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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1997
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UTILX CORPORATION
COMMISSION FILE NUMBER 0-16821
DELAWARE 91-1171716
(State of Incorporation) (I.R.S. Employer Identification Number)
22404 - 66TH AVENUE SOUTH
P. O. BOX 97009
KENT, WASHINGTON 98064-9709 (253) 395-0200
(Address of Principal Executive Offices) (Registrant's Telephone Number)
Indicate by checkmark whether the Registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) been subject to such filing
requirements for the past 90 days. Yes X No
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As of September 30, 1997, 7,199,186 shares of Common Stock were outstanding.
The total number of pages in this Form 10-Q is 16.
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TABLE OF CONTENTS
ITEM PAGE
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PART I
1. Financial Statements
Consolidated Balance Sheet
September 30, 1997 and March 31, 1997................. 3
Consolidated Statement of Operations
For the Three Months Ended
September 30, 1997 and September 30, 1996............ 4
Consolidated Statement of Operations
For the Six Months Ended
September 30, 1997 and 1996........................... 5
Consolidated Statement of Cash Flows
For the Six Months Ended
September 30, 1997 and 1996.......................... 6
Notes to Consolidated Financial Statements........... 7
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 9
PART II
1. Legal Proceedings.................................... 14
2. Changes in Securities................................ 14
3. Defaults Upon Senior Securities...................... 14
4. Submission of Matters to a Vote of Security Holders.. 14
5. Other................................................ 14
6. Exhibits............................................. 15
Signatures................................................. 16
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UTILX CORPORATION
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30 AND MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARES)
(UNAUDITED)
ASSETS
SEPTEMBER 30 MARCH 31
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Current assets:
Cash and cash equivalents......................... $ 770 $ 1,490
Accounts receivable, trade, net................... 20,558 15,873
Materials, supplies and inventories............... 9,519 7,715
Income taxes receivable........................... 481 469
Prepaid expenses and other........................ 536 184
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Total current assets.......................... 31,864 25,731
Equipment and improvements, net..................... 8,885 9,446
Other assets, net................................... 612 735
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Total assets.................................. $41,361 $35,912
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank.............................. $ 6,075 $ 985
Accounts payable.................................. 4,287 3,737
Accrued liabilities............................... 4,836 4,449
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Total current liabilities..................... 15,198 9,171
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Commitments and Contingencies
Stockholders' equity:
Common Stock, $0.01 par value
(authorized 25,000,000 shares)................ 72 72
Common Stock Warrants............................. 936 936
Additional paid-in capital........................ 17,438 17,390
Retained earnings................................. 8,320 8,908
Unearned compensation............................. (3)
Cumulative foreign currency
translation adjustment........................... (603) (562)
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Total stockholders' equity.................... 26,163 26,741
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Total liabilities and stockholders'
equity................................... $41,361 $35,912
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Common Stock issued and outstanding............... 7,199,186 7,184,631
(See Notes to Consolidated Financial Statements)
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UTILX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1997 1996
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Revenues..................................... $20,734 $15,549
Cost of revenues............................. 18,898 13,029
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Gross profit............................... 1,836 2,520
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Operating expenses:
Selling, general and administrative........ 1,916 1,845
Research and engineering................... 130 178
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Total operating expenses............... 2,046 2,023
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Operating income (loss)........................ (210) 497
Other income (expense), net.................... (110) 25
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Income (loss) before income taxes.............. (320) 522
Income tax provision........................... 6
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Net income (loss).............................. $ (320) $ 516
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Earnings (loss) per share (Note 2):
Primary.................................... $ (.04) $ .07
Fully diluted.............................. $ (.04) $ .07
Weighted average number of shares (Note 2):
Primary.................................... 7,190 7,330
Fully diluted.............................. 7,190 7,345
(See Notes to Consolidated Financial Statements)
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UTILX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1997 1996
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Revenues....................................... $39,501 $30,673
Cost of revenues............................... 35,765 25,273
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Gross profit............................... 3,736 5,400
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Operating expenses:
Selling, general and administrative.......... 3,854 3,832
Research and engineering..................... 288 371
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Total operating expenses............... 4,142 4,203
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Operating income (loss)........................ (406) 1,197
Other expense, net............................. (181) (16)
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Income (loss) before income taxes.............. (587) 1,181
Income tax provision........................... 1 12
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Net income (loss).............................. $ (588) $1,169
