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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, 2000
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, 2000, 7,475,944 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 $4.00.
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, 2000, the close of Registrant's 2000
fiscal year, is incorporated by reference into Part III hereof.
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TABLE OF CONTENTS
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ITEM
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PART I
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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......................................................14
7A. Quantitative and Qualitative Disclosures about Market Risk ..................................22
8. Financial Statements and Supplementary Data..................................................24
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................................................41
PART III
10. Directors and Executive Officers of the Registrant...........................................41
11. Executive Compensation.......................................................................41
12. Security Ownership of Certain Beneficial Owners and
Management...............................................................................41
13. Certain Relationships and Related Transactions...............................................41
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K..............................................................................42
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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-Registered Trademark- Corporation ("UTILX" or the "Company") was
incorporated in Delaware in October 1984. UTILX provides specialty services and
products to electric, telecommunications, 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 rejuvenating, replacing
or installing underground cables. The Company provides its CableCURE-Registered
Trademark- 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. Installation and replacement services are provided through the
Company's FlowMOLE-Registered Trademark- and conventional trenching services.
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 CABLECURE SERVICE
The Company 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. The deterioration of underground power and telephone cable by means
of water ingress is one of the most significant reliability issues facing the
electric utility and telecommunications industries today. Until the introduction
of the Company's cable treatment technology, utilities were obligated to replace
failing cable at considerable cost. At approximately half the cost of cable
replacement and with a twenty year unconditional warranty, CableCURE/XL
treatment is very cost-effective when compared to 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. CableCURE
fluids are injected into failing cables by the Company's specially trained
crews, subcontractors and licensees.
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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.
The Company holds, or has pending, patents on the materials and processes
associated with the treatment process. The Company also has exclusive agreements
with electrical component manufacturers for patented or proprietary injection
technology. The Company knows of no competing products which either use similar
technology or provide comparable benefits. However, there can be no assurance
that a competing product is not under development or currently being marketed to
select utility customers without the Company's knowledge, or that such a product
will not be developed in the future.
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 FLOWMOLE DRILLING SYSTEMS
The FlowMOLE drilling system is a patented system, application and process
created by the Company's engineers in the early 1980s to bore underground holes
and tunnels without any surface disruption. 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;
- 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.
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 electronic guidance systems
have effectively removed most limitations associated with tunnel depth. The
Company is a leader in the development of advanced electromagnetic guidance
techniques and 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 technology, however, may not be 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.
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The Company believes that the CableCURE injection and the FlowMOLE drilling
services are complementary 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
managers and agents to expand the market for its services by offering the
CableCURE service to FlowMOLE 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
allows the Company to proactively manage the underground infrastructure of the
customer by evaluating a deteriorating cable ("Test") and determining whether
the cable is a suitable injection candidate for CableCURE fluid ("Treat") or
whether the cable should be replaced using FlowMOLE service ("Replace"). The
Company then takes the appropriate action.
The Company is currently enhancing its existing technologies and is
developing new technologies in an effort to enhance and expand the complementary
services it offers through its nationwide network of operating and service
centers. The Company is well positioned to take advantage of the accelerating
trend towards deregulation of electric utilities in North America and Europe.
Since deregulated utilities are seeking ways to reduce their operating and
maintenance expenses while at the same time improving their reliability, the
Company stands to benefit from this important trend.
THE MARKET
OVERVIEW. Cities and suburbs rely on an infrastructure of cables and pipes
buried beneath streets, sidewalks, and landscaping to supply electric power,
telecommunications, 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 underground utilities in established
communities and developed its proprietary FlowMOLE drilling systems 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 previously unserved areas.
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, the
Company 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 cables that came
into widespread use in the early 1960s, as utilities responded to community
pressure to remove or avoid the use of unsightly overhead wires. The electric
utility industry has continued to expand underground distribution not only for
aesthetic reasons, but also because it tends to be more reliable and less
susceptible to storm damage than overhead service. Published sources indicate
that in excess of 50 million feet of electric cable have been buried each year
since 1970. Much of the cable buried in the
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1960s through early 1980s is coming to the end of its expected life and cable
failures will increase as the majority of the direct-buried cable approaches the
end of its expected life. The Company's cable restoration program promises to
provide significant benefits to those utility companies with such cable, which
includes almost every utility in North America, Europe and Asia. In fiscal 2000,
77% of the Company's total consolidated revenues came from the domestic electric
utility industry.
Power 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 a cost effective alternative to replacing the cable.
CableCURE is also 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
2000, comprising 13% of the Company's total consolidated revenue, was the
domestic telecommunications industry. The Company has grown and expanded in this
market segment by offering turnkey replacement or installation service to
telephone distribution and fiber loop providers. During fiscal 2000, U S West
was the Company's third largest customer with 10% of the Company's total
consolidated revenues. 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 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 optic cable in
developed areas that have a need for additional telecommunications services. In
addition, the expansion of broadband and interactive communication networks has
created demand for installation of new fiber optic cables. 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 anticipates that
substantial demand for connections to a fiber optic network will continue in the
future.
The Company is also marketing CableCURE/CB to the telecommunications
industry. This is a proprietary treatment process for copper aircore telephone
cables which removes water from damaged cables and prevents its re-entry.
Aircore cables were the prevalent type of cables installed by the telephone
industry until 1977 and are susceptible to water intrusion resulting in
degradation of the connection. There are over one billion feet of copper aircore
cables in use today. These one billion feet make up the bulk of the "last mile"
problem which incumbent telecommunications companies face as they seek to
provide high bandwidth access to residential customers. See "North America
Marketing and Sales" included in Part I, Item 1.
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. However, escalation of fuel and
labor-related costs may have a moderate impact on expenses in fiscal 2001.
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OTHER. The Company's services are also used by gas, 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 managed through the Company's headquarters in Kent, Washington.
The sales organization has dedicated field sales representatives as well as
operations personnel who conduct sales activities as part of their general
responsibilities. The Company employs two separate sales forces - one group
calls on the electric power industry and the other focuses on the
telecommunications industry. The Company believes that this market focused
approach is the best way to serve these two major markets. 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 from headquarters for marketing communications,
public relations and service-line support.
In fiscal 2000, the Company provided services to 182 customers in North
America. In fiscal 2000, the top five customers of the Company were Florida
Power & Light Company ("Florida Power & Light"), Commonwealth Edison, U S West,
Virginia Electric and Power Company, and Carolina Power and Light Company,
comprising 59% of the Company's total consolidated revenues. Domestic CableCURE
services accounted for 32% 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 12 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 also enters into licensing
agreements with utility companies and third party contractors to perform
CableCURE work.
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.
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Operations in North America are divided into four major regions with 17
operations and service centers that have provided the Company's services to
customers in 33 states and two provinces of Canada since the beginning of fiscal
2000. These centers operate with a high degree of autonomy and are responsible
for performing services for the customers and managing billing and collections
for sales activities. Each center's field operations staff coordinates
operations, including, on occasion, the movement of staff and equipment between
operations centers to balance workload. FlowMOLE drilling system crews are based
in these operations centers and typically consist of a crew manager with overall
job responsibility, a field technician, and one or more assistants. CableCURE
injection crews are based at 10 of these operations centers, with each injection
crew consisting of two to four members. Since capital equipment requirements for
CableCURE injection crews are minor, 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, 2000, the Company had 131 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 60 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, 2000, the Company had approximately 120
drilling and excavation crews and 51 CableCURE and craft crews in operation.
