<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 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 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 September 30, 1998, 7,425,560 shares of Common Stock were outstanding.
The total number of pages in this Form 10-Q is 19
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C> <C>
PART I
1. Financial Statements
Consolidated Balance Sheet
September 30, 1998 and March 31, 1998............................. 3
Consolidated Statement of Operations
For the three Months Ended
September 30, 1998 and 1997....................................... 4
Consolidated Statement of Operations
For the Six Months Ended
September 30, 1998 and 1997....................................... 5
Consolidated Statement of Cash Flows
For the Six Months Ended
September 30, 1998 and 1997....................................... 6
Notes to Consolidated Financial Statements........................ 7
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 10
PART II
1. Legal Proceedings................................................. 17
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 ............................................................ 19
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UTILX CORPORATION
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30 AND MARCH 31, 1998
(IN THOUSANDS, EXCEPT SHARES)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30 MARCH 31
------------ --------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 1,216 $ 528
Accounts receivable, trade.................................... 14,571 19,720
Materials, supplies and inventories........................... 8,550 8,839
Income taxes receivable....................................... 455 433
Prepaid expenses and other.................................... 156 284
--------- --------
Total current assets ..................................... 24,948 29,804
Equipment and improvements, net.................................... 13,457 13,091
Other assets, net.................................................. 414 584
--------- ---------
Total assets ............................................. $ 38,819 $ 43,479
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank.......................................... $ 3,060 $ 5,245
Current portion of capital lease obligations.................. 922 839
Accounts payable.............................................. 3,184 3,993
Accrued liabilities........................................... 5,476 5,475
--------- ---------
Total current liabilities................................. 12,642 15,552
Capital lease obligations, net of current portion.................. 2,241 2,224
Other long-term liabilities........................................ 885 872
--------- ---------
Total liabilities...................................... 15,768 18,648
--------- ---------
Commitments and Contingencies
Stockholders' equity:
Common Stock, $0.01 par value
(authorized 25,000,000 shares)............................ 74 74
Additional paid-in capital.................................... 18,520 18,469
Retained earnings............................................. 4,903 6,790
Cumulative foreign currency translation adjustment............ (446) (502)
---------- ----------
Total stockholders' equity................................ 23,051 24,831
-------- ---------
Total liabilities and stockholders' equity........... $ 38,819 $ 43,479
========= =========
Common Stock issued and outstanding........................... 7,425,560 7,407,760
</TABLE>
(See Notes to Consolidated Financial Statements)
3
<PAGE>
UTILX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues........................................................... $ 18,885 $ 20,734
Cost of revenues................................................... 18,453 18,898
--------- ---------
Gross profit.................................................. 432 1,836
--------- ---------
Operating expenses:
Selling, general and administrative........................... 2,008 1,916
Research and engineering...................................... 207 130
--------- ---------
Total operating expenses.................................. 2,215 2,046
--------- ---------
Operating income (loss) ........................................... (1,783) (210)
Other expense, net................................................. (128) (110)
--------- ---------
Income (loss) before income taxes.................................. (1,911) (320)
Income tax benefit................................................. 9 0
--------- ---------
Net income (loss).................................................. $ (1,902) $ (320)
========= =========
Earnings (loss) per share (Note 2):
Basic......................................................... $ (.26) $ (.04)
Diluted....................................................... $ (.26) $ (.04)
CALCULATION OF COMPREHENSIVE INCOME (LOSS):
Net Income (loss)........................................... $ (1,902) $ ( 320)
Change in cumulative foreign currency
translation adjustment, net........................ 63 (90)
---------- ---------
Comprehensive Income (loss)................................. $ (1,839) $ (410)
</TABLE>
(See Notes to Consolidated Financial Statements)
4
<PAGE>
UTILX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues........................................................... $ 40,908 $ 39,501
Cost of revenues................................................... 37,899 35,765
--------- ---------
Gross profit.................................................. 3,009 3,736
--------- ---------
Operating expenses:
Selling, general and administrative........................... 4,280 3,854
Research and engineering...................................... 354 288
--------- ---------
Total operating expenses.................................. 4,634 4,142