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Earnings (loss) per share (Note 2):
Primary.................................... $ (.08) $ .16
Fully diluted.............................. $ (.08) $ .16
Weighted average number of shares (Note 2):
Primary.................................... 7,187 7,264
Fully diluted.............................. 7,187 7,271
(See Notes to Consolidated Financial Statements)
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UTILX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS)
(UNAUDITED)
1997 1996
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OPERATING ACTIVITIES:
Net income (loss).............................. $ (588) $ 1,169
Adjustments to reconcile to net cash provided
by (used by) operating activities:
Depreciation and amortization............... 2,003 1,822
Other non-cash (income) expenses, net....... 50 31
Changes in assets and liabilities........... (5,949) 1,416
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Total adjustments........................... (3,896) 3,269
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Net cash provided by (used by) operating
activities............................... (4,484) 4,438
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INVESTING ACTIVITIES:
Cost of additions to equipment................. (1,368) (2,071)
Proceeds from sale of equipment................ 5
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Net cash used by investing activities.... (1,368) (2,066)
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FINANCING ACTIVITIES:
Net borrowings (repayments) on note payable.... 5,090 (1,750)
Issuance of Common Stock....................... 48 1
Purchase of Common Stock....................... (1)
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Net cash provided by (used by)
financing activities..................... 5,138 (1,750)
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CUMULATIVE TRANSLATION ADJUSTMENT
OF FOREIGN CURRENCY TRANSACTIONS................. (6) 12
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Net increase (decrease) in cash and cash
equivalents.................................... (720) 634
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CASH AND CASH EQUIVALENTS:
Beginning of period............................ 1,490 495
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End of period.................................. $ 770 $1,129
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(See Notes to Consolidated Financial Statements)
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UTILX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL STATEMENT PRESENTATION
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position
and operating results for the three-month and six-month periods ended
September 30, 1997 and 1996. The statements should be read in conjunction
with the March 31, 1997 audited consolidated financial statements included in
the fiscal 1997 Annual Report on Form 10-K.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS) No. 130, "Comprehensive
Income" ("FAS 130"). FAS 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of financial
statements. Comprehensive income includes items such as foreign currency
translation adjustments that are currently being presented by the company as
a component of shareholders' equity. The impact of adopting FAS 130 has not
been determined. The Company will adopt the statement for the year ending
March 31, 1999.
In June 1997 the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 establishes
standards for disclosures about operating segments in annual financial
statements and selected disclosures about operating segments in annual
financial statements and selected information in interim financial reports.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. FAS 131 supersedes FAS No.
14, "Financial Reporting for Segments of a Business Enterprise." FAS 131 is
effective for the year ending March 31, 1999 and requires restatement of
earlier periods presented. The impact of adopting FAS 131 has not been
determined.
2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 128, "Earnings Per Share." This statement will
change the computation, presentation and disclosure requirements for earnings
per share ("EPS"). The statement will be effective for interim and annual
reporting periods ending after December 15, 1997. This statement will
replace "primary" EPS with" basic" EPS, the principal difference being the
exclusion of common stock equivalents in the computation of basic EPS. In
addition, this statement will require the dual presentation of basic and
diluted EPS on the face of the consolidated statement of operations. EPS
computed pursuant to the statement is not expected to be materially different
from the historical earnings per share previously presented.
Primary 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") 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. Fully diluted earnings per share is
computed based on the weighted average number of shares of Common Stock and
common stock equivalents outstanding during the period taking into
consideration maximum potential dilution.
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3. ACCOUNTS RECEIVABLE
Accounts receivable, trade, net at September 30 and March 31, 1997 consist of
the following:
(In thousands)
September 30, 1997 March 31, 1997
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North American Customers:
Completed work not yet billed $ 8,470 $ 5,396
Billed but uncollected 11,001 9,427
International customers 1,508 1,332
Less allowance for doubtful accounts (421) (282)
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$20,558 $15,873
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4. MATERIALS, SUPPLIES AND INVENTORIES
Materials, supplies and inventories at September 30 and March 31, 1997
consist of the following:
(In thousands)
September 30, 1997 March 31, 1997
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Raw Materials and Spare Parts $ 7,668 $ 6,729
Work in Process 1,305 562
Finished Goods 983 918
Less allowance for potentially
obsolete or overstocked inventory (437) (494)
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$9,519 $7,715
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5. NOTE PAYABLE TO BANK
The Company has a committed credit facility of $10,000,000 with Seattle-First
National Bank of Washington ("Seafirst"). The agreement is collateralized by
the Company's inventory and accounts receivable. The credit agreement
requires that the Company maintain certain financial covenants, including
requirements to maintain certain levels of tangible net worth, current ratio,
and debt ratio. Borrowings bear interest at the Seafirst prime rate, the
LIBOR rate plus 1.40%, or other specified rates, at the Company's option.
