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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
JUNE 30, 1998
--------------------------------
UTILX CORPORATION
COMMISSION FILE NUMBER 0-16821
DELAWARE 91-1171716
(State of Incorporation) (I.R.S. Employer Identification Number)
22820 RUSSELL ROAD (98032)
P. O. BOX 97009
KENT, WASHINGTON 98064-9709 (253) 395-0200
(Address of Principal Executive (Registrant's Telephone Number)
Offices)
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 June 30, 1998, 7,412,760 shares of Common Stock were outstanding.
The total number of pages in this Form 10-Q is 17.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
PART I
<S> <C>
1. Financial Statements
Consolidated Balance Sheet
June 30, 1998 and March 31, 1998 . . . . . . . . . . . . . . . . 3
Consolidated Statement of Operations
For the Three Months Ended
June 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows
For the Three Months Ended
June 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . 6
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 9
PART II
1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 15
2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . 16
3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . 16
4. Submission of Matters to a Vote of Security Holders. . . . . . . 16
5. Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UTILX CORPORATION
CONSOLIDATED BALANCE SHEET
JUNE 30 AND MARCH 31, 1998
(IN THOUSANDS, EXCEPT SHARES)
ASSETS
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
------- --------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 702 $ 528
Accounts receivable, trade. . . . . . . . . . . . . . . . . . . . 18,264 19,720
Materials, supplies and inventories . . . . . . . . . . . . . . . 8,754 8,839
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . 447 433
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . 165 284
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . 28,332 29,804
Equipment and improvements, net . . . . . . . . . . . . . . . . . 13,218 13,091
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . 514 584
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 42,064 $ 43,479
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,325 $ 5,245
Current portion of capital lease obligations. . . . . . . . . . . 786 839
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . 3,866 3,993
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . 4,211 5,475
-------- --------
Total current liabilities. . . . . . . . . . . . . . . . . 14,188 15,552
Capital lease obligations, net of current portion. . . . . . . . . . . 2,164 2,224
Other long-term liabilities. . . . . . . . . . . . . . . . . . . . . . 858 872
-------- --------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 17,210 18,648
-------- --------
Commitments and Contingencies
Stockholders' equity:
Common Stock, $0.01 par value
(authorized 25,000,000 shares) . . . . . . . . . . . . . . . 74 74
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . 18,483 18,469
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 6,806 6,790
Cumulative foreign currency translation adjustment. . . . . . . . (509) (502)
-------- --------
Total stockholders' equity . . . . . . . . . . . . . . . . . 24,854 24,831
-------- --------
Total liabilities and stockholders' equity . . . . . . . . $ 42,064 $ 43,479
-------- --------
-------- --------
Common Stock issued and outstanding . . . . . . . . . . . . . . . 7,412,760 7,407,760
</TABLE>
(See Notes to Consolidated Financial Statements)
3
<PAGE>
UTILX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,024 $ 18,767
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,447 16,867
--------- ---------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,577 1,900
--------- ---------
Operating expenses:
Selling, general and administrative . . . . . . . . . . . . . . . 2,271 1,938
Research and engineering. . . . . . . . . . . . . . . . . . . . . 147 158
--------- ---------
Total operating expenses. . . . . . . . . . . . . . . . . . . . . 2,418 2,096
--------- ---------