--------- ---------
Operating income (loss) ........................................... (1,625) (406)
Other expense, net................................................. (262) (181)
--------- ---------
Income (loss) before income taxes.................................. (1,887) (587)
Income tax provision............................................... 1
--------- ---------
Net income (loss).................................................. $ (1,887) $ (588)
========= =========
Earnings (loss) per share (Note 2):
Basic......................................................... $ (.25) $ (.08)
Diluted....................................................... $ (.25) $ (.08)
CALCULATION OF COMPREHENSIVE INCOME (LOSS):
Net Income (loss)........................................... $ (1,887) $ (588)
Change in cumulative foreign currency
translation adjustment, net........................ 58 (40)
----------- ----------
Comprehensive Income (loss)................................. $ (1,829) $ (628)
========= ========
</TABLE>
(See Notes to Consolidated Financial Statements)
5
<PAGE>
UTILX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................................ $ (1,887) $ (588)
Adjustments to reconcile to net cash provided by (used in)
operating activities:
Depreciation and amortization........................................ 2,233 2,003
Other non-cash expenses, net ........................................ (1) 50
Changes in assets and liabilities.................................... 6,072 (5,949)
--------- ----------
Total adjustments.................................................... 8,304 (3,896)
--------- ----------
Net cash provided by (used in) operating activities............. 6,417 (4,484)
--------- ----------
INVESTING ACTIVITIES:
Cost of additions to equipment........................................... (1,943) (1,368)
Proceeds from sale of equipment.......................................... 37 0
--------- ---------
Net cash used in investing activities........................... (1,906) (1,368)
---------- ----------
FINANCING ACTIVITIES:
Net borrowings (repayments) on note payable.............................. (2,185) 5,090
Issuance of Common Stock................................................. 51 48
Net decrease in book overdraft........................................... (1,213) 0
Principal payments on capital leases..................................... (488) 0
---------- --------
Net cash provided by (used in) financing activities............. (3,835) 5,138
---------- ---------
EFFECT ON CASH FLOWS
OF CHANGES IN EXCHANGE RATES............................................... 12 (6)
--------- ----------
Net increase (decrease) in cash and cash equivalents..................... 688 (720)
CASH AND CASH EQUIVALENTS:
Beginning of period...................................................... 528 1,490
--------- ---------
End of period............................................................ $ 1,216 $ 770
========= =========
</TABLE>
(See Notes to Consolidated Financial Statements)
6
<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 thriee month and six-month period ending September
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 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.
Earnings (loss) Per Share is calculated as follows:
Basic earnings (loss) per common share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss)................................ $ (1,902) $ (320) $ (1,887) $ (588)
========= ========= ========== =========
Divided by weighted average common
shares outstanding .............................. 7,422 7,190 7,415 7,187
========= ========= ========== =========
Basic earnings (loss) per common share........... (.26) $ (.04) $ (.25) (.08)
========= ========= ========== =========
</TABLE>
7
<PAGE>
Diluted earnings (loss) per common share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss)................................ $ (1,902) $ (320) $ (1,887) $ (588)
========= ========= ========= ==========
Weighted average common shares outstanding....... 7,422 7,190 7,415 7,187
Stock options and warrants assumed
exercised - net, if dilutive............. 0 0 0 0
---------- --------- --------- ----------
Total diluted shares outstanding................. 7,422 7,190 7,415 7,187
========== ========= ========= ==========
Diluted earnings (loss) per common share......... $ (.26) $ (.04) $ (.25) $ (.08)
========== ========== ========= ===========
3. ACCOUNTS RECEIVABLE
Accounts receivable, trade, net consist of the following:
<CAPTION>
(In thousands)
September 30, 1998 March 31, 1998
------------------- --------------
<S> <C> <C>
North American customers:
Completed work not yet billed $ 3,914 $ 7,299
Billed but uncollected...................... 9,742 11,527
International customers........................ 1,385 1,349
Less allowance for doubtful accounts........... (470) (455)
---------- -----------
$ 14,571 $ 19,720
======== ========
4. MATERIALS, SUPPLIES AND INVENTORIES
Materials, supplies and inventories consist of the following:
<CAPTION>
(In thousands)
September 30, 1998 March 31, 1998
------------------ --------------
<S> <C> <C>
Raw Materials and Spare Parts.................. $ 8,116 $ 8,810
Work in Process................................ 1,097 684
Finished Goods................................. 34 116
Less allowance for potentially obsolete or
overstocked inventory.......................... (697) (771)
------- ---------
$ 8,550 $ 8,839
======= =========
</TABLE>
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 September 30, 1998 and
8
<PAGE>
March 31, 1998, the Company had an outstanding balance of $3,060,000 and
$5,245,000, respectively, under this facility at a weighted average borrowing
rate of 7.73% and 7.69%, respectively.
