<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________TO _____________________
COMMISSION FILE NUMBER 0-16821
UTILX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 91-1171716
(State of Incorporation) (I.R.S. Employer Identification Number)
22820 RUSSELL ROAD (98032)
P. O. BOX 97009
KENT, WASHINGTON 98064-9709 (253) 395-0200
(Address of Principal Executive Offices) (Registrant's Telephone Number)
Indicate by check mark whether the Registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
As of September 30, 1999, 7,447,560, shares of Common Stock were outstanding.
==============================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<S> <C>
PART I
FINANCIAL INFORMATION
1. Financial Statements
Consolidated Balance Sheet
September 30, 1999 and March 31, 1999............................ 3
Consolidated Statement of Operations
For the Three Months Ended
September 30, 1999 and 1998...................................... 4
Consolidated Statement of Operations
For the Six Months Ended
September 30, 1999 and 1998...................................... 5
Consolidated Statement of Cash Flows
For the Six Months Ended
September 30, 1999 and 1998...................................... 6
Notes to Consolidated Financial Statements....................... 7
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 10
3. Quantitative and Qualitative Disclosures about Market Risk....... 15
</TABLE>
<TABLE>
PART II
<S> <C>
1. Legal Proceedings................................................ 15
2. Changes in Securities............................................ 15
3. Defaults Upon Senior Securities.................................. 15
4. Submission of Matters to a Vote of Security Holders.............. 15
5. Other............................................................ 15
6. Exhibits......................................................... 15
Signatures....................................................... 16
</TABLE>
2
<PAGE>
Part I - Financial Information
ITEM 1. FINANCIAL STATEMENTS
UTILX CORPORATION
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30 AND MARCH 31, 1999
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
SEPTEMBER 30 MARCH 31
------------ --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 1,877 $ 1,580
Accounts receivable, net.............................................. 21,884 $ 16,301
Materials, supplies and inventories................................... 6,994 6,941
Income taxes receivable............................................... 192 191
Prepaid expenses and other............................................ 571 533
--------- --------
Total current assets ............................................. 31,518 25,546
Equipment and improvements, net............................................ 11,421 12,678
Other assets, net.......................................................... 353 351
--------- ---------
Total assets ..................................................... $ 43,292 $ 38,575
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank.................................................. $ 7,377 $ 5,538
Current portion of capital lease obligations.......................... 1,138 1,135
Accounts payable...................................................... 3,461 5,038
Accrued liabilities................................................... 9,684 5,573
--------- ---------
Total current liabilities......................................... 21,660 17,284
Capital lease obligations, net of current portion.......................... 1,646 2,210
Other long term liabilities................................................ 1,000 972
--------- ---------
Total liabilities.............................................. 24,306 20,466
--------- ---------
Commitments and contingencies (Note 7):
Stockholders' equity:
Common stock, $0.01 par value
(authorized 25,000,000 shares, 7,448,000 and 7,426,000
shares issued and outstanding, respectively).......................... 74 74
Additional paid-in capital............................................ 18,576 18,521
Retained earnings..................................................... 981 112
Cumulative foreign currency translation adjustment.................... (645) (598)
--------- ---------
Total stockholders' equity........................................ 18,986 18,109
--------- ---------
--------- ---------
Total liabilities and stockholders' equity................... $ 43,292 $ 38,575
--------- ---------
--------- ---------
</TABLE>
(See Notes to Consolidated Financial Statements)
3
<PAGE>
UTILX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenues...................................................................... $ 24,935 $ 18,885
Cost of revenues.............................................................. 21,721 18,453
--------- ---------
Gross profit............................................................. 3,214 432
Operating expenses:
Selling, general and administrative...................................... 2,383 2,008
Research and engineering................................................. 337 207
--------- ---------
Total operating expenses............................................. 2,720 2,215
--------- ---------
Operating income (loss) ...................................................... 494 (1,783)