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . 159 (196)
Other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . 135 71
--------- ---------
Income (loss) before income taxes. . . . . . . . . . . . . . . . . . . 24 (267)
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . 8 1
--------- ---------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16 $ (268)
--------- ---------
--------- ---------
Earnings( loss) per share (Note 2):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 00 (.04)
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .00 (.04)
Calculation of Comprehensive Income (loss):
Net Income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $ 16 $ (268)
Change in cumulative foreign currency
translation adjustment, net. . . . . . . . . . . . . . (7) 48
--------- ---------
Comprehensive Income (loss) . . . . . . . . . . . . . . . . . . . $ 9 $ (220)
--------- ---------
--------- ---------
</TABLE>
(See Notes to Consolidated Financial Statements)
4
<PAGE>
UTILX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income(loss). . . . . . . . . . . . . . . . . . . . . . . . . $ 16 $ (268)
Adjustments to reconcile to net cash provided by (used in)
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 1,114 990
Other non-cash expenses, net . . . . . . . . . . . . . . . . 0 3
Changes in assets and liabilities . . . . . . . . . . . . . . 1,488 (3,404)
--------- ---------
Total adjustments . . . . . . . . . . . . . . . . . . . . . . 2,602 (2,411)
--------- ---------
Net cash provided by (used in) operating activities . . . . 2,618 (2,679)
--------- ---------
INVESTING ACTIVITIES:
Cost of additions to equipment. . . . . . . . . . . . . . . . . . (1,130) (703)
Proceeds from sale of equipment . . . . . . . . . . . . . . . . . 24 0
--------- ---------
Net cash used in investing activities . . . . . . . . . . . (1,106) (703)
--------- ---------
FINANCING ACTIVITIES:
Net borrowings on note payable. . . . . . . . . . . . . . . . . . 80 2,600
Issuance of Common Stock. . . . . . . . . . . . . . . . . . . . . 14 0
Net decrease in book overdraft. . . . . . . . . . . . . . . . . . (1,213) 0
Principal payments on capital leases. . . . . . . . . . . . . . . (219) 0
--------- ---------
Net cash provided by (used in) financing activities . . . . (1,338) 2,600
--------- ---------
EFFECT ON CASH FLOWS
OF CHANGES IN EXCHANGE RATES. . . . . . . . . . . . . . . . . . . 0 5
--------- ---------
Net increase (decrease) in cash and cash equivalents. . . . . . . 174 (777)
CASH AND CASH EQUIVALENTS:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . 528 1,490
--------- ---------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 702 $ 713
--------- ---------
--------- ---------
</TABLE>
(See Notes to Consolidated Financial Statements)
5
<PAGE>
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 period ended June 30, 1998 and 1997.
The statements should be read in conjunction with the March 31, 1998 audited
consolidated financial statements included in the fiscal 1998 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 during the period in the cumulative
foreign currency translation adjustments that are presented as a component of
stockholders' equity. The Company has adopted the statement in this quarter.
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 on disclosures in the Company's financial statements of adopting FAS 131
has not been determined.
2. EARNINGS PER SHARE
Basic earnings (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares of Common Stock of UTILX Corporation, $0.01
par value per share (the "Common Stock") outstanding during the period. Diluted
earnings (loss) per share is computed by dividing net income (loss) by the sum
of the weighted average number of shares of Common Stock and, when dilutive,
common stock equivalents outstanding during the period. Common Stock equivalents
include shares issuable upon exercise of the Company's stock options and certain
warrants, net of the number of shares repurchasable on the open market with
proceeds from the exercise of such options and warrants.
