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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
DECEMBER 31, 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
--- ---
As of December 31, 1997, 7,215,286 shares of Common Stock were outstanding.
The total number of pages in this Form 10-Q is 20.
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TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. Financial Statements
Consolidated Balance Sheet
December 31, 1997 and March 31, 1997. . . . . . . . . . . . . . . 3
Consolidated Statement of Operations
For the Three Months Ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Operations
For the Nine Months Ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . 5
Consolidated Statement of Cash Flows
For the Nine Months Ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . . . . . . 7
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . 11
PART II
1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 18
2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . 18
3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . 18
4. Submission of Matters to a Vote of Security Holders . . . . . . . 18
5. Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6. Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UTILX CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31 AND MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARES)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
----------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 540 $ 1,490
Accounts receivable, trade, net. . . . . . . . . . . . . . . . 18,511 15,873
Materials, supplies and inventories. . . . . . . . . . . . . . 9,383 7,715
Income taxes receivable, net . . . . . . . . . . . . . . . . . 427 469
Prepaid expenses and other . . . . . . . . . . . . . . . . . . 134 184
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . 28,995 25,731
Equipment and improvements, net . . . . . . . . . . . . . . . . . 10,795 9,446
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . 592 735
---------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 40,382 $ 35,912
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank . . . . . . . . . . . . . . . . . . . . . $ 3,460 $ 985
Current portion of capital lease obligations . . . . . . . . . 302 0
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 3,769 3,737
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . 4,192 3,764
---------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . 11,723 8,486
Capital lease obligations, net of current portion . . . . . . . . 837 0
Other long-term liabilities . . . . . . . . . . . . . . . . . . . 790 685
---------- ----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . 13,350 9,171
---------- ----------
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 . . . . . . . . . . . . . . . . . . 17,507 17,390
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . 9,075 8,908
Unearned compensation. . . . . . . . . . . . . . . . . . . . . (3)
Cumulative foreign currency translation adjustment . . . . . . (558) (562)
----------- -----------
Total stockholders' equity . . . . . . . . . . . . . . . . 27,032 26,741
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Total liabilities and stockholders' equity . . . . . . $ 40,382 $ 35,912
---------- ----------
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Common Stock issued and outstanding. . . . . . . . . . . . . . 7,215,286 7,184,631
</TABLE>
(See Notes to Consolidated Financial Statements)
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UTILX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1997 1996
---- ----
Revenues . . . . . . . . . . . . . . . . . . . . . $ 22,577 $ 16,317
Cost of revenues . . . . . . . . . . . . . . . . . 19,354 13,604
---------- ----------
Gross profit. . . . . . . . . . . . . . . . . . 3,223 2,713
---------- ----------
Operating expenses:
Selling, general and administrative . . . . . . 2,167 1,702
Research and engineering. . . . . . . . . . . . 156 172
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Total operating expenses. . . . . . . . . . 2,323 1,874
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Operating income . . . . . . . . . . . . . . . . . 900 839
Other expense, net . . . . . . . . . . . . . . . . (145) (27)
---------- ----------
Income before income taxes . . . . . . . . . . . . 755 812
Income tax provision (benefit) . . . . . . . . . . 0 (944)
---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . $ 755 $ 1,756
---------- ----------
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Earnings per share (Note 2):
Basic . . . . . . . . . . . . . . . . . . . . . $ .10 $ .24
Diluted . . . . . . . . . . . . . . . . . . . . $ .10 $ .24
(See Notes to Consolidated Financial Statements)
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UTILX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1997 1996
