pending, including without limitation such as
are listed on the Schedule attached hereto, together with all income, royalties,
shop rights, damages and payments thereto, the right to sue for infringements
thereof, and all rights thereto throughout the world and all reissues,
divisions, continuations, renewals, extensions and continuations-in-part
thereof.
"Unused Line Fee" has the meaning set forth in the Schedule.
---------------
1.2 Other Terms. All accounting terms used in this Agreement, unless
-----------
otherwise indicated, shall have the meanings given to such terms in accordance
with GAAP. All other terms contained in this Agreement, unless otherwise
indicated, shall have the meanings provided by the Code, to the extent such
terms are defined therein.
2. LOANS; INTEREST RATE AND OTHER CHARGES.
6
<PAGE>
2.1 Total Facility. Upon the terms and conditions set forth herein and
--------------
provided that no Event of Default or event which, with the giving of notice or
the passage of time, or both, would constitute an Event of Default, shall
have occurred and be continuing, FINOVA shall, upon Borrower's request, make
advances to Borrower from time to time in an aggregate outstanding principal
amount not to exceed the Total Facility amount (the "Total Facility") set forth
--------------
on the Schedule hereto, subject to deduction of reserves for accrued interest
and such other reserves as FINOVA deems proper and reasonable from time to time
and as permitted by this Agreement, and less amounts FINOVA may be obligated to
pay in the future on behalf of Borrower. The Schedule is an integral part of
this Agreement and all references to "herein" "herewith" and words of similar
import shall for all purposes be deemed to include the Schedule.
2.2 Loans. Advances under the Total Facility ("Loans" and individually, a
----- -----
"Loan") shall be comprised of the amounts shown on the Schedule.
-----
2.3 Overlines; Overadvances. If at any time or for any reason the
-----------------------
outstanding amount of advances (including all Letters of Credit) extended or
issued pursuant hereto exceeds any of the dollar limitations ("Overline") or
--------
percentage limitations ("Overadvance") in the Schedule, then Borrower shall,
-----------
upon FINOVA's demand, immediately pay to FINOVA, in cash, the full amount of
such Overline or Overadvance which, at FINOVA's option, may be applied to reduce
the outstanding principal balance of the Loans and/or cash collateralize all or
any part of any outstanding Letters of Credit. Without limiting Borrower's
obligation to repay to FINOVA on demand the amount of any Overline or
Overadvance, Borrower agrees to pay FINOVA interest on the outstanding principal
amount of any Overline or Overadvance, on demand, at the rate set forth on the
Schedule and applicable to the Revolving Credit Loans.
2.4 Letters of Credit. At the request of Borrower, FINOVA may, in its
-----------------
Permitted Discretion, arrange for the issuance of letters of credit for the
account of Borrower and guarantees of payment of such letters of credit, in each
case in form and substance satisfactory to FINOVA in its sole discretion
(collectively, "Letters of Credit"). The aggregate face amount of all
-----------------
outstanding Letters of Credit from time to time shall not exceed the amount
shown on the Schedule, and shall be reserved against the availability of
Revolving Credit Loans. Borrower shall pay all bank charges for the issuance of
Letters of Credit, together with an additional fee to FINOVA equal to the
percentage set forth on the Schedule of the aggregate face amount of each Letter
of Credit outstanding from time to time during the term of this Agreement (the
"L/C Fee"). The L/C Fee shall be deemed to be fully earned upon the issuance of
- --------
each Letter of Credit and the passage of time, or both, would constitute an
Event of Default, shall be due and payable on the first Business Day of
each month following a month during which any Letter of Credit is outstanding.
Any advance by FINOVA under or in connection with a Letter of Credit shall
constitute an Obligation hereunder. Each Letter of Credit shall have an expiry
date no later than thirty (30) days prior to the last day of the Initial Term
or, if issued during any Renewal Term no later than thirty (30) days prior to
the last day of such Renewal Term. Immediately upon any termination of this
Agreement, Borrower shall either: (i) provide cash collateral to FINOVA in an
amount equal to 105% of the maximum amount of FINOVA's obligations under or in
connection with all then outstanding Letters of Credit, or (ii) cause to be
delivered to FINOVA releases of all FINOVA's obligations under outstanding
Letters of Credit. At FINOVA's discretion, any proceeds of Collateral received
by FINOVA may be held as the cash collateral required by this Section 2.4.
Borrower hereby agrees to indemnify, save, and hold FINOVA harmless from any
loss, cost, expense, or liability, including payments made by FINOVA, expenses,
and reasonable attorneys' fees incurred by FINOVA arising out of or in
connection with any Letters of Credit. Borrower agrees to be bound by the
issuing bank's regulations and interpretations of any Letters of Credit
guarantied by FINOVA and opened for Borrower's account or by FINOVA's
interpretations of any Letter of Credit issued by FINOVA for Borrower's account,
and Borrower understands and agrees that FINOVA shall not be liable for any
error, negligence, or mistake, whether of omission or commission, in following
Borrower's instructions or those contained in the Letters of Credit or any
modifications, amendments, or supplements thereto. Borrower understands that
FINOVA may indemnify the bank issuing a Letter of Credit for certain costs or
liabilities arising out of claims by Borrower against such issuing bank.
Borrower hereby agrees to indemnify and hold FINOVA harmless with respect to any
loss, cost, expense, or liability incurred by FINOVA under any such
indemnification by FINOVA to any issuing bank.
2.5 Loan Account. All advances made hereunder (including without
------------
limitation all advances made by FINOVA under or in connection with any Letter of
Credit) shall be added to and deemed part of the Obligations when made. FINOVA
may from time to time charge all Obligations of Borrower to Borrower's loan
account with FINOVA.
2.6 Interest; Fees. Borrower shall pay FINOVA interest on the daily
--------------
outstanding balance of the Obligations at the per annum rate set forth on the
Schedule. Borrower shall also pay FINOVA the fees set forth on the Schedule.
7
<PAGE>
2.7 Default Interest Rate. Upon the occurrence and during the continuation
---------------------
of an Event of Default, Borrower shall pay FINOVA interest on the daily
outstanding balance of the Obligations and any L/C Fee at a rate per annum which
is two percent (2%) in excess of the rate which would otherwise be applicable
thereto pursuant to the Schedule.
2.8 Examination Fee. Borrower agrees to pay to FINOVA the Examination Fee
---------------
in the amount set forth on the Schedule in connection with each audit or
examination of Borrower performed by FINOVA prior to or after the date hereof.
Without limiting the generality of the foregoing, Borrower shall pay to FINOVA
an initial Examination Fee in an amount equal to the amount set forth on the
Schedule. Such initial Examination Fee shall be deemed fully earned at the time
of payment and due and payable upon the closing of this transaction, and shall
be deducted from any good faith deposit paid by Borrower to FINOVA prior to the
date of this Agreement.
2.9 Excess Interest.
---------------
(a) The contracted for rate of interest of the loan contemplated hereby,
without limitation, shall consist of the following: (i) the interest rate set
forth on the Schedule, calculated and applied to the principal balance of the
Obligations in accordance with the provisions of this Agreement; (ii) interest
after an Event of Default, calculated and applied to the amount of the
Obligations in accordance with the provisions hereof; and (iii) all Additional
Sums (as herein defined), if any. Borrower agrees to pay an effective contracted
for rate of interest which is the sum of the above-referenced elements. The
Examination Fee, attorneys fees, expert witness fees, letter of credit fees,
collateral monitoring fees, closing fees, facility fees, Termination Fees,
Minimum Interest Charges, other charges, goods, things in action or any other
sums or things of value paid or payable by Borrower (collectively, the
"Additional Sums"), whether pursuant to this Agreement or any other documents or
---------------
instruments in any way pertaining to this lending transaction, or otherwise with
respect to this lending transaction, that under any applicable law may be deemed
to be interest with respect to this lending transaction, for the purpose of any
applicable law that may limit the maximum amount of interest to be charged with
respect to this lending transaction, shall be payable by Borrower as, and shall
be deemed to be, additional interest and for such purposes only, the agreed upon
and "contracted for rate of interest" of this lending transaction shall be
deemed to be increased by the rate of interest resulting from the inclusion of
the Additional Sums.
(b) It is the intent of the parties to comply with the usury laws of the
State of Arizona (the "Applicable Usury Law"). Accordingly, it is agreed that
--------------------
notwithstanding any provisions to the contrary in this Agreement, or in any of
the documents securing payment hereof or otherwise relating hereto, in no event
shall this Agreement or such documents require the payment or permit the
collection of interest in excess of the maximum contract rate permitted by the
Applicable Usury Law (the "Maximum Interest Rate"). In the event (a) any such
---------------------
excess of interest otherwise would be contracted for, charged or received from
Borrower or otherwise in connection with the loan evidenced hereby, or (b) the
maturity of the Obligations is accelerated in whole or in part, or (c) all or
part of the Obligations shall be prepaid, so that under any of such
circumstances the amount of interest contracted for, shared or received in
connection with the loan evidenced hereby, would exceed the Maximum Interest
Rate, then in any such event (1) the provisions of this paragraph shall govern
and control, (2) neither Borrower nor any other Person now or hereafter liable
for the payment of the Obligations shall be obligated to pay the amount of such
interest to the extent that it is in excess of the Maximum Interest Rate, (3)
any such excess which may have been collected shall be either applied as a
credit against the then unpaid principal amount of the Obligations or refunded
to Borrower, at FINOVA's option, and (4) the effective rate of interest shall be
automatically reduced to the Maximum Interest Rate. It is further agreed,
without limiting the generality of the foregoing, that to the extent permitted
by the Applicable Usury Law; (x) all calculations of interest which are made for
the purpose of determining whether such rate would exceed the Maximum Interest
Rate shall be made by amortizing, prorating, allocating and spreading during the
period of the full stated term of the loan evidenced hereby, all interest at any
time contracted for, charged or received from Borrower or otherwise in
connection with such loan; and (y) in the event that the effective rate of
interest on the loan should at any time exceed the Maximum Interest Rate, such
excess interest that would otherwise have been collected had there been no
ceiling imposed by the Applicable Usury Law shall be paid to FINOVA from time to
time, if and when the effective interest rate on the loan otherwise falls below
the Maximum Interest Rate, to the extent that interest paid to the date of
calculation does not exceed the Maximum Interest Rate, until the entire amount
of interest which would otherwise have been collected had there been no ceiling
imposed by the Applicable Usury Law has been paid in full. Borrower further
agrees that should the Maximum Interest Rate be increased at any time hereafter
because of a change in the Applicable Usury
8
<PAGE>
Law, then to the extent not prohibited by the Applicable Usury Law, such
increases shall apply to all indebtedness evidenced hereby regardless of when
incurred; but, again to the extent not prohibited by the Applicable Usury Law,
should the Maximum Interest Rate be decreased because of a change in the
Applicable Usury Law, such decreases shall not apply to the indebtedness
evidenced hereby regardless of when incurred.
2.10 Principal Payments; Proceeds of Collateral.
--------------------------------------------
(a) Principal Payments. Except where evidenced by notes or other
------------------
instruments issued or made by Borrower to FINOVA specifically containing payment
provisions which are in conflict with this Section 2.10 (in which event the
conflicting provisions of said notes or other instruments shall govern and
control), that portion of the Obligations consisting of principal payable on
account of Loans shall be payable by Borrower to FINOVA immediately upon the
earliest of (i) the receipt by FINOVA or Borrower of any proceeds of any of the
Collateral, to the extent of said proceeds, (ii) the occurrence of an Event of
Default in consequence of which FINOVA elects to accelerate the maturity and
payment of such loans, or (iii) any termination of this Agreement pursuant to
Section 9.2 hereof; provided, however, that any Overadvance or Overline shall be
-------- -------
payable on demand pursuant to the provisions of Section 2.3 hereof.
(b) Collections. Until FINOVA notifies Borrower to the contrary, Borrower
-----------
may make collection of all Receivables for FINOVA and shall receive all such
payments or sums as trustee of FINOVA and immediately deliver all such payments
or sums to FINOVA in their original form, duly endorsed in blank or cause the
same to be deposited into a Blocked Account or Dominion Account. FINOVA or its
designee may, at any time after an Event of Default under Section 7.1, notify
account debtors that the Receivables have been assigned to FINOVA and of
FINOVA's security interest therein, and may collect the Receivables directly and
charge the collection costs and expenses to Borrower's loan account. Borrower
agrees that, in computing the charges under this Agreement, all items of payment
shall be deemed applied by FINOVA on account of the Obligations three (3)
Business Days after receipt by FINOVA of good funds which have been finally
credited to FINOVA's account, whether such funds are received directly from
Borrower or from the Blocked Account bank or the Dominion Account bank, pursuant
to Section 2.10(c) hereof, and this provision shall apply regardless of the
amount of the Obligations outstanding or whether any Obligations are
outstanding; provided, that if any such good funds are received after 12:00 p.m.
--------
noon (Los Angeles time) on any Business Day or at any time on any day not
constituting a Business Day, such funds shall be deemed received on the
immediately following Business Day. FINOVA is not, however, required to credit
Borrower's account for the amount of any item of payment which is unsatisfactory
to FINOVA in its Permitted Discretion and FINOVA may charge Borrower's loan
account for the amount of any item of payment which is returned to FINOVA
unpaid.
(c) Establishment of a Dominion Account. Unless Borrower shall be
-----------------------------------
otherwise directed by FINOVA in writing, Borrower shall cause all proceeds of
Collateral to be deposited into a lockbox account, or such other "blocked
account" as FINOVA may require (each, a "Blocked Account") pursuant to an
---------------
arrangement with such bank as may be selected by Borrower and be acceptable to
FINOVA which proceeds, unless otherwise provided herein, shall be applied in
payment of the Obligations in such order in accordance with this Agreement.