In addition, at September 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.
The Company has been informed by Seafirst that the existing credit facility will
not be renewed. The Company has accepted a proposal from Wells Fargo Bank, N.A.
for a replacement line of credit for up to $10,000,000. The lender is completing
its due diligence and the Company expects to have the replacement credit
facility in place prior to January 4, 1999.
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 Company has agreed to certain
adjustments which will not result in a material adverse adjustment to the
Company's income tax calculations, and has been informed that no further
adjustments will be proposed. However, the Company has not yet agreed to a final
examiner's report.
CONTRACTUAL COMMITMENTS. Certain contracts were signed in December 1997 for
consulting service related to the installation of new computer software in 1998.
As of September 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 $800,000.
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.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
REVENUES
Consolidated revenues decreased 9% in the second quarter of fiscal 1999,
compared to the same period in fiscal 1998. Consolidated revenues increased 4%
in the first six months of fiscal 1999, compared to the same period in fiscal
1998.
NORTH AMERICAN OPERATIONS. Revenue from North American operations decreased to
$17.1 million in the second quarter of fiscal 1999, compared to $19.3 million in
the same period of the prior year. Revenues from installation and replacement
services in North America, primarily from FlowMole(R) guided boring services,
decreased to $12.0 million in the second quarter of fiscal 1999, compared to
$14.0 million in the same period of fiscal 1998. Revenues from repair and
restoration services in North America, primarily from CableCure(R) injection
services, decreased to $5.0 million in the second quarter of fiscal 1999,
compared to $5.3 million in the same period of fiscal 1998.
Revenues from installation and replacement services in North America increased
to $28.0 million in the first six months of fiscal 1999 compared to $26.2
million in the same period of fiscal 1998. Revenues from repair and restoration
services in North America decreased to $9.6 million in the first six months of
fiscal 1999 compared to $9.7 million in the same period of fiscal 1998.
During the second quarter of fiscal 1999, the Company completed the work
allocated for the calendar year by its largest customer, Florida Power & Light
("FPL"). The Company maintained certain levels of overhead in anticipation of
additional work from FPL in 1998. The work was not forthcoming and the Company
incurred losses as a result. The Company will continue to maintain overhead at
current levels to support expected future work levels. Unless work levels are
increased or overhead expenses are decreased, the Company will continue to incur
losses with respect to its Florida operations. Revenue from Florida operations
was $4.8 million in the second quarter of fiscal 1999, compared to $6.3 million
in the same period of the prior year. Revenue from Florida operations was $14.2
million in the first six months of fiscal 1999 compared to $10.2 million in the
same period of the prior year. The March 1998 cancellation of contracts with
Washington Gas Company also adversely affected revenues contributing to a
decrease in installation and replacement revenues in the second quarter and
first six months of fiscal 1999 of $2.4 million and $4.5 million, respectively,
compared to the same periods of the prior year.
The Company expects to be assigned work by FPL in calendar 1999 at levels
similar to calendar 1998. Revenues from FPL were $22.8 million in the first nine
months of calendar 1998. FPL's budget for calendar 1999 is expected to be
approved in November 1998. Accordingly, the amount of work that FPL will assign
to the Company cannot currently be guaranteed at any level. FPL has indicated
that it will seek competitive bids for substantial portions of the work, and the
Company therefore cannot be assured that it will retain its existing share of
FPL's work.
INTERNATIONAL OPERATIONS. Revenues from international operations increased to
$1.8 million in the second quarter of fiscal 1999, compared to $1.4 million in
the same period of fiscal 1998, due primarily to increased revenues from sales
of FlowMole equipment to customers in Asia and Europe. During fiscal 1998, the
Company was transitioning its equipment manufacturing to outside vendors and
after completing sales in the first quarter of fiscal 1998, had no available new
equipment to sell before September 1997.
Revenues from international operations decreased to $3.3 million in the first
six months of fiscal 1998 compared to $3.6 million in the same period of the
prior year, due primarily to decreased revenue from international sales of
equipment.