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Revenues . . . . . . . . . . . . . . . . . . . . . $ 62,078 $ 46,990
Cost of revenues . . . . . . . . . . . . . . . . . 55,119 38,877
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Gross profit. . . . . . . . . . . . . . . . . . 6,959 8,113
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Operating expenses:
Selling, general and administrative . . . . . . 6,022 5,533
Research and engineering. . . . . . . . . . . . 443 544
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Total operating expenses. . . . . . . . . . . . 6,465 6,077
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Operating income . . . . . . . . . . . . . . . . . 494 2,036
Other expense, net . . . . . . . . . . . . . . . . (326) (43)
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Income before income taxes . . . . . . . . . . . . 168 1,993
Income tax provision (benefit) . . . . . . . . . . 1 (932)
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Net income . . . . . . . . . . . . . . . . . . . . $ 167 $ 2,925
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Earnings per share (Note 2):
Basic . . . . . . . . . . . . . . . . . . . . . $ .02 $ .40
Diluted . . . . . . . . . . . . . . . . . . . . $ .02 $ .40
(See Notes to Consolidated Financial Statements)
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UTILX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 167 $ 2,925
Adjustments to reconcile to net cash provided by (used in)
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . 3,017 2,775
Other non-cash expenses, net . . . . . . . . . . . . . . . . . 54 48
Changes in assets and liabilities. . . . . . . . . . . . . . . (3,704) 1,866
--------- --------
Total adjustments. . . . . . . . . . . . . . . . . . . . . . . (633) 4,689
--------- --------
Net cash provided by (used in) operating activities. . . . (466) 7,614
--------- --------
INVESTING ACTIVITIES:
Cost of additions to equipment . . . . . . . . . . . . . . . . . . (2,936) (3,358)
Proceeds from sale of equipment. . . . . . . . . . . . . . . . . . 0 12
-------- --------
Net cash used by investing activities. . . . . . . . . . . (2,936) (3,346)
--------- ---------
FINANCING ACTIVITIES:
Net borrowings (repayments) on note payable. . . . . . . . . . . . 2,475 (2,500)
Issuance of Common Stock . . . . . . . . . . . . . . . . . . . . . 117 16
Purchase of Common Stock . . . . . . . . . . . . . . . . . . . . . 0 (1)
Payments on capital leases . . . . . . . . . . . . . . . . . . . . (148) 0
--------- --------
Net cash provided by (used by) financing activities. . . . 2,444 (2,485)
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EFFECT ON CASH FLOWS
OF FOREIGN CURRENCY TRANSACTIONS. . . . . . . . . . . . . . . . . . 8 (5)
-------- ---------
Net increase (decrease) in cash and cash equivalents . . . . . . . (950) 1,778
CASH AND CASH EQUIVALENTS:
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . 1,490 495
-------- --------
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 540 $ 2,273
-------- --------
</TABLE>
(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 nine-month periods ended December
31, 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 net changes in foreign currency translation
adjustments that are currently being presented by the Company as a component of
stockholders' equity. The impact of adopting FAS 130 has not been determined.
The Company will adopt the statement for the year ending March 31, 1999.
In June 1997 the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 establishes standards
for disclosures about operating segments in annual financial statements and
selected disclosures about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. FAS 131 supersedes FAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." FAS 131 is effective for the year ending
March 31, 1999 and requires restatement of earlier periods presented. The
impact of adopting FAS 131 has not been determined.
2. EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This
statement changes the computation, presentation and disclosure requirements for
earnings per share ("EPS"). The statement was implemented in these financial
statements. This statement replaces "primary" EPS with "basic" EPS, the
principal difference being the exclusion of common stock equivalents in the
computation of basic EPS. Earnings per share amounts for prior periods were
restated with no effect on previously reported amounts.
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of Common Stock of UTILX Corporation, $0.01 par value
per share (the "Common Stock") outstanding during the period. Diluted earnings
per share is computed based on 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. See also Note 7, "Subsequent
Events," for information regarding conversion of certain warrants subsequent to
December 31, 1997.