Borrower shall issue to any such bank an irrevocable letter of instruction
directing said bank to transfer such funds so deposited to FINOVA, either to any
account maintained by FINOVA at said bank or by wire transfer to appropriate
account(s) of FINOVA. All funds deposited in a Blocked Account shall immediately
become the sole property of FINOVA and Borrower shall obtain the agreement by
such bank to waive any offset rights against the funds so deposited. FINOVA
assumes no responsibility for any Blocked Account arrangement, including without
limitation, any claim of accord and satisfaction or release with respect to
deposits accepted by any bank thereunder. Alternatively, FINOVA may establish
depository accounts in the name of FINOVA at a bank or banks for the deposit of
such funds (each, a "Dominion Account") and Borrower shall deposit all proceeds
----------------
of Receivables and all cash proceeds of any sale of Inventory or, to the extent
permitted herein, Equipment or cause same to be deposited, in kind, in such
Dominion Accounts of FINOVA in lieu of depositing same to Blocked Accounts, and,
unless otherwise provided herein, all such funds shall be applied by FINOVA to
the Obligations in such order as FINOVA determines in its sole discretion.
(d) Payments Without Deductions. Borrower shall pay principal, interest,
---------------------------
and all other amounts payable hereunder, or under any other Loan Document,
without any deduction whatsoever, including, but not limited to, any deduction
for any setoff or counterclaim.
(e) Collection Days Upon Repayment. In the event Borrower repays the
------------------------------
Obligations in full at any
9
<PAGE>
time hereafter, such payment in full shall be credited (conditioned upon final
collection) to Borrower's loan account three (3) Business Days after FINOVA's
receipt thereof.
(f) Monthly Accountings. FINOVA shall provide Borrower monthly with an
-------------------
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by FINOVA), unless Borrower
notifies FINOVA in writing to the contrary within thirty (30) days after each
account is rendered, describing the nature of any alleged errors or admissions.
2.11 Application of Collateral. Except as otherwise provided herein,
-------------------------
FINOVA shall have the continuing and exclusive right to apply or reverse and re-
apply any and all payments to any portion of the Obligations in such order and
manner described in Section 2.12 below. To the extent that Borrower makes a
payment or FINOVA receives any payment or proceeds of the Collateral for
Borrower's benefit which is subsequently invalidated, declared to be fraudulent
or preferential, set aside or required to be repaid to a trustee, debtor in
possession, receiver or any other party under any bankruptcy law, common law or
equitable cause, or otherwise, then, to such extent, the Obligations or part
thereof intended to be satisfied shall be revived and continue as if such
payment or proceeds had not been received by FINOVA.
2.12 Application of Payments. The amount of all payments or amounts
-----------------------
received by FINOVA with respect to the Loan shall be applied to the extent
applicable under this Agreement: (i) first, to accrued interest through the date
of such payment, including any Default Interest; (ii) then, to any late fees,
overdue risk assessments, Examination Fee and expenses, collection fees and
expenses and any other fees and expenses due to FINOVA hereunder; and (iii)
last, the remaining balance, if any, to the unpaid principal balance of the
Loan; provided however, while an Event of Default exists under this Agreement,
or under any other Loan Document, each payment hereunder shall be (x) held as
cash collateral to secure Obligations relating to any Letters of Credit or other
contingent obligations arising under the Loan Documents and/or (y) applied to
amounts owed to FINOVA by Borrower as FINOVA in its sole discretion may
determine. In calculating interest and applying payments as set forth above:
(a) interest shall be calculated and collected through the date a payment is
actually applied by FINOVA under the terms of this Agreement; (b) interest on
the outstanding balance shall be charged during any grace period permitted
hereunder; (c) at the end of each month, all accrued and unpaid interest and
other charges provided for hereunder shall be added to the principal balance of
the Loan; and (d) to the extent that Borrower makes a payment or FINOVA receives
any payment or proceeds of the Collateral for Borrower?s benefit that is
subsequently invalidated, set aside or required to be repaid to any other
Person, then, to such extent, the Obligations intended to be satisfied shall be
revived and continue as if such payment or proceeds had not been received by
FINOVA and FINOVA may adjust the Loan balances as FINOVA, in its sole
discretion, deems appropriate under the circumstances.
2.13 Notification of Closing. Borrower shall provide FINOVA with at least
-----------------------
forty-eight (48) hours prior written notice of the Closing Date, to enable
FINOVA to arrange for the availability of funds. In the event the closing does
not take place through no fault of Borrower's on the date specified in
Borrower's notice to FINOVA and other than through the fault of FINOVA, Borrower
agrees to reimburse FINOVA for FINOVA's costs to maintain the necessary funds
available for the closing, at the Term Interest Rate with respect to the amount
specified in the Schedule, and at the Revolving Interest Rate with respect to an
amount equal to the initial advance under the Revolving Credit Loans facility
which is to be made on the Closing Date, for the number of days which elapse
between the date specified in Borrower's notice and the date upon which the
closing actually occurs (which number of days shall not include the date
specified in Borrower's notice, but shall include the Closing Date).
3. SECURITY.
3.1 Security Interest in the Collateral. To secure the payment and
-----------------------------------
performance of the Obligations when due, Borrower hereby grants to FINOVA a
first priority security interest (subject only to Permitted Encumbrances) in all
of Borrower's now owned or hereafter acquired or arising Inventory, Equipment,
Receivables, life insurance policies and the proceeds thereof, Trademarks,
Copyrights, Licenses and Patents, , Investment Property (as defined in Section
9-115 of the Code) and General Intangibles, including, without limitation, all
of Borrower's Deposit Accounts, money, any and all property now or at any time
hereafter in FINOVA's possession (including claims and credit balances), and all
proceeds (including proceeds of any insurance policies, proceeds of proceeds and
claims against third parties), all products and all books and records and
computer data related to any of the
10
<PAGE>
foregoing (all of the foregoing, together with all other property in which
FINOVA may be granted a lien or security interest, is referred to herein,
collectively, as the "Collateral").
----------
3.2 Perfection and Protection of Security Interest. Borrower shall, at
----------------------------------------------
its expense, take all actions requested by FINOVA at any time to perfect,
maintain, protect and enforce FINOVA's first priority security interest and
other rights in the Collateral and the priority thereof from time to time,
including, without limitation, (i) executing and filing financing or
continuation statements and amendments thereof and executing and delivering such
documents and titles in connection with motor vehicles as FINOVA shall require,
all in form and substance satisfactory to FINOVA, (ii) maintaining a perpetual
inventory and complete and accurate stock records, (iii) delivering to FINOVA
warehouse receipts covering any portion of the Collateral located in warehouses
and for which warehouse receipts are issued, and transferring Inventory to
warehouses designated by FINOVA, (iv) placing notations on Borrower's books of
account to disclose FINOVA's security interest therein and (v) delivering to
FINOVA all letters of credit on which Borrower is named beneficiary. FINOVA may
file, without Borrower's signature, one or more financing statements disclosing
FINOVA's security interest under this Agreement. Borrower agrees that a carbon,
photographic, photostatic or other reproduction of this Agreement or of a
financing statement is sufficient as a financing statement. If any Collateral is
at any time in the possession or control of any warehouseman, bailee or any of
Borrower's agents or processors, Borrower shall notify such Person of FINOVA's
security interest in such Collateral and, upon FINOVA's request, instruct them
to hold all such Collateral for FINOVA's account subject to FINOVA's
instructions. From time to time, Borrower shall, upon FINOVA's request, execute
and deliver confirmatory written instruments pledging the Collateral to FINOVA,
but Borrower's failure to do so shall not affect or limit FINOVA's security
interest or other rights in and to the Collateral. Until the Obligations have
been fully satisfied and FINOVA's obligation to make further advances hereunder
has terminated, FINOVA's security interest in the Collateral shall continue in
full force and effect.
3.3 Preservation of Collateral. FINOVA may, in its Permitted Discretion,
--------------------------
at any time discharge any lien or encumbrance on the Collateral or bond the
same, pay any insurance, maintain guards, pay any service bureau, obtain any
record or take any other action to preserve the Collateral and charge the cost
thereof to Borrower's loan account as an Obligation.
3.4 Insurance. Borrower will maintain and deliver evidence to FINOVA of
---------
such insurance as is required by FINOVA, written by insurers, in amounts, and
with lender's loss payee, additional insured, and other endorsements,
satisfactory to FINOVA. All premiums with respect to such insurance shall be
paid by Borrower as and when due. Accurate and certified copies of the policies
shall be delivered by Borrower to FINOVA. If Borrower fails to comply with this
Section, FINOVA may (but shall not be required to) procure such insurance and
endorsements at Borrower's expense and charge the cost thereof to Borrower's
loan account as an Obligation.
3.5 Collateral Reporting; Inventory.
-------------------------------
(a) Invoices. Borrower shall not re-date any invoice or sale from the
--------
original date thereof or make sales on extended terms beyond those customary in
Borrower's industry, or otherwise extend or modify the term of any Receivable.
If Borrower becomes aware of any matter affecting any Receivable, including
information affecting the credit of the account debtor thereon, Borrower shall
promptly notify FINOVA in writing.
(b) Instruments. In the event any Receivable is or becomes evidenced by a
-----------
promissory note, trade acceptance or any other instrument for the payment of
money, Borrower shall immediately deliver such instrument to FINOVA
appropriately endorsed to FINOVA and, regardless of the form of any presentment,
demand, notice of dishonor, protest and notice of protest with respect thereto,
Borrower shall remain liable thereon until such instrument is paid in full.
(c) Physical Inventory. Borrower shall conduct a physical count of the
------------------
Inventory at such reasonable intervals as FINOVA may request and promptly supply
FINOVA with a copy of such accounts accompanied by a report of the value
(calculated at the lower of cost or market value on a first in, first out basis)
of the Inventory and such additional information with respect to the Inventory
as FINOVA may request from time to time.
(d) Returns. For so long as no Event of Default has occurred and is
-------
continuing and subject to the provisions of Section 3.6(b), if any account
debtor returns any Inventory to Borrower in the ordinary course of its business,
Borrower shall promptly determine the reason for such return and promptly issue
a credit memorandum to the account debtor (sending a copy to FINOVA) in the
appropriate amount. In the event any attempted return occurs after the
occurrence of any Event of Default, Borrower shall (i) hold the returned
11
<PAGE>
Inventory in trust for FINOVA, (ii) segregate all returned Inventory from all of
Borrower's other property, (iii) conspicuously label the returned Inventory as
FINOVA's property, and (iv) immediately notify FINOVA of the return of any
Inventory, specifying the reason for such return, the location and condition of
the returned Inventory, and on FINOVA's request deliver such returned Inventory
to FINOVA.
(e) Borrower shall not consign any Inventory.
3.6 Receivables.
-----------
(a) Eligibility. (i) Borrower represents and warrants that each
-----------
Receivable covers and shall cover a bona fide sale or lease and delivery by it
of goods or the rendition by it of services in the ordinary course of its
business, and shall be for a liquidated amount and FINOVA's security interest
shall not be subject to any known offset, deduction, counterclaim, rights of
return or cancellation, lien or other condition in an amount greater than
$10,000. If any representation or warranty herein is breached as to any
Receivable or any Receivable ceases to be an Eligible Receivable for any reason
other than payment thereof, then FINOVA may, in addition to its other rights
hereunder, designate any and all Receivables owing by that account debtor as not
Eligible Receivables; provided, that FINOVA shall in any such event retain its
--------
security interest in all Receivables, whether or not Eligible Receivables, until
the Obligations have been fully satisfied and FINOVA's obligation to provide
loans hereunder has terminated.
(ii) FINOVA at any time shall be entitled to (i) establish and increase or
decrease reserves against Eligible Receivables and Eligible Inventory, (ii)
reduce the advance rates in the Schedule or restore such advance rates to any
level equal to or below the advance rates set forth in the Schedule or (iii)
impose additional restrictions (or eliminate the same) to the standards of
eligibility set forth in the definitions of "Eligible Receivables" and "Eligible
Inventory," in the exercise of its Permitted Discretion. FINOVA may but shall
not be required to rely on the schedules an/or reports delivered to FINOVA in
connection herewith in determining the then eligibility of Receivables and
Inventory. Reliance thereon by FINOVA from time to time shall not be deemed to
limit the right of FINOVA to revise advance rates or standards of eligibility as
provided above.
(b) Disputes. Borrower shall notify FINOVA promptly of all material
--------
disputes or claims and settle or adjust such disputes or claims at no expense to
FINOVA, but no discount, credit or allowance shall be granted to any account
debtor and no material returns of merchandise shall be accepted by Borrower
without FINOVA's consent, except for discounts, credits and allowances made or
given in the ordinary course of Borrower's business. FINOVA may, at any time
after the occurrence of an Event of Default, settle or adjust disputes or claims
directly with account debtors for amounts and upon terms which FINOVA considers
advisable in its reasonable credit judgment and, in all cases, FINOVA shall
credit Borrower's loan account with only the net amounts received by FINOVA in
payment of any Receivables.
3.7 Equipment. Borrower shall keep and maintain the Equipment in good
---------
operating condition and repair and make all necessary replacements thereto to
maintain and preserve the value and operating efficiency thereof at all times
consistent with Borrower's past practice, ordinary wear and tear excepted.
Borrower shall not permit any item of Equipment to become a fixture (other than
a trade fixture) to real estate or an accession to other property.