6
<PAGE>
<TABLE>
<CAPTION>
Earnings ( loss) Per Share is calculated as follows:
Basic earnings (loss) per common share:
Three Months Ended
June 30,
1998 1997
---- ----
<S> <C> <C>
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16 $ (268)
------- --------
------- --------
Divided by weighted average common
shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,408 7,184
------- --------
------- --------
Basic earnings (loss) per common share . . . . . . . . . . . . . . . . . . . . . $ .00 $ (.04)
------- --------
------- --------
<CAPTION>
Diluted earnings (loss) per common share:
Three Months Ended
June 30,
1998 1997
---- ----
<S> <C> <C>
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16 $ (268)
------- --------
------- --------
Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . 7,408 7,184
Stock options and warrants assumed
exercised - net, if dilutive. . . . . . . . . . . . . . . . . . . . . . . 181
------- --------
Total diluted shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . 7,589 7,184
------- --------
------- --------
Diluted earnings (loss) per common share . . . . . . . . . . . . . . . . . . . . $ .00 $ (.04)
------- --------
------- --------
</TABLE>
3. ACCOUNTS RECEIVABLE
Accounts receivable, trade, net consist of the following:
<TABLE>
<CAPTION>
(In thousands)
June 30, 1998 March 31, 1998
------------- --------------
<S> <C> <C>
North American customers:. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Completed work not yet billed . . . . . . . . . . . . . . . . . . . . . . . . $ 6,928 $ 7,299
Billed but uncollected. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,452 11,527
International customers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,353 1,349
Less allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . (469) (455)
-------- --------
$ 18,264 $ 19,720
-------- --------
-------- --------
4. MATERIALS, SUPPLIES AND INVENTORIES
Materials, supplies and inventories consist of the following:
<CAPTION>
(In Thousands)
June 30, 1998 March 31, 1998
------------- --------------
<S> <C> <C>
Raw Materials and Spare Parts. . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,370 $ 8,810
Work in Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,064 684
Finished Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 116
Less allowance for potentially obsolete or overstocked inventory . . . . . . . . (802) (771)
-------- --------
$ 8,754 $ 8,839
-------- --------
-------- --------
</TABLE>
7
<PAGE>
5. NOTE PAYABLE TO BANK
The Company has a committed credit facility of $10,000,000 with Seafirst
National Bank of Washington ("Seafirst"), scheduled to expire on January 4,
1999. The agreement is collateralized by the Company's inventory and accounts
receivable. The credit agreement requires that the Company maintain certain
financial covenants, including requirements to maintain certain levels of
tangible net worth, working capital and debt ratio. Borrowings bear interest at
the Seafirst prime rate, the LIBOR rate plus 2.0%, or other specified rates, at
the Company's option. The Company pays a commitment fee of up to 0.25% on the
unused portion of the facility. At June 30, 1998 and March 31, 1998, the
Company had an outstanding balance of $5,325,000 and $5,245,000, respectively,
under this facility at a weighted average borrowing rate of 7.44% and 7.69%,
respectively.
In addition, at June 30, 1998 the Company had an outstanding $500,000 letter of
credit under this facility, expiring April 15, 1999, to secure payments under an
insurance policy. No amounts have been drawn on this letter of credit.
6. COMMITMENTS AND CONTINGENCIES
FLORIDA SUBCONTRACT NEGOTIATIONS. On October 31, 1997, the Company filed a
complaint in Federal District Court in Florida against a contractor in Florida
with whom the Company has a contract for certain cable injection services for
Florida Power & Light through January 2000, and its principal shareholder. The
complaint alleges certain failures and breaches of contractual obligations and
requests declaratory relief and determination that the Company has sufficient
grounds to terminate its contracts with the contractor. The Company and
contractor have an ongoing dispute over the amount to be paid to the contractor
under its subcontract for certain cable injection services performed subsequent
to April 1, 1997. The complaint also requests, among other matters, that the
court determines that the price being paid currently by the Company to the
contractor is in accordance with the contract between the parties. This case is
in its early stages and at this time it is not possible to predict with
certainty the outcome of this matter.
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. The examination is ongoing and no
adjustments have yet been proposed. There can be no assurance that the final
outcome of the examination will not result in a material adverse adjustment to
the Company's income tax calculations.
CONTRACTUAL COMMITMENTS. As of June 30, 1998, the Company had outstanding
purchase orders aggregating approximately $540,000 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. As of June 30, 1998, total remaining expenditures required in fiscal 1999
to implement the new computer system, including these contracts as well as
internal labor, travel, and training costs, are expected to aggregate
approximately $1.0 million.
OTHER. The Company is involved in other litigation matters, both as a plaintiff
and as a defendant, arising in the ordinary course of its business. Management
expects that these matters will not have a materially adverse effect on the
consolidated financial position, results of operations or liquidity of the
Company.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR FIRST QUARTER
OF FISCAL YEAR 1999
COMPARED TO FIRST QUARTER
OF FISCAL YEAR 1998
-------------------
REVENUES
Consolidated revenues increased 17% in the first quarter of fiscal 1999,
compared to the same period in fiscal 1998.