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<TABLE>
<CAPTION>
Earnings Per Share is calculated as follows:
Basic earnings per common share: Three Months Ended Nine Months Ended
December 31, December 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 755 $ 1,756 $ 167 $ 2,925
-------- --------- -------- ---------
-------- --------- -------- ---------
Weighted average common shares outstanding 7,208 7,178 7,194 7,182
-------- --------- -------- ---------
-------- --------- -------- ---------
Basic earnings per common share $ .10 $ .24 $ .02 $ .40
-------- --------- -------- ---------
-------- --------- -------- ---------
<CAPTION>
Diluted earnings per common share: Three Months Ended Nine Months Ended
December 31, December 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 755 $ 1,756 $ 167 $ 2,925
-------- --------- -------- ---------
-------- --------- -------- ---------
Weighted average common shares outstanding 7,208 7,178 7,194 7,182
Stock options and warrants assumed
exercised - net 350 152 350 91
-------- --------- -------- ---------
Total diluted shares outstanding 7,558 7,330 7,544 7,273
-------- --------- -------- ---------
-------- --------- -------- ---------
Diluted earnings per common share $ .10 $ .24 $ .02 $ .40
-------- --------- -------- ----------
-------- --------- -------- ---------
</TABLE>
3. ACCOUNTS RECEIVABLE
Accounts receivable, trade, net at December 31 and March 31, 1997 consist of the
following:
(In thousands)
December 31, 1997 March 31, 1997
----------------- --------------
North American customers:
Completed work not yet billed $ 6,117 $ 5,396
Billed but uncollected 11,058 9,427
International customers 1,771 1,332
Less allowance for doubtful accounts (435) (282)
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$ 18,511 $ 15,873
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4. MATERIALS, SUPPLIES AND INVENTORIES
Materials, supplies and inventories at December 31 and March 31, 1997 consist of
the following:
(In thousands)
December 31, 1997 March 31, 1997
----------------- --------------
Raw Materials and Spare Parts $ 8,132 $ 6,729
Work in Process 792 562
Finished Goods 969 918
Less allowance for potentially obsolete or
overstocked inventory (510) (494)
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$ 9,383 $ 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
FLORIDA SUBCONTRACT NEGOTIATIONS. The Company is party to an agreement (the
"underlying agreement") under which it utilizes a single Florida-based
subcontractor for performance of certain CableCure injection tasks for Florida
Power & Light through January 2000. The underlying agreement calls for the
Company to pay the subcontractor a percentage of the amount charged to Florida
Power & Light for certain services defined in the underlying agreement. The
Company agreed to new pricing in its contract with Florida Power & Light in the
first quarter of fiscal 1998. The Company is in a dispute with this
subcontractor, over amounts to be paid to the subcontractor effective April 1,
1997. An interim agreement, subject to retroactive adjustments, was agreed to
by the Company and the subcontractor for the period April 1, 1997 to May 31,
1997. The subcontractor is continuing to perform the injection services
required by the Company under the underlying agreement. The Company believes
that payments made to the subcontractor subsequent to April 1, 1997 are in
conformity with the underlying agreement. The subcontractor claims to be
entitled to a percentage of additional amounts. On October 31, 1997, the
Company filed suit against the subcontractor in Florida, seeking resolution of
the price dispute, among other matters. There can be no complete assurance that
the final price settled upon for payments to the subcontractor will not result
in any 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 three quarters of fiscal 1998, management of the
Company does not anticipate that the final resolution of this matter will result
in any material adverse impact on the results of operations through December 31,
1997, or on the Company's consolidated financial position or liquidity, as of
December 31, 1997.
INTERNAL REVENUE SERVICE EXAMINATION. Pursuant to the completion of an Internal
Revenue Service examination of the Company's Federal Income Tax return for
fiscal 1994, the Company filed amended income tax returns for fiscal years 1991
through 1995 in December 1996, claiming additional income tax refunds. The
Internal Revenue Service has commenced a new examination of these amended
returns. As a result, income tax refunds of $518,000, including a refund
related to loss carry-backs from fiscal 1996, are being examined and the Company
cannot be assured of receiving such refunds until the new examination is
completed. The examination is in its early stages and no adjustments have yet
been proposed. The Company believes that its calculations will once again be
upheld but
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there can be no assurance that the final outcome of the examination will not
result in a material adverse adjustment to the Company's income tax
calculations.
CONTRACTUAL COMMITMENTS. As of December 31, 1997, the Company had outstanding
purchase orders aggregating approximately $2.5 million for equipment to be
delivered no later than fiscal 1999. Also, certain contracts were signed in
December 1997 for consulting service related to the installation of new computer
software in 1998. These contracts aggregate approximately $1.2 million. Total
expenditures required in 1998 to implement the new computer system, including
these contracts as well as internal labor, travel, and training costs, are
expected to aggregate $2.0 million.
CAPITAL LEASES. During the third quarter of fiscal 1998, the Company acquired
approximately $1.3 million of equipment pursuant to capital leases with terms of
up to 72 months. The acquisition costs and proceeds from capital leases are
netted in the Statement of Cash Flows.