3.8 Other Liens; No Disposition of Collateral. Borrower represents,
------------------------------------------
warrants and covenants that except for FINOVA's security interest, Permitted
Encumbrances, and such other liens, claims and encumbrances as may be permitted
by FINOVA in its sole discretion from time to time in writing, except as
disclosed in Schedule 3.8; all Collateral is and shall continue to be owned by
it free and clear of all liens, claims and encumbrances whatsoever and (b)
Borrower shall not, without FINOVA's prior written approval, sell, encumber or
dispose of or permit the sale, encumbrance or disposal of any Collateral or all
or any substantial part of any of its other assets (or any interest of Borrower
therein), except for the sale of Inventory or Equipment in the ordinary course
of Borrower's business. In the event FINOVA gives any such prior written
approval with respect to any such sale of Collateral, the same may be
conditioned on the sale price being equal to, or greater than, an amount
acceptable to FINOVA. The proceeds of any such sales of Collateral shall be
remitted to FINOVA pursuant to this Agreement for application to the
Obligations.
3.9 Collateral Security. The Obligations shall constitute one loan
-------------------
secured by the Collateral. FINOVA may, in its sole discretion, (i) exchange,
enforce, waive or release any of the Collateral, (ii) apply Collateral and
direct the order or manner of sale thereof as it may determine, and (iii)
settle, compromise, collect or otherwise liquidate any Collateral in any manner
without affecting its right to take any other action with respect to any other
Collateral.
4. CONDITIONS OF CLOSING.
12
<PAGE>
4.1 Initial Advance. The obligation of FINOVA to make the initial advance
---------------
hereunder or to issue or arrange for the issuance of the initial Letter of
Credit hereunder is subject to the fulfillment, to the satisfaction of FINOVA
and its counsel, of each of the following conditions on or prior to the date set
forth on the Schedule:
(a) Loan Documents. FINOVA shall have received each of the following Loan
--------------
Documents: (i) the Agreement fully and properly executed by Borrower; (ii)
promissory notes in such amounts and on such terms and conditions as FINOVA
shall specify, executed by Borrower; (iii) Guaranties executed by each of the
Guarantors and/or Validity and Support Agreements executed by the applicable
parties; (iv) such security agreements, intellectual property assignments,
pledge agreements, mortgages and deeds of trust as FINOVA may require with
respect to this Agreement and any Guaranties, executed by each of the parties
thereto and, if applicable, duly acknowledged for recording or filing in the
appropriate governmental offices; (v) Subordination Agreements in form and
substance acceptable to FINOVA, executed by each of the Subordinating Creditors,
together with copies of all instruments subject thereto showing a legend
indicating such subordination; (vi) such Blocked Account or Dominion Account
agreements as it shall determine; and (vii) such other documents, instruments
and agreements in connection herewith as FINOVA shall require, executed,
certified and/or acknowledged by such parties as FINOVA shall designate;
(b) Minimum Excess Availability. Borrower shall have Excess Availability
---------------------------
under the Revolving Credit Loans facility of not less than the amount specified
in the Schedule, after giving effect to the initial advance hereunder and after
giving effect to any applicable Loan Reserves against borrowing availability
under the Revolving Credit Loans.
(c) Terminations by Existing Lender. Borrower's existing lender(s) shall
-------------------------------
have executed and delivered UCC termination statements and other documentation
evidencing the termination of its liens and security interests in the assets of
Borrower or a subordination agreement in form and substance satisfactory to
FINOVA in its sole discretion;
(d) Charter Documents. FINOVA shall have received copies of Borrower's
-----------------
By-laws and Articles or Certificate of Incorporation, as amended, modified, or
supplemented to the Closing Date, certified by the Secretary of Borrower;
(e) Good Standing. FINOVA shall have received a certificate of corporate
--------------
status with respect to Borrower, dated within ten (10) days of the Closing Date,
by the Secretary of State of the state of incorporation of Borrower, which
certificate shall indicate that Borrower is in good standing in such state;
(f) Foreign Qualification. FINOVA shall have received certificates of
---------------------
corporate status with respect to Borrower and each other Loan Party, each dated
within ten (10) days of the Closing Date, issued by the Secretary of State of
each state in which such party's failure to be duly qualified or licensed would
have a material adverse effect on its financial condition or assets, indicating
that such party is in good standing;
(g) Authorizing Resolutions and Incumbency. FINOVA shall have received a
--------------------------------------
certificate from the Secretary of Borrower attesting to (i) the adoption of
resolutions of Borrower's Board of Directors, and shareholders or members if
necessary, authorizing the borrowing of money from FINOVA and execution and
delivery of this Agreement and the other Loan Documents to which Borrower is a
party, and authorizing specific officers of Borrower to execute same, and (ii)
the authenticity of original specimen signatures of such officers;
(h) Insurance. FINOVA shall have received the insurance certificates and
---------
certified copies of policies required by Section 3.4 hereof, in form and
substance satisfactory to FINOVA and its counsel, together with an additional
insured endorsement in favor of FINOVA with respect to all liability policies
and a lender's loss payable endorsement in favor of FINOVA with respect to all
casualty and business interruption policies, each in form and substance
acceptable to FINOVA and its counsel;
(i) Title Insurance. [Intentionally deleted.]
---------------
(j) Searches; Certificates of Title. FINOVA shall have received searches
-------------------------------
reflecting the filing of its financing statements and fixture filings in such
jurisdictions as it shall determine, and shall have received certificates of
title with respect to the Collateral which shall have been duly executed in a
manner sufficient to perfect all of the security interests granted to FINOVA;
(k) Landlord, Bailee and Mortgagee Waivers. FINOVA shall have received
---------------------------------------
landlord, bailee and/or mortgagee waivers from the lessors, bailees and/or
mortgagees of all locations where any Collateral is located;
(l) Fees. Borrower shall have paid all fees payable by it on the Closing
----
Date pursuant to this Agreement;
13
<PAGE>
(m) Opinion of Counsel. FINOVA shall have received an opinion of
-------------------
Borrower's counsel covering such matters as FINOVA shall determine in its sole
discretion;
(n) Officer Certificate. FINOVA shall have received a certificate of the
-------------------
President and the Chief Financial Officer or similar official of Borrower,
attesting to the accuracy of each of the representations and warranties of
Borrower set forth in this Agreement and the fulfillment of all conditions
precedent to the initial advance hereunder;
(o) Solvency Certificate. If requested, FINOVA shall have received a
--------------------
signed certificate of the Borrower's duly elected Chief Financial Officer
concerning the solvency and financial condition of Borrower, on FINOVA's
standard form;
(p) Blocked Account. The Blocked Account referred to in Section 2.10(c)
---------------
hereof shall have been established to the satisfaction of FINOVA in its sole
discretion;
(q) Environmental Assessment. If required by FINOVA, Borrower shall have
------------------------
caused a Phase I Environmental Assessment to be conducted on the property or
properties owned or occupied by Borrower, all at Borrower's own expense and the
results of such assessment(s) shall have been in form and substance satisfactory
to FINOVA in its sole discretion. Such assessment(s) shall have included, in
FINOVA's discretion, core samplings, and shall have been conducted by an
environmental engineer acceptable to FINOVA;
(r) Environmental Certificate. FINOVA shall have received an Environmental
-------------------------
Certificate from Borrower, in form and substance satisfactory to FINOVA in its
discretion, with respect to all locations of Collateral;
(s) Search and References. FINOVA shall have received and approved the
---------------------
results of UCC, tax lien, litigation, judgment, and bankruptcy searches
regarding Buyer, Borrower, Seller, Investors and such members of the senior
management of Seller as shall remain with Borrower, and shall have received
satisfactory customer, vendor and credit reference checks on Seller.
(t) Lease and Landlord's Consent.
----------------------------
[Intentionally deleted].
(u) Life Insurance. [Intentionally deleted].
--------------
(v) No Material Adverse Changes. Prior to the Closing Date, there shall
---------------------------
have occurred no material adverse change in the financial condition of Seller or
Borrower, or in the condition of the assets of Seller, from that shown on the
draft financial statements for Seller dated on the date set forth in the
Schedule. At the closing, Borrower shall deliver to FINOVA an officer's
certification confirming that Borrower is unaware of the existence of any such
material adverse change in Seller's financial condition.
(w) Material Agreements. FINOVA shall have received, reviewed and approved
-------------------
all material agreements to which Borrower shall be a party, including any such
agreements of Seller which Borrower shall assume.
(x) Projections. Borrower shall submit cash flow projections and pro forma
-----------
balance sheet with adjusting entries (i) showing that the proposed financing
will provide sufficient funds for the Borrower's projected working capital
needs, and (ii) showing: (1) that the Borrower will have reasonably sufficient
capital for the conduct of its business following the initial funding, and (2)
that the Borrower will not incur debts beyond its ability to pay such debts as
they mature.
(y) Opinions. To the extent any Person other than Borrower shall be
--------
parties to the Loan Documents, FINOVA reserves the right to require satisfactory
opinions of counsel for each such Person concerning the proper organization of
such Person and the due authorization, execution, delivery, enforceability,
validity and binding effect of the Loan Documents to which such Person is a
party. Each such opinion of counsel shall confirm, to the satisfaction of
FINOVA, that the opinion is being delivered to FINOVA at the instruction of the
party represented by such counsel, that FINOVA is entitled to rely on such
opinion and that for purposes of such reliance, FINOVA is deemed to be in
privity with the opining counsel.
(z) ADA Compliance. If necessary, as of the Closing Date, Borrower shall
--------------
be in compliance with the Americans with Disabilities Act of 1990 ("ADA"), or,
-----
if any renovations of Borrower's facilities or modifications of Borrower's
employment practices shall be required to bring them into compliance with the
ADA, review and approval by FINOVA of Borrower's proposed plan to come into such
compliance. Borrower shall deliver representations and warranties to FINOVA
concerning Borrower's compliance with the ADA, and no evidence shall have come
to the attention of FINOVA indicating that Borrower is not in compliance with
the ADA (except to the extent that FINOVA has reviewed and approved Borrower's
plan to come into compliance).
(aa) Subordination and Intercreditor Agreements. FINOVA and each
------------------------------------------
Subordinating Creditor shall have entered into a Subordination Agreement, in
form and substance satisfactory to FINOVA. Without
14
<PAGE>
limiting the generality of the foregoing, Seller shall enter into one or more
Subordination Agreements with FINOVA, in form and substance satisfactory to
FINOVA, providing that Seller's right to payments in respect of the Seller
Subordinated Indebtedness shall be subordinated in right of payment to the Loan.
(bb) Stock Pledge. [Intentionally deleted.]
------------
(cc) Acquisition Documents. [Intentionally deleted].
---------------------
(dd) Employment and Non-compete agreements. [Intentionally deleted.]
-------------------------------------
(ee) Asset Appraisal. Borrower shall have provided to FINOVA, at
---------------
Borrower's sole cost and expense, an asset appraisal of all Borrower's fixed
assets upon which FINOVA shall be granted a first priority lien and security
interest, which appraisal must be acceptable to FINOVA in all respects.
(ff) Transaction Costs. [Intentionally deleted.]
-----------------
(gg) Schedule Conditions. Borrower shall have complied with all additional
-------------------
conditions precedent as set forth in the Schedule attached hereto.
(hh) Other Matters. All other documents and legal matters in connection
-------------
with the transactions contemplated by this Agreement shall have been delivered,
executed and recorded and shall be in form and substance satisfactory to FINOVA
and its counsel including, without limitation, each of the items listed on the
Closing Checklist attached as Exhibit 4.1 hereto.
-----------
4.2 Subsequent Advances. The obligation of FINOVA to make any advance or
--------------------
issue or cause any Letter of Credit to be issued hereunder (including the
initial advance or Letter of Credit) shall be subject to the further conditions
precedent that, on and as of the date of such advance or Letter of Credit
issuance: (a) the representations and warranties of Borrower set forth in this
Agreement shall be accurate, before and after giving effect to such advance or
issuance and to the application of any proceeds thereof; (b) no Event of
Default and no event which, with notice or passage of time or both, would
constitute an Event of Default has occurred and is continuing, or would result
from such advance or issuance or from the application of any proceeds thereof;
(c) no material adverse change has occurred in the Borrower's business,
operations, financial condition, in the condition of the Collateral or other
assets of Borrower or in the prospect of repayment of the Obligations; and (d)
FINOVA shall have received such other approvals, opinions or documents as FINOVA
shall reasonably request.
5. REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants that:
5.1 Due Organization. It is a corporation duly organized, validly existing
----------------
and in good standing under the laws of the State set forth on the Schedule, is
qualified and authorized to do business and is in good standing in all states in
which such qualification and good standing are necessary in order for it to
conduct its business and own its property, and has all requisite power and
authority to conduct its business as presently conducted, to own its property
and to execute and deliver each of the Loan Documents to which it is a party and
perform all of its Obligations thereunder, and has not taken any steps to wind-
up, dissolve or otherwise liquidate its assets;
5.2 Other Names. Borrower has not, during the preceding five (5) years,
-----------
been known by or used any other corporate or fictitious name except as set forth
on the Schedule, nor has Borrower been the surviving corporation of a merger or
consolidation or acquired all or substantially all of the assets of any Person
during such time;
5.3 Due Authorization. The execution, delivery and performance by Borrower
-----------------
of the Loan Documents to which it is a party have been authorized by all
necessary corporate action and do not and shall not constitute a violation of
any applicable law or of Borrower's Articles or Certificate of Incorporation or
By-Laws or any other document, agreement or instrument to which Borrower is a
party or by which Borrower or its assets are bound;
5.4 Binding Obligation. Each of the Loan Documents to which Borrower is a
------------------
party is the legal, valid and binding obligation of Borrower enforceable against
Borrower in accordance with its terms;
5.5 Intangible Property. Borrower possesses adequate assets, licenses,
-------------------
patents, patent applications, copyrights, trademarks, trademark applications and
trade names for the present and planned future conduct of its business without
any known conflict with the rights of others, and each is valid and has been
duly registered or filed with the appropriate governmental authorities; each of
Borrower's patents, patent applications, copyrights, trademarks and trademark
applications which have been registered or filed with any governmental authority
(including the U.S. Patent and Trademark Office and the Library of Congress) are
listed by name, date and filing number on the Schedule;
5.6 Capital. Borrower has capital sufficient to conduct its business, is
-------
able to pay its debts as they mature, and owns property having a fair salable
value
15
<PAGE>
greater than the amount required to pay all of its debts (including
contingent debts);
5.7 Material Litigation. Except as disclosed in Schedule 5.7, Borrower
has no pending or overtly threatened litigation, actions or proceedings which
would materially and adversely affect its business, assets, operations,
prospects or condition, financial or otherwise, or the Collateral or any of
FINOVA's interests therein;
5.8 Title; Security Interests of FINOVA. Borrower has good, indefeasible
-----------------------------------
and merchantable title to the Collateral and, upon the execution and delivery of
the Loan Documents, the filing of UCC-1 Financing Statements, delivery of the
certificate(s) evidencing any pledged securities, the filing of any collateral
assignments or security agreements regarding Borrower, Trademarks, Copyrights,
Licenses and/or Patents, if any, with the appropriate governmental offices and
the recording of any mortgages or deeds of trust with respect to real property,
in each case in the appropriate offices, this Agreement and such documents shall
create valid and perfected first priority liens in the Collateral, subject only
to Permitted Encumbrances;
5.9 Restrictive Agreements; Labor Contracts. Borrower is not a party or
---------------------------------------
subject to any contract or subject to any charge, corporate restriction,
judgment, decree or order materially and adversely affecting its business,
assets, operations, prospects or condition, financial or otherwise, or which
restricts its right or ability to incur Indebtedness, and it is not party to any
labor dispute. In addition, no labor contract is scheduled to expire during the
Initial Term of this Agreement, except as disclosed to FINOVA on Schedule 5.9.
5.10 Laws. Borrower is not in violation of any applicable statute,
----
regulation, ordinance or any order of any court, tribunal or governmental
agency, in any respect materially and adversely affecting the Collateral or its
business, assets, operations, prospects or condition, financial or otherwise;
5.11 Consents. Borrower has obtained or caused to be obtained or issued
--------
any required consent of a governmental agency or other Person in connection with
the financing contemplated hereby;
5.12 Defaults. Borrower is not in default with respect to any note,
--------
indenture, loan agreement, mortgage, lease, deed or other agreement to which it
is a party or by which it or its assets are bound, nor has any event occurred
which, with the giving of notice or the lapse of time, or both, would cause such
a default;
5.13 Financial Condition. The Prepared Financials fairly present
-------------------
Borrower's financial condition and results of operations and those of such other
Persons described therein as of the date thereof in accordance with GAAP; there
are no material omissions from the Prepared Financials or other facts or
circumstances not reflected in the Prepared Financials; and there has been no
material and adverse change in such financial condition or operations since the
date of the initial Prepared Financials delivered to FINOVA hereunder;
5.14 ERISA. None of Borrower, any ERISA Affiliate, or any Plan is or has
-----
been in violation of any of the provisions of ERISA, any of the qualification
requirements of IRC Section 401(a) or any of the published interpretations
thereunder, nor has Borrower or any ERISA Affiliate received any notice to such
effect. No notice of intent to terminate a Plan has been filed under Section
4041 of ERISA, nor has any Plan been terminated under ERISA. The PBGC has not
instituted proceedings to terminate, or appointed a trustee to administer, a
Plan. No lien upon the assets of Borrower has arisen with respect to a Plan. No
prohibited transaction or Reportable Event has occurred with respect to a Plan.
Neither Borrower nor any ERISA Affiliate has incurred any withdrawal liability
with respect to any Multiemployer Plan. Borrower and each ERISA Affiliate have
made all contributions required to be made by them to any Plan or Multiemployer
Plan when due. There is no accumulated funding deficiency in any Plan, whether
or not waived;
5.15 Taxes. Borrower has filed all tax returns and such other reports as
-----
it is required by law to file and has paid or made adequate provision for the
payment on or prior to the date when due of all taxes, assessments and similar
charges that are due and payable;
5.16 Locations; Federal Tax ID No. Borrower's chief executive office and
----------------------------
the offices and locations where it keeps the majority of the Collateral (except
for Inventory in transit) are at the locations set forth on the Schedule, except
to the extent that such locations may have been changed after notice to FINOVA
in accordance with Section 6.4 hereof; Borrower's federal tax identification
number is as shown on the Schedule;
5.17 Business Relationships. There exists no actual or threatened
----------------------
termination, cancellation or limitation of, or any modification or change in,
the business relationship between Borrower and any customer or any group of
customers whose purchases individually or in the aggregate are material to the
business of Borrower, or with any material supplier, and there exists no present
condition or state of facts or circumstances which would materially and
adversely
16
<PAGE>
affect Borrower or prevent Borrower from conducting such business
after the consummation of the transactions contemplated by this Agreement in
substantially the same manner in which it has heretofore been conducted; and
5.18 Reaffirmations. Each request for a loan made by Borrower pursuant to
--------------
this Agreement shall constitute (i) an automatic representation and warranty by
Borrower to FINOVA that there does not then exist any Event of Default and (ii)
a reaffirmation as of the date of said request of all of the representations and
warranties of Borrower contained in this Agreement and the other Loan Documents.
5.19 Year 2000 Representations & Warranties. Borrower has taken all action
--------------------------------------
necessary to assure that there will be no material adverse change to Borrower's
business by reason of the advent of the year 2000, including without limitation
that all computer-based systems, embedded microchips and other processing
capabilities effectively recognize and process dates after April 1, 1999.
6. COVENANTS.
6.1 Affirmative Covenants. Borrower covenants that, so long as any
---------------------
Obligation remains outstanding and this Agreement is in effect, it shall:
6.1.1 Taxes. File all tax returns and pay or make adequate provision
-----
for the payment of all taxes, assessments and other charges on or prior to the
date when due;
6.1.2 Notice of Litigation. Promptly notify FINOVA in writing of any
--------------------
litigation, suit or administrative proceeding which may materially and adversely
affect the Collateral or Borrower's business, assets, operations, prospects or
condition, financial or otherwise, whether or not the claim is covered by
insurance;
6.1.3 ERISA. Notify FINOVA in writing (i) promptly upon the occurrence
-----
of any event described in Paragraph 4043 of ERISA, other than a termination,
partial termination or merger of a Plan or a transfer of a Plan's assets and
(ii) prior to any termination, partial termination or merger of a Plan or a
transfer of a Plan's assets;
6.1.4 Change in Location. Notify FINOVA in writing forty-five (45)
------------------
days prior to any change in the location of Borrower's chief executive office or
the location of any Collateral except that which occurs in the normal course of
business; or Borrower's opening or closing of any other place of business;
6.1.5 Corporate Existence. Maintain its corporate existence and its
-------------------
qualification to do business and good standing in all states necessary for the
conduct of its business and the ownership of its property and maintain adequate
assets, licenses, patents, copyrights, trademarks and trade names for the
conduct of its business;
6.1.6 Labor Disputes. Promptly notify FINOVA in writing of any labor
--------------
dispute to which Borrower is or may become subject and the expiration of any
labor contract to which Borrower is a party or bound;
6.1.7 Violations of Law. Promptly notify FINOVA in writing of any
-----------------
violation of any law, statute, regulation or ordinance of any governmental
entity, or of any agency
thereof, applicable to Borrower which may materially and adversely affect the
Collateral or Borrower's business, assets, prospects, operations or condition,
financial or otherwise;
6.1.8 Defaults. Notify FINOVA in writing within five (5) Business Days
--------
of Borrower's default under any note, indenture, loan agreement, mortgage, lease
or other agreement to which Borrower is a party or by which Borrower is bound,
or of any other default under any Indebtedness of Borrower to the extent that
any such default has a material adverse affect on Borrower or the Collateral;
6.1.9 Capital Expenditures. Promptly notify FINOVA in writing of the
--------------------
making of any Capital Expenditure materially affecting Borrower's business,
assets, prospects, operations or condition, financial or otherwise, except to
the extent permitted in the Schedule;
6.1.10 Books and Records. Keep adequate records and books of account
-----------------
with respect to its business activities in which proper entries are made in
accordance with GAAP, reflecting all of its financial transactions;
6.1.11 Leases; Warehouse Agreements. Provide FINOVA with (i) copies of
----------------------------
all agreements between Borrower and any landlord, warehouseman or bailee which
owns any premises at which any Collateral may, from time to time, be located
(whether for processing, storage or otherwise), and (ii) without limiting the
landlord, bailee and/or mortgagee waivers to be provided pursuant to Section
4.1(j) hereof, additional landlord, bailee and/or mortgagee waivers in form
acceptable to FINOVA with respect to all locations where any Collateral is
hereafter located;
6.1.12 Additional Documents. At FINOVA's request, promptly execute or
--------------------
cause to be
17
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executed and delivered to FINOVA any and all documents, instruments
or agreements deemed reasonably necessary by FINOVA to facilitate the collection
of the Obligations or the Collateral or otherwise to give effect to or carry out
the terms or intent of this Agreement or any of the other Loan Documents.
Without limiting the generality of the foregoing, if any of the Receivables with
a face value in excess of $1,000 arises out of a contract with the United States
of America or any department, agency, subdivision or instrumentality thereof,
Borrower shall promptly notify FINOVA of such fact in writing and shall execute
any instruments and take any other action required or requested by FINOVA to
comply with the provisions of the Federal Assignment of Claims Act; and
6.1.13 Financial Covenants. Comply with the financial covenants set
-------------------
forth on the Schedule.
6.1.14 Year 2000 Covenants. Borrower shall take all action necessary to
-------------------
assure that there will be no material adverse change to Borrower's business by
reason of the advent of the year 2000, including without limitation that all
computer-based systems, embedded microchips and other processing capabilities
effectively recognize and process dates after April 1, 1999. At FINOVA's
request, Borrower shall provide to FINOVA assurance reasonably acceptable to
FINOVA that Borrower's computer-based systems, embedded microchips and other
processing capabilities are year 2000 compatible.
6.2 Negative Covenants. Without FINOVA's prior written consent, which
-------------------
consent FINOVA may withhold in its sole discretion, so long as any Obligation
remains outstanding and this Agreement is in effect, Borrower shall not:
6.2.1 Mergers. Merge or consolidate with or acquire any other Person, or
-------
make any other material change in its capital structure or in its business or
operations which might adversely affect the repayment of the Obligations;
6.2.2 Loans. Make advances, loans or extensions of credit to, or invest
-----
in, any Person, except for loans or cash advances to employees which are
permitted in the Schedule;
6.2.3 Dividends. Declare or pay cash dividends upon any of its stock or
---------
distribute any of its property or redeem, retire, purchase or acquire directly
or indirectly any of its stock;
6.2.4 Adverse Transactions. Enter into any transaction which materially
--------------------
and adversely affects the Collateral or its ability to repay the Obligations in
full as and when due;
6.2.5 Indebtedness of Others. Guarantee or become directly or
----------------------
contingently liable for the Indebtedness of any Person, except by endorsement of
instruments for deposit and except for the existing guarantees made by Borrower
prior to the date hereof, if any, which are set forth in the Schedule;
6.2.6 Repurchase. Make a sale to any customer on a bill-and-hold,
----------
guaranteed sale, sale and return, sale on approval, consignment, or any other
repurchase or return basis;
6.2.7 Name. Use any corporate or fictitious name other than its
----
corporate name as set forth in its Articles or Certificate of Incorporation on
the date hereof or as set forth on the Schedule;
6.2.8 Prepayment. Prepay any Indebtedness other than trade payables and
----------
other than the Obligations;
6.2.9 Capital Expenditure. Make or incur any Capital Expenditure if,
-------------------
after giving effect thereto, the aggregate amount of all Capital Expenditures by
Borrower in any fiscal year would exceed the amount set forth on the Schedule;
6.2.10 Compensation. Pay total compensation, including salaries,
------------
withdrawals, fees, bonuses, commissions, drawing accounts and other payments,
whether directly or indirectly, in money or otherwise, during any fiscal year to
all of Borrower's executives, officers and directors (or any relative thereof)
in an amount in excess of the amount set forth on the Schedule;
6.2.11 Indebtedness. Create, incur, assume or permit to exist any
------------
Indebtedness (including Indebtedness in connection with Capital Leases) in
excess of the amount set forth on the Schedule, other than (i) the Obligations,
(ii) trade payables and other contractual obligations to suppliers and customers
incurred in the ordinary course of business, and (iii) other Indebtedness
existing on the date of this Agreement and reflected in the Prepared Financials
(except Indebtedness paid on the date of this Agreement from proceeds of the
initial advances hereunder), and (iv) Subordinated Debt;
6.2.12 Affiliate Transactions. Except as set forth below, sell,
----------------------
transfer, distribute or pay any money or property to any Affiliate, or invest in
(by capital contribution or otherwise) or purchase or repurchase any stock or
Indebtedness, or any property, of any Affiliate, or become liable on any
guaranty of the indebtedness, dividends or other obligations of any Affiliate.