Other (income) expense, net................................................... 188 128
--------- ---------
Income (loss) before income taxes............................................. 306 (1,911)
Income tax provision.......................................................... 0 9
--------- ---------
Net income (loss)............................................................. $ 306 $ (1,902)
--------- ---------
--------- ---------
Earnings (loss) per share (Note 2):
Basic.................................................................... $ .04 $ (.26)
Diluted.................................................................. $ .04 $ (.26)
CALCULATION OF COMPREHENSIVE INCOME (LOSS):
Net income (loss)...................................................... $ 306 $ (1,902)
Change in cumulative foreign currency
translation adjustment, net................................... (31) 63
--------- ---------
Comprehensive income (loss)............................................ $ 275 $ (1,839)
--------- ---------
--------- ---------
</TABLE>
(See Notes to Consolidated Financial Statements)
4
<PAGE>
UTILX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenues...................................................................... $48,310 $40,908
Cost of revenues.............................................................. 41,796 37,899
------- -------
Gross profit............................................................. 6,514 3,009
Operating expenses:
Selling, general and administrative...................................... 4,794 4,280
Research and engineering................................................. 525 354
------- -------
Total operating expenses.............................................. 5,319 4,634
------- -------
Operating income (loss) ...................................................... 1,195 (1,625)
Other (income) expense, net................................................... 326 262
------- -------
Income (loss) before income taxes............................................. 869 (1,887)
Income tax provision.......................................................... 0 0
------- -------
Net income (loss) ............................................................ $869 $(1,887)
------- -------
------- -------
Earnings (loss) per share (Note 2):
Basic............................................................ $ .12 $ (.25)
Diluted.......................................................... $ .11 $ (.25)
CALCULATION OF COMPREHENSIVE INCOME (LOSS):
Net income (loss) ............................................................ $869 $(1,887)
Change in cumulative foreign currency
translation adjustment, net.......................................... (47) 58
------- -------
Comprehensive income (loss)................................................... $822 $(1,829)
------- -------
------- -------
</TABLE>
(See Notes to Consolidated Financial Statements)
5
<PAGE>
UTILX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................................ $ 869 $ (1,887)
Adjustments to reconcile to net cash provided by (used in) operating
activities:
Depreciation and amortization........................................ 2,153 2,233
Gain on sale equipment .............................................. (2) (1)
Changes in assets and liabilities.................................... (4,866) 6,072
--------- ---------
Total adjustments.................................................... (2,715) 8,304
--------- ---------
Net cash provided by (used in) operating activities............. (1,846) 6,417
--------- ---------
INVESTING ACTIVITIES:
Cost of additions to equipment........................................... (931) (1,943)
Proceeds from sale of equipment.......................................... 35 37
--------- ---------
Net cash used in investing activities........................... (896) (1,906)
--------- ---------
FINANCING ACTIVITIES:
Net borrowings (repayments) on note payable.............................. 1,839 (2,185)
Issuance of common stock................................................. 55 51
Book overdraft........................................................... 1,753 (1,213)
Principal payments on capital leases..................................... (561) (488)
--------- --------
Net cash provided by (used in) financing activities............. 3,086 (3,835)
--------- ---------
EFFECT ON CASH FLOWS
OF CHANGES IN EXCHANGE RATES............................................... (47) 12
--------- ---------
Net increase (decrease) in cash and cash equivalents..................... 297 688
CASH AND CASH EQUIVALENTS:
Beginning of period...................................................... 1,580 528
--------- ---------
End of period............................................................ $ 1,877 $ 1,216
--------- ---------
--------- ---------
</TABLE>
(See Notes to Consolidated Financial Statements)
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL STATEMENT PRESENTATION
In the opinion of the management of UTILX Corporation (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 and six month period ended September 30, 1999 and 1998. The
statements should be read in conjunction with the March 31, 1999 audited
consolidated financial statements included in the fiscal 1999 Annual Report
on Form 10-K.