7. SUBSEQUENT EVENT
On January 29, 1998, the holder of a warrant to acquire 600,000 shares of the
Company's common stock at a warrant price of $5.50 per share, exercised the
warrant and also exercised the holder's option to put the shares back to the
Company at their current value. Based on the closing price of the Company's
common stock on January 28, 1998, the Company's net obligation to repurchase the
warrant shares is approximately $1.1 million. The Company expects to exercise
its option to issue new shares of common stock to satisfy this obligation. The
number of shares to be issued will be based on the current share value when the
shares are registered with the Securities and Exchange Commission.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THIRD QUARTER
OF FISCAL YEAR 1998
COMPARED TO THIRD QUARTER
OF FISCAL YEAR 1997
--------------------------------
REVENUES
Consolidated revenues increased 38% in the third quarter of fiscal 1998,
compared to the same period in fiscal 1997. Consolidated revenues increased 32%
in the first nine months of fiscal 1998, compared to the same period in fiscal
1997.
NORTH AMERICAN OPERATIONS. Revenues from installation and replacement services,
primarily from FlowMole-Registered Trademark- guided boring services in North
America increased to $16.7 million in the third quarter of fiscal 1998, compared
to $11.1 million in the same period of fiscal 1997. Revenues from repair and
restoration services in North America, primarily from CableCure injection
services, increased to $4.4 million in the third quarter of fiscal 1998,
compared to $4.0 million in the same period of fiscal 1997.
Revenues from installation and replacement services in North America increased
to $42.9 million in the first nine months of fiscal 1998 compared to $30.2
million in the same period of fiscal 1997. Revenues from repair and restoration
services in North America increased to $14.1 million in the first nine months of
fiscal 1998 compared to $11.3 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 new drilling crews during the third quarter of fiscal
1998, utilizing new equipment delivered near the beginning of the third
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.
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. The Company had anticipated
even higher levels of such revenues, but customer decisions to delay projects
until 1998 resulted in lower than expected growth in such revenues in the third
quarter of fiscal 1998. Reasons for such delays included deferral of projects
until calendar 1998 budgets became available, prioritization of replacement
projects over injection work, and conversion of CableCure-only contracts into
Test, Treat or Replace contracts.
INTERNATIONAL OPERATIONS. Revenues from international operations increased to
$1.5 million in the third quarter of fiscal 1998, compared to $1.2 million in
the same period of fiscal 1997. The increase resulted from sales of FlowMole
drilling equipment to customers in Japan. Revenues from international
operations decreased to $5.1 million in the first nine months of fiscal 1998
compared to $5.5 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, offset in part by
growth revenues from European CableCure operations. 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, but had little remaining inventory in the third quarter of fiscal
1997. The Company
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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.
Delivery of new drilling systems from the Company's vendors allowed the Company
to continue selling new equipment in the third quarter of fiscal 1998.
GROSS PROFIT
Gross profit increased 19% in the third quarter of fiscal 1998, compared to the
same period in fiscal 1997. Gross profit decreased 14% in the first nine months
of fiscal 1998, compared to the same period in fiscal 1997.
NORTH AMERICAN OPERATIONS. Gross profit from installation and replacement
services increased in the third quarter of fiscal 1998 compared to the same
period of fiscal 1997, but declined as a percentage of revenue. In early fiscal
1998, 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. These costs
resulted in lower gross profit during the first two quarters of fiscal 1998. New
equipment began to arrive in September 1997. The new crews were placed into
service which increased gross profit as a percentage of revenue in the third
quarter of fiscal 1998, compared to the first two quarters 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. As a result, better margins were achieved
in the third quarter of fiscal 1998.
Gross profit from repair and restoration services decreased as percentage of
revenue in the third quarter. In early fiscal 1998, 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 new services are more labor
intensive and generated lower profit margins than injection services. The
Company has negotiated price increases in October 1997 on certain contracts for
location and repair of electric faults, partially offsetting the higher costs of
these services during the third quarter of fiscal 1998. In addition, during the
first three 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. Also, customer decisions delayed
CableCure projects planned for the third quarter of fiscal 1998. As a result,
the amount of CableCure revenues produced per available crew decreased, which
adversely impacted gross profit.