The Company pays a commitment fee of up to 0.125% on the unused portion of
the facility. This line of credit currently expires on June 30, 1998. The
Company currently anticipates that it will be able to negotiate an extension
of this line of credit.
6. COMMITMENTS AND CONTINGENCIES
The Company is party to an agreement (the "underlying agreement") under which
it utilizes a single Florida-based subcontractor for performance of certain
CableCure injection tasks for Florida Power & Light through January 2000.
The underlying agreement calls for the Company to pay the subcontractor a
percentage of the amount charged to Florida Power & Light for certain
services defined in the underlying agreement. The Company agreed to new
pricing in its contract with Florida Power & Light. The Company is in a
dispute with this subcontractor, over amounts to be paid to the subcontractor
effective April 1, 1997. An interim agreement, subject to retroactive
adjustments, was agreed to by the Company and the subcontractor for the
period April 1, 1997 to May 31, 1997. The subcontractor is continuing to
perform the injection services required by the Company under the underlying
agreement while the negotiations continue. The Company believes that
payments made to the subcontractor subsequent to April 1, 1997 are in
conformity with the underlying agreement. The
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subcontractor claims to be entitled to a percentage of additional amounts. On
October 31, 1997, the Company filed suit against the subcontractor in
Florida, seeking resolution of the price dispute, among other matters. There
can be no complete assurance that the final price settled upon for payments
to the subcontractor will not result in an adverse effect on the gross profit
realized by the Company under its contract with Florida Power & Light.
Based on the footage injected by the subcontractor during the first two
quarters of fiscal 1998, management of the Company does not anticipate that
the final resolution of this matter will result in a material adverse impact
on the results of operations through September 30, 1997, or on the Company's
consolidated financial position or liquidity, as of September 30, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR SECOND QUARTER
OF FISCAL YEAR 1998
COMPARED TO SECOND QUARTER
OF FISCAL YEAR 1997
REVENUES
Consolidated revenues increased 33% in the second quarter of fiscal 1998,
compared to the same period in fiscal 1997. Consolidated revenues increased
29% in the first six months of fiscal 1998, compared to the same period in
fiscal 1997.
NORTH AMERICAN OPERATIONS. Revenues from installation and replacement
services in North America increased to $14.0 million in the second quarter of
fiscal 1998, compared to $9.7 million in the same period of fiscal 1997.
Revenues from repair and restoration services in North America increased to
$5.3 million in the second quarter of fiscal 1998, compared to $3.7 million
in the same period of fiscal 1997.
Revenues from installation and replacement services in North America
increased to $26.2 million in the first six months of fiscal 1998 compared to
$19.2 million in the same period of fiscal 1997. Revenues from repair and
restoration services in North America increased to $9.7 million in the first
six months of fiscal 1998 compared to $7.2 million in the same period of
fiscal 1997.
The increased revenues from installation and replacement operations were
attributed to increased demand for such services and the Company's ability to
maintain a higher level of drilling crews than in the prior year to meet the
demand. The Company added four new drilling crews in September 1998,
utilizing the new equipment delivered in the second quarter. Also, the
Company has increased the number of crews performing installation and
replacement services using conventional trenching methods and added its own
crews for pulling cable through conduit installed by its FlowMole crews.
These new crews also contributed to the increased revenues in the second
quarter of fiscal 1998.
Continued strong demand for repair and restoration services, primarily under
"Test, Treat or Replace" contracts, contributed to the increased repair and
restoration revenue levels. Revenues also increased due to the addition of
new services, such as location and repair of faults in electric cables.
Customers choosing Test, Treat or Replace contracts also contributed to the
increased demand for installation and replacement services.