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,
-------------------- -------------------
1999 1998 1999 1998
----- -------- ----- --------
<S> <C> <C> <C> <C>
Net income (loss)................................ $306 $(1,902) $869 $(1,887)
----- -------- ----- --------
----- -------- ----- --------
Divided by weighted average common
shares outstanding .............................. 7,444 7,422 7,433 7,415
----- -------- ----- --------
----- -------- ----- --------
Basic earnings (loss) per common share........... $.04 $(.26) $.12 $(.25)
----- -------- ----- --------
----- -------- ----- --------
</TABLE>
Diluted earnings (loss) per common share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
1999 1998 1999 1998
----- -------- ----- --------
<S> <C> <C> <C> <C>
Net income (loss) .................................. $306 $(1,902) $869 $(1,887)
----- -------- ----- --------
----- -------- ----- --------
Weighted average common shares outstanding........... 7,444 7,422 7,433 7,415
Stock options and warrants assumed
exercised - net, if dilutive................ 351 0 351 0
----- -------- ----- --------
Total diluted shares outstanding .................... 7,795 7,422 7,784 7,415
----- -------- ----- --------
----- -------- ----- --------
Diluted earnings (loss) per common share............. $.04 $(.26) $.11 $(.25)
----- -------- ----- --------
----- -------- ----- --------
</TABLE>
7
<PAGE>
3. ACCOUNTS RECEIVABLE
Accounts receivable, net, consist of the following:
<TABLE>
<CAPTION>
(In thousands)
September 30, 1999 March 31, 1999
------------------ --------------
<S> <C> <C>
North American customers:
Work completed but not billed.................... $8,888 $5,825
Billed but uncollected.......................... 12,537 9,332
International customers.............................. 768 1,705
Less allowance for doubtful accounts................. (309) (561)
-------- --------
Total..................................... $21,884 $16,301
-------- --------
-------- --------
</TABLE>
4. MATERIALS, SUPPLIES AND INVENTORIES
Materials, supplies and inventories consist of the following:
<TABLE>
<CAPTION>
(In thousands)
September 30, 1999 March 31, 1999
------------------ ---------------
<S> <C> <C>
Raw materials and spare parts........................ $7,853 $8,377
Work in process...................................... 105 26
Less allowance for obsolete or overstocked
inventory........................................... (964) (1,462)
-------- --------
Total.......................................... $6,994 $6,941
-------- --------
-------- --------
</TABLE>
5. ACCRUED LIABILITIES
Accrued liabilities, are as follows:
<TABLE>
<CAPTION>
(In thousands)
September 30, 1999 March 31, 1999
------------------ --------------
<S> <C> <C>
Accrued payroll and related costs...................... $2,746 $1,858
Book overdraft......................................... 1,753 0
Accrued sales tax...................................... 380 223
Accrued insurance...................................... 2,279 1,988
Other.................................................. 2,526 1,504
-------- --------
Total.......................................... $9,684 $5,573
-------- --------
-------- --------
</TABLE>
8
<PAGE>
6. NOTE PAYABLE TO BANK
On April 23, 1999, the Company entered into a $10,000,000, two year,
revolving credit facility from FINOVA Capital Corporation ("FINOVA").
Outstanding borrowings under the facility are not to exceed the lesser of
$10,000,000 or the sum of a) 85% of eligible accounts receivable, plus, b) an
amount not to exceed the lesser of 50% of the auction value of the Company's
equipment or $4,000,000, less, c) any loan reserves. The FINOVA facility is
secured by the Company's assets.
The credit agreement requires that the Company maintain certain financial
covenants, including requirements to maintain certain levels of net worth and
debt service coverage. The agreement also places certain restrictions on
capital expenditures, other indebtedness and executive compensation.
Borrowings bear interest at prime (8.25% at September 30, 1999) plus 1%. The
Company pays annual fees of $50,000, monthly fees of $2,000 and may be
required to pay certain termination fees if the Company terminates the
facility prior to the two year term.