Notwithstanding the foregoing, Borrower may
18
<PAGE>
pay compensation permitted by Section 6.23 to employees who are Affiliates and,
if no Event of Default has occurred, Borrower may (i) engage in transactions
with Affiliates in the normal course of business, in amounts and upon terms
which are fully disclosed to FINOVA and which are no less favorable to Borrower
than would be obtainable in a comparable arm's length transaction with a Person
who is not an Affiliate, and (ii) make payments to a Subordinating Creditor that
is an Affiliate, subject to and only to the extent expressly permitted in the
Subordination Agreement between such Subordinating Creditor and FINOVA;
6.2.13 Nature of Business. Enter into any new business or make any
------------------
material change in any of Borrower's business objectives, purposes or
operations;
6.2.14 FINOVA's Name. Use the name of FINOVA in connection with any of
-------------
Borrower's business or activities, except in connection with internal business
matters or as required in dealings with governmental agencies and financial
institutions or with trade creditors of Borrower, solely for credit reference
purposes; or
6.2.15 Margin Security. Borrower will not (and has not in the
----------------
past) engaged principally, or as one of its important activities, in the
business of extending credit for the purpose of purchasing or carrying margin
stock (within the meaning of Regulation G or Regulation U issued by the Board of
Governors of the Federal Reserve System), and no proceeds of any Loan or other
advance will be used to purchase or carry any margin stock or to extend credit
to others for the purpose of purchasing or carrying any margin stock, or in any
manner which might cause such Loan or other advance or the application of such
proceeds to violate (or require any regulatory filing under) Regulation G,
Regulation T, Regulation U, Regulation X or any other regulation of the Board of
Governors of the Federal Reserve System, in each case as in effect on the date
or dates of such Loan or other advance and such use of proceeds. Further, no
proceeds of any Loan or other advance will be used to acquire any security of a
class which is registered pursuant to Section 12 of the Securities Exchange Act
of 1934.
6.2.16 Real Property. Purchase or acquire any real property without
-------------
FINOVA's prior written consent, a condition of which consent shall include
delivery of appropriate environmental reports and analysis, in form and
substance satisfactory to FINOVA and its counsel.
7. DEFAULT AND REMEDIES.
7.1 Events of Default. Any one or more of the following events shall
-----------------
constitute an Event of Default under this Agreement:
(a) Borrower fails to pay when due and payable any portion of the
Obligations at stated maturity, upon acceleration or otherwise;
(b) Borrower or any other Loan Party fails or neglects to perform, keep,
or observe any Obligation including, but not limited to, any term, provision,
condition, covenant or agreement contained in any Loan Document to which
Borrower or such other Loan Party is a party;
(c) Any material adverse change occurs in Borrower's business, assets,
operations, prospects or condition, financial or otherwise;
(d) The prospect of repayment of any portion of the Obligations or the
value or priority of FINOVA's security interest in the Collateral is materially
impaired;
(e) Any portion of Borrower's assets is seized, attached, subjected to a
writ or distress warrant, is levied upon or comes into the possession of any
judicial officer;
(f) Borrower shall generally not pay its debts as they become due or shall
enter into any agreement (whether written or oral), or offer to enter into any
agreement, with all or a significant number of its creditors regarding any
moratorium or other indulgence with respect to its debts or the participation of
such creditors or their representatives in the supervision, management or
control of the business of Borrower;
(g) Any bankruptcy or other insolvency proceeding is commenced by
Borrower, or any such proceeding is commenced against Borrower and remains
undischarged or unstayed for forty-five (45) days;
(h) Any notice of lien, levy or assessment is filed of record with respect
to any of Borrower's assets exceeding $100,000;
(i) Any judgments are entered against Borrower in an aggregate amount
exceeding $100,000 in any fiscal year;
(j) Any default shall occur under (i) any material agreement between
Borrower and any third party including, without limitation, any default which
would result in a right by such third party to accelerate the maturity of any
Indebtedness of Borrower to such third party, or (ii) any Subordinated Debt;
19
<PAGE>
(k) Any representation or warranty made or deemed to be made by Borrower,
any Affiliate or any other Loan Party in any Loan Document or any other
statement, document or report made or delivered to FINOVA in connection
therewith shall prove to have been misleading in any material respect;
(l) [Intentionally deleted.]
(m) Any Prohibited Transaction or Reportable Event shall occur with
respect to a Plan which could have a material adverse effect on the financial
condition of Borrower; any lien upon the assets of Borrower in connection with
any Plan shall arise; Borrower or any of its ERISA Affiliates shall fail to make
full payment when due of all amounts which Borrower or any of its ERISA
Affiliates may be required to pay to any Plan or any Multiemployer Plan as one
or more contributions thereto; Borrower or any of its ERISA Affiliates creates
or permits the creation of any accumulated funding deficiency, whether or not
waived; or
(n) Any transfer of more than fifteen percent (15%) of the issued and
outstanding shares of common stock or other evidence of ownership of Borrower.
NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, FINOVA RESERVES THE RIGHT
TO CEASE MAKING ANY LOANS DURING ANY CURE PERIOD STATED ABOVE, AND THEREAFTER IF
AN EVENT OF DEFAULT HAS OCCURRED.
7.2 Remedies. Upon the occurrence of an Event of Default, FINOVA may, at
--------
its option and in its sole discretion and in addition to all of its other rights
under the Loan Documents, cease making Loans, terminate this Agreement and/or
declare all of the Obligations to be immediately payable in full. Borrower
agrees that FINOVA shall also have all of its rights and remedies under
applicable law, including, without limitation, the default rights and remedies
of a secured party under the Code, and upon the occurrence of an Event of
Default Borrower hereby consents to the appointment of a receiver by FINOVA in
any action initiated by FINOVA pursuant to this Agreement and to the
jurisdiction and venue set forth in Section 9.25 hereof, and Borrower waives
notice and posting of a bond in connection therewith. Further, FINOVA may, at
any time, take possession of the Collateral and keep it on Borrower's premises,
at no cost to FINOVA, or remove any part of it to such other place(s) as FINOVA
may desire, or Borrower shall, upon FINOVA's demand, at Borrower's sole cost,
assemble the Collateral and make it available to FINOVA at a place reasonably
convenient to FINOVA. FINOVA may sell and deliver any Collateral at public or
private sales, for cash, upon credit or otherwise, at such prices and upon such
terms as FINOVA deems advisable, at FINOVA's discretion, and may, if FINOVA
deems it reasonable, postpone or adjourn any sale of the Collateral by an
announcement at the time and place of sale or of such postponed or adjourned
sale without giving a new notice of sale. Borrower agrees that FINOVA has no
obligation to preserve rights to the Collateral or marshall any Collateral for
the benefit of any Person. FINOVA is hereby granted a license or other right to
use, without charge, Borrower's labels, patents, copyrights, name, trade
secrets, trade names, trademarks and advertising matter, or any similar
property, in completing production, advertising or selling any Collateral and
Borrower's rights under all licenses and all franchise agreements shall inure to
FINOVA's benefit. Any requirement of reasonable notice shall be met if such
notice is mailed postage prepaid to Borrower at its address set forth in the
heading to this Agreement at least five (5) days before sale or other
disposition. The proceeds of sale shall be applied, first, to all attorneys
fees and other expenses of sale, and second, to the Obligations in such order as
FINOVA shall elect, in its sole discretion. FINOVA shall return any excess to
Borrower and Borrower shall remain liable for any deficiency to the fullest
extent permitted by law.
7.3 Standards for Determining Commercial Reasonableness. Borrower and
---------------------------------------------------
FINOVA agree that the following conduct by FINOVA with respect to any
disposition of Collateral shall conclusively be deemed commercially reasonable
(but other conduct by FINOVA, including, but not limited to, FINOVA's use in its
sole discretion of other or different times, places and manners of noticing and
conducting any disposition of Collateral shall not be deemed unreasonable): Any
public or private disposition: (i) as to which on no later than the fifth
calendar day prior thereto written notice thereof is mailed or personally
delivered to Borrower and, with respect to any public disposition, on no later
than the fifth calendar day prior thereto notice thereof describing in general
non-specific terms, the Collateral to be disposed of is published once in a
newspaper of general circulation in the county where the sale is to be conducted
(provided that no notice of any public or private disposition need be given to
the Borrower or published if the Collateral is perishable or threatens to
decline speedily in value or is of a type customarily sold on a recognized
market); (ii) which is conducted at any place designated by FINOVA, with or
without the Collateral being present; and (iii) which commences at any time
between 8:00 a.m. and 5:00 p.m. Without
20
<PAGE>
limiting the generality of the foregoing, Borrower expressly agrees that, with
respect to any disposition of accounts, instruments and general intangibles, it
shall be commercially reasonable for FINOVA to direct any prospective purchaser
thereof to ascertain directly from Borrower any and all information concerning
the same, including, but not limited to, the terms of payment, aging and
delinquency, if any, the financial condition of any obligor or account debtor
thereon or guarantor thereof, and any collateral therefor.
8. EXPENSES AND INDEMNITIES
8.1 Expenses. Borrower covenants that, so long as any Obligation remains
--------
outstanding and this Agreement remains in effect, it shall promptly reimburse
FINOVA for all costs, fees and expenses incurred by FINOVA in connection with
the negotiation, preparation, execution, delivery, administration and
enforcement of each of the Loan Documents, including, but not limited to, the
attorneys' and paralegals' fees of in-house and outside counsel, expert witness
fees, lien, title search and insurance fees, appraisal fees, all charges and
expenses incurred in connection with any and all environmental reports and
environmental remediation activities, and all other costs, expenses, taxes and
filing or recording fees payable in connection with the transactions
contemplated by this Agreement, including without limitation all such costs,
fees and expenses as FINOVA shall incur or for which FINOVA shall become
obligated in connection with (i) any inspection or verification of the
Collateral, (ii) any proceeding relating to the Loan Documents or the
Collateral, (iii) actions taken with respect to the Collateral and FINOVA's
security interest therein, including, without limitation, the defense or
prosecution of any action involving FINOVA and Borrower or any third party, (iv)
enforcement of any of FINOVA's rights and remedies with respect to the
Obligations or Collateral and (v) consultation with FINOVA's attorneys and
participation in any workout, bankruptcy or other insolvency or other proceeding
involving any Loan Party or any Affiliate, whether or not suit is filed or the
issues are peculiar to federal bankruptcy or state insolvency laws. Borrower
shall also pay all FINOVA charges in connection with bank wire transfers,
forwarding of loan proceeds, deposits of checks and other items of payment,
returned checks, establishment and maintenance of lockboxes and other Blocked
Accounts, and all other bank and administrative matters, in accordance with
FINOVA's schedule of bank and administrative fees and charges in effect from
time to time.
8.2 Environmental Matters.
----------------------
The Environmental Certificate dated on or about the date of this Agreement
is incorporated herein for all purposes as if fully stated in this Agreement.
9. MISCELLANEOUS.
9.1 Examination of Records; Financial Reporting.
-------------------------------------------
(a) Examinations. FINOVA shall at all reasonable times have full access
------------
to and the right to examine, audit, make abstracts and copies from and inspect
Borrower's records, files, books of account and all other documents, instruments
and agreements relating to the Collateral and the right to check, test and
appraise the Collateral. Borrower shall deliver to FINOVA any instrument
necessary for FINOVA to obtain records from any service bureau maintaining
records for Borrower. All instruments and certificates prepared by Borrower
showing the value of any of the Collateral shall be accompanied, upon FINOVA's
request, by copies of related purchase orders and invoices. FINOVA may, at any
time after the occurrence of an Event of Default, remove from Borrower's
premises Borrower's books and records (or copies thereof) or require Borrower to
deliver such books and records or copies to FINOVA. FINOVA may, without expense
to FINOVA, use such of Borrower's personnel, supplies and premises as may be
reasonably necessary for maintaining or enforcing FINOVA's security interest.
(b) Reporting Requirements. Borrower shall furnish FINOVA, upon request,
----------------------
such information and statements as FINOVA shall request from time to time
regarding Borrower's business affairs, financial condition and the results of
its operations. Without limiting the generality of the foregoing, Borrower
shall provide FINOVA with: (i) FINOVA's standard form collateral and loan
report, each business day, and upon FINOVA's request, copies of sales journals,
cash receipt journals, and deposit slips; (ii) upon FINOVA's request, copies of
sales invoices, customer statements and credit memoranda issued, remittance
advices and reports; (iii) copies of shipping and delivery documents, upon
request; (iv) on or prior to the date set forth on the Schedule, monthly agings
(aged from invoice date) and reconciliations of Receivables (with listings of
concentrated accounts), payables reports, machinery and equipment reports,
compliance certificates and unaudited financial statements with respect to the
prior month prepared on a basis consistent with such statements prepared in
prior months and otherwise in accordance with GAAP; (v) audited annual
consolidated and consolidating financial statements, prepared in accordance with
GAAP applied on a basis consistent with the most recent Prepared Financials
provided to FINOVA by Borrower, including balance sheets, income
21
<PAGE>
and cash flow statements, accompanied by the unqualified report thereon of
independent certified public accountants acceptable to FINOVA, as soon as
available, and in any event, within one hundred twenty (120) days after the end
of each of Borrower's fiscal years; and (vi) such certificates relating to the
foregoing as FINOVA may request, including, without limitation, a monthly
certificate from the president and the chief financial officer of Borrower
showing Borrower's compliance with each of the financial covenants set forth in
this Agreement, and stating whether any Event of Default has occurred or event
which, with giving of notice or the passage of time, or both, would constitute
an Event of Default, and if so, the steps being taken to prevent or cure such
Event of Default. All reports or financial statements submitted by Borrower
shall be in reasonable detail and shall be certified by the principal financial
officer of Borrower as being complete and correct.