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INTERNATIONAL OPERATIONS. Revenues from international operations decreased
to $1.4 million in the second quarter of fiscal 1998, compared to $2.2
million in the same period of fiscal 1997. Revenues from international
operations decreased to $3.6 million in the first six months of fiscal 1998
compared to $4.3 million in the same period of the prior year. The decrease
resulted from decreased revenues from equipment sales due to the Company's
decision to outsource the manufacturing of its equipment. On April 2, 1996
the Company announced a decision to cease its in-house assembly of FlowMole
drilling equipment. During the first six months of fiscal 1997, the Company
was able to sell equipment from its remaining inventory of drilling systems
assembled in-house. The Company has issued purchase orders to a number of
manufacturers for new FlowMole drilling systems to be delivered in fiscal
1998 and 1999. The second quarter of 1998 was the first opportunity for
equipment delivery from the new vendors, and the Company completed an
equipment sale in September 1997. Delivery of new drilling systems from the
Company's vendors allow the Company to continue selling equipment in the
third quarter of fiscal 1998 and beyond.
GROSS PROFIT
Gross profit decreased 27% in the second quarter of fiscal 1998, compared to
the same period in fiscal 1997. Gross profit decreased 31% in the first six
months of fiscal 1998, compared to the same period in fiscal 1997.
NORTH AMERICAN OPERATIONS. Gross profit from installation and replacement
services decreased in the second quarter of fiscal 1998 compared to the same
period of fiscal 1997. New employees were hired both for drilling crews and
for new conventional trenching and cable pulling crews, including employees
being trained, in anticipation of the delivery of newly ordered FlowMole
equipment. New equipment began to arrive in September 1997. Additional
hiring and training expenses, which are generally not offset by new revenues
until the new crews are deployed to perform work and trained sufficiently to
be productive, reduced gross profit as a percentage of revenue in the second
quarter of fiscal 1998. The Company also determined that pricing on certain
contracts was adversely affecting fiscal 1998 gross margin. The Company
approached several customers for price increases during the second quarter of
fiscal 1998, after identifying its least profitable contracts. The Company
either obtained price increases or canceled work under those contracts.
Gross profit from repair and restoration services decreased for similar
reasons. The Company substantially increased the number of crews involved in
the preparation of cables for CableCure injection, including crews starting
up new services for location and repair of faults in electric cables. Those
services are more labor intensive and generated lower profit margins than
injection services. The Company has also negotiated price increases in
October 1997 on certain contracts for location and repair of electric faults.
In addition, during the first two quarters of fiscal 1998, the Company
encountered a high percentage of cables where, after testing by Company
crews, it was determined that injection would not be cost-effective. As a
result, the amount of CableCure revenues produced per crew decreased, which
adversely impacted gross profit for the period.
INTERNATIONAL OPERATIONS. Gross profit from international operations in the
second quarter of fiscal 1998 decreased compared to the same period of the
prior year due to lower revenue levels. Gross profit for the first six
months of fiscal 1998 decreased due to the decreased revenues from equipment
sales. Increased levels of personnel in the Company's European service
operations combined with slow work release by customers in the second quarter
of fiscal 1998 adversely affected on gross profit.
OPERATING EXPENSES AND OTHER INCOME (EXPENSES)
Total operating expenses increased 1% in the second quarter of fiscal 1998,
compared to the same period of fiscal 1997. Total operating expenses
decreased 1% in the first six months of fiscal 1998 compared to the same
period of fiscal 1997. Selling, general and administrative expenses
increased 4% and research and engineering expenses decreased 27% compared to
the second quarter of fiscal 1997. The relatively small increase in selling,
general and administrative expenses in fiscal 1998 was primarily generated by
costs associated with the selection of a new
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management information system, targeted for fiscal 1999 implementation. The
lower level of research and engineering expense in fiscal 1998 reflected
reduced spending on the Company's Series G Drill from fiscal 1997 levels.
Other income (expense), net, was an expense of $110,000 and $181,000 in the
second quarter of fiscal 1998 and the first six months of fiscal 1998,
respectively, compared to income of $25,000 and an expense of $16,000 in the
same periods of the prior year. This change was a result of increased
interest expense due to higher average borrowings on the Company's line of
credit.
As a result of the foregoing, the Company recorded a pretax loss of $320,000
in the second quarter of fiscal 1998, compared to pretax income of $522,000
in the same period of fiscal 1997. The Company recorded a pretax loss of
$587,000 in the first six months compared to pretax income of $1.2 million in
the same period of 1997.
