-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UTXSxafXrXoSu6eYpAfG+HTT59qc+fiTfqw0YxGDZ3ts9tLLlPjtIiGgCXjrPWaN nevllZbCyebVhoid65WeAg== 0000912057-97-005459.txt : 19970222 0000912057-97-005459.hdr.sgml : 19970222 ACCESSION NUMBER: 0000912057-97-005459 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970214 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UTILX CORP CENTRAL INDEX KEY: 0000821361 STANDARD INDUSTRIAL CLASSIFICATION: WATER, SEWER, PIPELINE, COMM AND POWER LINE CONSTRUCTION [1623] IRS NUMBER: 911171716 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16821 FILM NUMBER: 97534807 BUSINESS ADDRESS: STREET 1: 22404 66TH AVE S CITY: KENT STATE: WA ZIP: 98064-9709 BUSINESS PHONE: 2063950200 FORMER COMPANY: FORMER CONFORMED NAME: FLOWMOLE CORP DATE OF NAME CHANGE: 19910609 10-Q 1 FORM 10-Q 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 QUARTER ENDED DECEMBER 31, 1996 ---------------------------- UTILX CORPORATION COMMISSION FILE NUMBER 0-16821 DELAWARE 91-1171716 (State of Incorporation) (I.R.S. Identification Number) 22404 - 66TH AVENUE SOUTH P. O. BOX 97009 KENT, WASHINGTON 98064-9709 (206) 395-0200 (Address of Principal Executive Offices) (Telephone Number) ---------------------------- Securities registered pursuant to Section 12(b) or (g) of the Act: COMMON STOCK, .01 PAR VALUE THE NASDAQ STOCK MARKET, INC. (Class of Security) (Exchange on Which Registered) ---------------------------- The registrant has 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 has been subject to such filing requirements for the past 90 days. As of December 31, 1996, 7,180,075 shares of Common Stock were outstanding. The total number of pages in this Form 10-Q is 14. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS ITEM PAGE ---- ---- PART I 1. Financial Statements Consolidated Balance Sheet December 31, 1996 and March 31, 1996 . . . . . . . . . . . . . 3 Consolidated Statement of Operations For the Three Months Ended December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . 4 Consolidated Statement of Operations For the Nine Months Ended December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . 5 Consolidated Statement of Cash Flows For the Nine Months Ended December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . 6 Notes to Consolidated Financial Statements . . . . . . . . . . 7 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . 9 PART II 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 13 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . 13 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . 13 4. Submission of Matters to a Vote of Security Holders. . . . . . 13 5. Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6. Exhibits and Reports on Forms 8-K. . . . . . . . . . . . . . . 13 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 -2- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UTILX CORPORATION CONSOLIDATED BALANCE SHEET DECEMBER 31 AND MARCH 31, 1996 (IN THOUSANDS, EXCEPT SHARES) (UNAUDITED) ASSETS DECEMBER 31 MARCH 31 ----------- -------- Current assets: Cash and cash equivalents . . . . . . . . . . $ 2,273 $ 495 Accounts receivable, trade, net . . . . . . . 12,208 10,659 Materials, supplies and inventories . . . . . 6,248 8,128 Income taxes receivable . . . . . . . . . . . 337 1,019 Prepaid expenses and other. . . . . . . . . . 462 216 ------- ------- Total current assets . . . . . . . . . . 21,528 20,517 Equipment and improvements, net. . . . . . . . . . 9,936 9,113 Other assets, net. . . . . . . . . . . . . . . . . 752 994 ------- ------- Total assets . . . . . . . . . . . . . . $32,216 $30,624 ------- ------- ------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable to bank. . . . . . . . . . . . . $ - $ 2,500 Accounts payable. . . . . . . . . . . . . . . 1,969 1,912 Accrued liabilities . . . . . . . . . . . . . 3,469 2,756 ------- ------- Total current liabilities. . . . . . . . 5,438 7,168 ------- ------- Stockholders' equity: Common Stock, $0.01 par value (authorized 25,000,000 shares). . . . . 72 72 Common Stock Warrants . . . . . . . . . . . . 936 936 Additional paid-in capital. . . . . . . . . . 17,414 17,399 Retained earnings . . . . . . . . . . . . . . 8,865 5,940 Unearned compensation . . . . . . . . . . . . (37) (76) Cumulative foreign currency translation adjustment. . . . . . . . . . . . . . . . . (472) (815) ------- ------- Total stockholders' equity . . . . . . . 26,778 23,436 ------- ------- Total liabilities and stockholders' equity. . . . . . . . . . . . . . $32,216 $30,624 ------- ------- ------- ------- Common Stock issued and outstanding . . . . . 7,180,075 7,184,116 (See Notes to Consolidated Financial Statements) -3- UTILX CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 1996 1995 ---- ---- Revenues . . . . . . . . . . . . . . . . . . . . . . $16,317 $13,155 Cost of revenues . . . . . . . . . . . . . . . . . . 