(c) Guarantor's Financial Statements and Tax Returns. [Intentionally
------------------------------------------------
deleted.]
9.2 Term; Termination.
-----------------
(a) Term. The Initial Term of the Revolving Credit Loans facility and the
----
obligation of FINOVA to made advances with respect thereto in accordance with
this Agreement shall be as set forth on the Schedule, and the Revolving Credit
Loans facility and this Agreement shall be automatically renewed for one or more
Renewal Term(s) as set forth in the Schedule, unless earlier terminated as
provided herein.
(b) Prior Notice. Each party shall have the right to terminate this
------------
Agreement effective at the end of the Initial Term or at the end of any Renewal
Term by giving the other party written notice not less than sixty (60) days
prior to the effective date of such termination, by registered or certified
mail.
(c) Payment in Full. Upon the effective date of termination, the
---------------
Obligations shall become immediately due and payable in full in cash.
(d) Early Termination; Termination Fee. In addition to the procedure set
----------------------------------
forth in Section 9.2(b), Borrower may terminate this Agreement at any time but
only upon sixty (60) days' prior written notice and prepayment of the
Obligations. Upon any such early termination by Borrower or any termination of
this Agreement by FINOVA upon the occurrence of an Event of Default, then, and
in any such event, Borrower shall pay to FINOVA upon the effective date of such
termination a fee (the "Termination Fee") in an amount equal to the amount shown
---------------
on the Schedule.
9.3 Recourse to Security; Certain Waivers. All Obligations shall be
-------------------------------------
payable by Borrower as provided for herein and, in full, at the termination of
this Agreement; recourse to security shall not be required at any time.
Borrower waives presentment and protest of any instrument and notice thereof,
notice of default and, to the extent permitted by applicable law, all other
notices to which Borrower might otherwise be entitled.
9.4 No Waiver by FINOVA. Neither FINOVA's failure to exercise any right,
-------------------
remedy or option under this Agreement, any supplement, the Loan Documents or
other agreement between FINOVA and Borrower nor any delay by FINOVA in
exercising the same shall operate as a waiver. No waiver by FINOVA shall be
effective unless in writing and then only to the extent stated. No waiver by
FINOVA shall affect its right to require strict performance of this Agreement.
FINOVA's rights and remedies shall be cumulative and not exclusive.
9.5 Binding on Successor and Assigns. All terms, conditions, promises,
--------------------------------
covenants, provisions and warranties shall inure to the benefit of and bind
FINOVA's and Borrower's respective representatives, successors and assigns.
9.6 Severability. If any provision of this Agreement shall be prohibited
------------
or invalid under applicable law, it shall be ineffective only to such extent,
without invalidating the remainder of this Agreement.
9.7 Amendments; Assignments. This Agreement may not be modified, altered
-----------------------
or amended, except by an agreement in writing signed by Borrower and FINOVA.
Borrower may not sell, assign or transfer any interest in this Agreement or any
other Loan Document, or any portion thereof, including, without limitation, any
of Borrower's rights, title, interests, remedies, powers and duties hereunder or
thereunder. Borrower hereby consents to FINOVA's participation, sale,
assignment, transfer or other disposition, at any time or times hereafter, of
this Agreement and any of the other Loan Documents, or of any portion hereof or
thereof, including, without limitation, FINOVA's rights, title, interests,
remedies, powers and duties hereunder or thereunder. In connection therewith,
FINOVA may disclose all documents and information which FINOVA now or hereafter
may have relating to Borrower or Borrower's business. To the extent that FINOVA
assigns its rights and obligations hereunder to a third party, FINOVA shall
thereafter be released from such assigned obligations to Borrower and such
assignment shall effect a novation between Borrower and such third party.
9.8 Integration. This Agreement, together with the Schedule (which is a
-----------
part hereof) and the other Loan Documents, reflect the entire understanding of
the
22
<PAGE>
parties with respect to the transactions contemplated hereby.
9.9 Survival. All of the representations and warranties of Borrower
--------
contained in this Agreement shall survive the execution, delivery and acceptance
of this Agreement by the parties. No termination of this Agreement or of any
guaranty of the Obligations shall affect or impair the powers, obligations,
duties, rights, representations, warranties or liabilities of the parties hereto
and all shall survive such termination.
9.10 Evidence of Obligations. Each Obligation may, in FINOVA's
-----------------------
discretion, be evidenced by notes or other instruments issued or made by
Borrower to FINOVA. If not so evidenced, such Obligation shall be evidenced
solely by entries upon FINOVA's books and records.
9.11 Loan Requests. Each oral or written request for a loan by any Person
-------------
who purports to be any employee, officer or authorized agent of Borrower shall
be made to FINOVA on or prior to 11:00 a.m., Pacific time, on the Business Day
on which the proceeds thereof are requested to be paid to Borrower and shall be
conclusively presumed to be made by a Person authorized by Borrower to do so and
the crediting of a loan to Borrower's operating account shall conclusively
establish Borrower's obligation to repay such loan. Unless and until Borrower
otherwise directs FINOVA in writing, all loans shall be wired to Borrower's
operating account set forth on the Schedule.
9.12 Notices. Any notice required hereunder shall be in writing and
-------
addressed to the Borrower and FINOVA at their addresses set forth at the
beginning of this Agreement. Notices hereunder shall be deemed received on the
earlier of receipt, whether by mail, personal delivery, facsimile, or otherwise,
or upon deposit in the United States mail, postage prepaid.
9.13 Brokerage Fees. Borrower represents and warrants to FINOVA that,
--------------
with respect to the financing transaction herein contemplated, no Person is
entitled to any brokerage fee or other commission and Borrower agrees to
indemnify and hold FINOVA harmless against any and all such claims.
9.14 Disclosure. No representation or warranty made by Borrower in this
----------
Agreement, or in any financial statement, report, certificate or any other
document furnished in connection herewith contains any untrue statement of a
material fact or omits to state any material fact necessary to make the
statements herein or therein not misleading. There is no fact known to Borrower
or which reasonably should be known to Borrower which Borrower has not disclosed
to FINOVA in writing with respect to the transactions contemplated by this
Agreement which materially and adversely affects the business, assets,
operations, prospects or condition (financial or otherwise), of Borrower.
9.15 Publicity. FINOVA is hereby authorized to issue appropriate press
---------
releases and to cause a tombstone to be published announcing the consummation of
this transaction and the aggregate amount thereof.
9.16 Captions. The Section titles contained in this Agreement are without
--------
substantive meaning and are not part of this Agreement.
9.17 Injunctive Relief. Borrower recognizes that, in the event Borrower
-----------------
fails to perform, observe or discharge any of its Obligations under this
Agreement, any remedy at law may prove to be inadequate relief to FINOVA.
Therefore, FINOVA, if it so requests, shall be entitled to temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages.
9.18 Counterparts; Facsimile Execution. This Agreement may be executed in
---------------------------------
one or more counterparts, each of which taken together shall constitute one and
the same instrument, admissible into evidence. Delivery of an executed
counterpart of this Agreement by telefacsimile shall be equally as effective as
delivery of a manually executed counterpart of this Agreement. Any party
delivering an executed counterpart of this Agreement by telefacsimile shall also
deliver a manually executed counterpart of this Agreement, but the failure to
deliver a manually executed counterpart shall not affect the validity,
enforceability, and binding effect of this Agreement.
9.19 Construction. The parties acknowledge that each party and its
------------
counsel have reviewed this Agreement and that the normal rule of construction to
the effect that any ambiguities are to be resolved against the drafting party
shall not be employed in the interpretation of this Agreement or any amendments
or exhibits hereto.
9.20 Time of Essence. Time is of the essence for the performance by
---------------
Borrower of the Obligations set forth in this Agreement.
9.21 Limitation of Actions. Borrower agrees that any claim or cause of
---------------------
action by Borrower against FINOVA, or any of FINOVA's directors, officers,
employees, agents, accountants or attorneys, based upon, arising from, or
relating to this Agreement, or any other present or future agreement, or any
other transaction contemplated hereby or thereby or relating hereto or thereto,
or any other matter, cause or thing whatsoever, whether or not relating hereto
or thereto, occurred, done, omitted or suffered to be done by
23
<PAGE>
FINOVA, or by FINOVA's directors, officers, employees, agents, accountants or
attorneys, whether sounding in contract or in tort or otherwise, shall be barred
unless asserted by Borrower by the commencement of an action or proceeding in a
court of competent jurisdiction by the filing of a complaint within one year
after the first act, occurrence or omission upon which such claim or cause of
action, or any part thereof, is based and service of a summons and complaint on
an officer of FINOVA or any other Person authorized to accept service of process
on behalf of FINOVA, within 30 days thereafter. Borrower agrees that such one-
year period of time is a reasonable and sufficient time for Borrower to
investigate and act upon any such claim or cause of action. The one-year period
provided herein shall not be waived, tolled, or extended except by a specific
written agreement of FINOVA. This provision shall survive any termination of
this Loan Agreement or any other agreement.
9.22 Liability. Neither FINOVA nor any FINOVA Affiliate shall be liable
---------
for any indirect, special, incidental or consequential damages in connection
with any breach of contract, tort or other wrong relating to this Agreement or
the Obligations or the establishment, administration or collection thereof
(including without limitation damages for loss of profits, business
interruption, or the like), whether such damages are foreseeable or
unforeseeable, even if FINOVA has been advised of the possibility of such
damages. Neither FINOVA, nor any FINOVA Affiliate shall be liable for any
claims, demands, losses or damages, of any kind whatsoever, made, claimed,
incurred or suffered by the Borrower through the ordinary negligence of FINOVA,
or any FINOVA Affiliate. "FINOVA Affiliate" shall mean FINOVA's directors,
----------------
officers, employees, agents, attorneys or any other Person or entity affiliated
with or representing FINOVA.
9.23 Notice of Breach by FINOVA. Borrower agrees to give FINOVA written
--------------------------
notice of (i) any action or inaction by FINOVA or any attorney of FINOVA in
connection with any Loan Documents that may be actionable against FINOVA or any
attorney of FINOVA or (ii) any defense to the payment of the Obligations for any
reason, including, but not limited to, commission of a tort or violation of any
contractual duty or duty implied by law. Borrower agrees that unless such notice
is fully given as promptly as possible (and in any event within sixty (60) days)
after Borrower has knowledge, or with the exercise of reasonable diligence
should have had knowledge, of any such action, inaction or defense, Borrower
shall not assert, and Borrower shall be deemed to have waived, any claim or
defense arising therefrom.
9.24 Application of Insurance Proceeds. The net proceeds of any casualty
---------------------------------
insurance insuring the Collateral, after deducting all costs and expenses
(including attorneys fees) of collection, shall be applied, at FINOVA's option,
either toward replacing or restoring the Collateral, in a manner and on terms
satisfactory to FINOVA, or toward payment of the Obligations. Any proceeds
applied to the payment of Obligations shall be applied in such manner as FINOVA
may elect. In no event shall such application relieve Borrower from payment in
full of all installments of principal and interest which thereafter become due
in the order of maturity thereof.
9.25 Power of Attorney. Borrower appoints FINOVA and its designees as
-----------------
Borrower's attorney, with the power to endorse Borrower's name on any checks,
notes, acceptances, money orders or other forms of payment or security that come
into FINOVA's possession; to sign Borrower's name on any invoice or bill of
lading relating to any Receivable, on drafts against customers, on assignments
of Receivables, on notices of assignment, financing statements and other public
records, on verifications of accounts and on notices to customers or account
debtors; to send requests for verification of Receivables to customers or
account debtors; after the occurrence of any Event of Default, to notify the
post office authorities to change the address for delivery of Borrower's mail to
an address designated by FINOVA and to open and dispose of all mail addressed to
Borrower; and to do all other things FINOVA deems necessary or desirable to
carry out the terms of this Agreement. Borrower hereby ratifies and approves
all acts of such attorney. Neither FINOVA nor any of its designees shall be
liable for any acts or omissions nor for any error of judgment or mistake of
fact or law while acting as Borrower's attorney. This power, being coupled with
an interest, is irrevocable until the Obligations have been fully satisfied and
FINOVA's obligation to provide loans hereunder shall have terminated.
24
<PAGE>
9.26 Governing Law; Waivers. THIS AGREEMENT, INCLUDING WITHOUT LIMITATION
----------------------
ENFORCEMENT OF THE OBLIGATIONS, SHALL BE INTERPRETED IN ACCORDANCE WITH THE
INTERNAL LAWS (AND NOT THE CONFLICT OF LAWS RULES) OF THE STATE OF ARIZONA
GOVERNING CONTRACTS TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. BORROWER HEREBY
CONSENTS TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED
WITHIN THE COUNTY OF MARICOPA IN THE STATE OF ARIZONA OR, AT THE SOLE OPTION OF
FINOVA, IN ANY OTHER COURT IN WHICH FINOVA SHALL INITIATE LEGAL OR EQUITABLE
PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN
CONTROVERSY. BORROWER WAIVES ANY OBJECTION OF FORUM NON CONVENIENS AND VENUE.
BORROWER FURTHER WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT, AND
CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE IN THE MANNER SET FORTH IN
SECTION 9.12 HEREOF FOR THE GIVING OF NOTICE. BORROWER FURTHER WAIVES ANY RIGHT
IT MAY OTHERWISE HAVE TO COLLATERALLY ATTACK ANY JUDGMENT ENTERED AGAINST IT.