INCOME TAX EXPENSE (BENEFIT)
The Company would normally expect an effective income tax rate of
approximately 40% on positive pretax income. This exceeds the federal
statutory rate of 34% due to the impact of state income taxes and
nondeductible expenses. The impact of deductions deferred from prior years
and net operating loss carryforwards eliminated substantially all of the
Company's income tax provision in the first two quarters of fiscal 1997, due
to the provision of a valuation allowance at the end of fiscal 1996 against
the full amount of the Company's net deferred tax assets. The Company did
not provide for any federal income tax benefit in the first two quarters of
fiscal 1998 as it continues to provide a valuation allowance against the full
amount of its net deferred tax assets.
NET INCOME (LOSS)
As a result of the foregoing, the Company recorded a net loss of $320,000 in
the second quarter of fiscal 1998, compared to net income of $516,000 in the
same period of fiscal 1997. The Company recorded a net loss of $588,000 in
the first six months of fiscal 1998 compared to net income of $1.2 million in
the same period of fiscal 1997.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 128, "Earnings Per Share." This statement will
change the computation, presentation and disclosure requirements for earnings
per share ("EPS"). The statement will be effective for interim and annual
reporting periods ending after December 15, 1997. This statement will
replace "primary" EPS with "basic" EPS, the principal difference being the
exclusion of common stock equivalents in the computation of basic EPS. In
addition, this statement will require the dual presentation of basic and
diluted EPS on the face of the consolidated statement of operations. EPS
computed pursuant to the statement is not expected to be materially different
from the historical earnings per share previously presented.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS) No. 130, "Comprehensive
Income" ("FAS 130"). FAS 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of financial
statements. Comprehensive income includes items such as foreign currency
translation adjustments that are currently being presented by the company as
a component of shareholders' equity. The impact of adopting FAS 130 has not
been determined. The Company will adopt the statement for the year ending
March 31, 1999.
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In June 1997 the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 establishes
standards for disclosures about operating segments in annual financial
statements and selected disclosures about operating segments in annual
financial statements and selected information in interim financial reports.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. FAS 131 supersedes FAS No.
14, "Financial Reporting for Segments of a Business Enterprise." FAS 131 is
effective for the year ending March 31, 1999 and requires restatement of
earlier periods presented. The impact of adopting FAS 131 has not been
determined.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had unused sources of liquidity consisting
of $770,000 in cash and cash equivalents and an unused balance on its
committed line of credit of $3,925,000. This compares to $1,490,000 in cash
and cash equivalents and an unused balance on its committed line of credit of
$4,015,000 at March 31, 1997. Uses of cash during the first half of fiscal
1998 primarily related to capital expenditures of $1.4 million for equipment
to expand the Company's capabilities to perform additional auxiliary
services, such as equipment for locating and repairing faults in electric
cables. The Company also is financing a growing level of working capital,
due to rapid growth in North American service operations. The Company
anticipates the periodic usage of its line of credit throughout fiscal 1998.
The Company anticipates that through cash generated by operations, lease
financing of certain purchases of new equipment and the periodic use of its
credit facility, it will be able to meet its cash requirements through at
least fiscal 1998.
REVIEW AND OUTLOOK
The Company is experiencing strong demand for its services in North America,
and is recruiting personnel to expand its capacity. The third quarter of the
Company's fiscal year has historically generated its peak revenue levels due
to the normal seasonality of work release from utility customers. The
Company had received eleven new drilling systems for use in its North
American service operations as of October 30, 1997, including four placed
into service in September 1997. The Company is scheduled to receive an
additional twelve new systems by December 31, 1997. Increased equipment
capacity will allow the Company to increase its capacity to perform work.
However, the Company's revenue levels and the weighted average number of
FlowMole systems in operation on any given day are also affected by factors
which include weather, pricing, competition, customer work release practices,
soil and other work difficulty determinants, and permitting. The Company's
contracts typically allow for cancellation by the customers on relatively
short notice. Therefore, sudden changes in demand may have an immediate
adverse impact on the Company's revenue levels. The Company expects to see
increased volumes from new customers in calendar year 1998, and some
increased volumes from existing customers. The Company expects to continue to
rely on a small number of customers for the majority of the Company's North
American CableCure revenues, increasing the exposure of the Company to such
short-term fluctuations in revenues. See also the discussion under "Risk
Factors," below.
This Form 10-Q contains forward-looking statements, in addition to those
under the caption "Review and Outlook." Such statements are subject to
substantial risk. Actual results may vary materially due to risks and
uncertainties inherent in the Company's business, including those described
under "Review and Outlook," those described under "Risk Factors," below, and
additional factors described in Item 7 of the Company's fiscal 1997 Form 10-K
filed with the Securities and Exchange Commission.