INTERNATIONAL OPERATIONS
The Company's international operations include direct performance of
CableCURE injection in Western Europe, licensing of CableCURE technology in
Scandinavia, South Korea, Brazil, Peoples Republic of China, Taiwan and Hong
Kong and sales of FlowMOLE drilling systems and spare parts in the international
market. The European CableCURE operations are headquartered in Germany, which is
a branch office of the Company's wholly owned subsidiary, UTILX Limited, based
in Corby, Northamptonshire, England. International sales of CableCURE services
accounted for 4.5% of the Company's total consolidated revenues. For a
discussion of revenues, net income and assets with respect to international
operations see Note 12 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, the German Deutschemark 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. The Company
utilizes foreign exchange derivative agreements to partially hedge these risks.
See Note 12 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 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. In fiscal 2000, the Company leveraged some of its intellectual property
to forge alliances with partners who can offer tactical and strategic advantages
in terms of new products and support.
During fiscal 2000, the Company filed patent applications for two new
life-extension products which are included in the Company's new Trynergy brand
technology. Trynergy represents the three-way synergy between the Company's
technologies. The first of these technologies is the inclusion of proprietary
fluid delivery systems into power cable or wire rope design. The fluid delivery
system is designed to continuously supply fluid to enhance the performance and
life expectancy of the cable or rope. The second element is a family of
proprietary treatment fluids and lubricants which are optimized to maintain the
life of the cable or the rope. The third leg of the Trynergy triangle is
proprietary manufacturing and/or installation procedures which insure high
performance results independent of craft manufacturing and installation
practices. Market applications for two identified products, flexible-life,
low-cost power cables that can last forever and wire ropes with an extended
life, are being researched prior to commercialization.
PURCHASING AND MANUFACTURING
Manufacturing operations consist 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.
In fiscal 2000, the Company made the decision to purchase or lease any new
drilling systems from outside vendors in order to reduce its requirement for
engineering support and inventory. Nevertheless, some level of engineering and
inventory must be maintained in order to support its current fleet of FlowMOLE
drills in the field.
CableCURE fluids are obtained solely from Dow Corning under an exclusive
license and distribution agreement between the Company and Dow Corning. Critical
equipment for the injections process is also purchased from several vendors
through exclusive licensing arrangements. 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
fluid-jet 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 10 current
patents in the United States relating to underground drilling. In December, the
Company submitted a provisional patent filing for additional electronic
technology. 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
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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
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 "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, provides CableCURE
services in the United States, Canada, and Europe, has licensed the CableCURE
injection service in Korea, Scandinavia, Brazil, Peoples Republic of China,
Taiwan and Hong Kong, 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. The Company is
competitive in many situations based on its highly skilled workforce and safety
record. Some contractors provide additional installation-related services and
possess other capabilities which in some circumstances may cause them to be
udged a better choice by potential customers. Conventional trenching
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<PAGE>
contractors may be able to provide lower-priced services than FlowMOLE 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 will serve to increase both
the demand for guided drilling services and price competition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation," in
Part II, Item 7 for a discussion of the effects of competition on financial
performance.
GOVERNMENT REGULATIONS
Federal, state, and local provisions, including the laws of foreign
countries in which the Company operates, regulating construction, land use or
the protection of the environment, workplace safety, and health are the
principal governmental regulations affecting the Company. To date, such
regulations have not had a material adverse impact on the Company's operations.
The Company's manufacturing processes are limited in scope and the Company
believes that hazardous waste generated by the manufacturing process is disposed
of in compliance with applicable laws. The bentonite drilling fluid, which the
Company uses in the FlowMOLE drilling process, is an inert substance, the use of
which is not generally restricted by environmental laws. The CableCURE service
utilizes substances which are not generally subject to regulation. The Company
contracts with a national environmental services company for the disposal of
spent CableCURE fluid. The Company seeks out local, certified disposal sites for
the disposal of excess drilling mud wherever it identifies any regulations
regarding such materials. Environmental issues may arise in 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, 2000, worldwide employment of the Company totaled 876
individuals. Of the Company's 857 employees in the United States, 84 were based
in Kent, Washington, and 773 in regional operations and sales centers. A total
of 8 employees were engaged in sales and marketing, 735 in operations, 18 in
manufacturing, 7 in research and engineering, and 89 in general and
administrative functions. In Europe, 15 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 60 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, 2000, 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 58) 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
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<PAGE>
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.
DARLA VIVIT NORRIS (age 50) has been Senior Vice President, Chief Financial
Officer and Treasurer since December 1998. From May 1993 to December 1998 she
was Chief Financial Officer and 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
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 45) 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 48) has been Chief Operating Officer since September
1999, 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 42) has been Senior Vice President, Business
Development since April 1999, and 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 36) has been Vice President, Corporate Operations
since December 1998. He was promoted to Acting Vice President of Florida
Operations in June 1998 and held this position 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 40) 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
526,000 total square feet of space for operations and outside storage purposes
in Alabama, Arizona, California, Colorado, Florida, Illinois, Maryland, New
Jersey, North Carolina, Texas, Oklahoma and Virginia, and approximately 11,000
square feet and 1,900 square feet of space for operation centers in Corby,
England and Rinteln and Neutraubling, Germany. 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
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.
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<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, 2000.
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, 2000 as reported on
the Nasdaq National Market was $4.00.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
2000 FISCAL YEAR
----------------
<S> <C> <C>
1st Quarter Ending June 30, 1999 $3.500 $1.500
2nd Quarter Ending September 30, 1999 4.750 2.438
3rd Quarter Ending December 31, 1999 4.750 2.563
4th Quarter Ending March 31, 2000 8.438 3.000
1999 FISCAL YEAR
----------------
1st Quarter Ending June 30, 1998 $5.750 $4.125
2nd Quarter Ending September 30, 1998 5.000 3.250
3rd Quarter Ending December 31, 1998 3.438 1.434
4th Quarter Ending March 31, 1998 3.500 1.500
</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, 2000, the number of stockholders of record of Common Stock was
512, 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.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Financial Summary:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------------
(In thousands except earnings per share)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues $ 105,091 $78,866 $82,464 $64,875 $48,993
Gross profit 12,844 3,646 7,346 10,352 6,408
Operating income (loss) 2,613 (6,123) (1,568) 2,058 (2,680)
Income (loss) before income taxes 1,900 (6,678) (2,117) 2,022 (2,589)
Net income (loss) 1,885 (6,678) (2,118) 2,968 (4,489)
Earnings (loss) per share:
Basic 0.25 (0.90) (0.29) 0.41 (0.62)
Diluted 0.24 (0.90) (0.29) 0.41 (0.62)
Weighted average shares outstanding:
Basic 7,446 7,420 7,214 7,180 7,185
Diluted 7,790 7,420 7,214 7,303 7,185
<CAPTION>
AS OF MARCH 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 10,985 $ 8,262 $14,252 $16,560 $13,349
Total assets 42,456 38,575 43,479 35,912 30,624
Capital lease obligations, net of current portion 1,747 2,210 2,224 0 0
Common stockholders' equity 20,085 18,109 24,831 26,741 23,456
</TABLE>
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."