NORTH AMERICAN OPERATIONS. Revenues from installation and replacement services
in North America, primarily from FlowMole-Registered Trademark- guided boring
services, increased to $16.0 million in the first quarter of fiscal 1999,
compared to $12.2 million in the same period of fiscal 1998. Revenues from
repair and restoration services in North America, primarily from
CableCure-Registered Trademark- injection services, increased to $4.6 million in
the first quarter of fiscal 1999, compared to $4.4 million in the same period of
fiscal 1998.
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 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. 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 the start date of such projects resulted in lower
than expected growth in such revenues in the first quarter of fiscal 1999. Such
delays were caused in part by customers' internal delays in approving calendar
1998 budgets and preparation of work orders to be released to the Company.
INTERNATIONAL OPERATIONS. Revenues from international operations decreased to
$1.5 million in the first quarter of fiscal 1999, compared to $2.1 million in
the same period of fiscal 1998. The decrease resulted primarily from the absence
of revenues from equipment
sales to customers in Asia in the first quarter of fiscal 1999.
GROSS PROFIT
Gross profit increased 36% in the first quarter of fiscal 1999, compared to the
same period in fiscal 1998.
NORTH AMERICAN OPERATIONS. Gross profit from installation and replacement
services increased in the first quarter of fiscal 1999 compared to the same
period of fiscal 1998, and increased as a percentage of revenue. The Company
had a larger percentage of newly hired crews performing complex installation and
replacement projects during the first quarter of fiscal 1999. The Company
believes that the productivity of newly hired crews will improve as they gain
additional experience and training.
9
<PAGE>
Gross profit from repair and restoration services decreased as a percentage of
revenue in the first quarter. Contributing factors included the delays in the
start date of planned CableCure projects in the first quarter of fiscal 1999 and
the resulting increased level of crew downtime between jobs.
INTERNATIONAL OPERATIONS. Gross profit from international operations in the
first quarter of fiscal 1999 decreased compared to the same period of the prior
year due to lower revenue levels, but increased as a percentage of revenues.
Revenues from European service operations are typically higher than from
international sales of FlowMole equipment and spare parts. In the first three
months of fiscal 1999, European service operations generated 64% of
international revenues, compared to only 43% in the first three months of 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 15% in the first quarter of fiscal 1999,
compared to the same period of fiscal 1998. Selling, general and administrative
expenses increased 17% and research and engineering expenses decreased 7%
compared to the first quarter of fiscal 1998. The increase in selling, general
and administrative expenses in fiscal 1999 was primarily generated by higher
profit sharing royalties owed pursuant to 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 research and engineering
expense in fiscal 1999 reflected reduced spending on the Company's Series G
Drill from fiscal 1998 levels.
Other income (expense), net, was a net expense of $134,000 compared to a net
expense of $71,000 in the same period. This change was a result of increased
interest expense due primarily to new capital leases related to the financing of
a portion of the Company's new drilling systems.
INCOME (Loss) BEFORE INCOME TAXES
As a result of the foregoing, the Company recorded pretax income of $24,000 in
the first quarter of fiscal 1999, compared to a pretax loss of $267,000 in the
same period of fiscal 1998.
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 Company
has provided a valuation allowance against the full amount of the Company's net
deferred tax assets. Accordingly, no tax benefits were recorded against
operating losses generated in fiscal 1998.
NET INCOME (Loss)
As a result of the foregoing, the Company recorded net income of $16,000 in the
first quarter fiscal 1999, compared to a net loss of $268,000 in the same period
of fiscal 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
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.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had unused sources of liquidity consisting of
$702,000 in cash and cash equivalents and an unused balance on its committed
line of credit of $4,175,000. This compares to $528,000 in cash and cash
equivalents and an unused balance on its committed line of credit of $4,755,000
at March 31, 1998. Uses of cash during the quarter of fiscal 1999 primarily
related to capital expenditures of $1.1 million. The Company also is financing
a growing level of working capital, due to rapid growth in North American
service operations.