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RISK FACTORS
COMPETITION. The Company has experienced a long-term trend of declining
prices for guided boring ("FlowMole") services, particularly for smaller
diameter utility installations, due to competitive pressures and changes in
utility bidding practices. This trend has also caused the Company to lower
its prices for CableCure injection services, which are priced at a discount
to replacement costs, including replacement via guided boring. In addition,
the Company's utility customers are increasing their requests for "turnkey"
installation, replacement and restoration services, requiring their drilling
contractors to take responsibility for switching circuits, terminating
circuits, and other non-incidental tasks. These tasks require additional
equipment and labor, and the cost increases can offset any price increase the
Company is able to negotiate for the expansion of its services. The overall
trend of falling prices for installation and replacement services is expected
to continue into the future, as more customers award work based on
competitive bidding, more customers require their drilling contractors to
perform additional tasks as part of the drilling contract, and more
conventional contractors acquire drilling capabilities in order to enter into
this segment of the construction industry. This trend will continue to put
downward pressure on the market price for CableCure Services. The Company
cannot predict the ultimate duration or the magnitude of these decreases.
SEASONAL FACTORS. Weather and other seasonal factors may decrease the
Company's revenues and profits in any given period. Adverse weather may
preclude the Company from operating its FlowMole drilling systems or
providing its CableCure services at certain times of the year. In addition,
the Company believes that the regular budgetary cycles of certain of its
North American utility customers tend to concentrate demand for the Company's
services during the third quarter of its fiscal year (the fourth quarter of
the calendar year), although other budgetary factors described below may
override this trend in any given quarter. As a result of these factors,
results of operation in any given fiscal quarter are not necessarily
indicative of results in any other fiscal quarter.
UTILITIES' BUDGETARY CONSIDERATIONS. Budgetary considerations arising
from unfavorable regulatory determinations on matters such as rate-setting,
capitalization of services performed by the Company, or siting of power
production facilities, or from reductions in new housing starts, reductions
in electric utility revenues due to mild weather, and general economic
downturns have affected the ability of some of the Company's utility
customers to sustain their cable replacement or other maintenance programs
and accordingly adversely impact the Company's revenues and profits.
Although the Company has broadened its customer base, three customers
generate a significant portion of the Company's consolidated revenues, and a
small number of customers generate more than half of its CableCure revenues.
Because cable replacement, restoration and other maintenance programs are, to
a substantial extent, deferrable and the Company's contracts with its utility
customers permit termination of orders on relatively short notice,
postponement or cancellation of such programs by customers can interject
substantial volatility into the Company's revenues and profits.
DOW CORNING CORPORATION. The Company purchases its CableCure fluid
exclusively from Dow Corning. In May 1995, Dow Corning filed for protection
under Chapter 11. While the Company has been informed by Dow Corning that it
intends to continue the CableCure business, there can be no assurance that
Dow Corning or the bankruptcy court will not take action to amend or
terminate the CableCure license agreement.
FLORIDA SUBCONTRACT NEGOTIATIONS. The Company is party to an agreement
(the "underlying agreement") under which it utilizes a single Florida-based
subcontractor for performance of certain CableCure injection tasks for
Florida Power & Light through January 2000. The underlying agreement calls
for the Company to pay the subcontractor a percentage of the amount charged
to Florida Power & Light for certain services defined in the underlying
agreement. The Company agreed to new pricing in its contract with Florida
Power & Light. The Company is in a dispute with this subcontractor, over
amounts to be paid to the subcontractor effective April 1, 1997. An interim
agreement, subject to retroactive adjustments, was agreed to by the Company
and the subcontractor for the period April 1, 1997 to May 31, 1997. The
subcontractor is continuing to perform the injection services required by the
Company under the underlying agreement while the negotiations continue. The
Company believes that payments made to the subcontractor subsequent to April 1,
1997 are in conformity with the
-13-
<PAGE>
underlying agreement. The subcontractor claims to be entitled to a percentage
of additional amounts. On October 31, 1997, the Company filed suit against
the subcontractor in Florida, seeking resolution of the price dispute, among
other matters (See Part II, Item 1 and Note 6 of Notes to Consolidated
Financial Statements included in Part I, Item 1). There can be no complete
assurance that the final price settled upon for payments to the subcontractor
will not result in an adverse effect on the gross profit realized by the
Company under its contract with Florida Power & Light. Based on the footage
injected by the subcontractor during the first two quarters of fiscal 1998,
management of the Company does not anticipate that the final resolution of
this matter will result in a material adverse impact on the results of
operations through September 30, 1997, or on the Company's consolidated
financial position or liquidity, as of September 30, 1997. The subcontractor
may continue injection services until this matter is resolved, which will
service to increase the total amount of footage subject to the pricing
dispute.