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<PAGE>
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)
-------------------------------- ----------------------------
2000 1999 1998 2000-1999 1999-1998
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues 100.0 % 100.0 % 100.0 % 33.3 % (4.4%)
Cost of revenues 87.8 95.4 91.1 22.6 0.1
--------- --------- --------- ---------- ----------
Gross profit 12.2 4.6 8.9 252.3 (50.4)
--------- --------- --------- ---------- ----------
Operating expenses:
Selling, general and administrative 8.8 11.6 10.0 2.2 10.6
Research and engineering 0.9 0.8 0.8 40.2 (2.4)
--------- --------- --------- ---------- ----------
Total operating expenses 9.7 12.4 10.8 4.7 9.6
--------- --------- --------- ---------- ----------
Operating income (loss) 2.3 (7.8) (1.9) 142.7 290.5
Other expense, net 0.6 (0.7) (0.7) 28.5 1.1
--------- --------- --------- ---------- ----------
Income (loss) before income taxes 1.8 (8.5) (2.6) 128.5 215.4
Income tax expense (benefit) .0 .0 .0 .3 (100.0)
--------- --------- --------- ---------- ----------
Net income (loss) 1.8 % (8.5%) (2.6%) 128.2 % 215.4 %
========= ========= ========= ========== ==========
</TABLE>
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
REVENUES. Consolidated revenues increased approximately 33.3% due to a
37.7% increase in revenues from North American services partially offset by a
16.1% decrease in revenues from international operations.
Total revenues from North American operations were $99.6 million in
fiscal 2000. Revenues from electric utilities, telecommunication companies, and
other customers constituted 82%, 14% and 4%, respectively of such fiscal 2000
revenues. Revenues from electric utilities increased substantially in fiscal
2000, primarily from the expansion of services to existing customers. Revenues
from telecommunications companies increased in fiscal 2000 due to expansion of
service capabilities to existing customers as well as new customers.
Revenues from North American installation and replacement services were
$70.7 million in fiscal 2000 compared to $52.4 million in fiscal 1999, an
increase of $18.3 million. The increase was due to increased revenues from some
of the Company's key customers including, Florida Power & Light, Commonwealth
Edison and U S West. The Company also increased its business with other
telecommunications companies.
Revenues from North American CableCURE injection services increased by
23%, from $19.9 million to $24.5 million. This was due primarily to an increase
in injection services for Florida Power and Light. Total cable injected in
fiscal 2000 increased to 617 miles compared to 514 miles in 1999.
Revenue from the Company's international operations decreased to $5.5
million in fiscal 2000 compared to $6.5 million in fiscal 1999. 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
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<PAGE>
increased their acceptance of the CableCURE technology and the Company increased
its marketing efforts. At the end of March 1999, the Company sold its U.K.
drilling operation.
GROSS PROFIT. Gross profit, as a percentage of revenues, increased to 12%
of total revenues in fiscal 2000 compared to 5% of total revenues in fiscal
1999. This increase was primarily due to the mix of higher margin work from
CableCURE and certain telecommunications companies. Labor and equipment
productivity also improved.
The Company experienced a lower gross profit as a percentage of revenue
from its international operations in fiscal 2000, decreasing from 36% in fiscal
1999 to 34% in fiscal 2000.
OPERATING EXPENSES. The Company's operating expenses increased 4.7% as
the Company was able to hold overhead relatively stable despite the 33% increase
in revenues in fiscal 2000 compared to fiscal 1999. Selling, general and
administrative expenses increased only 2.2% in fiscal 2000. Research and
engineering expenses increased 40.2% compared to fiscal 1999 as the Company
increased its efforts to improve its service to customers and develop new
products.
OPERATING INCOME. As a result of the foregoing factors, the Company
reported an operating income of $2,613,000 in fiscal 2000 compared to an
operating loss of $6,123,000 in fiscal 1999.
OTHER INCOME AND EXPENSE. Net interest expense was $696,000 in fiscal
2000, compared to net interest expense of $583,000 in fiscal 1999. The increase
was primarily a result of higher borrowing costs and higher average usage of the
Company's credit facility.
INCOME TAX BENEFIT. 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 made
certain operational and marketing improvements to achieve such levels of future
income; however, the continuing success of such efforts is uncertain. The
Company has incurred losses in two of its past three fiscal years. Management
has also evaluated its current normalized performance which takes into account
certain short term contracts with customers, the operating capacity of its
drilling fleet as well as the risks and uncertainties associated with the
business. (See "Important Risk Factors Regarding Forward Looking Statements.")
Accordingly, under the provisions of Statement of Financial Accounting Standards
(SFAS) No. 109 "Accounting for Income Taxes", management is currently unable to
conclude that the full realization of the net deferred tax assets is more likely
than not. Therefore, the Company recorded a valuation allowance of $2,083,000
against the amount of its net deferred tax assets as of March 31, 2000. The
Company recorded a $70,000 income tax benefit in fiscal 2000. The Company
recorded a full allowance of $3,146,000 against the amount of its net deferred
tax assets as of March 31, 1999. See Note 4 of Notes to Consolidated Financial
Statements included in Part II, Item 8.
NET INCOME (LOSS). As a result of the foregoing factors, the Company
recorded net income of $1,885,000 in fiscal 2000 compared to a net loss of
$6,678,000 in fiscal 1999.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA).
"EBITDA" is defined as net income plus interest expense, plus the provision for
income taxes, plus depreciation and amortization. Management believes that
EBITDA is a relevant and helpful measurement of the Company's operating
performance, liquidity and its ability to service its debt and other fixed
obligations and that EBITDA is commonly reported and widely used by analysts,
investors and other interested parties because it eliminates many differences in
financial, capitalization, and tax structures. EBITDA should be used as a
supplement to net income, operating income and cash flow from operations and
other measures of financial performance and liquidity reported in accordance
with generally accepted accounting principles (GAAP), and not as a substitute
for such measurements. EBITDA as used in this report may not be comparable to
similarly titled measures reported by other companies due to differences in
accounting policies.
-16-
<PAGE>
Cash flows from operating, investing and financing activities in accordance with
GAAP were $4,072,000, $3,152,000 and $1,731,000 for fiscal 2000, respectively,
compared to $6,065,000, $(3,036,000) and $(1,959,000) one year ago.
The Company had consolidated EBITDA of $7.1 million for fiscal 2000, as compared
to a loss of $736,000 million before interest, taxes, depreciation and
amortization for the same period one year ago.
At March 31, 2000 interest expense was $888,000, compared to $790,000, for the
same period of fiscal 1999. Depreciation and amortization expense decreased to
$4.268 million for fiscal 2000, from $5.152 million for the same period in
fiscal 1999. Included in total interest expense is interest on capital leases.