Capital expenditures in the three months ended June 30, 1998 primarily included
costs associated with the Company's plan to replace virtually all of its
management information systems with new enterprise-wide software. The Company
has determined that some of its management information systems do not accurately
adjust for the Year 2000, and has commenced a project to replace its management
information systems in its entirety. The software selected is certified by the
vendor to be Year 2000 compliant. The implementation of the new system is
scheduled for no later than the third quarter of fiscal 1999. The Company does
not anticipate any material charge to earnings associated with writing off the
net book value of capitalized hardware and software costs.
The Company has begun contacting its major vendors and customers to obtain their
assurance that systems affecting the Company are Year 2000 complaint. To date,
the Company is unaware of any situations of noncompliance that would adversely
affect its operations. The Company has also analyzed its equipment and its
operations and has not identified any processes that depend upon software that
is date sensitive or otherwise subject to risks associated with the Year 2000.
However, significant uncertainty exists concerning the potential costs and
effects associated with Year 2000 compliance. Any Year 2000 compliance problem
of either the Company or its major vendors and customers could have a material
adverse effect on the Company's financial condition, results of operations and
cash flows.
The Company ordered new drilling systems in early 1997 and began taking delivery
of such new systems in September 1997. Total committed expenditures for such
equipment to be delivered after June 30, 1998 was approximately $540,000.
Because of adverse developments affecting the general economy in many Asian
countries, the Company may be required to hold drilling systems in inventory for
an extended period of time prior to 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 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 relies on cash flow from operations and lease financing, in addition
to its line of credit, to fund operations. The Company believes that its lease
facility and line of credit, together with cash flow from operations, will be
adequate to meet its financing needs for the foreseeable future. There can be
no assurance, that such facilities will continue to be available on terms
acceptable to the Company or at all. The Company's financial performance will
be a key factor in determining the availability of such facilities. If either
facility became unavailable to the Company, or if the Company is required to
seek additional capital to fund anticipated growth, the Company would be
required to seek other sources of public or private capital. There can be no
assurance that adequate funds will be available to the Company through such
sources when needed or will be available on terms favorable to the Company. If
at any time the Company is unable to obtain sufficient funds, the Company will
be required to restrict or eliminate plans for expansion and other aspects of
its operations.
The Company's bank credit facility expires on January 4, 1999; however, the
Company expects to be able to obtain a renewal of the facility or to negotiate a
similar facility with another financial institution.
11
<PAGE>
REVIEW AND OUTLOOK
INSTALLATION AND REPLACEMENT SERVICES. The Company currently plans to
increase its personnel to add additional installation and replacement
capabilities in fiscal 1999. However, the Company's revenue levels and the
weighted average number of crews in operation on any given day, will be affected
by a number of factors, including weather, pricing, competition, customer work
release practices, soil and other work difficulty determinants, and permitting.
See also the discussion under COMPETITION, SEASONAL FACTORS AND UTILITIES'
BUDGETARY CONSIDERATIONS included under "Important Risk Factors Regarding
Forward-Looking Statements," below.
REPAIR AND RESTORATION SERVICES. The Company expects a continuation of the
trend towards increased customer acceptance of the CableCure process, including
an increased level of work under "Test, Treat or Replace" contracts. The Company
anticipates that the trend towards lower pricing for cable replacement will
continue to place downward pressure on the price for CableCure services. The
Company's ten largest CableCure customers account for the majority of the
Company's CableCure revenues. The Company expects to see increased volumes from
new customers in the second half of calendar 1998, and some increased volumes
from existing customers, but expects to continue to be dependent upon a small
number of customers. The Company's goal is to reduce this dependency through
growth. Because the Company's customers can typically cancel their work on
short notice, a certain degree of uncertainty always exists in the Company's
future revenue levels. See also the discussion under COMPETITION, SEASONAL
FACTORS, UTILITIES' BUDGETARY CONSIDERATIONS and DOW CORNING CORPORATION
included under "Important Risk Factors Regarding Forward-Looking Statements",
below.