At September 30, 1999, the Company had an outstanding balance of $7,377,000
under this facility, compared to $5,538,000 at March 31, 1999 under a prior
facility. For the second quarter of fiscal 2000 and fiscal 1999, the weighted
average borrowing rate was 9.11% and 8.96%, respectively.
7. COMMITMENTS AND CONTINGENCIES
The Company is involved in various 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 increased 32% in the second quarter of fiscal 2000,
compared to the same period in fiscal 1999. Consolidated revenues increased
18% in the first six months of fiscal 2000, compared to the same period in
fiscal 1999.
NORTH AMERICAN OPERATIONS. Revenue from North American operations increased
to $23.6 million in the second quarter of fiscal 2000, compared to $17.1
million in the same period of the prior year. This increase was due primarily
to increased revenues from Florida Power and Light ("FPL"), the Company's
major customer. Revenues from FPL were $14.9 million and $13.4 million in the
first half of fiscal 2000 and 1999, respectively.
Revenue from North American operations increased to $45.4 million in the
first half of fiscal 2000, compared to $37.6 million in the same period of
the prior year. In addition to the increase in revenue from FPL, the Company
experienced increased revenues from operations in the Western half of the
U.S. and from the telecommunications industry. Revenues from its Western
region increased from $7.9 million to $13.1 million between fiscal 1999 and
2000. Revenues from the telecommunications industry were $7.1 million and
$2.4 million in the first half of fiscal 2000 and 1999 respectively.
INTERNATIONAL OPERATIONS. Revenues from international operations decreased to
$1.3 million in the second quarter of fiscal 2000, compared to $1.8 million
in the same period of fiscal 1999. On March 31, 1999, the Company sold its
drilling service business in the United Kingdom. The drilling service
industry in the United Kingdom has been undergoing a consolidation, with
declining business opportunities for the specialty driller. The decline in
revenues in the second quarter of fiscal 2000 was caused by the sale of the
drilling services business which accounted for $499,000 of revenues in the
second quarter of fiscal 1999.
Revenues from international operations decreased to $2.9 million in the first
six months of fiscal 2000, compared to $3.3 million in the same period of the
prior year. This decline was primarily due to the decline in revenues caused
by the sale of the drilling services business, which accounted for $939,000
of revenues in the first half of fiscal 1999, partially offset by increased
revenues from CableCURE-Registered Trademark- services in Europe and Asia.
GROSS PROFIT
Gross profit increased $2.8 million, or 644%, in the second quarter of fiscal
2000, compared to the same period in fiscal 1999. Gross profit increased $3.5
million, or 116.5%, in the first six months of fiscal 2000, compared to the
same period in fiscal 1999.
NORTH AMERICAN OPERATIONS. Gross profit from the Company's services increased
$2.8 million, or 1,340%, in the second quarter of fiscal 2000 compared to the
same period of fiscal 1999. This increase was mainly due to a change in the
operating structure in the Company's Florida operations. In fiscal 1999, FPL,
the Company's dominant customer in Florida, was scaling down the amount of
work given to the Company. In anticipation of a new contract, the Company had
made the decision to leave in place some of the overhead structure for a
higher level of revenues. At the end of the third quarter of fiscal 1999, FPL
awarded the Company a new three year contract.
Gross profit from the Company's services increased $3.5 million, or 116.5%,
in the first half of fiscal 2000 compared to the same period of fiscal 1999.
An increase in the percentage of CableCURE-Registered Trademark- services, as
well as efficiencies in the Company's Florida operations, contributed to this
increase.
INTERNATIONAL OPERATIONS. Gross profit from international operations in the
second quarter of fiscal 2000 decreased $5,000, or .1%, compared to the same
period of the prior fiscal year. However, the profit margin increased
primarily due to an increase in the percentage of international revenue from
CableCURE-Registered Trademark- operations in Germany.