For fiscal 2000, interest on capital leases was $192,000 and $207,000 for fiscal
1999. Interest expense on capital leases is included in cost of sales in the
accompanying financial statements.
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 $52.4 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 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
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<PAGE>
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 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.
LIQUIDITY AND CAPITAL RESOURCES
Since its initial public offering, the Company has primarily financed its
operations through cash flow from operations, cash reserves, capital leases and
periodic use of a credit facility.
The Company's cash and cash equivalents totaled $769,000 at March 31, 2000.
During fiscal 2000, the Company incurred capital expenditures of approximately
$3,160,000 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
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<PAGE>
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 $3.0 million in capital expenditures
in fiscal 2001, primarily for upgrades to and replacement of its fleet of
drilling equipment 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, 2000, the Company had an available revolving credit facility
of $12,000,000 and an outstanding balance on the facility of $3,897,000. The
facility is secured primarily by the assets of the Company. See also Note 6 of
Notes to Consolidated Financial Statements included in Part II, item 8.
REVIEW AND OUTLOOK
As electric power and telephone utility companies enter a more competitive
era, they are finding that their customers are placing increasing emphasis on
reliability. In fact, end user reliability expectations have been heightened by
the marketing campaigns of these utility companies. At the same time, these
utility companies are attempting to reduce their operating and maintenance
expenditures to generate more profits in efforts to make themselves more
attractive investments for their own shareholders. The Company is in an
excellent position to take advantage of this fundamental dilemma of its
customers. In addition, the increased reliance on outsourcing by these utility
companies has further positioned the Company for growth. The Company believes it
has treated or replaced only a small fraction of the cable that will need
treatment or replacement over the coming years and that the opportunity this
represents is an ongoing and significant issue for its customers. The Company is
accelerating its efforts to focus on its CableCURE business in the electric
power and telephone markets because of its cost-effectiveness for the customer.
FLOWMOLE AND RELATED SERVICES. The Company currently owns or leases
equipment to field 131 FlowMOLE systems and 60 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 certain new
off-the-shelf drilling equipment in fiscal 2001 in order to replace some of its
older equipment, but may also use short-term rentals to supplement its equipment
needs until it chooses to acquire new or used equipment of its own.
The Company expects the field personnel delivering FlowMOLE services to
remain relatively stable in fiscal 2001. 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 the recent
ruling by the Federal Energy Regulatory Commission to allow the capitalization
and subsequent amortization of the costs of the CableCURE service, as well as a
20-
-19-
<PAGE>
year warranty, a new sales incentive structure and focused marketing. These
developments have already resulted in the Company's ability to attract new
business. On the other hand, the Company anticipates that the trend towards
lower pricing for cable replacement will continue to place downward pressure on
the price for CableCURE services. See "Competition" under Part I, Item I. The
Company's ten largest CableCURE customers account for approximately 65% of
consolidated CableCURE revenues. The Company expects to see increased volumes
from new customers in fiscal 2001 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. 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 will sell surplus
drilling equipment and continue to support customers with the sale of spare
parts.
CableCURE services in Europe have been concentrated in Germany and the
Netherlands. The Company also has current licensees operating in Scandinavia,
Brazil and parts of Asia. International CableCURE revenue levels, primarily from
German operations, were approximately $4,475,000 in fiscal 2000 and $2,775,000
in fiscal 1999. The Company is in the process of adding personnel to support
expected growth in European CableCURE services. The Company plans to continue
expanding its sales efforts throughout Europe and Asia.
The Company continues to sell surplus equipment and spare parts to
Europe, Asia and South America. Such sales accounted for 18% and 17% of revenue
from international operations in fiscal 2000 and fiscal 1999, respectively.
OPERATING EXPENSES. The Company anticipates that its current general and
administrative staffing levels can support the planned growth in the Company's
operations for fiscal 2001. Selling, research and engineering expense are
expected to increase as the Company increases it marketing efforts for CableCURE
in the power and telecommunications industries and continues to pursue
development of its new Trynergy technology.
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 2000 levels if the projections for
increasing levels of CableCURE revenues are achieved. The provision for warranty
expense will also increase due to increasing levels of CableCURE revenues. 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 2001, capital spending
will emphasize the upgrading of existing field power units to support existing
drill units, the purchase of new off-the-shelf drilling equipment to replace
aging equipment and the continued upgrade of computer hardware and software.
The Company has recorded an allowance for obsolete inventory. The Company
analyzes its inventory based on inventory turn ratios. A full valuation
allowance is maintained against any non-moving inventory until disposition.
Since slow moving inventory is generally composed of spare parts and materials
for its proprietary technologies, management weighs any valuation allowance
against the expected consumption of such items in future revenue production. The
allowance for obsolete inventory was $1,322,000 and $1,462,000 as of March 31,
2000 and 1999, respectively.
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 2001.
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<PAGE>
IMPORTANT RISK FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The Company may from time to time make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases and in reports to
stockholders. The Private Securities Litigation Reform Act of 1995 contains a
safe harbor for forward-looking statements on which the Company relies in making
such disclosures. In connection with this safe harbor provision, the Company is
hereby identifying important factors that could cause actual results to differ
materially from those contained in any forward-looking statement made by or on
behalf of the Company. Any such statement is qualified by reference to the
following cautionary statements:
UTILITIES' BUDGETARY CONSIDERATIONS. Budgetary considerations, arising from
unfavorable regulatory determinations on matters such as rate-setting,
capitalization of services performed by the Company, approval of mergers and
acquisitions, 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
31% of the Company's consolidated revenues, and 10 customers generate
approximately 80% 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. In addition, the Company
believes that the regular budgetary cycles of certain of its North American
utility customers tend to concentrate demand for the Company's services during
the third quarter of its fiscal year (the fourth quarter of the calendar year),
although other budgetary factors described below may override this trend in any
given quarter. As a result of these factors, results of operations in any given
fiscal quarter are not necessarily indicative of results in any other fiscal
quarter.
MANAGEMENT OF GROWTH. 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
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<PAGE>
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 Deutschemark 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 12
of Notes to Consolidated Financial Statements included in Part II, Item 8.
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 and certain operating and capital leases, which bear interest at
variable rates.
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. The
Company is party to short-term forward contracts in the management of its
foreign currency exposure. Gains and losses on forward contracts qualifying as
hedges are deferred and included in the measurement of the related foreign
currency transaction.