INTERNATIONAL OPERATIONS. Due to adverse developments affecting the
general economy in many Asian countries, the Company cannot predict the level of
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 equipment sales in Asia to continue at some modest level. Also, the
Company's Korean CableCure licensee has temporarily suspended much of its
operations. See also the discussion above listed under "Liquidity and Capital
Resources" regarding the Company's contractual obligations to purchase
additional drilling systems for sale to international customers or for use in
the Company's internal operations.
IMPORTANT RISK FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The Company may from time to time make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases, and in reports
to stockholders. The Private Securities Litigation Reform Act of 1995 contains
a safe harbor for forward-looking statements on which the Company relies in
making such disclosures. In connection with this safe harbor provision, the
Company is hereby identifying important factors that could cause actual results
to differ materially from those contained in any forward-looking statement made
by or on behalf of the Company. Any such statement is qualified by reference to
the following cautionary statements:
UTILITIES' BUDGETARY CONSIDERATIONS. Budgetary considerations, arising
from unfavorable regulatory determinations on matters such as rate-setting,
capitalization of services performed by the Company, approval of mergers and
acquisitions or siting of power production facilities, or from reductions in new
housing starts, reductions in electric utility revenues due to mild weather, and
general economic downturns, or overall utility profitability relative to its
objectives have affected the ability of some of the Company's utility customers
to sustain their cable replacement or other maintenance programs and accordingly
adversely impact the Company's revenues and profits. Although the Company has
broadened its customer base, one customer generates over 30% of the Company's
consolidated revenues, and a small number of customers generate over 50% 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.
12
<PAGE>
COMPETITION. The Company has experienced a long-term trend of declining
prices for guided boring services, particularly for smaller diameter utility
installations, due to competitive pressures and changes in utility bidding
practices. This trend has also caused the Company to lower its prices for
CableCure injection services, which are priced at a discount to replacement
costs, including replacement via guided boring. In addition, the Company's
utility customers are increasing their requests for "turnkey" installation,
replacement and restoration services, requiring their drilling contractors to
take responsibility for switching circuits, terminating circuits, and other
non-incidental tasks. These tasks require additional equipment and labor, and
the cost increases can offset any price increase the Company is able to
negotiate for the expansion of its services. The overall trend of falling prices
for guided boring services is expected to continue into the future, as more
customers award work based on competitive bidding, more customers require their
drilling contractors to perform additional tasks as part of the drilling
contract, and more conventional contractors acquire drilling capabilities in
order to enter into this segment of the construction industry. This trend will
continue to put downward pressure on the market price for CableCure Services.
The Company cannot predict the ultimate duration or the magnitude of such
decreases, which could result in a material adverse effect on the Company's
financial condition, results of operations and cash flows.
SEASONAL FACTORS. Weather and other seasonal factors may decrease the
Company's revenues and profits in any given period. Adverse weather may
preclude the Company from operating its FlowMole drilling systems or providing
its CableCure services at certain times of the year. Such factors severely
impacted the Company's operations in the fourth quarter of fiscal 1998. In
addition, the Company believes that the regular budgetary cycles of certain of
its North American utility customers tend to concentrate demand for the
Company's services during the third quarter of its fiscal year (the fourth
quarter of the calendar year), although other budgetary factors described below
may override this trend in any given quarter. As a result of these factors,
results of operations in any given fiscal quarter are not necessarily indicative
of results in any other fiscal quarter.
MANAGEMENT OF GROWTH. The Company expects significant internal growth.
There can be no assurance that the Company's systems, procedures and controls
will be adequate to support the Company's operations as they expand. Any future
growth will impose significant additional responsibilities on members of senior
management, including the need to identify, recruit and integrate new senior
level managers and executives. There can be no assurance that such additional
management will be identified and retained by the Company. To the extent that
the Company is unable to manage its growth efficiently and effectively, or is
unable to attract and retain additional qualified management, there could be a
material adverse effect on the Company's financial condition, results of
operations and cash flows.