13,604 10,798 ------- ------- Gross profit . . . . . . . . . . . . . . . . . . 2,713 2,357 ------- ------- Operating expenses: Selling, general and administrative. . . . . . . 1,702 2,048 Research and engineering . . . . . . . . . . . . 172 168 ------- ------- Total operating expenses . . . . . . . . . . 1,874 2,216 ------- ------- Operating income (loss). . . . . . . . . . . . . . . 839 141 Other income (expense), net. . . . . . . . . . . . . (27) 22 ------- ------- Income (loss) before income taxes. . . . . . . . . . 812 163 Income tax provision (benefit) . . . . . . . . . . . (944) 59 ------- ------- Net income (loss). . . . . . . . . . . . . . . . . . $ 1,756 $ 104 ------- ------- ------- ------- Earnings (loss) per share (Note 2): Primary. . . . . . . . . . . . . . . . . . . . . .24 .01 Fully diluted. . . . . . . . . . . . . . . . . . .24 .01 Weighted average number of shares (Note 2): Primary. . . . . . . . . . . . . . . . . . . . . 7,330 7,192 Fully diluted. . . . . . . . . . . . . . . . . . 7,434 7,192 (See Notes to Consolidated Financial Statements) -4- UTILX CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 1996 1995 ---- ---- Revenues . . . . . . . . . . . . . . . . . . . . $46,990 $36,028 Cost of revenues from operations . . . . . . . . . . 38,877 30,905 ------- ------- Gross profit . . . . . . . . . . . . . . . . . . 8,113 5,123 ------- ------- Operating expenses: Selling, general and administrative. . . . . . . 5,533 5,951 Research and engineering . . . . . . . . . . . . 544 489 ------- ------- Total operating expenses . . . . . . . . . . 6,077 6,440 ------- ------- Operating income (loss). . . . . . . . . . . . . . . 2,036 (1,317) Other income (expense), net. . . . . . . . . . . . . (43) 154 ------- ------- Income (loss) before income taxes. . . . . . . . . . 1,993 (1,163) Income tax benefit . . . . . . . . . . . . . . . . . 932 314 ------- ------- Net income (loss). . . . . . . . . . . . . . . . . . $ 2,925 $ (849) ------- ------- ------- ------- Earnings (loss) per share (Note 2): Primary .. . . . . . . . . . . . . . . . . 40 (.12) Fully diluted. . . . . . . . . . . . . . . . . . .40 (.12) Weighted average number of shares (Note 2): Primary . . . . . . . . . . . . . . . . . . . 7,285 7,185 Fully diluted. . . . . . . . . . . . . . . . . . 7,325 7,185 (See Notes to Consolidated Financial Statements) -5- UTILX CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995 (IN THOUSANDS) (UNAUDITED) 1996 1995 ---- ---- OPERATING ACTIVITIES: Net Income (Loss) . . . . . . . . . . . . . . . $ 2,925 $ (849) Adjustments to reconcile to net cash provided by (used by) operating activities: Depreciation and amortization. . . . . . . . 2,775 2,744 Net book value of drilling systems sold. . . 115 Other non-cash (income) expenses, net. . . . 48 (136) Changes in: Accounts receivable, trade . . . . . . . . (1,428) 572 Materials, supplies and inventories. . . . 2,057 (884) Prepaid expenses and other . . . . . . . . (83) (258) Income taxes receivable. . . . . . . . . . 562 (319) Accounts payable . . . . . . . . . . . . . 45 103 Accrued liabilities. . . . . . . . . . . . 713 (2,033) ------- ------- Total adjustments. . . . . . . . . . . . . . 4,689 (96) ------- ------- Net cash used provided by (used by) operating activities. . . . . . . . . . 7,614 (945) ------- ------- INVESTING ACTIVITIES: Cost of additions to equipment. . . . . . . . . (3,358) (2,287) Proceeds from sale of equipment . . . . . . . . 12 178 ------- ------- Net cash used by investing activities . (3,346) (2,109) ------- ------- FINANCING ACTIVITIES: Net borrowings (payments) on note payable . . . (2,500) 2,750 Proceeds from exercise of stock options . . . . 16 2 Repurchase of common stock. . . . . . . . . . . (1) (1) ------- ------- Net cash provided by (used by) financing activities . . . . . . . . . . (2,485) 2,751 ------- ------- CUMULATIVE TRANSLATION ADJUSTMENT OF FOREIGN CURRENCY TRANSACTIONS . . . . . . . . . (5) (24) ------- ------- Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . 1,778 (327) CASH AND CASH EQUIVALENTS: Beginning of period . . . . . . . . . . . . . . 495 840 ------- ------- End of period . . . . . . . . . . . . . . . . . $ 2,273 $ 513 ------- ------- ------- ------- (See Notes to Consolidated Financial Statements) -6- UTILX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. FINANCIAL STATEMENT PRESENTATION In the opinion of management of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position and operating results for the three-month and nine-month periods ended December 31, 1996 and 1995. The statements should be read in conjunction with the March 31, 1996 audited consolidated financial statements included in the fiscal 1996 Annual Report on Form 10-K. 2. EARNINGS PER SHARE Primary earnings per share is computed by dividing net income (loss) by the weighted average number of shares of Common Stock of UTILX Corporation, $0.01 par value per share (the "Common Stock"), and common stock equivalents outstanding during the period. Common stock equivalents, when dilutive, include shares issuable upon exercise of the Company's stock options and certain warrants. Fully diluted earnings per share is computed based on the weighted average number of shares of Common Stock and common stock equivalents outstanding during the period taking into consideration maximum potential dilution. 