10
<PAGE>
GROSS PROFIT
Gross profit decreased 76% in the second quarter of fiscal 1999, compared to the
same period in fiscal 1998. Gross profit decreased 19% in the first six months
of fiscal 1999, compared to the same period in fiscal 1998.
NORTH AMERICAN OPERATIONS. Gross profit from installation and replacement
services decreased in the second quarter of fiscal 1999 compared to the same
period of fiscal 1998.
The Company was not able to reduce the costs of Florida operations in line with
the reduction in revenues, in part due to focusing crews and administrative
staff in Florida on job completion, invoicing and collections. In addition, the
Company incurred extra costs to temporarily relocate several Florida crews to
other regions. Furthermore, the Company chose to maintain a level of overhead
costs in Florida consistent with the expectation of increased levels of business
in the future. This produced a severe adverse effect on gross profit from North
American operations. The results for the third quarter of fiscal 1999 are
expected to be severely affected as well, as the Company cannot anticipate any
measurable increase in revenues from Florida operations before January 1999, and
continues to maintain a sufficient infrastructure in Florida to be able to
respond in the event an increase of business is experienced at that time.
INTERNATIONAL OPERATIONS. Gross profit from international operations in the
second quarter of fiscal 1999 increased compared to the same period of the prior
year due to higher revenue levels, but decreased slightly as a percentage of
revenues due to the mix of revenues. Gross Profit from European service
operations are typically higher than from international sales of FlowMole
equipment and spare parts.
Gross profit from international operations increased for first six months of
fiscal 1999 due to the increased revenues from European service operations,
which more than offset the impact of having less revenue from equipment sales.
OPERATING EXPENSES AND OTHER INCOME (EXPENSES)
Total operating expenses increased 8% in the second quarter of fiscal 1999,
compared to the same period of fiscal 1998. Total operating expenses increased
12% in the first six months of fiscal 1999 compared to the same period of fiscal
1998. The increase in selling, general and administrative expenses in fiscal
1999 was primarily generated by increased spending on corporate projects
designed to support the Company's planned growth, including costs associated
with the selection of a new management information system. The higher level of
research and engineering expense in fiscal 1999, while not a significant
increase in total dollars spent, reflected increased spending on new electronic
guidance devices for the Company's FlowMole equipment.
Other income (expense), net, was a net expense of $128,000 and $262,000 in the
second quarter and the first six months of fiscal 1999, respectively, compared
to expense of $110,000 and $181,000 in the same periods of the prior year. 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 a pretax loss of $1,911,000
in the second quarter of fiscal 1999, compared to a pretax loss of $320,000 in
the same period of fiscal 1998. The Company recorded pretax loss of $1,887,000
in the first six months of fiscal 1999 compared to a pretax loss of $587,000 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 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.
11
<PAGE>
Accordingly, no tax benefits were recorded against operating losses generated
in fiscal 1998 and in the first six months of fiscal 1999.
NET INCOME (LOSS)
As a result of the foregoing, the Company recorded a net loss of $1,902,000 in
the second quarter of fiscal 1999, compared to a net loss of $320,000 in the
same period of fiscal 1998. The Company recorded a net loss of $1,887,000 in the
first six months of fiscal 1999 compared to net loss of $588,000 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.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had unused sources of liquidity consisting of
$1,216,000 in cash and cash equivalents and an available balance on its
committed line of credit of $6,440,000. This compares to $528,000 in cash and
cash equivalents and an available balance on its committed line of credit of
$4,755,000 at March 31, 1998. Uses of cash during the second quarter of fiscal
1999 primarily related to capital expenditures of $800,000. During the three and
six months ended September 30, 1998, the Company substantially reduced its level
of outstanding receivables to generate cash from operations. However, further
reductions of that magnitude are not expected.
Capital expenditures in the six months ended September 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 November 1998. 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 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 these facilities or similar replacement 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 or may be unable to meet its financial obligations on
a timely basis.
The Company's bank credit facility expires on January 4, 1999 and will not be
renewed. The Company has accepted a proposal for a replacement credit facility
and expects the lender to complete its due diligence and approve the new credit
facility in December 1998. There can be no assurance that the lender will not
cancel its offer of credit. Also, although three other potential lenders
submitted similar proposals to the Company, there can be no assurance that those
offers will continue to be available.