-22-
<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, of 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,
2000 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended March 31, 2000, in conformity with
accounting principles generally accepted in the United States. 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 audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, 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 12, 2000
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
UTILX CORPORATION
CONSOLIDATED BALANCE SHEET
MARCH 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 769 $ 1,580
Accounts receivable, net 24,011 16,301
Materials, supplies and inventories, net of allowance
of $1,450 and $1,462, respectively 4,755 6,941
Income taxes receivable 82 191
Prepaid expenses and other 902 533
-------- --------
Total current assets 30,519 25,546
Equipment and improvements, net 11,573 12,678
Other assets, net 364 351
-------- --------
Total assets $ 42,456 $ 38,575
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Revolving credit facility $ 3,897 $ 5,538
Current portion of capital lease obligations 1,363 1,135
Accounts payable 7,711 5,038
Other current liabilities 6,563 5,573
-------- --------
Total current liabilities 19,534 17,284
Capital lease obligations, net of current portion 1,747 2,210
Other long term liabilities 1,090 972
-------- --------
Total liabilities 22,371 20,466
-------- --------
Commitments and Contingencies (Note 10)
Stockholders' equity:
Common stock, $0.01 par value
(authorized 25,000,000 shares, 7,475,944 and 7,425,560 shares issued
and outstanding, respectively) 75 74
Additional paid-in capital 18,665 18,521
Retained earnings 1,997 112
Accumulated other comprehensive loss (652) (598)
-------- --------
Total stockholders' equity 20,085 18,109
-------- --------
Total liabilities and stockholders' equity $ 42,456 $ 38,575
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
UTILX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenues $ 105,091 $ 78,866 $ 82,464
Cost of revenues 92,248 75,220 75,118
--------- --------- ---------
Gross profit 12,843 3,646 7,346
--------- --------- ---------
Operating expenses:
Selling, general and administrative 9,310 9,113 8,242
Research and engineering 920 656 672
--------- --------- ---------
Total operating expenses 10,230 9,769 8,914
--------- --------- ---------
Operating income (loss) 2,613 (6,123) (1,568)
--------- --------- ---------
Other income (expense):
Interest expense, net (696) (583) (444)
Other income (expense), net (17) 28 (105)
--------- --------- ---------
Total (713) (555) (549)
--------- --------- ---------
Income (loss) before income taxes 1,900 (6,678) (2,117)
Income tax expense (benefit) 15 0 1
--------- --------- ---------
Net income (loss) $ 1,885 $ (6,678) $ (2,118)
========= ========= =========
Earnings (loss) per share:
Basic 0.25 (0.90) (0.29)
Diluted 0.24 (0.90) (0.29)
Weighted average number of shares:
Basic 7,446 7,420 7,214
Diluted 7,790 7,420 7,214
Calculation of comprehensive income (loss)
Net income (loss) $ 1,885 $ (6,678) $ (2,118)
Change in cumulative foreign currency translation adjustment, net (54) (96) 60
--------- --------- ---------
Comprehensive income (loss) $ 1,831 $ (6,774) $ (2,058)
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
UTILX CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON COMMON ADDITIONAL OTHER
STOCK COMMON STOCK PAID-IN RETAINED DEFERRED COMPREHENSIVE
SHARES STOCK WARRANTS CAPITAL EARNINGS COMPENSATION INCOME (LOSS)
----------- --------- ---------- ----------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 1, 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 warrants 182,474 2 (936) 934
Amortization of deferred compensation 3
Change in accumulated other
comprehensive income 60
Net loss (2,118)
----------- --------- ---------- ----------- ---------- -------------- ---------------
Balance, March 31, 1998 7,740,760 74 0 18,469 6,790 0 (502)
Stock options exercised 17,800 1 52
Change in accumulated other
comprehensive income (96)
Net loss (6,678)
----------- --------- ---------- ----------- ---------- -------------- ---------------
Balance, March 31, 1999 7,425,560 74 0 18,521 112 0 (598)
Stock options exercised 50,384 1 144
Change in accumulated other
comprehensive income (54)
Net income 1,885
----------- --------- ---------- ----------- ---------- -------------- ---------------
Balance, March 31, 2000 7,475,944 $ 75 $ 0 $ 18,665 $ 1,997 $ 0 $ (652)
----------- --------- ---------- ----------- ---------- -------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
-26-
<PAGE>
UTILX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 1,885 $ (6,678) $ (2,118)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 4,268 5,152 4,441
Deferred income taxes (70) 77
(Gain) loss on sale of assets (50) (152) 123
Changes in:
Accounts receivable (7,710) 3,390 (3,825)
Materials, supplies and inventories 2,186 1,878 (1,108)
Prepaid expenses and other (369) (251) (108)
Income taxes receivable 109 239 (39)
Other assets 57 (8) (104)
Accounts payable (210) 1,045 258
Other liabilities 1,108 1,450 680
---------- ---------- ----------
Total adjustments (681) 12,743 395
---------- ---------- ----------
Net cash provided by (used in)
operating activities 1,204 6,065 (1,723)
---------- ---------- ----------
INVESTING ACTIVITIES:
Cost of additions to equipment (2,150) (3,305) (4,438)
Proceeds from sale of equipment 60 269 5
---------- ---------- ----------
Net cash used in investing
activities (2,090) (3,036) (4,438)
---------- ---------- ----------
FINANCING ACTIVITIES:
Net (payments) borrowings on revolving credit facility (1,641) 293 4,260
Net increase (decrease) in book overdraft 2,883 (1,213) 1,213
Net payments on capital leases (1,258) (1,091) (434)
Issuance of common stock 145 52 146
Repurchase of common stock 0 0 (1)
---------- ---------- ----------
Net cash provided by (used in)
financing activities 129 (1,959) 5,184
---------- ---------- ----------
EFFECT ON CASH FLOWS OF
FOREIGN CURRENCY TRANSACTIONS (54) (18) 10
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents (811) 1,052 (962)
CASH AND CASH EQUIVALENTS
Beginning of period 1,580 528 1,490
---------- ---------- ----------
End of period $ 769 $ 1,580 $ 528
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-27-
<PAGE>
UTILX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
UTILX-Registered Trademark- Corporation ("UTILX" or the "Company") provides
specialty services to electric, telecommunications, natural gas, water, sewer,
and other utilities in the United States and in certain foreign countries, and
drilling equipment to contractors and other users outside of the United States.
The Company's primary business is the installation, replacement and restoration
of underground infrastructure for power and telecommunication companies.
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 by 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.
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.
In accordance with Company policy, for jobs lasting more than 30 days, revenues
and costs were recognized on the percentage of completion method.
Royalty, lease, spare parts and equipment sales are recognized as earned, under
provisions of the underlying sales, lease, or license agreement, when all goods
or services have been delivered and the collection of the sales price is
reasonably assured.
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. At times, balances may exceed federally insured limits.
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) have been low due to the
financial stability of its customers which 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 pay cash or 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.
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<PAGE>
MATERIALS, SUPPLIES AND INVENTORIES
Materials, supplies, and inventories are valued at the lower of cost, determined
on the moving average basis, or market. The Company provides an allowance for
obsolete inventory based on a detailed review of inventory quantities, aging,
and expected usage.
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. Expenses associated with
equipment including depreciation, operating leases, capitalized lease interest,
and maintenance and repairs, are included in cost of revenues.
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.
RESEARCH AND ENGINEERING
Expenditures for research and engineering are charged to expense as incurred.
WARRANTY
Estimated warranty claims are provided for at the time of sale of products with
CableCURE warranties covering the products from ten to twenty years. Warranty
expense is included in selling, general and administrative expense.
INCOME TAXES
Deferred taxes are recognized based on the difference between the financial
statement and tax basis of assets and liabilities at enacted tax rates in effect
in the years in which the differences are expected to reverse. Deferred tax
expense or benefit represents the change in deferred tax asset or liability
balances.
A valuation allowance is established for deferred tax assets when it is more
likely than not that the deferred tax asset will not be realized.