3. MATERIALS, SUPPLIES AND INVENTORIES Materials, supplies and inventories at December 31, 1996 and March 31, 1996 consists of the following: (In thousands) December 31, 1996 March 31, 1996 ----------------- -------------- Materials and supplies $ 4,990 $ 5,233 Work in process 672 1,077 Finished goods 1,263 2,753 Less Allowance for potentially obsolete or overstocked inventory (677) (935) -------- -------- 6,248 $ 8,128 -------- -------- -7- 4. NOTE PAYABLE TO BANK The Company has obtained a renewal of its committed, uncollateralized credit facility of $5,000,000. The credit agreement contains certain financial covenants that require the company to maintain certain levels of tangible net worth, working capital and debt ratio. This line of credit expires on June 30, 1998. 5. COMMITMENTS AND CONTINGENCIES INTERNAL REVENUE SERVICE AUDIT. The Internal Revenue Service's examination of the Company's federal income tax return for fiscal 1994 has been completed. The Company has been notified that there will be no adjustment to the income tax return. In the third quarter of fiscal 1997, the Company filed several amended federal income tax returns and these will recover greater income tax refunds from prior years than had been projected. The Company accordingly reported an $850,000 income tax benefit in the third quarter of its current fiscal year. The Company continues to provide a full valuation account for remaining net deferred tax assets and to evaluate the account on a quarterly basis. OTHER MATTERS. In August 1995, the Company was named a defendant in litigation filed in the United States District Court for the Southern District of Texas on behalf of a person alleging serious personal injury in June 1994 while performing work at a Company work site. In April 1996, an amended complaint was filed adding as additional plaintiffs certain relatives of the injured person. The plaintiffs have alleged negligence, gross negligence and breach of contract by the Company. The complaint requests an unspecified amount of damages in excess of $50,000 and punitive damages, plus interest and costs. A co-defendant has tendered its defense in this litigation to the Company's insurer, which has accepted the tender under reservation of rights. In December 1996, all plaintiffs and defendants participated in mediation and reached a settlement agreement which is pending final court approval. If the settlement is approved as agreed, the Company's share of the cost of the settlement will be covered by existing insurance reserves. The Company is involved in other litigation matters, both as a plaintiff and as a defendant, arising in the ordinary course of its business. Management expects that these matters will not have a materially adverse effect on the consolidated financial position, results of operations or liquidity of the Company. -8- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THIRD QUARTER OF FISCAL YEAR 1997 COMPARED TO THIRD QUARTER OF FISCAL YEAR 1996 ------------------- REVENUES Consolidated revenues increased 24% in the third quarter of fiscal 1997, and 30% in the first nine months of fiscal 1997, compared to the same periods in fiscal 1996. NORTH AMERICAN OPERATIONS. Revenues from FlowMole drilling operations in North America ("FlowMole operations") increased to $11 million in the third quarter of fiscal 1997 compared to $8.8 million in the same period of fiscal 1996. Revenues from CableCure services in North America ("CableCure operations") increased to $4 million in the third quarter of fiscal 1997 compared to $2.3 million in the same period of fiscal 1996. Revenues from FlowMole operations increased to $30.2 million in the first nine months of fiscal 1997, compared to $26.1 million in the same period in fiscal 1996. Revenues from CableCure operations increased to $11.2 million in the first nine months of fiscal 1997, compared to $4.5 million in the same period in fiscal 1996. The increased revenues in FlowMole operations were attributed to increased demand for FlowMole services and the Company's ability to maintain a higher level of drilling crews than in the prior year. In fiscal 1996, under a previously commenced program to consolidate crews and improve training in order to improve average crew performance, the Company reduced its crew levels during the first and second quarters. When demand for services increased in