10
<PAGE>
Gross profit from international operations increased 4% for the first six
months of fiscal 2000, compared to the same period of the prior fiscal year,
due to an increase in the percentage of international revenue from
CableCURE-Registered Trademark- operations in Germany.
OPERATING EXPENSES AND OTHER (INCOME) EXPENSES
Total operating expenses increased 22% in the second quarter of fiscal 2000,
compared to the same period of fiscal 1999. Total operating expenses
increased 15% in the first six months of fiscal 2000 compared to the same
period of fiscal 1999. The increase was primarily due to an increase in
selling, general and administrative expenses, resulting from expenses
associated with the continued modification of the Company's information
system including depreciation.
Other expense, net, was $188,000 and $326,000 in the second quarter and the
first six months of fiscal 2000, respectively, compared to other expense,
net, of $128,000 and $262,000 in the same periods of the prior fiscal year.
This 24% increase is a result of increased interest expense due to higher
borrowing costs.
NET INCOME (LOSS)
As a result of the foregoing, the Company recorded net income of $306,000 in
the second quarter of fiscal 2000, compared to net loss of $1.9 million in
the same period of fiscal 1999. The Company recorded net income of $869,000
in the first six months of fiscal 2000, compared to a net loss of $1.9
million in the same period of fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
On April 23, 1999, the Company closed a new, two year, revolving credit
facility with FINOVA Capital Corporation for $10.0 million. The facility is
secured primarily by the assets of the Company. See Note 6 of Notes to
Consolidated Financial Statements.
At September 30, 1999, the Company had unused sources of liquidity consisting
of $1.9 million in cash and cash equivalents and an available balance on its
committed line of credit from FINOVA of $2.6 million. This compares to $1.6
million in cash and cash equivalents and an available balance on its
committed line of credit of $4.5 million at March 31, 1999. Uses of cash
during the second quarter of fiscal 2000 primarily related to capital
expenditures of $931,000 and changes in working capital.
Capital expenditures in the six months ended September 30, 1999, primarily
included costs associated with the Company's management information systems.
The Company relies on cash flow from operations and lease financing, in
addition to its line of credit, to fund operations and capital expenditures.
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 these facilities became
unavailable to the Company, or if the Company is required to seek additional
capital to fund anticipated growth, the Company would be required to seek
other sources of public or private capital. There can be no assurance that
adequate funds will be available to the Company through such sources when
needed or will be available on terms favorable to the Company. If at any time
the Company is unable to obtain sufficient funds, the Company will be
required to restrict or eliminate plans for expansion and other aspects of
its operations or may be unable to meet its financial obligations on a timely
basis.
REVIEW AND OUTLOOK
INSTALLATION AND REPLACEMENT SERVICES. The Company anticipates that
opportunities for its installation and replacement services in the
telecommunications industry will be a source of growth in the near future. In
the first half of fiscal 2000 revenues from the telecommunications industry
made up 15% of revenues, compared to 6% in the same period last year.
11
<PAGE>
In December 1998, FPL informed the Company they would award all of FPL's
statewide underground cable replacement and injection work to the Company for
a three year period, beginning January 1999. The Company expects FPL to
continue to be a significant customer in calendar 1999 and future years.
However, there can be no assurances that competition, budgetary factors or
other matters, including cancellation of previously issued work orders, will
not reduce the level of work performed for FPL. Also, the Company's revenue
levels and the 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, permitting soil and other working
conditions. See also the discussion under, UTILITIES' BUDGETARY
CONSIDERATIONS, COMPETITION AND SEASONAL FACTORS included under "Important
Risk Factors Regarding Forward-Looking Statements," below.