FOREIGN CURRENCY TRANSLATION
Sales to foreign customers are denominated in U.S. dollars, the Company's
functional currency, with the exception of sales generated through the Company's
international distribution operations. Sales in these countries are denominated
in the local currency.
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.
The Company is party to short-term forward contracts in the management of its
foreign currency exposure. Gains and losses on forward contracts qualifying as
hedges are deferred and included in the measurement of the related foreign
currency transaction. Losses are not deferred if it is estimated that deferral
would lead to recognizing losses in later periods. At March 31, 2000 the Company
had outstanding forward exchange contracts for U.S. $200,000. At March 31, 1999,
the Company had no outstanding foreign exchange contracts.
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<PAGE>
Cash flows from foreign currency contracts are classified in the same category
as the cash flows from the items being hedged.
EARNINGS PER SHARE
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 7.
COMPREHENSIVE INCOME
Comprehensive income includes net income and accumulated other comprehensive
income, which is composed of foreign currency translation adjustments.
Comprehensive income is presented in the Consolidated Statement of Stockholders'
Equity.
STOCK OPTION PLANS
The Company accounts for stock option plans under the provisions of Accounting
Principles Board Opinion No. 25 ("APB 25"). In October 1995, the FASB issued
SFAS No. 123, "Accounting for Stock-Based Compensation", which 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 has 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 (loss) had SFAS 123 been adopted for
expense recognition purposes. See Note 9.
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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the fiscal 2000
presentation, with no effect on previously reported net income (loss) or
retained earnings.
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 30.5%, 29% and 31% of
consolidated revenues for fiscal 2000, 1999 and 1998, respectively. Amounts due
from Florida Power & Light for services were approximately $4,241,000 and
$1,712,000 at March 31, 2000 and 1999, 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 $480,000, $173,000 and $890,000 in fiscal 2000, 1999
and 1998, respectively. An amount of $106,000 was due from Puget Sound Energy,
Inc. at March 31, 2000.
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 10.
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<PAGE>
NOTE 3 -- ACCOUNTS RECEIVABLE
NOTE 3
Accounts receivable, at March 31, consist of the following:
<TABLE>
<CAPTION>
2000 1999
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
North American customers:
Completed work not yet billed $ 8,923 $ 5,825
Billed but uncollected 14,702 9,332
International customers 1,084 1,705
Less allowance for doubtful accounts (698) (561)
---------- ---------
Total $ 24,011 $ 16,301
---------- ---------
---------- ---------
</TABLE>
NOTE 4 -- EQUIPMENT AND IMPROVEMENTS
Equipment and improvements, at March 31, are as follows:
<TABLE>
<CAPTION>
2000 1999
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment $ 34,221 $ 32,749
Office furniture and equipment 576 564
Computer equipment 4,208 3,875
Leasehold improvements 381 366
Assets not placed in service 1,036 286
---------- ---------
$ 40,422 37,840
Less accumulated depreciation and amortization (28,849) (25,162)
---------- ---------
Total $ 11,573 $ 12,678
---------- ---------
---------- ---------
</TABLE>
Equipment under capital lease totaled $5,891,000 and $4,866,000 at March 31,
2000 and 19999, respectively. Accumulated depreciation related to equipment
under capital leases was $2,774,000 and $915,000 at March 31, 2000 and 1999,
respectively.
Repairs and maintenance expenses for fiscal 2000, 1999 and 1998 were
approximately $2,214,000, $1,616,000, and $1,656,000 respectively.
-31-
<PAGE>
NOTE 5 -- OTHER LIABILITIES
Other current liabilities, at March 31, are as follows:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Accrued payroll and related costs $ 2,464 $ 1,858
Accrued sales tax 453 223
Accrued insurance, net of prepayments 2,540 1,988
Other 1,106 1,504
--------- ---------
Total $ 6,563 $ 5,573
--------- ---------
--------- ---------
Other long-term liabilities, at March 31, are as follows:
2000 1999
--------- ---------
(IN THOUSANDS)
Accrued warranty $ 1,039 $ 815
Other 51 157
--------- ---------
Total $ 1,090 $ 972
--------- ---------
--------- ---------
</TABLE>
Under the terms of its insurance policies, the Company 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.
These reserves are based upon historical loss experience, independent actuarial
evaluation, estimates of final settlement, expected trends in claim severity,
frequency and other factors which may vary significantly as claims are settled.
Accordingly, ultimate losses may vary significantly from amounts recorded in the
financial statements.
NOTE 6 - REVOLVING CREDIT FACILITY
The Company has a $12,000,000 revolving credit facility from FINOVA Capital
Corporation ("FINOVA") which expires April 20, 2002. Outstanding borrowings
under the facility are not to exceed the lesser of $12,000,000 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. The FINOVA facility is collateralized 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 coverage. The agreement also places certain restrictions on capital
expenditures, other indebtedness and executive compensation. Borrowings bear
interest at prime (8.50% at March 31, 2000) plus .5%. The Company pays annual
fees of $60,000, monthly fees of $2,000 and may be required to pay certain
termination fees if the Company terminates the facility prior to the expiration
of the term.
At March 31, 2000, the Company had an outstanding balance of $3,897,000 under
this facility, compared to $5,538,000 at March 31, 1999 under a prior facility.
At March 31, 2000 and fiscal 1999, the weighted average borrowing rate was 9.24%
and 9.75%, respectively.
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<PAGE>
NOTE 7 -- COMMON STOCK, PREFERRED STOCK AND OPTIONS
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, 1999,
254,182 additional shares were added to the 1994 Plan. The 1994 Plan requires
that options be granted at and with exercise prices equal to the market value of
the Common Stock on the date of grant. Options granted under the 1994 Plan
generally provide for full vesting of options within four years after grant, and
have terms from the grant date of ten years. At March 31, 2000, 69,994 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, 2000, 23,000
shares were issuable under the Director Plan.
Pertinent information covering the different plans is as follows:
<TABLE>
<CAPTION>
Employee Plans Director Plan
Shares Average Price Shares Average Price
------ ------------- ------ -------------
<S> <C> <C> <C> <C>
Outstanding, April 1, 1997 524,100 3.40 170,000 5.74
Issued 267,000 4.55 50,000 5.04
Canceled (37,000) 4.89 0 0
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
Issued 521,750 3.15 25,000 4.25
Canceled (82,848) 3.53 (10,000) 9.00
Exercised (50,384) 5.07 0 0
----------- ------- ----------- -------
Outstanding, March 31, 2000 1,141,416 $3.01 195,000 $5.05
----------- ------- ----------- -------
----------- ------- ----------- -------
Exercisable, March 31, 2000 228,768 $3.42 187,000 $5.04
----------- ------- ----------- -------
----------- ------- ----------- -------
</TABLE>
All options issued in fiscal 2000, 1999 and 1998 were granted at exercise prices
equal to fair market value. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for the stock option plans. Had compensation cost for the Company's
stock option plans been determined based on the
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<PAGE>
fair value at the grant date of the awards, consistent with the provisions of
SFAS No. 123, for fiscal 2000, 1999 and 1998 grants, fiscal 2000, 1999 and 1998
would have included a compensation expense provision of $888,000, $535,000 and
$373,000 respectively. Proforma net income and diluted income per share for
fiscal 2000 would have been $997,000 and $.13, 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. 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>
1998 6.00% 6 Years 53% None
1999 5.38% 6 Years 71% None
2000 6.38% 6 Years 98% None
</TABLE>
Pertinent information regarding options outstanding as of March 31, 2000 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 $2.75 663,000 $2.1663 8.44 131,600 $2.2625
$2.875 to $4.625 545,416 $3.7746 8.40 210,168 $3.9943
$5.3125 to $14.50 128,000 $7.2544 5.51 74,000 $7.9350
------- -------
1,336,416 415,768
</TABLE>
COMMON STOCK WARRANT
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 Common Stock (based on the then current market price).