INTERNATIONAL OPERATIONS. Gross profit from international operations in the
third quarter of fiscal 1998 increased compared to the same period of the prior
year due to higher revenue levels. Gross profit for the first nine months of
fiscal 1998 increased due primarily to the mix of revenues. Revenues from
European service operations are typically higher than from international sales
of FlowMole equipment and spare parts. In the first nine months of fiscal 1998,
European service operations generated 48% of international revenues, compared to
only 34% in the first nine months of fiscal 1997. Also, in fiscal 1997, when
the Company was selling its remaining inventory of FlowMole equipment assembled
in-house, the Company accepted certain equipment sales orders at lower gross
margins than were generated in fiscal 1998. See "Review and Outlook", below for
a discussion of factors expected to impact future levels of international
revenues.
OPERATING EXPENSES AND OTHER INCOME (EXPENSES)
Total operating expenses increased 24% in the third quarter of fiscal 1998,
compared to the same period of fiscal 1997. Total operating expenses increased
6% in the first nine months of fiscal 1998 compared to the same period of fiscal
1997. Selling, general and administrative expenses increased 27% and research
and engineering expenses decreased 9% compared to the third quarter of fiscal
1997. The increase in selling, general and administrative expenses in fiscal
1998 was primarily generated by higher profit sharing royalties, owed under the
Company's CableCure license agreement, and increased spending on corporate
projects designed to support the Company's growth, including costs associated
with the selection of a new management information system. The lower level of
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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 $145,000 and $326,000 in the
third quarter and the first nine months of fiscal 1998, respectively, compared
to expense of $27,000 and $43,000 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 and on capital leases related to the
financing of a portion of the Company's new drilling systems.
As a result of the foregoing, the Company recorded pretax income of $755,000 in
the third quarter of fiscal 1998, compared to pretax income of $812,000 in the
same period of fiscal 1997. The Company recorded pretax income of $168,000 in
the first nine months compared to pretax income of $2.0 million for 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 carry-forwards
eliminated substantially all of the Company's income tax provision in the first
three 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 net federal income tax benefit in
the first three quarters of fiscal 1998 as it continues to provide a valuation
allowance against the full amount of its net deferred tax assets.
In the third quarter of fiscal 1997, the Company filed several amended Federal
income tax returns and expects to recover greater income tax refunds from prior
years than had been projected. The amendments resulted from the conclusion of
an Internal Revenue Service examination of the Company's fiscal 1994 return,
allowing the immediate deductibility of certain royalty payments made in that
year. The Company accordingly reported an $850,000 income tax benefit in the
third quarter of fiscal 1997. Additional income tax benefits in the third
quarter of fiscal 1997 reflect the recovery of foreign income taxes paid in
prior years. See also Note 6 of Notes to Consolidated Financial Statements
included in Part I, Item 1 relating to the examination of the Company's amended
tax returns and the possible impact on certain refunds not yet received by the
Company.
-13-
<PAGE>
NET INCOME
As a result of the foregoing, the Company recorded net income of $755,000 in the
third quarter fiscal 1998, compared to net income of $1,756,000 in the same
period of fiscal 1997. The Company recorded net income of $167,000 in the first
nine months of fiscal 1998 compared to net income of $2.9 million in the same
period of fiscal 1997.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS) No. 130, "Comprehensive Income" ("FAS
130"). FAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of financial statements. Comprehensive
income includes items such as foreign currency translation adjustments that are
currently being presented by the company as a component of stockholders' equity.
The impact of adopting FAS 130 has not been determined. The Company will adopt
the statement for the year ending March 31, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 establishes standards
for disclosures about operating segments in annual financial statements and
selected disclosures about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. FAS 131 supersedes FAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." FAS 131 is effective for the year ending
March 31, 1999 and requires restatement of earlier periods presented. The
impact of adopting FAS 131 has not been determined.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had unused sources of liquidity consisting of
$540,000 in cash and cash equivalents and an unused balance on its committed
line of credit of $6,540,000. 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 three quarters of fiscal 1998
primarily related to capital expenditures of $2.9 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. However, during the third quarter of fiscal
1998, improved collections of accounts receivable allowed the Company to reduce
its level of short-term borrowing.
Capital expenditures in the nine months ended December 31, 1997 included
$371,000 for initial software license fees associated with the Company's plan to
replace virtually all of its management information systems with new
enterprise-wide software. Total expenditures are anticipated to be between $2
million and $3 million, including internal labor costs. The impact of these
expenditures will be approximately a $300,000 increase in operating expenses
annually, beginning in fiscal 1999. However there can be no assurance that the
Company will not determine that it is necessary to incur additional
expenditures, which could be material. See also YEAR 2000 COMPLIANCE, under
"Risk Factors", below.