subsequent quarters, revenue growth was partially constrained by the need to add and train new crew members. The time required to add and train new FlowMole crews could also constrain revenue growth if demand should exceed capacity in future periods. In addition, the Company has expanded its capacity for non-drilling services such as trenching, which has also increased demand. Continued strong demand for CableCure services, primarily under "Test, Treat or Replace" contracts, contributed to the increased CableCure revenue levels. Customers choosing Test, Treat or Replace contracts also contributed to the increased demand for FlowMole services. INTERNATIONAL OPERATIONS. Revenues from international operations decreased to $1.2 million in the third quarter of fiscal 1997, compared to $2.0 million in the same period of fiscal 1996. This decrease was primarily attributed to an anticipated reduction in sales of FlowMole drilling equipment due to depleted inventory while transitioning manufacturing to outside vendors. Revenues from international operations remained at $5.5 million for the first nine months of fiscal 1997 and also for the same period of fiscal 1996. Equipment sales revenue decreased to $341,000 in the third quarter of fiscal 1997 compared to $799,000 in the same period of fiscal 1996. Equipment sales revenue increased to $2.5 million during the first nine months of fiscal 1997 compared to $2.4 million in the same period of fiscal 1996. As discussed under "Review and Outlook", the Company has sold substantially all of its inventory of new equipment. The Company has not yet placed an order with an outside manufacturer for additional equipment to be held for sale. Although the Company expects to place such an order in the next few months, due to existing inventory levels and manufacturing lead times, the Company expects a continued low level of revenue from equipment sales at least through the remainder of fiscal 1997. -9- GROSS PROFIT Gross profit increased 15% in the third quarter of fiscal 1997 compared to the same period in fiscal 1996, and increased 58% in the first nine months of fiscal 1997 compared to the same period of fiscal 1996. NORTH AMERICAN OPERATIONS. Gross profit from FlowMole operations and CableCure operations increased in the third quarter of fiscal 1997 compared to the same period of fiscal 1996 as a result of increased demand for FlowMole services and the Company's expanded capability to support non-drilling services. From July 1st to December 31st of fiscal 1997, worldwide employment increased from 515 to 669, as drilling crews and new types of crews for the provision of broader ranges of services to customers were added. Additional hiring and training expenses and equipment purchases resulting from the increase in head count contributed to a reduction in gross profit as a percentage of revenue in the third quarter of fiscal 1997. INTERNATIONAL OPERATIONS. Overall gross profit from international operations decreased in the third quarter of fiscal 1997 compared to the same period of fiscal 1996. The decrease was due to lower revenue levels. For the first nine months of fiscal 1997, gross profit from international operations was essentially unchanged from the same period of fiscal 1996. OPERATING EXPENSES AND OTHER INCOME (EXPENSES) Total operating expenses decreased 15% in the third quarter of fiscal 1997 compared to the same period of fiscal 1996. In the first nine months of fiscal 1997 operating expenses decreased by 6% compared to the same period of fiscal 1996. Provisions for royalty payments under the Company's exclusive CableCure license have increased to over $200,000 per quarter in fiscal 1997, compared to none in the same periods of fiscal 1996. The Company's restructuring, as announced on April 2, 1996, has contributed to reduced corporate overhead, resulting in lower expenses for both third quarter and year to date to more than offset the increased CableCure royalty expenses. Research and engineering costs in the third quarter of fiscal 1997 include increases in CableCure research expenditures. The Company expects a continued investment in CableCure research through the next fiscal year. Increased research and engineering costs for the first nine months of fiscal 1997 include expenses for the continued Series G-Drill prototype testing. Other income (expense), net was an expense of $27,000 in the third quarter of fiscal 1997 compared to income of $22,000 in the same period of fiscal 1996. In the first nine months of fiscal 1997 other income (expense), net was an expense of $43,000 compared to income of $154,000 in the same period of fiscal 1996. During the third quarter of fiscal year 1997, foreign exchange losses account for the increased expenses. The Company recorded a gain from its share of the start-up operations of a joint venture in the first nine months of