Accordingly, 182,474 shares of the 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
deferred compensation on the balance sheet and was amortized over the vesting
period on a straight-line basis. During fiscal 1998, pursuant to provisions of
the 1994 Plan, the Company repurchased 345 shares at market prices on vesting
dates to cover payroll tax withholding requirements of approximately $1,000.
PREFERRED STOCK
The Company has 2,000,000 shares of authorized Preferred Stock. During fiscal
years 2000, 1999 and 1998, there were no shares designated, issued, or
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
$8.00 per one one-hundredth (1/100th) Preferred Share, subject to adjustment.
Holders of Preferred
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<PAGE>
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.
EARNINGS (LOSS) PER SHARE
In fiscal 2000, 1999, and 1998 the weighted average number of outstanding shares
of the Common Stock, used to calculate basic earnings (loss) per share, was
7,446,000, 7,420,000 and 7,214,000, respectively. In fiscal 2000, the weighted
average number issuable under outstanding stock options and warrants, net of
assumed shares repurchased, was 344,000. Accordingly, the number of shares used
to calculate diluted earnings per share was 7,790,000 in fiscal 2000. No such
adjustment was considered in fiscal 1999 and 1998 because it would be
antidilutive due to net losses incurred in those years.
-35-
<PAGE>
NOTE 8 -- INCOME TAXES
The components of the income tax provisions for the years ended March 31, are as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Domestic
Current expense - Federal and State $ 85 $ 0 $ 1
Deferred benefit (70) 0 0
-------- -------- --------
Total domestic 15 0 1
Foreign 0 0 0
-------- -------- --------
Total income tax provision $ 15 $ 0 $ 1
======== ======== ========
</TABLE>
A reconciliation of the United States federal statutory income tax rate to the
effective income rate for the years ended March 31 was as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
U.S. Statutory income tax 34.0% 34.0% 34.0%
State income tax 0.5% 0.0% 2.4%
Tax effect of nondeductible expenses 10.9% (4.7%) (15.3%)
Change in valuation allowance (46.5%) (29.0%) (24.7%)
Other, net 1.8% (0.3%) 2.3%
-------- -------- --------
0.7% 0.0% 1.3%
======== ======== ========
</TABLE>
The components of the current net deferred tax assets and long-term deferred tax
liabilities at March 31 are:
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Current deferred tax assets
Inventory reserves $ 773 $ 560 $ 327
Accrued liabilities 128 27 176
Employee benefits 294 344 240
Accrued insurance premiums 527 843 496
Bad debt reserves 195 71 80
Net operating loss carryforward 371 2,033 502
Other 94 22 52
--------- --------- ---------
Total current deferred tax assets 2,382 3,900 1,873
Long-term deferred tax liabilities
Property and equipment (229) (594) (518)
Other 0 (160) (147)
--------- --------- ---------
Total long-term deferred tax liabilities (229) (754) (665)
--------- --------- ---------
Net deferred tax asset 2,153 3,146 1,208
Less valuation allowance (2,083) (3,146) (1,208)
--------- --------- ---------
Net deferred tax asset, included in other assets $ 70 $ 0 $ 0
========= ========= =========
</TABLE>
In order to realize the aggregate carrying value of its net deferred tax assets,
the Company will be required to generate taxable income in future years.
Management of the Company has taken 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
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<PAGE>
deferred tax assets is more likely than not. Therefore, the Company maintains a
valuation allowance against the majority of its net deferred tax asset as of
March 31, 2000.
NOTE 9 -- 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. The
Company makes matching contributions based on employee contributions and length
of employee service. Total Company contributions under this plan for fiscal
2000, 1999 and 1998 were approximately $416,000, $344,000 and $307,000,
respectively.
NOTE 10 -- 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 various
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 $4,597,000, $4,997,000 and $5,135,000 for fiscal 2000, 1999 and
1998, respectively.
At March 31, 2000, 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
Leases Leases
----------------------------------
(In thousands)
<S> <C> <C>
2001 $ 3,748 $ 1,546
2002 2,399 1,213
2003 1,122 457
2004 649 190
2005 474 20
Thereafter 1,159 0
----------- --------
Total future minimum lease payments $ 9,551 3,426
Less interest included in minimum capital lease payments =========== 316
--------
Capital lease obligations 3,110
Less current portion 1,363
--------
Long-term portion of capital lease obligations, March 31, 2000 $ 1,747
========
</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 $49,000 for fiscal year 2001.
NOTE 11 -- SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION Supplemental cash
flow information for the years ended March 31, is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 902 $ 617 $ 445
Income taxes refunded, net 0 (177) (78)
</TABLE>
-37-
<PAGE>
In fiscal 1999 and 1998, 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 and $1,494,000 in fiscal 1999 and 1998,
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 and $560,000 was recognized on the sales in fiscal 1999 and 1998,
respectively. There were no such sales in fiscal 2000.
The Company acquired equipment pursuant to capital leases in the aggregate
amount of approximately $1,023,000, $1,333,000 and $3,533,000 in fiscal 2000,
1999 and 1998, respectively.
-38-
<PAGE>
NOTE 12 -- SEGMENT 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 $1,146,000, $1,628,000 and $2,399,000 in fiscal 2000, 1999 and 1998,
respectively. The following amounts are included in the consolidated financial
statements for North American and European operations:
<TABLE>
<CAPTION>
Fiscal Year 2000 (In thousands)
Adjustments
North and
American European Eliminations Consolidated
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Unrelated customers $ 100,277 $ 4,334 0 $ 104,611
Related parties 480 0 0 480
Intersegment 823 0 (823) 0
--------- --------- --------- ---------
Total revenues $ 101,580 $ 4,334 $ (823) $ 105,091
Net income (loss) $ 2,185 $ (193) $ (107) $ 1,885
Identifiable assets $ 38,480 $ 4,202 $ (226) $ 42,456
<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 0 $ 78,693
Related parties 173 0 0 173
Intersegment 189 0 189 0
---------- ---------- ---------- ----------
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 0 $ 81,574
Related parties 890 0 0 890
Intersegment 0 0 225 (225)
--------- --------- --------- ---------
Total revenues $ 78,907 $ 3,782 $ (228) $ 82,464
Net income (loss) $ (1,545) $ (566) $ (7) $ (2,118)
Identifiable assets $ 40,671 $ 2,980 $ (172) $ 43,479
</TABLE>
-39-
<PAGE>
Intersegment revenues occur on sales of spare parts inventory and equipment.