The Company ordered 55 new drilling systems (consisting of a FlowMole drill and
a field power unit) in early 1997 and began taking delivery of such new systems
in September 1997. 34 drills and 24 field power units had been delivered as of
December 31, 1997, and the Company will be required to accept delivery of the
remaining drilling systems by the end of fiscal 1999. Total committed
expenditures for such equipment to be delivered after December 31, 1997 was
approximately $2.5 million. Certain field power units purchased prior to
December 31, 1997 were financed through capital leases, aggregating
approximately $1.3 million. Because of adverse development affecting the
general economy in many Asian countries, the Company may be required to pay for
drilling systems in advance of opportunities to sell those drilling systems or
to place them into service in North American operations. Although Company
management currently expects growth in North American service operations to be
sufficient to utilize the
-14-
<PAGE>
remaining drilling systems, there can be no assurance that customers will not
seek to cancel or delay planned projects, or that other factors might prevent
the Company from achieving its growth objectives.
The Company utilizes operating leases to finance the purchase of vehicles and
other construction equipment. Although the Company has two lease facilities
currently available, there can be no assurance that these leasing companies will
continue to offer the Company such lease facilities, or that market conditions
will not adversely affect the cost of such leases.
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. 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.
However, the Company does not expect year-over-year growth in the immediate
future to be as high as the growth rate in the second and third quarters of
fiscal 1998. Seven customers who utilize the Company's services for both cable
replacement and cable repair and restoration services, primarily under "Test,
Treat or Replace' contracts, accounted for 43% of the Company's consolidated
revenues for the three months ended December 31, 1997. Also, the Company
expects to continue to rely on a small number of customers for the majority of
the Company's North American repair and restoration revenues, increasing the
exposure of the Company to such short-term fluctuations in revenues. See also
the discussion under "Risk Factors," below.
The Company generated $504,000 in revenues from sales of FlowMole drilling
equipment to customers in Asia during the three months ended December 31, 1997.
Due to adverse developments affecting the general economy in many Asian
countries, the Company does not expect significant levels of such equipment
sales in the foreseeable future. However, since the Company's largest markets
for equipment sales in Asia are Japan and Taiwan, countries less adversely
impacted by economic factors than other Asian countries, the Company does expect
to continue to complete some level of equipment sales. Also, the Company's
Korean CableCure licensee has temporarily suspended much of its operations.
Revenue from Korean CableCure activities was not material in the nine months
ended December 31, 1997. See also the discussion above listed under "Liquidity
and Capital Resources" regarding the Company's contractual obligations to
purchase additional drilling systems for sale or for internal operations.
The Company expects to incur an increased level of operating expenses during the
fourth quarter of fiscal 1998. The primary cause of the increase will be costs
associated with the planning and design of a new enterprise-wide management
information system. Other costs related to continued recruiting of management
personnel for North American operations and temporary costs related to
relocation of the Company's corporate headquarters and central warehouse to a
new building, expected to be completed in the first quarter of fiscal 1998.
Lower facilities costs in the new, smaller headquarters are expected to
partially offset the higher annual expenses of the new computer software in
fiscal 1999 and later years. See also discussion of capital expenditures under
"Liquidity and Capital Resources," above.
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.
-15-
<PAGE>
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, one customer generates a significant portion of the Company's
consolidated revenues, and a small number of customers generate more than half
of its CableCure revenues. 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. Such
factors resulted in deferrals of significant CableCure projects scheduled for
the third quarter of fiscal 1998.
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 in the
first quarter of fiscal 1998. The Company is in a dispute with this
subcontractor, over amounts to be paid to the subcontractor effective April 1,
1997. An interim agreement, subject to retroactive adjustments, was agreed to
by the Company and the subcontractor for the period April 1, 1997 to May 31,
1997. The subcontractor is continuing to perform the injection services
required by the Company under the underlying agreement. The Company believes
-16-
<PAGE>
that payments made to the subcontractor subsequent to April 1, 1997 are in
conformity with the underlying agreement. The subcontractor claims to be
entitled to a percentage of additional amounts. On October 31, 1997, the
Company filed suit against the subcontractor in Florida, seeking resolution of
the price dispute, among other matters. (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 any 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 three quarters of fiscal
1998, management of the Company does not anticipate that the final resolution of
this matter will result in any material adverse impact on the results of
operations through December 31, 1997, or on the Company's consolidated financial
position or liquidity, as of December 31, 1997. The subcontractor may continue
injection services until this matter is resolved, which will serve to increase
the total amount of footage subject to pricing disputes.