fiscal 1996. This joint venture ceased operations in the third quarter of fiscal 1996. INCOME (LOSS) BEFORE INCOME TAXES As a result of the foregoing, the Company recorded pretax income of $812,000 in the third quarter of fiscal 1997 compared to pretax income of $163,000 in the same period of fiscal 1996. The Company recorded pretax income of $2,037,000 in the first nine months of fiscal 1997 compared to a pretax loss of $1,163,000 in the same period of fiscal 1996. -10- INCOME TAX EXPENSE (BENEFIT) The Company would normally expect an effective income tax rate of approximately 40% on positive pretax income. This exceeds the federal statutory rate of 34% due to the impact of state income taxes and nondeductible expenses. The Company continues to provide a 100% valuation allowance for net deferred tax assets (originally established in the fourth quarter of fiscal 1996). As a result, due to utilization of net operating loss carryforwards and other deferred tax benefits in fiscal 1997, the Company has eliminated substantially all of the Company's income tax provision in the first, second and third quarters of fiscal 1997. In the third quarter of fiscal 1997, the Company filed several amended Federal income tax returns and will recover greater income tax refunds from prior years than had been projected. The amendments resulted from the conclusion of an Internal Revenue Service examination of the Company's fiscal 1994 return, allowing the immediate deductibility of certain royalty payments made in that year. The Company accordingly reported an $850,000 income tax benefit in the third quarter of fiscal 1997. Additional income tax benefits reflect the projected recovery of foreign income taxes paid in prior years. The Company's effective income tax rate in the third quarter of fiscal 1996 was 36%. NET INCOME (LOSS) As a result of the foregoing, the Company recorded net income of $1,756,000 in the third quarter of fiscal 1997 compared to net income of $104,000 in the same period of fiscal 1996. The Company recorded net income of $2,925,000 in the first nine months of fiscal 1997 compared to a net loss of $849,000 in the same period of fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1996, the Company had unused sources of liquidity consisting of $2.3 million in cash and cash equivalents and an unused balance on its committed line of credit of $5,000,000. The line of credit expires on June 30, 1998. This compares to $495,000 in cash and cash equivalents and an unused balance on its committed line of credit of $2,500,000 at March 31, 1996. Capital expenditures of $3.4 million for equipment to expand the Company's capabilities to perform additional auxiliary services, such as trenching and fusion of gas pipes, represents the primary use of cash during the first nine months of fiscal 1997. The net increases in cash during the first, second and third quarters of fiscal 1997 were primarily due to the impact of positive cash flow from operations, including the collection of federal income tax refunds. The Company has anticipated the periodic usage of its line of credit throughout fiscal 1997. The Company anticipates that through cash generated by operations and the periodic use of its credit facility, it will be able to meet its cash requirements through at least fiscal 1997. REVIEW AND OUTLOOK The Company is experiencing strong demand for its FlowMole and CableCure services in North America. The Company's revenue levels and the weighted average number of FlowMole systems in operation on any given day are affected by factors which include weather, pricing, competition, customer work release practices, soil and other work difficulty determinants, and permitting. The Company may choose to increase or decrease its capacity; however, management currently plans to add crews or equipment when it has a high degree of confidence in the Company's ability to keep the added crews busy. In addition, the Company's contracts typically allow for cancellation by the customers on relatively short notice. Therefore, sudden changes in demand may have an immediate adverse impact on the Company's revenue levels. A small number of customers generate the majority of the Company's North American CableCure revenues, increasing the exposure of the Company to such short term fluctuations in revenues. See also the discussion under "Risk Factors", below. -11- The Company has announced the termination of its in-house assembly of new FlowMole drilling equipment. No decision has yet been made as to the vendor or vendors who will perform such assembly services for the Company in the future. The Company has sold substantially all its inventory of new drilling equipment. The nature and timing of the decision regarding future equipment purchasing may have an impact on the continuation of revenue from equipment sales in the long term and limited