REPAIR AND RESTORATION SERVICES. The Company expects the trend towards
increased customer acceptance of the CableCURE-Registered Trademark- process,
including an increased level of work under "Test, Treat or Replace"
contracts, to continue. The Company also expects growth of its
CableCURE-Registered Trademark- services in Europe and Asia. To improve
customer acceptance of CableCURE-Registered Trademark-, the Company now
offers a twenty year warranty on CableCURE-Registered Trademark- services.
Management does not believe that this will have a material impact on the
financial position or operating results of the Company based on historical
results and laboratory tests. The Company anticipates that the trend towards
lower pricing for cable replacement will continue to place downward pressure
on the price for CableCURE-Registered Trademark- services.
CableCURE-Registered Trademark- revenues in Florida will be a key factor in
determining growth in consolidated CableCURE-Registered Trademark- revenues
in calendar 2000. The Company expects to see increased volumes from new
customers in calendar 2000, 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 UTILITIES' BUDGETARY
CONSIDERATIONS, COMPETITION, SEASONAL FACTORS and DOW CORNING CORPORATION
included under "Important Risk Factors Regarding Forward-Looking Statements",
below.
INTERNATIONAL OPERATIONS. In fiscal 2000, the Company has ceased selling its
drilling systems in the international market. However, the Company does
continue to support the drilling systems in place with the continued sale of
spare parts. Management expects most of its international growth to come from
CableCURE-Registered Trademark- services in Europe and Asia.
IMPORTANT RISK FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The Company may from time to time make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases and in reports
to stockholders. The Private Securities Litigation Reform Act of 1995
contains a safe harbor for forward-looking statements on which the Company
relies in making such disclosures. In connection with this safe harbor
provision, the Company is hereby identifying important factors that could
cause actual results to differ materially from those contained in any
forward-looking statement made by or on behalf of the Company. Any such
statement is qualified by reference to the following cautionary statements:
UTILITIES' BUDGETARY CONSIDERATIONS. Budgetary considerations arising from
unfavorable regulatory determinations on matters such as rate-setting,
capitalization of services performed by the Company, approval of mergers and
acquisitions, siting of power production facilities, reductions in new
housing starts, reductions in electric utility revenues due to mild weather,
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, can adversely impact the Company's revenues and profits.
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 cause
substantial volatility to the Company's revenues and profits. Although the
Company has broadened its customer base, in the first half of fiscal 2000 one
customer generated over 31% of the Company's consolidated revenues, and 14
customers generated approximately 80% of its CableCURE-Registered Trademark-
revenues.
12
<PAGE>
COMPETITION. The Company has experienced a long term trend of declining
prices for trenchless drilling services provided to electric utilities,
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-Registered Trademark-
injection services, which are priced at a discount to replacement costs,
including replacement via trenchless drilling. 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 may offset any price increase the Company is able to
negotiate for the expansion of its services. The overall trend of falling
prices for trenchless drilling services provided to electric utilities is
expected to continue into the future which will continue to put downward
pressure on the market price for CableCURE-Registered Trademark- Services.
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-Registered Trademark-
drilling systems or providing its CableCURE-Registered Trademark- services at
certain times of the year. In addition, the Company believes that the regular
budgetary cycles of certain of its North American utility customers tend to
concentrate demand for the Company's services during the third quarter of its
fiscal year (the fourth quarter of the calendar year), although other
budgetary factors described above may override this trend in any given
quarter. As a result of these factors, results of operations in any given
fiscal quarter are not necessarily indicative of results in any other fiscal
quarter.
MANAGEMENT OF GROWTH. There can be no assurance that the Company's systems,
procedures and controls will be adequate to support the Company's operations
as they expand. Any future growth will impose significant additional
responsibilities on members of senior management, including the need to
identify, recruit and integrate new senior level managers and executives. To
the extent that the Company is unable to manage its growth efficiently and
effectively, or is unable to attract and retain additional qualified
management, 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 growth as a result of labor shortages.