YEAR 2000 COMPLIANCE. The Company has determined that many of its computer
software applications do not accurately adjust for the Year 2000. The Company
has determined that it will replace virtually all of its management information
systems with new enterprise wide software. The software selected is certified
by the vendor to be Year 2000 compliant. The implementation of the new system
is scheduled for no later than the third quarter of fiscal 1999. See also
discussion of capital expenditures under "Liquidity and Capital Resources",
above.
The Company has begun contacting its major vendors and customers to obtain
their assurance that systems affecting the Company are Year 2000 compliant. To
date, the Company is unaware of any situations of noncompliance that would
adversely affect its operations. The Company has also analyzed its equipment
and its operations and has not identified any processes that depend upon
software that is date sensitive or otherwise subject to risks associated with
the Year 2000. See also discussion of capital expenditures under "Liquidity and
Capital Resources", above.
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 or fiscal 1999.
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.
-17-
<PAGE>
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 Florida against Power Cable Restoration, Inc. ("PCR"), a contractor in
Florida with whom the Company has a contract for certain cable injection
services for Florida Power & Light through January 2000, and Ronald E. Aleshire,
a principal shareholder in PCR. The complaint alleges certain failures and
breaches of contractual obligations and requests declaratory relief and
determination that UTILX has sufficient grounds to terminate its contracts with
PCR. The Company and PCR have an ongoing dispute over the amount to be paid to
PCR under its subcontract for certain cable injection services performed
subsequent to April 1, 1997. The complaint also requests, among other matters,
that the court determine that the price being paid currently by UTILX to PCR is
in accordance with the contract between the parties. In December 1997, the
defendants filed a Motion for Dismissal and a Motion to Transfer Action. In
January 1998, defendants' Motion to Transfer Action to the Southern District of
Florida was granted. The court is expected to rule on the defendants' Motion
for Dismissal in early 1998. This case is in its early stages and at this time
it is not possible to predict with certainty 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.
ITEM 5. OTHER
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule. Filed herewith.
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
November 10, 1997. Filed herewith.
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<PAGE>
(b) Reports on Form 8-K:
None
-19-
<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: February 3, 1998 By: /s/ Craig E. Davies
--------------------------
Craig E. Davies, President and
Chief Executive Officer
Date: February 3, 1998 By: /s/ Larry D. Pihl
--------------------------
Larry D. Pihl, Vice President
and Chief Financial Officer
-20-
<PAGE>
UTILX CORPORATION
As Filed with the Securities and Exchange Commission on February 5, 1998
File No. 0-16821
----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
EXHIBITS
TO
QUARTERLY REPORT FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
UNDER
THE SECURITIES EXCHANGE ACT OF 1934
---------------------
UTILX CORPORATION
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
27.1 Financial Data Schedule. Filed herewith.
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
November 10, 1997. 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 $10,000,000 (the "Loan"). Capitalized
terms used in this agreement shall have the meaning given in the Credit
Agreement, as modified by any prior modification agreement. For mutual
consideration, Borrower and Bank agree to amend the above loan documents as
follows:
1. DEBT RATIO. Section 7.4 of the Agreement is amended to change the
maximum permitted ratio of Debt to Tangible Net Worth to 0.80 to 1, and to
waive compliance with Section 7.4 for the period ending September 30, 1997
only.
2. 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 November 10, 1997.
Bank: Borrower:
SEAFIRST BANK UTILX CORPORATION
By: /s/ Terry Jones By: /s/ Larry D. Pihl
------------------------- -------------------------
Title: Vice President Title: VP, CFO
----------------------- -------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF UTILX CORPORATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 540
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<RECEIVABLES> 18,946
<ALLOWANCES> 435
<INVENTORY> 9,383
<CURRENT-ASSETS> 28,995
<PP&E> 35,624
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<TOTAL-ASSETS> 40,382
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<TOTAL-LIABILITY-AND-EQUITY> 40,382
<SALES> 62,078
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<TOTAL-COSTS> 61,584
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