inventory levels will adversely impact equipment sales revenues in the near future. Also, although the Company expects to maintain or increase its revenues from spare parts sales to international customers, such customers may in fact respond to the Company's decision by turning to other suppliers for equipment and spare parts. This Form 10-Q contains forward looking statements, in addition to those under the caption "Review and Outlook". Such statements are subject to substantial risk. Actual results may vary materially due to risks and uncertainties inherent in the Company's business, including those described under "Review and Outlook," those described under "Risk Factors" below, and additional descriptions included in Item 7 of the Company's fiscal 1996 Form 10-K filed with the Securities and Exchange Commission. RISK FACTORS COMPETITION. The Company has experienced a long-term trend of declining prices for guided boring services, particularly for smaller diameter utility installations, due to competitive pressures and changes in utility bidding practices. This trend has also caused the Company to lower its prices for CableCure injection services, which are priced at a discount to replacement costs, including replacement via guided boring. In addition, the Company's utility customers are increasing their requests for "turnkey" installation, replacement and restoration services, requiring their drilling contractors to take responsibility for switching circuits, terminating circuits, and other non-incidental tasks. These tasks require additional equipment and labor, and the cost increases can offset any price increase the Company is able to negotiate for the expansion of its services. The 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 these decreases. SEASONAL FACTORS. Weather and other seasonal factors may decrease the Company's revenues and profits in any given period. Adverse weather may preclude the Company from operating its FlowMole drilling systems or providing its CableCure services at certain times of the year. In addition, the Company believes that the regular budgetary cycles of certain of its North American utility customers tend to concentrate demand for the Company's services during the third quarter of its fiscal year (the fourth quarter of the calendar year), although other budgetary factors described below may override this trend in any given quarter. As a result of these factors, results of operation in any given fiscal quarter are not necessarily indicative of results in any other fiscal quarter. UTILITIES' BUDGETARY CONSIDERATIONS. Budgetary considerations arising from unfavorable regulatory determinations on matters such as rate-setting, capitalization of services performed by the Company, or siting of power production facilities, or from reductions in new housing starts, reductions in electric utility revenues due to mild weather, and general economic downturns, have affected the ability of some of the Company's utility customers to sustain their cable replacement or other maintenance programs and, accordingly, adversely impact the Company's revenues and profits. Although the Company has broadened its customer base, one customer, Virginia Electric and Power Company, continues to generate a significant portion of the Company's FlowMole revenues, and a small number of customers generate more than half of its CableCure revenues. Because cable replacement, restoration and other maintenance programs are, to a substantial extent, deferrable and the Company's contracts with its utility customers permit termination of orders on relatively short notice, postponement or cancellation of such programs by customers can interject substantial volatility into the Company's revenues and profits. -12- DOW CORNING CORPORATION. In May 1995, Dow Corning Corporation ("Dow Corning") filed for protection under Chapter 11 of the United States Bankruptcy Code and began to operate as a debtor in possession. To date, Dow Corning has not filed any motion to assume or reject the exclusive license agreement with the Company, and the Company is unaware of any orders in the bankruptcy court to date which pertain to the exclusive license agreement. Management of Dow Corning has repeatedly indicated to the Company that its intends to continue conducting the business with the Company, and the Company is currently unaware of any facts which would lead it to believe that Dow Corning intends to discontinue the relationship. However, there can be no guarantee that the CableCure license agreement will not be amended or rejected during the course of the bankruptcy proceeding. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS EMERSON, ET AL. V. UTILX CORPORATION, A. B. CHANCE CO., THE CITY OF BRYAN AND PAUWELS TRANSFORMERS, INC. In August 1995, the Company was named a defendant in litigation filed in the United States District Court for the Southern District of Texas on behalf of a person alleging serious personal injury in June 1994 while performing work at a Company work site. In April 1996, an amended complaint was filed adding as additional plaintiffs certain relatives of the injured person. The plaintiffs have alleged negligence, gross negligence and breach of contract by the Company. The complaint requests an unspecified amount of damages in excess of $50,000 and punitive damages, plus interest and costs. The City of Bryan, a co-defendant, has tendered its defense in this litigation to the Company's insurer, which has accepted the tender under reservation of rights. In December 1996, all plaintiffs and defendants participated in mediation and reached a settlement agreement which is pending final court approval. If the settlement is approved as agreed, the Company's share of the cost of the settlement will be covered by existing insurance reserves. 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. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) 11.1 Statement Regarding Computation of Per Share Earnings. 27.1 Financial Data Schedule. (b) Report on Form 8-K. None. -13- UTILX CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UTILX CORPORATION -------------------------------------- (Registrant) Date: February 11, 1997 By: /s/ Craig E. Davies -------------------------------------- Craig E. Davies, President and Chief Executive Officer Date: February 11, 1997 By: /s/ Larry D. Pihl -------------------------------------- Larry D. Pihl, Vice President / Chief Financial Officer -14- As Filed with the Securities and Exchange Commission on February 13, 1997 File No. 0-16821 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------- EXHIBITS TO QUARTERLY REPORT FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996 UNDER THE SECURITIES EXCHANGE ACT OF 1934 ------------------------- UTILX CORPORATION INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------ ----------- 11.1 Statements Regarding Computation of Per Share Earnings. Filed herewith. 27.1 Financial Data Schedule. Filed herewith. EX-11 2 EXH 11 EXHIBIT 11.1 UTILX CORPORATION STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Quarter Ended December 31 ------------------------------------- 1996 1995 Earnings Shares Earnings Shares -------- ------ -------- ------ (In Thousands, Except Per Share Amounts) Primary earnings per common share: Net earnings available for common stock and weighted average common shares outstanding $1,756 7,178 $ 104 7,185 Stock options and warrants assumed exercised - net 152 7 ------ ------ ------ ------ Total net earnings and primary common shares $1,756 7,330 $ 104 7,192 ------ ------ ------ ------ ------ ------ ------ ------ Primary earnings per common share $ .24 $ .01 ------ ------ ------ ------ Fully diluted earnings per common share: Net earnings available for common stock and weighted average common shares outstanding $1,756 7,178 $ 104 7,185 Stock options and warrants assumed exercised - net 256 7 ------ ------ ------ ------ Total net earnings and fully diluted common shares $1,756 7,434 $ 104 7,192 ------ ------ ------ ------ ------ ------ ------ ------ Fully diluted earnings per common share $ .24 $ .01 ------ ------ ------ ------
EXHIBIT 11.1 UTILX CORPORATION STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Nine Months Ended December 31, ----------------------------------- 1996 1995 Earnings Earnings Shares (Loss) Shares -------- ------- ------ ------ (In Thousands, Except Per Share Amounts) Primary earnings (loss) per common share: Net earnings (loss) available for common stock and weighted average common shares outstanding $2,925 7,182 $ (849) 7,185 Stock options and warrants assumed exercised - net 103 ------ ------ ------ ------ Total net earnings (loss) and primary common shares $2,925 7,285 $ (849) 7,185 ------ ------ ------ ------ ------ ------ ------ ------ Primary earnings (loss) per common share $ .40 $ (.12) ------ ------ ------ ------ Fully diluted earnings (loss) per common share: Net earnings (loss) available for common stock and weighted average common shares outstanding $2,925 7,182 $ (849) 7,185 Stock options and warrants assumed exercised - net 143 ------ ------ ------ ------ Total net earnings (loss) and fully diluted common shares $2,925 7,325 $ (849) 7,185 ------ ------ ------ ------ ------ ------ ------ ------ Fully diluted earnings (loss) per common share $ .40 $ (.12) ------ ------ ------ ------
EX-27.1 3 EXH 27, FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF UTILX CORPORATION FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS MAR-31-1997 DEC-31-1996 2,273 0 12,484 276 6,248 21,528 31,693 21,757 32,216 5,438 0 0 0 72 26,706 32,216 46,990 46,990 38,877 44,954 33 0 10 1,993 (932) 2,925 0 0 0 2,925 .40 .40
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