12
<PAGE>
REVIEW AND OUTLOOK
INSTALLATION AND REPLACEMENT SERVICES. The Company anticipates that
opportunities to add installation and replacement services for existing
customers will be the primary source of growth in the near future, especially
from existing customers who utilize CableCure services. The Company expects FPL
to continue to be a significant customer in calendar 1999 and future years.
Also, there can be no assurances that competition, budgetary factors or other
matters will not reduce the level of work performed for FPL. Also, 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. CableCure revenues in Florida will be a key factor
in determining growth in consolidated CableCure revenues in calendar 1999. The
Company expects to see increased volumes from new customers in calendar 1999,
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, the Company does expect
equipment sales to continue at some modest level. Company management expects
most of its international growth to come from CableCure services in Europe.
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.
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
13
<PAGE>
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 and have overridden these factors in calendar 1998. 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. 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 President and Chief
Executive Officer resigned October 30, 1998 and the Company's Senior Vice
President and Secretary resigned effective November 13, 1998 and both positions
must be filled with permanent replacements. There can be no assurance that such
additional management will be identified and retained by the Company. In
addition, 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.
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 FPL
through January 2000. The underlying agreement calls for the Company to pay the
subcontractor a percentage of the amount charged to FPL for certain services
defined in the underlying agreement. The Company agreed to new pricing in its
contract with FPL 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
14
<PAGE>
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 FPL. 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.
YEAR 2000 DATA CONVERSION. The year 2000 issue is the result of computer
programs having been written using two digits, rather than four, to define the
applicable year. Any of the Company's computers, computer programs,
manufacturing and administration equipment or construction equipment used by its
crews that have date-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. If any of the Company's systems or
equipment that have date-sensitive software use only two digits, system failures
or miscalculations may result causing disruptions of operations, including,
among other things, a temporary inability to process transactions with third
parties or engage in similar normal business activities.
During 1997, the Company initiated a project to address the Year 2000 issue that
encompasses operating and administrative areas of the Company. In addition,
executive management regularly monitors the status of the Company's Year 2000
remediation plans. The process includes an assessment of issues and development
of remediation plans, where necessary, as they relate to internally used
software, computer hardware and use of computer applications in the Company's
processes and products. In addition, the Company is engaged in assessing the
Year 2000 issue with significant customers and suppliers.
INTERNAL INFRASTRUCTURE. The Company has determined that its propriety equipment
used by FlowMole and CableCure crew does not rely on date sensitive software.
The Company believes that it has identified substantially all of the major
computers, software applications, and related equipment used in connection with
is internal operations that must be modified, upgraded, or replaced to minimize
the possibility of a material disruption to its business. The Company has
commenced the process of replacing systems that have been identified as
adversely affected. On November 2, 1998, the Company converted its enterprise
wide information systems to newly installed software certified by the vendor to
be Year 2000 compliant. Out of an estimated total project cost of $2.5 to $3
million including internal labor, travel and training costs, about $800,000
remained to be spent as of September 30, 1998.
SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS. In addition to computers and
related systems, the operation of office and facilities equipment, such as fax
machines, photocopiers, telephone switches, security systems, elevators, and
other common devices may be affected by the Year 2000 problem. The Company is
currently assessing the potential effect of, and costs of remediating, the Year
2000 problem on its office and facilities equipment. The Company estimates the
total cost to the Company of completing any required modifications, upgrades, or
replacements of these other internal systems will not have a material adverse
effect on the Company's business or results of operations. This estimate is
being monitored and will be revised as additional information becomes available.
15
<PAGE>
CUSTOMERS. The Company is preparing to implement a communications plan with its
customers to attempt to identify and resolve, if possible, issues associated
with the Year 2000. If the Company's customers are unable to resolve Year 2000
issues, those customers could have difficulty preparing new work packages for
issuance to the Company or approving and paying invoices for the Company's
services. The Company's revenues and cash flows from operations could be
severely affected as a result. The Company's customers primarily consist of
large utility companies who are expending substantial resources to solve Year
2000 problems. However, there can be no assurance that the Company will be able
to identify if its customers have Year 2000 problems that will affect the
Company. Also, even if such problems are identified, the Company may not be able
to influence its customers to prioritize a timely solution to Year 2000 problems
that are identified. Any failure of customers to resolve Year 2000 issues in a
timely matter could have a material adverse effect on the Company's business,
financial condition, cash flows and results of operations.