DOW CORNING CORPORATION. The Company purchases its CableCURE-Registered
Trademark- 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-Registered Trademark-
business, there can be no assurance that Dow Corning or the bankruptcy court
will not take action to amend or terminate the CableCURE-Registered
Trademark- license agreement.
FOREIGN CURRENCY FLUCTUATIONS. The Company's financial results are affected
by fluctuations in certain foreign currencies, particularly the exchange rate
between the U.S. Dollar and the British Pound Sterling, German Deutschmark
and Euro. Such fluctuations could result in material adverse adjustments to
the carrying values of accounts receivable or other assets measured in
foreign currencies, or on the reported results of operations of the Company's
European operations.
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.
The Company has determined that its propriety equipment used by
FlowMOLE-Registered Trademark- and CableCURE-Registered Trademark- crews 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 its internal operations that
must be modified, upgraded, or replaced to minimize the possibility of a
material disruption to its business. On November 2, 1998, the
13
<PAGE>
Company converted its enterprise-wide information system to newly installed
software certified by the vendor to be Year 2000 compliant. The Company is in
the process of replacing systems that have been identified as adversely
affected. The Company expects all other systems which are not Year 2000
compliant to be replaced by November 30, 1999.
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 has assessed the potential effect of, and
remediation costs of, 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.
The Company implemented 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
determine if its customers have adequately addressed their own Year 2000
problems. 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 manner could have a material adverse effect on the
Company's business, financial condition, cash flows and results of operations.
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.
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 these 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 potential failures. As a
result, management expects that the Company could 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.
The Company has developed contingency plans to be implemented as part of its
efforts to identify and correct Year 2000 problems affecting its customers or
major vendors. These plans include, but are not limited to, increased work
hours for Company personnel or use of contract personnel to provide manual
workaround solutions for customer work release systems or invoice approval
processes. 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.
14
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to the risk of fluctuating interest rates in the
normal course of business, primarily as a result of its revolving credit
facility which bears interest at variable rates.
The Company uses the U.S. Dollar as its functional currency, except for its
European operations. The assets and liabilities of the Company's European
operations are translated into U.S. Dollars at exchange rates in effect at
the balance sheet date. Income and expense items are translated at the
average exchange rates prevailing during the period. Aggregate translation
gains and losses included in the determination of net income have not been
material.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable
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
15
<PAGE>
UTILX CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UTILX CORPORATION
-------------------------------------
(Registrant)
Date: November 10, 1999 By:/s/ William M. Weisfield
-------------------------------------
William M. Weisfield, President,
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Date: November 10, 1999 By:/s/ Darla Vivit Norris
-------------------------------------
Darla Vivit Norris, Senior Vice
President, Chief Financial Officer and
Treasurer
(Principal Financial Officer)
16
<PAGE>
UTILX CORPORATION
As Filed with the Securities and Exchange Commission on November 12, 1999
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, 1999
UNDER
THE SECURITIES EXCHANGE ACT OF 1934
---------------------
UTILX CORPORATION
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule. Filed herewith.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF UTILX CORPORATION FOR THE SIX MONTHS ENDED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,877
<SECURITIES> 0
<RECEIVABLES> 22,193
<ALLOWANCES> 309
<INVENTORY> 6,994
<CURRENT-ASSETS> 31,518
<PP&E> 38,641
<DEPRECIATION> 27,220
<TOTAL-ASSETS> 43,292
<CURRENT-LIABILITIES> 21,660
<BONDS> 0
0
0
<COMMON> 74
<OTHER-SE> 18,912
<TOTAL-LIABILITY-AND-EQUITY> 43,292
<SALES> 0
<TOTAL-REVENUES> 24,935
<CGS> 21,721
<TOTAL-COSTS> 24,441
<OTHER-EXPENSES> 188
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 162
<INCOME-PRETAX> 306
<INCOME-TAX> 0
<INCOME-CONTINUING> 306
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 306
<EPS-BASIC> .04
<EPS-DILUTED> .04
</TABLE>