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 1998.
FOREIGN CURRENCY FLUCTUATIONS. The Company's financial results are
affected by fluctuations in certain foreign currencies, particularly the
British Pound Sterling and the German Deutschemark.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
UTILX Corporation vs. Power Cable Restoration, Inc. and Ronald E. Aleshire
- - On October 31, 1997, the Company filed a complaint in Federal District
Court in Tampa, Florida against Power Cable Restoration, Inc. ("PCR"), a
contractor in Florida with whom the Company has a contract for certain cable
injection services for Florida Power & Light through January 2000, and Ronald
E. Aleshire, a principal shareholder in PCR. The complaint alleges certain
failures and breaches of contractual obligations and requests declaratory
relief and determination that UTILX may terminate its contracts with PCR.
The Company and PCR have an ongoing dispute over the amount to be paid to PCR
under its subcontract for certain cable injection services performed
subsequent to April 1, 1997. The complaint also requests, among other
matters, that the court determine that the price being paid currently by
UTILX to PCR is in accordance with the contract between the parties. This
case is in its early stages and at this time it is not possible to predict
the outcome of this matter (See also Note 6 of Notes to Consolidated
Financial Statements included in Part I, Item 1).
The Company is involved in other litigation matters, both as a plaintiff
and as a defendant, arising in the ordinary course of its business.
Management expects that these other matters will not have a materially
adverse effect on the consolidated financial position, results of operations
or liquidity of the Company.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-14-
<PAGE>
ITEM 5. OTHER
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.39 Loan Modification Agreement between Registrant and Bank of America
NW, N.A., doing business as Seafirst Bank, successor by name
change to Seattle-First National Bank, dated September 30, 1997.
Filed herewith.
11.1 Statement Regarding Computation of Per Share Earnings. Filed
herewith.
27.1 Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K:
None
-15-
<PAGE>
UTILX CORPORATION
SIGNATURES
Pursuant to the requirements 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
---------------------------
(Registrant)
Date: November 6, 1997 By:/s/ Craig E. Davies
--------------------------------
Craig E. Davies, President and
Chief Executive Officer
Date: November 6, 1997 By:/s/ Larry D. Pihl
--------------------------------
Larry D. Pihl, VicePresident and
Chief Financial Officer
-16-
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.39 Loan Modification Agreement between Registrant and Bank of
America NW, N.A., doing business as Seafirst Bank, successor by
name change to Seattle-First National Bank, dated September 30,
1997. Filed herewith.
11.1 Statements Regarding Computation of Per Share Earnings. Filed
herewith.
27.1 Financial Data Schedule. Filed herewith.
<PAGE>
EXHIBIT 10.39
SEAFIRST BANK LOAN MODIFICATION
AGREEMENT
- -----------------------------------------------------------------------------
This agreement amends the Revolving Note dated December 2, 1994 ("Note")
and Credit Agreement dated December 2, 1994 ("Credit Agreement"), each
executed by UTILX CORPORATION ("Borrower") in favor of Bank of America
National Trust and Savings Association, doing business as Seafirst Bank,
successor by merger to Seattle-First National Bank and Bank of America NW,
N.A. ("Bank"), regarding a loan in the maximum principal amount of $5,000,000
(the "Loan"). Capitalized terms used in this agreement shall have the meaning
given in the Credit Agreement, as modified by any prior modification
agreement. For mutual consideration, Borrower and Bank agree to amend the
above loan documents as follows:
1. NOTE. The Note is amended to provide that Borrower's maximum
liability for principal under the Note is changed to $10,000,000.
2. DEFINITIONS. The following definition is added to the Credit
Agreement:
"BORROWING BASE" SHALL MEAN 75% OF ALL OF BORROWER'S BILLED
ACCOUNTS RECEIVABLE, BOTH FOREIGN AND DOMESTIC.