9.27 MUTUAL WAIVER OF RIGHT TO JURY TRIAL. FINOVA AND BORROWER EACH
-------------------------------------
HEREBY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON,
ARISING OUT OF, OR IN ANY WAY RELATING TO: (i) THIS AGREEMENT; (ii) ANY OTHER
PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN FINOVA AND BORROWER; OR (iii)
ANY CONDUCT, ACTS OR OMISSIONS OF FINOVA OR BORROWER OR ANY OF THEIR DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH
FINOVA OR BORROWER; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT
OR TORT OR OTHERWISE.
Borrower:
UTILX Corporation, a Delaware Corporation
Fed. Tax ID # 91-1171716
By /s/ William M. Weisfield
--------------------------------------
William M. Weisfield, President
[ADD NOTARY HERE FOR BORROWER]
FINOVA:
FINOVA CAPITAL CORPORATION
By /s/ Pete Martinez
-------------------------------------------
Title Vice President, Western Portfolio Manager
-----------------------------------------
<PAGE>
Schedule to
Loan and Security Agreement
Borrower: UTILX Corporation
Address: 22820 Russell Road, Kent, WA 98032
Date: April 20, 1999
This Schedule forms an integral part of the Loan and Security Agreement between
the above Borrower and FINOVA Capital Corporation dated the above date, and all
references herein and therein to "this Agreement" shall be deemed to refer to
said Agreement and to this Schedule.
================================================================================
DEFINITIONS (SECTION 1):
"Guarantor(s)" means None
------------
"Management Fees" means None
----------------
"Permitted Senior Indebtedness" means None
------------------------------
"Subordinating Creditor" means None
----------------------
================================================================================
TOTAL FACILITY (Section 2.1):
$10,000,000
________________________________________________________________________________
LOANS (Section 2.2):
Revolving Credit Loans: A revolving line of credit consisting
----------------------
of loans against Borrower's Eligible Receivables ("Receivable
----------
Loans") and against Borrower's Eligible Inventory ("Inventory
----- ---------
Loans") (the Receivable Loans and the Inventory Loans shall be
-----
collectively referred to as the "Revolving Credit Loans" in an
----------------------
aggregate outstanding principal amount not to exceed the
lesser of (a) or (b) below:
(a) Ten Million Dollars ($10,000,000) (the "Revolving
---------
Credit Limit"), less any Loan Reserves, or
------------
(b) the sum of
<PAGE>
(i) an amount equal to (A) 85% of the net amount of
Eligible Receivables, less (B) the aggregate undrawn face
amount of all Letters of Credit issued under Section 2.4 of
this Agreement; plus
----
(ii) an amount not to exceed the lesser of:
(A) 50% of the auction value (as determined by
FINOVA's appaiser) of Borrower's Equipment, or
(B) $4,000,000; less
----
(iii) any Loan Reserves.
LETTERS OF CREDIT (Section 2.4):
The aggregate face amount of all outstanding Letters of Credit
from time to time shall not exceed $800,000, and shall be
reserved against the availability of Revolving Credit Loans
pursuant to Section 2.4 hereof. The L/C fee shall equal one
percent (1%) of the face amount of each Letter of Credit issued
and an additional one quarter percent (0.25%) of the aggregate
face amount of each Letter of Credit outstanding from time to
time during the term of this Agreement for each 30 day period or
fraction thereof. The L/C Fee shall be deemed to be fully earned
upon the issuance of each Letter of Credit and shall be due and
payable on the first Business Day of each month following a month
during which any Letter of Credit is outstanding. The amount of
Letters of Credit (including freight and duty) shall be
subtracted from the Revolving Credit Limit.
================================================================================
INTEREST AND FEES (SECTION 2.6):
Revolving Interest Rate. Borrower shall pay FINOVA interest on the
-----------------------
daily outstanding balance of Borrower's Revolving Credit Loans at a
per annum rate of 1% in excess of the rate of interest announced
publicly by Citibank, N.A., (or any successor thereto), from time to
time as its "prime rate" (the " Prime Rate") which may not be such
----------
institution's lowest rate. The interest rate chargeable hereunder in
respect of the Revolving Credit Loans (herein, the "Revolving Interest
------------------
Rate") shall be increased or decreased, as the case may be, without
----
notice or demand of any kind, upon the announcement of any change in
the Prime Rate. Each change in the Prime Rate shall be effective
hereunder on the first day following the announcement of such change.
Interest charges and all other fees and charges herein shall be
computed on the basis of a year of 360 days and actual days elapsed
and shall be payable to FINOVA in arrears on the first day of each
month.
<PAGE>
Monthly Service Fee. Borrower shall also pay FINOVA a monthly
-------------------
service fee of $2,000 per month in advance on the first day of each
month during the term hereof. Such fee shall be prorated on the basis
of a 30 day month.
Facility Fee. Borrower shall pay to FINOVA a facility fee equal to
------------
0.50% per annum of the amount of the Total Facility ("Facility Fee").
------------
The Facility Fee shall be deemed fully earned at the time when due and
is otherwise due and payable annually, commencing upon the first
anniversary of the date of this Agreement and continuing on each
subsequent anniversary thereof.
Examination Fee. Borrower agrees to pay to FINOVA an examination fee
---------------
in the amount of $600 per person per day in connection with each audit
or examination of Borrower performed by FINOVA prior to or after the
date hereof, plus all out-of-pocket costs and expenses incurred in
connection therewith (the "Examination Fee"). Without limiting the
---------------
generality of the foregoing, Borrower shall pay to FINOVA an initial
Examination Fee in an amount equal to $600 per person per day, plus
all out-of-pocket costs and expenses incurred in connection therewith.
Such initial Examination Fee shall be deemed fully earned at the time
of payment and due and payable upon the closing of this transaction,
and shall be deducted from any good faith deposit paid by Borrower to
FINOVA prior to the date of this Agreement.
===============================================================================
NOTIFICATION OF CLOSING (SECTION 2.13):
The amount for purposes of Section 2.13 shall be computed using the
Revolving Interest Rate.
===============================================================================
CONDITIONS OF CLOSING (Section 4.1):
The obligation of FINOVA to make the initial advance hereunder or to
issue or arrange for the issuance of the initial Letter of Credit
hereunder is subject to the fulfillment, to the satisfaction of FINOVA
and its counsel, of each of the following conditions, in addition to
the conditions set forth in Sections 4.1 and 4.2 above:
(a) Lease and Landlord's Consent (Section 4.1(t)). Location(s):
----------------------------------------------
Washington, Florida, Virginia, Colorado, New Jersey, Alabama.
(b) No Material Adverse Change (Section 4.1(v)). Draft financial
-------------------------------------------
statements for Seller dated as of February 28, 1999. Further, no
material adverse change has occurred in
<PAGE>
the Borrower's business, operations, financial condition, or assets or
in the prospect of repayment of the Obligations since February 28,
1999.
(c) Support Agreements. William M. Weisfield, and Darla V. Norris
------------------
shall each have delivered a Support Agreement in favor of FINOVA,
and in form and substance satisfactory to FINOVA.
(d) Minimum Excess Availability (Section 4.1(b)). Not less than
--------------------------------------------
$1,000,000.
Borrower shall cause the conditions precedent set forth in Section 4.1
of this Agreement and set forth above in this Schedule to be
satisfied, and shall provide evidence to FINOVA that all such
conditions precedent have been satisfied, on or before closing.
================================================================================
BORROWER INFORMATION:
Borrower's State of Incorporation (Section 5.1): Delaware
Borrower's copyrights, patents trademarks, and licenses (Section
5.5): See attached Exhibit.
---------------------
Fictitious Names/Prior Corporate Names (Section 5.2):
Prior Corporate Names: Flow, Inc., Flow Jet Corporation,
FlowMole Corporation
Fictitious Names: None
Borrower Locations (Section 5.16): See Exhibit.
Borrower's Federal Tax Identification Number (Section
5.16): 91-1171716
Permitted Encumbrances (Section 1.1): See Schedule 3.8
===============================================================================
FINANCIAL COVENANTS (SECTION 6.1.13):
Borrower shall comply with all of the following
covenants. Compliance shall be determined as of the end
of each quarter (as determined by FINOVA in its sole
discretion), except as otherwise specifically provided
below:
Current Ratio. Borrower shall maintain a ratio of Current Assets to
------------- Current Liabilities of not less than 1.0 to 1.0;
Net Worth. Borrower shall maintain Net Worth of not less than the
--------- following:
<PAGE>
$17,950,000 from March 31, 1999 up to and through June 29, 1999;
$18,075,000 from June 30, 1999 up to and through September 29,
1999;
$18,550,000 from September 30, 1999 up to and through December
30, 1999;
$19,075,000 from December 31, 1999 up to and through March 30,
2000;
$19,090,000 from March 31, 2000 up to and through June 29, 2000;
$19,200,000 from June 30, 2000 up to and through September 29,
2000;
$19,600,000 from September 30, 2000 up to and through December
30, 2000;
$19,900,000 from December 31, 2000 up to and through March 30,
2001;
$20,000,000 from March 31, 2001 and threafter.
Total Debt Service Coverage Ratio As of the last day of each calendar
---------------------------------
quarter ended March 31, June 30, September 30 or December 31,
Borrower?s Operating Cash Flow/Actual for the consecutive 12-
month period ending as of such last day must be at least 1.0
times the amount necessary to meet Borrower?s Total Contractual
Debt Service for such 12-month period; provided however, that,
----------------
with respect to the calculations set forth herein for the fiscal
year end period March 31, 2000, Borrower?s Operating Cash
Flow/Actual and Senior Contractual Debt Service shall be
determined on a fiscal year-to-date basis; and, provided further,
----------------
that all such determinations shall be made on a consolidated
basis.
===============================================================================
NEGATIVE COVENANTS (SECTION 6.2):
Employee Advances: Borrower shall not make any loans or
------------------
advances to Employees except in the ordinary course of
business and consistent with past practices of Borrower in an
aggregate amount not exceeding at any time $10,000.
Existing Guaranties: None.
--------------------
Capital Expenditures: Borrower shall not make or incur
---------------------
any Capital Expenditure if, after giving effect thereto, the
aggregate amount of all unfinanced Capital Expenditures by
Borrower in any fiscal year (beginning with the March 31, 2000
fiscal year) would cause the Total Debt Service Coverage Ratio to
fall below the
<PAGE>
required ratio and the Minimum Excess Availability to be less
than $750,000. For purposes of monitoring the foregoing
performance requirements in 1) and 2) hereof, each such
requirement shall be evaluated monthly on a fiscal year-to-date
basis. For any monthly period where either performance criteria
is not satisfied, no Capital Expenditures may be made until both
performance criteria are again satisfied.
Compensation: Borrower shall not pay total compensation,
------------
including salaries, withdrawals, fees, bonuses, commissions,
drawing accounts and other payments, whether directly or
indirectly, in money or otherwise, during any fiscal year to all
of Borrower's executives, officers and directors (or any relative
thereof) in an amount in excess of 115% of such total
compensation paid in the immediately preceding fiscal year;
provided, however, that Borrower may pay bonuses not to exceed
$100,000 in the aggregate per $500,000 increment of Net Income in
each fiscal year.
Indebtedness: Borrower shall not create, incur, assume or
------------
permit to exist any Indebtedness (including in connection with
Capital Leases) in excess of $1,000,000 other than (i) the
Obligations, (ii) accrued liabilities, trade payables and other
contractual obligations to suppliers and customers incurred in
the ordinary course of business and (iii) other Indebtedness
existing on the date of this Agreement (other than Indebtedness
paid on the date of this Agreement from proceeds of the initial
advances
===============================================================================
REPORTING REQUIREMENTS (SECTION 9.1):
1. Borrower shall provide FINOVA with monthly agings aged by invoice
date and reconciliations of Receivables within ten (10) days
after the end of each month.
2. Borrower shall provide FINOVA with monthly accounts payable
agings aged by invoice date, outstanding or held check registers
and inventory certificates within ten (10) days after the end of
each month.
3. Borrower shall provide FINOVA with monthly reports for Borrower?s
Equipment indicating the gross value thereof (before
depreciation) or such other reports as are reasonably requested
by FINOVA, all within ten (10) days after the end of each month.
4. Borrower shall provide FINOVA with monthly unaudited financial
statements within thirty (30) days after the end of each month.
5. Borrower shall provide FINOVA with audited consolidated and
consolidating fiscal financial statements within one hundred
twenty (120) days after the end of each fiscal year, as more
specifically described in Section 9.1(b) hereof, and with an
opinion issued by a Certified Public Accountant which is
acceptable to FINOVA.
<PAGE>
6. Borrower shall provide FINOVA with annual operating budgets
(including income statements, balance sheets and cash flow
statements, by month) for the upcoming fiscal year of Borrower
within thirty (30) days prior to the end of each fiscal year of
Borrower.
7. Borrower's balance sheets for purposes of the definition of
Prepared Financials shall be as of the most recent date available
subject to FINOVA approval.
<PAGE>
===============================================================================
TERM (Section 9.2):
The initial term of this Agreement shall be two year(s) from
the date hereof (the "Initial Term") and shall be
------------
automatically renewed for successive periods of one (1) year
each (each, a "Renewal Term"), unless earlier terminated as
------------
provided in Section 7 or 9.2 above or elsewhere in this
Agreement.
===============================================================================
TERMINATION FEE (Section 9.2):
(A) Revolving Credit Loans Facility. The Termination Fee
-------------------------------
applicable to the Revolving Credit Loans facility provided
for in Section 9.2(d) shall be an amount equal to the
following percentage of the Revolving Credit Limit:
(i) three percent (3%), if such early termination occurs on
or prior to the first anniversary of the date of this
Agreement;
(ii) two percent (2%), if such early termination occurs
after the first anniversary of the date of this Agreement.