AVAILABILITY OF QUALIFIED EMPLOYEES. The Company's ability to provide
high-quality services on a timely basis requires an adequate supply of skilled
laborers, equipment operators, journeymen linemen and project managers.
Accordingly, the Company's ability to increase its productivity and
profitability will be limited by its ability to employ, train and retain skilled
personnel necessary to meet the Company's requirements. Many companies in the
Company's industry are currently experiencing shortages of qualified personnel,
and there can be no assurance that the Company will be able to maintain an
adequate skilled labor force necessary to operate efficiently, that the
Company's labor expenses will not increase as a result of a shortage in the
supply of skilled personnel or that the Company will not have to curtail its
planned internal growth as a result of labor shortages.
DOW CORNING CORPORATION. The Company purchases its CableCure fluid
exclusively from Dow Corning. In May 1995, Dow Corning filed for protection
under Chapter 11. While the Company has been informed by Dow Corning that it
intends to continue the CableCure business, there can be no assurance that Dow
Corning or the bankruptcy court will not take action to amend or terminate the
CableCure license agreement.
13
<PAGE>
FLORIDA SUBCONTRACT NEGOTIATIONS. The Company is party to an agreement (the
"underlying agreement") under which it utilizes a single Florida-based
subcontractor for performance of certain CableCure injection tasks for Florida
Power & Light through January 2000. The underlying agreement calls for the
Company to pay the subcontractor a percentage of the amount charged to Florida
Power & Light for certain services defined in the underlying agreement. The
Company agreed to new pricing in its contract with Florida Power & Light in the
first quarter of fiscal 1998. The Company is in a dispute with this
subcontractor over amounts to be paid to the subcontractor effective April 1,
1997. An interim agreement, subject to retroactive adjustments, was agreed to
by the Company and the subcontractor for the period April 1, 1997 to May 31,
1997. The subcontractor is continuing to perform the injection services
required by the Company under the underlying agreement. The Company believes
that payments made to the subcontractor subsequent to April 1, 1997 are in
conformity with the underlying agreement. The subcontractor claims to be
entitled to a percentage of additional amounts. On October 31, 1997, the
Company filed suit against the subcontractor in Florida, seeking resolution of
the price dispute, among other matters. There can be no assurance that the
final price settled upon for payments to the subcontractor will not have a
material adverse effect on the gross profit realized by the Company under its
contract with Florida Power & Light. Based on the footage injected by the
subcontractor since April 1, 1997, management of the Company does not anticipate
that the final resolution of this matter will result in any material adverse
impact on its results of operations, or on the Company's consolidated financial
position or liquidity.
FOREIGN CURRENCY FLUCTUATIONS. The Company's financial results are
affected by fluctuations in certain foreign currencies, particularly the
exchange rate between the British Pound Sterling and the German Deutschmark.
Such fluctuations could result in material adverse adjustments to the carrying
values of accounts receivable or other assets measured in foreign currencies, or
on the reported results of operations of the Company's European operations.
YEAR 2000 RISK FACTORS. Significant uncertainty exists concerning the
potential costs and effects associated with Year 2000 compliance. Any Year 2000
compliance problem of either the Company or its major vendors and customers
could have a material adverse effect on the Company's financial condition,
results of operations and cash flows.
14
<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 determines that the price being paid currently by UTILX to PCR is
in accordance with the contract between the parties. In December 1997, the
defendants filed a Motion for Dismissal and a Motion to Transfer Action. In
January 1998, defendants' Motion to Transfer Action to the Southern District of
Florida was granted.
In April 1998 the Court denied defendants' Motion to Dismiss (with the
limited exception of UTILX's prayer for attorneys fees which was dismissed
without prejudice). Discovery has progressed with UTILX obtaining production of
certain documents of PCR. UTILX was required to file a Motion to Compel
Discovery to obtain access to additional records PCR had objected to producing.