3. CREDIT LIMIT. Section 1.10 of the Credit Agreement is amended
increase the credit limit to $10,000,000.
4. BORROWING BASE COVENANT. A new Section 7.12 is added to the Credit
Agreement to read as follows:
7.12 BORROWING BASE. THE OUTSTANDING PRINCIPAL BALANCE OF THE
REVOLVING NOTE PLUS THE FACE AMOUNT OF ALL LETTERS OF CREDIT
OUTSTANDING SHALL NOT EXCEED THE BORROWING BASE ON MARCH 31, 1998.
5. OTHER TERMS. Except as specifically amended by this agreement or
any prior amendment, all other terms, conditions, and definitions
of the Note, Credit Agreement, and all other notes, security
agreements, guaranties, deeds of trust, mortgages, and other
instruments or agreements entered into with regard to the Loan
shall remain in full force and effect.
DATED as of September 30, 1997.
Bank: Borrower:
SEAFIRST BANK UTILX CORPORATION
By: /s/ Terry Jones By: /s/ Larry D. Pihl
------------------------------ ---------------------------
Title: Vice President Title: VP, CFO
---------------------------- -------------------------
LOAN MODIFICATION AGREEMENT (UTILX CORPORATION;u200/17124)
<PAGE>
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Quarter Ended September 30,
-----------------------------------------------------
1997 1996
(Loss) Shares Earnings Shares
------ ------ -------- ------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Primary earnings (loss) per common share:
Net earnings (loss) available for
common stock and weighted average
common shares outstanding $ (320) 7,190 $ 516 7,187
Stock options and warrants
assumed exercised - net 143
------- ------ ------- ------
Total net earnings (loss) and
primary common shares $ (320) 7,190 $ 516 7,330
------- ------ ------- ------
------- ------ ------- ------
Primary earnings (loss) per common share $ (.04) $ .07
------- -------
------- -------
Fully diluted earnings (loss)
per common share:
Net earnings (loss) available
for common stock and weighted
average common shares outstanding $ (320) 7,190 $ 516 7,187
Stock options and warrants assumed
exercised - net 158
------- ------ ------- ------
Total net earnings (loss) and fully
diluted common shares $ (320) 7,190 $ 516 7,345
------- ------ ------- ------
------- ------ ------- ------
Fully diluted earnings (loss)
per common share $ (.04) $ .07
------- -------
------- -------
</TABLE>
<PAGE>
UTILX CORPORATION
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Six Months Ended September 30,
-----------------------------------------------------
1997 1996
(Loss) Shares Earnings Shares
------ ------ -------- ------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Primary earnings (loss) per common share:
Net earnings (loss) available for
common stock and weighted average
common shares outstanding $ (588) 7,187 $ 1,169 7,185
Stock options and warrants assumed
exercised - net 79
------- ------ ------- -----
Total net earnings (loss) and
primary common shares $ (588) 7,187 $ 1,169 7,264
------- ------ ------- -----
------- ------ ------- -----
Primary earnings (loss) per common share $ (.08) $ .16
------- -------
------- -------
Fully diluted earnings (loss)
per common share:
Net earnings (loss) available for common
stock and weighted average common
shares outstanding $ (588) 7,187 $ 1,169 7,185
Stock options and warrants assumed
exercised - net 86
------- ------ ------- -----
Total net earnings (loss) and fully
diluted common shares $ (588) 7,187 $ 1,169 7,271
------- ------ ------- -----
------- ------ ------- -----
Fully diluted earnings (loss)
per common share $ (.08) $ .16
------- -------
------- -------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF UTILX CORPORATION FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 770
<SECURITIES> 0
<RECEIVABLES> 20,842
<ALLOWANCES> 284
<INVENTORY> 9,519
<CURRENT-ASSETS> 31,864
<PP&E> 33,235
<DEPRECIATION> 24,350
<TOTAL-ASSETS> 41,361
<CURRENT-LIABILITIES> 15,198
<BONDS> 0
72
0
<COMMON> 0
<OTHER-SE> 26,091
<TOTAL-LIABILITY-AND-EQUITY> 41,361
<SALES> 39,501
<TOTAL-REVENUES> 39,501
<CGS> 35,765
<TOTAL-COSTS> 39,907
<OTHER-EXPENSES> 66
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115
<INCOME-PRETAX> (587)
<INCOME-TAX> (1)
<INCOME-CONTINUING> (588)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (588)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