SUPPLIERS. The Company has initiated communications with third party suppliers
of the products and financial services used, operated, or maintained by the
Company to identify and, to the extent possible, to resolve issues involving the
Year 2000 problem. The Company believes that its major suppliers are adequately
addressing their Year 2000 exposure. However, the Company has limited or no
control over the actions of these third party suppliers. Thus, while the Company
expects that it will be able to resolve any significant Year 2000 problems with
these systems before the occurrence of a material disruption to the business of
the Company or any of its customers, any failure of these third parties to
resolve Year 2000 problems with their systems in a timely manner could have a
material adverse effect on the Company's business, financial condition, cash
flows and results of operations.
MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS. The Company expects to identify
and resolve all Year 2000 problems that could materially adversely affect its
business operations. However, management believes that it is not possible to
determine with complete certainty that all Year 2000 problems affecting the
Company have been identified or corrected. The number of devices that could be
affected and the interactions among theses devices are simply too numerous. In
addition, one cannot accurately predict how many Year 2000 problem related
failures will occur or the severity, duration, or financial consequences of
these perhaps inevitable failures. As a result, management expects that the
Company could likely suffer the following consequences:
1. a significant number of operational inconveniences and inefficiencies
for the Company and its clients that may divert management's time and
attention and financial and human resources from its ordinary business
activities; and
2. a lesser number of serious system failures that may require significant
efforts by the Company's customers to prevent or alleviate material
business disruptions.
CONTINGENCY PLANS. The Company is currently developing contingency plans to be
implemented as part of its efforts to identify and correct Year 2000 problems
affecting its customers or major vendors. The Company expects to complete its
contingency plans by June 30, 1999. These plans could include increased work
hours for Company personnel or use of contract personnel to provide manual
workaround for customer work release systems or invoice approval processes, and
similar approaches. If the Company is required to implement any of these
contingency plans, it could have a material adverse effect on the Company's
financial condition and results of operations.
16
<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 and
received documents from UTILX. Additionally, UTILX conducted depositions of PCR
employees in April 1998 and July 1998 and additional depositions are scheduled.
PCR has deposed one UTILX representative and one FPL representative has also
been deposed. 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 originally denied, but then granted when reviewed in
October 1998. A portion of the case dealing with work under a subcontract
between PCR and UTILX from March 1996 to March 1997 will be arbitrated. UTILX
will proceed rapidly with the AAA to process arbitration. The District Court
case will be temporarily stayed pending the arbitration..
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.
17
<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
18
<PAGE>
UTILX CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UTILX CORPORATION
--------------------------------
(Registrant)
Date: November 9, 1998 By:/s/ William M. Weisfield
-------------------------------------
William M. Weisfield, President and
Chief Executive Officer
Date: November 9, 1998 By:/s/ Larry D. Pihl
-------------------------------------
Larry D. Pihl, Vice President and
Chief Financial Officer
19
<PAGE>
UTILX CORPORATION
As Filed with the Securities and Exchange Commission on November 13, 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 SEPTEMBER 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.
<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 IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1999
<PERIOD-START> JUL-01-1998 APR-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 1,216 1,216
<SECURITIES> 0 0
<RECEIVABLES> 15,042 15,042
<ALLOWANCES> 471 471
<INVENTORY> 8,550 8,550
<CURRENT-ASSETS> 24,948 24,948
<PP&E> 38,709 38,709
<DEPRECIATION> 25,252 25,252
<TOTAL-ASSETS> 38,819 38,819
<CURRENT-LIABILITIES> 12,642 12,642
<BONDS> 3,126 3,126
0 0
0 0
<COMMON> 74 74
<OTHER-SE> 22,977 22,977
<TOTAL-LIABILITY-AND-EQUITY> 38,819 38,819
<SALES> 18,885 40,908
<TOTAL-REVENUES> 18,885 40,908
<CGS> 18,453 37,899
<TOTAL-COSTS> 20,668 42,533
<OTHER-EXPENSES> (36) (80)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 164 342
<INCOME-PRETAX> (1,911) (1,887)
<INCOME-TAX> (9) 0
<INCOME-CONTINUING> (1,902) (1,887)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,902) (1,887)
<EPS-PRIMARY> (0.26) (0.25)
<EPS-DILUTED> (0.26) (0.25)
</TABLE>