No Termination Fee shall be due, if after the first
anniversary date of this Agreement, Borrower pays all of the
Obligations in full from the proceeds of a conventional loan
from a federally insured U.S. Commercial Bank.
===============================================================================
DISBURSEMENT (Section 9.11):
Unless and until Borrower otherwise directs FINOVA in
writing, all loans shall be wired to Borrower's operating
account: as designated in writing to FINOVA.
<PAGE>
================================================================================
ADDITIONAL PROVISIONS:
Within ninety (90) days of the date of this Agreement,
Borrower shall, at FINOVA?s request execute and deliver to
FINOVA or otherwise provide such additional UCC-1 Financing
Statements, Landlord Waivers, vehicle certificates of title,
and additional documents to be filed with the United States
Patent and Trademark Office, as may be required in FINOVA?s
sole discretion.
<TABLE>
<CAPTION>
Borrower: FINOVA:
<S> <C>
UTILX Corporation, a Delaware corporation FINOVA CAPITAL
Corporation
By:/s/ William M. Weisfield By: /s/ Pete Martinez
------------------------- ------------------
William M. Weisfield, President Title: Vice President, Western Portfolio Manager
</TABLE>
[Add Notary Provision for Borrower]
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
--------------------------
Subsidiary Jurisdiction of Incorporation
FlowMole Export Sales Corporation Washington
UTILX Limited United Kingdom
UTILX International Product Sales, Inc. Barbados, West Indies
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-83728 and No. 333-53349) and Form S-3 (No. 333-
47113) of UTILX Corporation of our report dated May 18, 1999 relating to the
financial statements and financial statement schedules, which appears in this
Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Seattle, WA
June 22, 1999
<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, 1999
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,580
<SECURITIES> 0
<RECEIVABLES> 17,809
<ALLOWANCES> 1,508
<INVENTORY> 6,941
<CURRENT-ASSETS> 25,546
<PP&E> 37,840
<DEPRECIATION> 25,162
<TOTAL-ASSETS> 38,575
<CURRENT-LIABILITIES> 17,284
<BONDS> 0
0
0
<COMMON> 74
<OTHER-SE> 18,035
<TOTAL-LIABILITY-AND-EQUITY> 38,575
<SALES> 78,866
<TOTAL-REVENUES> 78,866
<CGS> 75,220
<TOTAL-COSTS> 84,989
<OTHER-EXPENSES> 555
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 583
<INCOME-PRETAX> (6,678)
<INCOME-TAX> 0
<INCOME-CONTINUING> (66,787)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,678)
<EPS-BASIC> (.90)
<EPS-DILUTED> (.90)
</TABLE>
<PAGE>
EXHIBIT 99.1
1999 Annual Report & Form 10-K
[UTILX LOGO APPEARS HERE]
CableCure(R)
FlowMole(R)
<PAGE>
Corporate Profile
UTILX Corporation provides critical services for the installation and
rejuvenation of aged underground utility infrastructure with proprietary
CableCure/(R)/ solution, in the U.S. and Canada through a network of regional
sales and service centers. The Company also provides CableCure services
throughout Europe and Asia. Based in Kent, Washington, UTILX Corporation began
commercial operations in 1984. The Company was incorporated in Delaware and its
initial public offering was completed on March 25, 1988.
Directors and Officers
<TABLE>
<S> <C>
DIRECTORS OFFICERS
William M. Weisfield William M. Weisfield
Chairman of the Board President & Chief Executive Officer
Darla Vivit Norris
Senior Vice President, Chief Financial Officer & Treasurer
Stanley J. Bright
Vice Chairman of the Board of Directors James E. Bartholomew
MidAmerican Energy Holdings Company Senior Vice President, Eastern Region
Davenport, Iowa
Scott E. Reynolds
Senior Vice President, Western Region
John D. Durbin Glen J. Bertini
Principal, Olympic Capital Partners Senior Vice President, Business Development
Seattle, Washington
George T. Taylor
Vice President, Corporate Operations
John W. Ellis David L. Barnes
Chairman and Chief Executive Officer Vice President, Western Region
The Baseball Club of Seattle
Johnnie M. Barr
Vice President, Mid Atlantic Region
Walter M. Higgins Phyllis A. Miller
Chairman, President & Chief Executive Officer Vice President, Corporate Attorney
AGL Resources, Inc.
Atlanta, Georgia Phyllis A. Boyd
Controller, Chief Accounting Officer
Anne G. Cameron
Robert E. Runice Corporate Secretary
Private Investor & Business Consultant
Alisa M. Scott
Assistant Corporate Secretary
</TABLE>
<PAGE>
Consolidated Financial Highlights
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
For years ended March 31,
Revenues $78,866 $82,464 $64,875 $48,993 $49,717
Net income (loss) (6,678) (2,118) 2,968 (4,489) (2,022)
Earnings (loss) per share (.90) (.29) .41 (.62) (.28)
- ---------------------------------------------------------------------------------------------------
Cash flow from (used by) operations 6,065 (1,723) 6,150 148 (1,690)
Capital expenditures 3,305 4,438 3,848 3,138 3,958
- ---------------------------------------------------------------------------------------------------
As of March 31,
Current ratio 1.5 1.9 2.8 2.9 3.8
Working capital $ 8,262 $14,252 $16,560 $13,349 $18,073
Total assets 38,575 43,479 35,912 30,624 35,348
- ---------------------------------------------------------------------------------------------------
Stockholders equity $18,109 $24,831 $26,741 $23,456 $28,070
Year-end book value per share 2.44 3.35 3.72 3.26 3.91
Number of employees 763 778 741 515 521
- ---------------------------------------------------------------------------------------------------
</TABLE>
Forward-Looking Statements
Except for the historical information contained herein, the matters discussed in
the Annual Report are forward-looking statements that involve risks and
uncertainties, including competitive pressures, weather, regulatory and other
matters affecting the utility industry in general, and other risks detailed in
the Company's most recent filing with the Securities and Exchange Commission on
Form 10-K. Actual results and timelines may differ materially from those
projected. These forward-looking statements represent the Company's judgment as
of the date of the preparation of the Annual Report. The Company disclaims,
however, any intent or obligation to update these forward-looking statements.
FlowMole CableCure
[FLOWMOLE CHART APPEARS HERE] [CABLECURE CHART APPEARS HERE]
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Dear Shareholders,
This is my first letter to you as your President and CEO. Last year was a very
difficult year for UTILX. It was a year of record losses. It was a year of
complete change, not only at my position but also at the entire senior
management level. I feel confident telling you that things have changed and for
the better.
Let's briefly look back at 1999. We got off to a promising start with strong
revenue growth from our largest customer, Florida Power and Light and had a
breakeven first quarter. However, that situation quickly changed.
. By the middle of the year, we had exhausted Florida Power and Light's
budget for UTILX. Revenues were severely curtailed for the remainder of the
calendar year, leading to large losses in the second and third quarters.
. A number of non-operating expenses also hit our bottom line.
. We settled our lawsuit against our former subcontractor in Florida. The
settlement was a positive event because it allows us to save costs in the
future by doing the work with our own crews. However, it contributed $381
thousand to the year's loss.
. We settled many insurance claims from past years, but we continued to pay
for inadequate insurance coverage in those prior years by adding $833
thousand to our insurance liability reserve. We now have no further
substantial claims from those prior years.
. We recognized the value of putting all of our assets to work and tackled
our high inventory levels. In doing so, we have set aside a charge for
inventory obsolescence of $700 thousand.
Despite the record losses of 1999, the year ended on an upswing. Besides the
management changes which I will discuss below in more detail, we were awarded
new or extended long term contracts from Florida Power and Light, U S West,
Virginia Power and others. As work with these customers ramped up, we were able
to minimize operating losses in our fourth quarter.
And now for the management changes. I became President and CEO, in addition to
my responsibilities as Chairman, in late November. Much of my twenty nine years
of work experience has been in turnaround situations and the Board felt that I
was well qualified to effect needed changes at UTILX. With the departure of the
CFO and the SVP of Operations, I started to put my own team in place, a team
that can focus on developing and implementing the strategies which will return
our Company to profitability. I recognized the operational talent already
existing at UTILX, people who had been able to make a positive contribution to
the bottom line despite the losses of the whole. I promoted UTILX veterans Scott
Reynolds, Jim Bartholomew and Glen Bertini to senior management positions. I
also brought in talent from the outside including Johnnie Barr, an experienced
and well respected operations VP, and Darla Norris, a CFO with whom I
accomplished a previous turnaround. All of the Officers listed inside the cover
of this report have new or expanded responsibilities. This team will make a
difference in what we can accomplish at UTILX.
In our short time together, we have confirmed that we have the core ingredients
to be a successful Company:
. Our workforce, from our crews to our administrative staff, is skilled,
loyal and motivated.
. We have a terrific proprietary product in CableCure, and CableCure is a
product proven to be reliable and cost effective for our customers.
. In a recent survey which we had commissioned, our customers rated us
excellent in both performance and value.
ii
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With these core strengths, it is the challenge of the managers that I have
selected to provide the direction and focus necessary to return UTILX to
profitability.
You have a new team leading your Company. Profitability is our key word, not
growth. We will seek growth only when we know it can add to the bottom line. To
that end, in fiscal 2000, we will be emphasizing increased productivity in the
field with new tracking and incentive compensation systems. We will also
continue working to decrease overhead at both our corporate headquarters and in
our field operations centers. We are also examining each of our contracts to
increase their profitability, renegotiating or terminating when possible those
which cannot be profitable.
We will continue to focus on growing our CableCure business. This strategy
remains sound for many reasons:
. CableCure is not capital intensive and CableCure growth will not require a
significant financing commitment.
. The proprietary nature of this service means there is no direct
competition. Any indirect competition is much less cost effective.
. Compared to our FlowMole business, CableCure has higher margins.
To jump start increased sales of our CableCure service, we have improved and
simplified our warranty, extending it from ten years to twenty years. After
twelve years of actual experience, and with the results of many aging
experiments in the laboratory, we are confident that CableCure can extend the
life of a cable by at least twenty years. We have also initiated a new business
plan to improve sales in the telecommunications market. Our CableCure/CB product
has been developed to improve the bandwidth of damaged copper telephone wire
cable found in many residential neighborhoods. In this age of increasing
bandwidth demands, the potential of this market is significant.
Your new management team will refocus on the customer. In terms of our existing
customers, we already know that they like our work and our service. However, in
order to optimize our performance, we need to be closely involved in our
customers planning process. We need to know the strategies and direction of
their senior management. In the future, relationships with our key customers
must be strengthened at all levels: sales, operational, and with senior
management. This also applies to future customers, where we will exploit and
enlarge our senior relationships in the industry in order to shorten the sales
cycle.
In conclusion, I know that we have many challenges. However, I believe that
UTILX is poised to perform profitably and I believe that your new management can
and will make a difference. I look forward to seeing you at our annual meeting
on July 30th, and to my quarterly reports during this fiscal year.
/s/ William M. Weisfield
William M. Weisfield
President & CEO
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UTILX Corporation's Domestic Operation Areas
[CHART APPEARS HERE]
iv
<PAGE>
UTILX Corporate Information
ANNUAL REPORT AND FORM 10-K
This publication serves as both our 1999 Annual report to Stockholders and the
Report on Form 10-K filed with the Securities and Exchange Commission. For
online access to our SEC filings and additional financial information visit:
http://www.businesswire.com/cnn/utilx.htm.
For additional copies and other information available to investors, please send
written requests to: Darla Vivit Norris, Senior Vice President and Chief
Financial Officer, UTILX, P.O. Box 97009, Kent, Washington 98064-9709.
1999 ANNUAL MEETING
The 1999 Annual Meeting of Stockholders of UTILX is Friday, July 30, 1999 at
10:30 a.m., at UTILX Corporation, 22820 Russell Road, Kent, Washington 98032.
STOCK PRICE AND STOCKHOLDER DATA
The following table sets forth the high and low stock for the Common Stock as
quoted on the Nasdaq National Market during the quarters indicated. The closing
price for the common stock on June 2, 1999 as reported on the Nasdaq National
Market was $3.3125.
<TABLE>
<CAPTION>
1999 Fiscal Year High Low
---------------- -------- -------
<S> <C> <C>
1st Quarter $ 5 3/4 4 1/8
2nd Quarter 5 3 1/4
3rd Quarter 3 7/16 1 7/16
4th Quarter 3 1/2 1 1/2
1998 Fiscal Year
----------------
1st Quarter $ 4 7/8 3 13/16
2nd Quarter 5 3/8 4
3rd Quarter 6 7/8 4 3/8
4th Quarter 7 7/8 4 7/8
</TABLE>
On June 2, 1999, the number of stockholders of record of Common Stock was 606,
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 holder of record.
DIVIDEND POLICY
The Company currently intends to retain its earnings to fund the development and
growth of its business. The Company has not paid cash dividends on common stock
to date and does not anticipate doing so in the foreseeable future.
CORPORATE HEADQUARTERS
UTILX Corporation
22820 Russell Road (98032)
P.O. Box 97009
Kent, Washington 98064-9709
Telephone (253) 395-0200
Facsimile (253) 395-1040
INTERNATIONAL SUBSIDIARY
UTILX 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
Graham & Dunn,
Seattle, Washington
AUDITORS
PricewaterhouseCoopers LLP,
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 National Market System under
the symbol UTLX.
UTILX(R), FlowMole(R) and CableCure(R) are registered trademarks of UTILX
Corporation. UTILX Corporation is an equal-opportunity affirmative-action
employer.
<PAGE>
[UTILX LOGO APPEARS HERE]
UTILX Corporation
22820 Russell Road (98032)
P.O. Box 97009
Kent, Washington 98064-9709
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