Eliminations and adjustments are made to eliminate the intersegment revenues and
related profit.
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 13 -- 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. As of March 31, 2000, this payment was fully amortized. The Company
purchases its chemicals exclusively from Dow Corning. Worldwide CableCURE
revenues accounted for 35.5% of consolidated revenues in fiscal 2000.
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 2000, 1999 and 1998,
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 14 -- ARBITRATION AND LITIGATION
In December 1998, the Company executed a settlement agreement with a
subcontractor. The Company agreed to pay the subcontractor $1,000,000 in four
equal installments over two years, of which the first two payments occurred in
December 1998 and August 1999. 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 remaining portion
of the settlement was attributed to the value of the non-compete agreement and
is being amortized over the seven year period to which it applies.
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.
-40-
<PAGE>
NOTE 15 -- SELECTED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR 2000 1QTR 2QTR 3QTR 4QTR
----------- ----------- ---------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues $ 23,375 $ 24,935 $ 28,609 $ 28,172
Gross profit 3,300 3,214 3,826 2,504
Net income 563 306 912 104
Earnings per share:
Basic $ 0.08 $ 0.04 $ 0.12 $ 0.01
Diluted $ 0.07 $ 0.04 $ 0.12 $ 0.01
<CAPTION>
FISCAL YEAR 1999 1QTR 2QTR 3QTR 4QTR
----------- ----------- ---------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
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) (934)
Earnings (loss) per share:
Basic $ 0 $ (0.26) $ (0.52) $ (0.12)
Diluted $ 0 $ (0.26) $ (0.52) $ (0.12)
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Information called for by Part III (Items 10, 11, 12 and 13) is
incorporated by reference from the Registrant's definitive proxy statement that
involves the election of directors and that will be filed with the Securities
and Exchange Commission within 120 days after March 31, 2000, the close of the
Registrant's 2000 fiscal year. For a description of the executive officers of
the Registrant, see "Executive Officers of the Registrant" included in Part I,
Item 1.
-41-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS:
<TABLE>
<S> <C>
Report of Independent Accountants 23
Consolidated Balance Sheet, March 31, 2000 and 1999 24
Consolidated Statement of Operations and Comprehensive Income for the years 25
ended March 31, 2000, 1999 and 1998
Consolidated Statement of Changes in Stockholders' Equity for the years ended
March 31, 2000, 1999 and 1998 26
Consolidated Statement of Cash Flows for the years ended March 31, 2000, 1999 and 27
1998
Notes to Consolidated Financial Statements 28
</TABLE>
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.
-42-
<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.
3.2 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.
3.3 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.
4.1 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.
4.2 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.
4.3 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.
10.6 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.
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<PAGE>
10.7 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.
10.8 Employment Agreements between Registrant and William M. Weisfield
dated November 1, 1998. Incorporated by reference to Exhibit
Numbers 10.1 and 10.2 to Registrant's Form 8-K dated December
4, 1998 filed under the Exchange Act.
10.9 Incentive Compensation Agreement between Registrant and Glen J.
Bertini dated October 29, 1999. Filed herewith.
10.10 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.
10.11 Loan Modification Agreement between Registrant and FINOVA Capital
Corporation dated April 23, 1999. Filed under the Exchange Act
on Form 10-K for the Fiscal Year ended March 31, 1999.
10.12 Loan Modification Agreement between Registrant and FINOVA Capital
Corporation dated December 20, 1999. Filed under the Exchange
Act to Exhibit 10.41 to Registrant's Form 10-Q for quarter
ending December 31, 1999.
10.13 Loan Modification Agreement between Registrant and FINOVA Capital
Corporation dated March 1, 2000. Filed herewith.
21.1 Subsidiaries of Registrant. Filed herewith.
23.1 Consent of Independent Accountants. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
99.1 Additional Stockholder Material. Filed herewith.
</TABLE>
-44-
<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 9, 2000
--------------------------
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.
<TABLE>
<S> <C> <C>
/s/ WILLIAM M. WEISFIELD President, Chief Executive June 9, 2000
---------------------------------------- Officer and Chairman of the Board
(William M. Weisfield) (Principal Executive Officer)
/s/ DARLA VIVIT NORRIS
---------------------------------------- Senior Vice President, Chief Financial Officer and June 9, 2000
(Darla Vivit Norris) Treasurer (Principal Financial Officer)
/s/ PHYLLIS A. BOYD
---------------------------------------- Controller, Chief Accounting Officer June 9, 2000
(Phyllis A. Boyd) (Principal Accounting Officer)
/s/ STANLEY J. BRIGHT
---------------------------------------- Director June 9, 2000
(Stanley J. Bright)
/s/ JOHN D. DURBIN
---------------------------------------- Director June 9, 2000
(John D. Durbin)
/s/ JOHN W. ELLIS
---------------------------------------- Director June 9, 2000
(John W. Ellis)
/s/ WALTER M. HIGGINS
---------------------------------------- Director June 9, 2000
(Walter M. Higgins)
/s/ ROBERT E. RUNICE
---------------------------------------- Director June 9, 2000
(Robert E. Runice)
</TABLE>
-45-
<PAGE>
As filed with the Securities and Exchange Commission on June 21, 2000
File No. 0-16821
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
EXHIBITS
TO
ANNUAL REPORT AND FORM 10-K
FOR THE YEAR ENDED MARCH 31, 2000
UNDER
THE SECURITIES EXCHANGE ACT OF 1934
---------------
UTILX CORPORATION
<PAGE>
<TABLE>
<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.
3.2 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.
3.3 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.
4.1 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.
4.2 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.
4.3 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.
10.6 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.
10.7 Exclusive License and Distribution Agreement dated as of September
26, 1991 between UTILX Corporation and Dow Corning
Corporation. Incorporated by reference to Exhibit Number 1 to
Registrant's Form 8-K dated September 26, 1991 filed under the
Exchange Act.
<PAGE>
10.8 Employment Agreements between Registrant and William M. Weisfield
dated November 1, 1998. Incorporated by reference to Exhibit
Numbers 10.1 and 10.2 to Registrant's Form 8-K dated December
4, 1998 filed under the Exchange Act.
10.9 Incentive Compensation Agreement between Registrant and Glen J.
Bertini dated October 29, 1999. Filed herewith.
10.10 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.
10.11 Loan Modification Agreement between Registrant and FINOVA Capital
Corporation dated April 23, 1999. Filed under the Exchange Act
on Form 10-K for the Fiscal Year ended March 31, 1999.
10.12 Loan Modification Agreement between Registrant and FINOVA Capital
Corporation dated December 20, 1999. Filed under the Exchange
Act to Exhibit 10.41 to Registrant's Form 10-Q for quarter
ending December 31, 1999.
10.13 Loan Modification Agreement between Registrant and FINOVA Capital
Corporation dated March 1, 2000. Filed herewith.
21.1 Subsidiaries of Registrant. Filed herewith.
23.1 Consent of Independent Accountants. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
99.1 Additional Stockholder Material. Filed herewith.
</TABLE>