The Motion to Compel was granted in April 1998 and PCR's Motion for
Reconsideration of the Order Compelling Discovery was denied in May 1998. The
review of additional records commenced in June 1998. PCR has requested
documents from UTILX. Additionally, UTILX conducted depositions of PCR
employees in April 1998 and July 1998 and additional depositions are being
scheduled. The case has been placed on the two week trial calendar for January
18, 1999. Discovery and other pretrial activities must be completed before
then. PCR filed a Motion to Compel Arbitration of a portion of the case (i.e.,
issues relating to a subcontract for the period from March 1996 to March 1997).
The motion was denied.
PCR has filed its answer and counterclaims to UTILX's complaint. PCR
formally denied any liability to UTILX and has asserted a counterclaim alleging
breach of contract by UTILX. In addition, PCR has requested declaratory relief
with respect to the establishment of appropriate compensation to PCR for cable
injection services. UTILX filed its answer to the counterclaim and has
unequivocally denied all counterclaims asserted by PCR.
The parties are obligated by court order to engage in a formal mediation
and discussions have taken place with respect to the selection of a mediator and
potential scheduling of the mediation. There is still substantial discovery and
trial preparation work to be accomplished and at this time it is not possible to
predict with certainty the outcome of the matter.
The Company is involved in other litigation matters, both as a plaintiff
and as a defendant, arising in the ordinary course of its business. Management
expects that these other matters will not have a materially adverse effect on
the consolidated financial position, results of operations or liquidity of the
Company.
15
<PAGE>
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
In accordance with the Company's Bylaws, a shareholder proposing to
transact business at the Company's annual meeting must provide written
notice of such proposal, in the manner provided by the Company's Bylaws,
not fewer than 60 nor more than 90 days prior to the date of such annual
meeting (or, if the Company provides less than 60 days notice of such
meeting, no later than 10 days after the date of the Company's notice). In
addition, if the Company receives notice of a shareholder proposal less
than 45 days prior to the date of mailing the notice of such annual
meeting, the persons named as proxies in such proxy statement and proxy
will have discretionary authority to vote on such shareholder proposal.
The expected mailing date of the notice of the Company's 1999 annual
meeting is June 30, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K:
None
16
<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: August 7, 1998 By:/s/ Craig E. Davies
----------------------------
Craig E. Davies, President and
Chief Executive Officer
Date: August 7, 1998 By:/s/ Larry D. Pihl
----------------------------
Larry D. Pihl, Vice President and
Chief Financial Officer
17
<PAGE>
UTILX CORPORATION
As Filed with the Securities and Exchange Commission on August 12, 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 JUNE 30, 1998
UNDER
THE SECURITIES EXCHANGE ACT OF 1934
---------------------
UTILX CORPORATION
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27.1 Financial Data Schedule. Filed herewith.
<PAGE>
EXHIBIT 27.1
UTILX CORPORATION
FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF UTILX CORPORATION FOR THE THREE MONTHS
ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 702
<SECURITIES> 0
<RECEIVABLES> 18,733
<ALLOWANCES> 469
<INVENTORY> 8,754
<CURRENT-ASSETS> 28,332
<PP&E> 39,775
<DEPRECIATION> 26,557
<TOTAL-ASSETS> 42,064
<CURRENT-LIABILITIES> 14,188
<BONDS> 3,022
0
0
<COMMON> 74
<OTHER-SE> 24,780
<TOTAL-LIABILITY-AND-EQUITY> 42,064
<SALES> 22,024
<TOTAL-REVENUES> 22,024
<CGS> 19,447
<TOTAL-COSTS> 21,865
<OTHER-EXPENSES> 135
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 145
<INCOME-PRETAX> 24
<INCOME-TAX> 8
<INCOME-CONTINUING> 16
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16
<EPS-PRIMARY> .002
<EPS-DILUTED> .002
</TABLE>
